Q & A on State of the State

Posted: Tuesday, January 27, 2004

Editor's Note: The following was prepared by Gov. Frank Murkowski's office in response to questions received following the governor's State of the State address on Jan. 13. This is the second in a series of questions and answers that will be printed this week.

Q: Shouldn't use of the Alaska Permanent Fund income be part of a "comprehensive plan"?

A: The governor has a five-point fiscal program, which he detailed in his State of the State speech. The governor made it clear that his program does not include an income tax. He believes the public needs to decide between some use of the income of the permanent fund to maintain essential public services or a significant decline in public services in FY 2006. Neither the Conference of Alaskans nor the questions referred to it preclude the Legislature from passing revenue measures such as user fees or taxes that the governor or others have proposed.

Q: Explain how using a portion of the permanent fund income for government benefits Alaskans.

A: Gov. Murkowski said Alaska has to figure out how it wants to pay for public services. Most states use revenue from a state sales tax, income tax or both. Alaska's population is so small that even at statehood Congress recognized that a state government could not be supported by these traditional means. As a result, Congress gave the state land that had significant natural resources so that its development could generate revenues to support state services.

In 1976, voters endorsed the permanent fund to create a source of annual income from one-time oil development for the day when oil production declined. With oil production today less than half of what it was at its peak and the threat of significant erosion of public services because of continuing anticipated reductions in oil revenue, many Alaskans believe that day is now.

Gov. Murkowski believes Alaskans need to understand that the state is now at the point where it either has to cut a quarter of what the state currently spends on services or find another way to pay for them, if those services are to

continue at current levels.

Gov. Murkowski has said Alaskans need to consider two questions what happens to their dividend if a portion of the fund's income is used to maintain essential public services and what happens to their essential public services if it is not.

Q: Doesn't the Legislature already have the authority to appropriate a portion of the permanent fund income with just a simple majority vote? Why not just do that? Would it not be less expensive than the Conference of Alaskans?

A: Yes, the Legislature currently has the authority to appropriate income and in fact, it does. Each year it appropriates income to pay dividends and inflation proof the fund (neither is required by the Constitution). Income left over has been appropriated back into the fund itself or left in the Earnings Reserve Account for future distribution.

Some Alaskans may not realize that there currently is enough income to pay dividends and help support public services. As a result, there is a stigma that using even this left-over income for government is a "raid" on the dividend.

Some suggest that it will take a crisis (such as significant budget cuts) for the Legislature to believe it has "political permission" to use the left-over income to pay for public programs.

The governor believes it is the responsibility of his administration and the Legislature to explain why using a portion of the permanent fund is necessary to maintain levels of public services before such a crisis occurs.

Q: What economic impact would using a portion of the permanent fund income for public services have on Alaska's economy? Won't using a portion of the fund income for public services just create a bigger urban-rural divide?

A: This will have minimal impacts on Alaska's economy. If anything, it will help over the long term by focusing more spending on things such as education.

The private sector would be expected to increase investment, which would grow the economy and create jobs for Alaskans. The uncertainty of how Alaska is going to balance its budget in the future has discouraged business from investing in Alaska.

Most of Alaska's natural resources are in rural Alaska and development of these resources will mean jobs in rural Alaska and a way to support these communities.

Q: How would using a portion of the permanent fund income for public services be fair to all Alaskans? Would an income tax be a fairer way to assess funds for public services?

A: Traditional responsibilities of governments are called "public goods." These are the things that individuals cannot efficiently do for themselves such as build transportation infrastructure, provide homeland security, protect the

environment and maintain a quality education system. All Alaskans benefit from these public goods. Use of a portion of the permanent fund income to help pay for "public goods" would be to everyone's benefit.

Moreover, it would add new money to our economy along with the beneficial multiplier effect which new money provides. An income tax simply recycles money that already is in Alaska's economy by redistributing wealth from hard-working Alaskans to government.

Q: The permanent fund trustees claim that the percent of market value, or POMV, concept will protect the permanent fund dividend; but how exactly is it protected?

A: The board of trustees explains this very well. Percent of market value is a calculation method that is used by virtually all of the nation's major endowments (universities, etc.). It also is used by Anchorage and Sitka communities that have permanent funds. In fact, it is required of nonprofits by the IRS because it automatically ensures a steady income stream not subject to the dramatic ups and downs of the investment market. The trustees believe this change would be similarly beneficial to the permanent fund.

Changing the calculation of how much income is available ensures there is income each year to pay whatever is decided the income should be used for. In fact, the current practice of relying on realized income actually jeopardizes a consistent dividend. Because of poor earnings of stock investments in recent years, early in 2003 it looked like there would not be sufficient income to pay any dividend.

On Wednesday: Questions and answers related to the governor's long-term fiscal program.



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