The Pew Charitable Trusts

Alaska, like most states, is facing a major budget deficit. But Alaska, unlike any other state, has enough money in the bank to cover this year's deficit nearly 50 times over.

And Alaska won't use it.

The Alaska Permanent Fund is surely one of the strangest fiscal tales in state government today.

The fund was established by voters in 1976 to ensure that the state's forthcoming oil wealth would not be blown in one generation. One of the most successful public investments worldwide, the fund grew to nearly $30 billion before recent bad years in the stock market. Now at $23 billion, the fund last fall paid dividends of $1,540 to every man, woman and child in Alaska, with residency being the only qualification.

Meanwhile, with no income tax or state sales tax, Alaska continues to run budget deficits. In the current fiscal year, spending is expected to outstrip revenues by $500 million in a general fund of $2.4 billion -- and that's considered good news. Until the price of oil jumped over $30 a barrel, the deficit was projected at more than $800 million, with $1 billion deficits looming down the road.

In all but two years since 1990, Alaska has had to cover deficits by dipping into a reserve account established by the settlement of lawsuits with the oil industry. But that account is under $2 billion and headed for depletion by June 2005, a cliff that would seem to threaten sudden, massive budget cuts and/or sudden, massive tax increases. With state spending already lower on a per capita, inflation-adjusted basis than it was in 1979, the last year before oil money flooded the treasury, any significant cuts would be painful to certain constituencies.

Republican Gov. Frank Murkowski campaigned last fall on a platform of no new taxes and no use of permanent fund earnings to fill the fiscal gap. Instead, he argued that easing regulations on oil, gas, timber and mining could generate enough income to balance the budget. During committee hearings on his confirmation, Revenue Commissioner Bill Corbus declined to spell out how the flow of new money from resource extraction industries would eliminate the fiscal gap within two and a half years.

Meanwhile, Murkowski rattled some lawmakers in his State of the State address Jan. 23 by suggesting that the permanent fund could be used to leverage economic development.

The principal of the fund is constitutionally protected and can't be spent without a public vote.

But Murkowski said that the state would approach companies in which the fund invests to see if they want to create jobs in Alaska.

"While we want the permanent fund to make good investments, there's no reason why we shouldn't direct attention to those companies willing to provide jobs here," Murkowski said.

He also said he will ask Wall Street money managers to reduce the fees they charge the fund and provide some charitable contributions in Alaska.

And the governor spoke vaguely of "aggressively leveraging" the fund in other ways, reminiscent of his comment in 1997 that the fund could be used to secure bonds for construction of a natural gas pipeline.

Murkowski's speech elicited a nervous defense from the Republican majority in the Legislature and a variety of interpretations by Democrats. Legislators regard the permanent fund as the third rail of Alaska politics, just as national leaders often tread lightly when it comes to Social Security. In 1999, in an advisory vote, 83 percent of voters statewide rejected the proposed use of some permanent fund earnings for government.

"I felt a wave of uncertainty flow across a number of legislators there in the body," Senate Minority Leader Johnny Ellis, D-Anchorage, said after Murkowski's speech. "What he said was a lot of loaded language there."

Ellis noted that in debates over the years Alaskans have settled on managing the permanent fund for the best return, rejecting proposals to use the money for economic development projects or other specific goals.

But Sen. Ralph Seekins, R-Fairbanks, a former board member of the public corporation that manages the permanent fund, said that Democrats were overreacting.

Murkowski is not proposing to make fund investments as a quid pro quo for jobs, Seekins said. "We need to make the investment and then leverage what we can out of that after the fact."

Despite Murkowski's campaign pledge not to use the permanent fund's investment earnings for government, some lawmakers say they want the flexibility to consider that in coming years.

A proposed constitutional amendment has been introduced that would change the fund into an endowment, eliminating the notion of principal and allowing legislators to spend up to 6 percent of the fund per year. If passed by a two-thirds vote of the Legislature, the amendment would go on the 2004 general election ballot.