The Reason Alaska Still Doesn’t Have a Fiscal Plan

Alaskans have long been aware that oil production would not always pay the bills. Nearly every political text from the 80s and 90s includes some reference to a “long-term fiscal plan” required to offset the eventual decline in oil revenues. Record high oil prices masked the problem from 2006 to 2014. But, when oil prices crashed in 2014, the realization resurfaced. Renewed calls for a long-term fiscal plan followed but have not been answered.

The Alaska Legislature and Governor have been trying to address the issue for almost a decade now. But the solution to the problem has been hard to find. The inability to find a solution is not from a lack of ideas. There are several workable options. The challenge is that there is no consensus on how to accomplish the goal. So, just for fun, let’s look at this problem through the lens of game theory (my specialty). I think it explains the outcomes we’ve seen for the past 7 years.

The Options

For our purposes today, four options constitute long-term fiscal plans. The trick is to find the best way to balance the current budget, along with a consideration of how future Alaskans will balance theirs. Any plan that accomplishes balanced budgets will work. There is no single right answer.

Viable paths garner support from at least 21 Representatives, 11 Senators, and the Governor. If the path requires a constitutional amendment, the math is different. A joint resolution to put the question on the ballot requires 27 Representatives and 14 Senators (the Governor does not have to sign resolutions). The amendment then requires a majority vote of the people.

So, here are the four main options in play:

The Turn Alaska Blue Plan

As we discussed before, a preferred long-term fiscal plan from the perspective of the Democratic Party would be one in which the government grows while the private sector shrinks. This would allow the government to be the primary source of economic activity, which erodes the capitalist system that many party members detest. It simultaneously furthers the environmental component of the party platform.

This plan works by using oil taxes and PFD cuts to balance a larger budget while also growing the Permanent Fund. Treating the Fund as an endowment rather than a trust allows for a larger government than the economy can support. As oil investment stops, production declines to the point that it stops flowing. At that point, the Democratic Party will be in control of making policy decisions, which will result in an income tax to replace lost oil revenues.

Implementing this long-term fiscal plan only requires a simple majority vote in favor of an oil tax increase, then a future simple majority vote in favor of an income tax.

The Keep Alaska Red Plan

The opposing plan we discussed was one in which growing the private sector is the primary goal. Rather than attempting to replace the capitalist system with a socialist one, this plan is designed to strengthen it. To accomplish that goal, this long-term fiscal plan seeks to balance the budget by keeping it small while growing the economic base. A stronger economy would support the smaller government with a low and broad tax on economic activity.

This plan works by reducing the size of the government and tying it directly to the economy. To do so, it requires that the economy can support the public sector through a tax on the private sector. This plan would ideally take the Permanent Fund away from the government, reducing the ability to fund programs for which the people aren’t willing to pay.

Implementing this plan requires a constitutional amendment, due to the 2016 Supreme Court decision that the legislature need not follow statutes regarding appropriations. An amendment is the only way to protect the PFD from legislative cuts, thus limiting the growth of the fund (and the government as a result) while encouraging economic activity.

The “No Taxes” Plan

Many observers of Alaska’s finances question the logic of levying a tax while paying a dividend. They view the PFD as a distribution of surplus revenue. From that perspective, it makes no sense to create a surplus through taxation merely to distribute that surplus through a dividend. While not everyone agrees with that premise, it is a valid long-term plan.

This plan works by replacing falling oil revenues with increasing investment earnings. By slowly repealing the PFD, the Fund would grow fast enough to avoid the need for any broad-based taxation.
However, as I discussed before, this plan is more likely to work in theory than in practice. Because it does not establish any connection between the public and private sectors, this plan poses a significant risk of unintended consequences.

Regardless, this plan is the easiest to implement. It requires no legislation. All it requires is prioritizing Fund growth and treating the PFD as a distribution of surplus revenue.

A Compromise Plan

It is possible to craft a plan with any combination of fiscal restraint and new revenues. Therefore, the three plans above represent the bookends. An infinite number of plans exist in the space between.
A compromise long-term fiscal plan would take components of each to find some middle ground. Implementing it would mean finding a combination of legislation, constitutional amendments, and budget negotiation that works for everyone.

This “holy grail” long-term fiscal plan is the most difficult to achieve, as it would require everyone to give up something they want and accept something they don’t support. While there was an effort to craft such a plan with a working group during the last legislature, implementing it has proven difficult. We can safely call this infinite set of possible combinations a single plan.

The Players

When we talk about players in game theory, we mean the people that have the power to change the outcome. In this case, we are talking about the Legislature and the Governor. If this was a political strategy I was developing for a client, I would analyze all 61 players. For this exercise, we can reduce them into three groups with similar views.

Note that each person within the groups has slightly different views. I’m lumping them together to simplify the game. If you’re interested in how these groups think, check out this post I wrote a few years ago.

Here are the three players:

Robin Hood

This group consists of legislators that are generally supportive of more government spending, especially on programs that “level the playing field.” They prefer to pay for those services with taxes on the wealthier members of society (including corporations). This “take from the rich and give to the poor” mentality is why I call this the Robin Hood group.

The members of this group generally prefer not to cut the PFD (as it helps the poor). But if they can’t raise enough taxes, they would rather cut the dividend than reduce the size of government. In Alaska’s current legislature, this group generally consists of the 16 Representatives and 9 Senators from the Democratic Party. These are supporters of the “Turn Alaska Blue” plan.

Hammond

When Jay Hammond put forward the idea of the Permanent Fund, he described Alaskans as shareholders. In his biography, he talks about his goal for each Alaskan to earn literal shares in the Fund for each year of residency. In his mind, the Fund would be a mechanism to connect the people to their resources, thus ensuring the government managed them well.

When asked what he envisioned when the oil was gone, he very clearly stated that the dividend belonged to the people. He believed that if the government couldn’t pay the bills, it should raise taxes to do so.
The Hammond group follows the logic the creator of the dividend described. The key to this group is that PFD cuts are last option on the list. The choice for them is between other forms of taxation and budget cuts. This group would much rather cut the budget, but is willing to raise taxes if necessary.

The number of Hammond members has dwindled in the past decade. In 2023, I would put 13 Representatives, 4 Senators, and the Governor in this group. These are supporters of the “Keep Alaska Red” plan.

Hickel

While the Hammond group views the Fund as belonging to the people, this group considers it to belong to the Government. This alternative view changes the frame of a PFD cut from a taking of money from the people, to a reduction is government spending.

This view matches the beliefs of Governor Wally Hickel. According to his book, “The Alaska Solution,” Hickel viewed the Permanent Fund as a means to pay for the government without raising taxes. He spoke about the Fund as a development bank to pay for infrastructure projects. He was also very critical of the dividend, claiming that “our citizens came to care about the dividend the way a drug addict cares about getting his fix.”

The primary way this group views a long-term fiscal plan is to cut the dividend, which is the “No Taxes” plan. In effect, they believe the right size of government is the largest they can afford without paying for it. In today’s legislature, there are roughly 11 Representatives and 7 Senators in the Hickel group.

Payoffs

Because the players assign different values to each option, the game is a little more complicated than it seems.

For the Robin Hood group, every dollar of government spending has value. Any negative impact on the private sector is heavily discounted. So, they score points purely by increasing government spending.

For the Hammond group, government spending has very little worth. It is growing the private sector that gives them value. So, they score points by getting and keeping as much money as possible in the hands of the residents. They believe the Permanent Fund Dividend is the most efficient way to accomplish that goal.

For the Hickel group, there is some moderate value in government services (especially infrastructure). But there is significant negative value from paying taxes. This is especially true when taxes fall on the wealthier members of society.

Let’s reduce these ideas to some hypothetical values:

Budget cutsPFD cutsTaxes
Robin Hood-3-2-1
Hammond-1-3-2
Hickel-2-1-3
Hypothetical payoffs from policy options.

Keep in mind, this is an oversimplification. But you should be able to draw some conclusions:

  • Robin Hood and Hammond agree that taxes are better than PFD cuts but disagree on how those revenues should be used. While Robin Hood would cut the PFD for a larger budget, Hammond would certainly not.
  • Hammond and Hickel agree that budget cuts are better than taxes but disagree about the value the PFD has for Alaska. While Hammond would cut the budget to pay a larger dividend, Hickel would not.
  • Robin Hood and Hickel agree that PFD cuts are better than budget cuts, but they strongly disagree about raising taxes.

Winning the Game

If any group had enough members to get their way, the game would be over. Historically, the Hammond group was large enough to win outright. Since 2016, the Hickel and Robin Hood groups have grown. Today, no group is large enough to get their way.

Therefore, none of the preferred plans can be achieved under the current legislative makeup. That implies that passing a long-term fiscal plan today requires compromise. It’s important to note that there is no constitutional fix available without all three groups. There are ways for two groups to pass a joint resolution in one body, but those same groups don’t have enough members to pass the other. So, any permanent fiscal plan requires participation from all three groups.

Conversely, it only takes any two groups joining together to pass a statutory plan or a simple budget fix. Consequently, it is much easier to accept a short-term fix that is acceptable to two groups than to implement a long-term fix that requires even more concessions.

That’s why we still don’t have a “long-term fiscal plan” in the way people envision. What we have instead is a series of short-term solutions that will work in the long term. Let’s explore that assertion a little more.

Expected Outcome

Because a constitutional fix requires all three groups, it requires greater compromise than getting two groups together. In other words, the value to the Hickel and Robin Hood groups are always higher with a short-term solution than the compromise required to bring the Hammond group on board for a long-term one.

That means that a long-term solution is unavailable under the current legislative composition, which leaves three possible outcomes:

  • The two Republican factions (Hammond and Hickel) agree to a smaller budget, a smaller PFD, and no taxes.
  • The Hammond Republicans and the Democratic Party members agree to a slightly larger budget and a larger PFD, with some form of tax to balance the budget.
  • The Hickel Republicans join the Democratic Party members to pass a larger budget, a much smaller PFD, and no taxes.

Look closer at the options for the Hammond Republicans — whose primary goal is maintaining the PFD. To get there, they have two options. First, they could join the Democratic members. The concession they must give is to vote in favor of new taxes and a larger budget than they would like.

Their other option is to concede on their primary goal, accepting a smaller PFD and getting a smaller budget. Because taxes are a non-starter for the Hickel group, the negotiation would pit the budget and dividend against one another. Each group has differing opinions on the right size of government and how much of the PFD to use to pay for it. If there were no other options, these groups could find a compromise.

But there is another option. Notice that two outcomes involving the Hickel group have something in common. Both outcomes result in a PFD cut rather than a tax. The only question is the size of the PFD cut, which depends on the size of the budget. Because the Robin Hood and Hickel groups agree that government spending is better than PFD distributions, it’s much easier for the Hickel group to accept a larger budget than a larger PFD.

Hence, the expected outcome of this game is for the Democratic Party members and the Hickel Republicans to join forces. The result is a larger budget and a smaller PFD.

The Bottom Line

The takeaway here is that the only alternative to PFD cuts is for the Hammond and Robin Hood groups to join forces. However, these two groups don’t agree on much. They are at opposite ends of the political spectrum, bound only by a belief that raising taxes is better than cutting the dividend. The only way such a coalition works is to pass a new law creating a tax. In exchange, the coalition would follow the existing law regarding the PFD for the year. That’s not a fair trade — Especially with every other policy choice creating conflict.

Once you realize the dynamics, the future is clear. Cutting the PFD to pay for government services is the long-term fiscal plan of least resistance. Obviously, that’s the path we are on. As I’ve said before, this path eventually leads to the death of the PFD.

So, the reason we don’t have a long-term fiscal plan is simple. A series of short-term plans works better for the players in the game today. Putting a different long-term fiscal plan into place requires exceptional strategy development and flawless tactical execution by the Hammond group. And it gets more difficult each session that the their position loses ground.

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