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NEW BEGINNINGS TOWARD A STATE FISCAL PLAN

James Borsetti
Palmer, AK
September 19, 2002

Alaska is the last great frontier. Frontiers are all about new beginnings and so is the fiscal plan I am proposing we develop.

Income taxes are old school and we certainly don't want them. Fact is we pay to many taxes already. Our plan should not increase taxes. If successfully applied, it should work towards lowering the ones we now suffer. Robbing Peter to pay Paul does not produce positive economic development. Bringing dollars into our economy from outside is the way to build a solid future.

We all know resource development and exportation have played a major role in Alaska's economy. Some people feel we have under taxed the corporations involved. They may have a point; however, I feel more development, not higher taxes, is the answer to the growth of our resource income. Regardless of what direction we take in developing our resources, the fiscal plan being proposed here has more to do with how we use the Permanent Funds immense wealth. Can we use our present wealth in a more productive manner today to build a better tomorrow? Can we guarantee lawfully legislated permanent dividend checks? Can we find the funds the legislators need to run a productive government? Can we eliminate the need for state income taxes? I believe we can if we apply the politics of compromise.

The Permanent Fund has had some tremendous success. However, it has some serious flaws. First, though the people like to believe it belongs to them, our present laws give total control of its earnings to the Legislature. The Legislature can use these earnings for any lawful purpose. They don't have to appropriate dividend checks at all. Second, the Permanent Fund is one fund saddled with three conflicting purposes. It is supposed to be a permanent savings account. Then, it is responsible to pay the people's dividend check. Also, its earnings are available to the politicians for use in the State budget. That is a heavy load for one Fund. Multiple purposes for the Fund has split the people. An atmosphere of distrust has resulted in us not using our wealth to its true potential. Here is where we need compromise.

We don't need a Permanent Fund. We need two Permanent Funds. We can make them both truly permanent by constitutional legislating. Both of these new Funds can only make a yearly payout up to but no more than 5 percent of the five-year average market value of the Fund. This should successfully inflation-proof each Fund while also help establish a predictable balanced year to year payout. We give each Fund one and only one purpose as well as only one lawful owner.

The first Fund would belong to the people. I will call it the Peoples Permanent Fund or the PPF. A board of directors would manage this Fund. The board would also be responsible for setting the Fund's yearly appropriations. The PPF would by law only pay dividend checks. As the PPF grows in balance so would the dividend check. This new beginning would be especially positive for those individuals and households who plan to make Alaska their permanent home.

The second Fund would belong to the Legislature. I will call it the State Operating Fund or the SOF. A board of directors would manage this Fund. The legislators would appropriate the SOF yearly earnings. They could add it to the General Operating Budget or perhaps build their own Earnings Reserve Account. They could use the earnings available for any lawful purpose. This is the Fund we could use to eliminate the need to tax the people. Used with wisdom, these earnings could help develop our State economy. We have all witnessed the positive effect dividend checks have had on our economy. The SOF earnings could increase this positive effect through governmental development funded by dollars earned outside.

Splitting the existing Permanent Fund in half could start both Funds. We could also legislate half of the 25 percent (12.5%) of the yearly resource revenue allocated to the present Fund to each new Fund. I realize a change of this magnitude would take time for debate, fine-tuning, and perhaps a constitutional convention.

Let us just imagine a plan of this type was in effect for fiscal 2003. Each Fund would start with a balance of about 11.5 billion dollars. Earnings for each Fund?s first year could be projected at 8 percent or 920 million. The 12.5 percent of allocated oil revenue would add at least 125 million to the balance. Using our 5 percent of five-year average of market value formula each Fund would have 625 million of useable earnings. That means the ?PPF? first dividend check should be about 975.dollars. Balance of the ?PPF? would grow by 420 million. For the next three years dividend checks would remain at this amount. Then they would experience consistent yearly growth.

Mirroring the PPF the State Operating Fund would make available, its first year, 625 million for appropriation by the legislators. This Fund would also have a consistent payout for the first four years. It too would then have steady growth. This would be enough to end the need for new taxes. We could even hope for some positive development.

Dividend checks would initially take a hit. After that, the sky is the limit and checks would be protected by law not the good graces of the legislators.

Long-term State Fiscal Planning would have a predictable addition helping us plan a stable future economy.

We need a fiscal plan of this design. It will take a lot of work. We need some brave leaders to break the trail. Alaska is a rich state. Let us use these riches today to build a better tomorrow.


James R Borsetti
borsettij@hotmail.com

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