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Alaska is on an unsustainable financial track if it doesn't adjust its spending and liabilities.
The unfunded pension liability for public employees and teachers' retirement systems in particular stands at $12 billion. The state currently makes annual payments of $600 million.
The Alaska Retirement Management Board has proposed Gov. Sean Parnell direct $2 billion toward the pension liability over the next four years. Gov. Parnell has proposed $3 billion, which the board supports. Such an injection would reduce annual payments to $500 million, preventing the number from increasing to more than $1 billion annually. It would save the state between $374 million and $424 million per fiscal year, according to the state.
The liability affects the comfort level of bond rating agencies, which could compromise the state's ability to bond. Governments bond for capital projects.
If the rating agencies are concerned with the pension liability, then Alaska must be attentive to. It also should be keen on funding the pensions and removing the debt. In addition, if it cannot afford its current pensions, then it should honor what it has promised and adjust to what it has the wherewithal to support financially, especially as Alaska's oil production, which is Alaska's main revenue source, is declining along with the price per barrel.
Gov. Parnell and the Legislature adopted an oil-tax cut in the most recent legislative session. He expects oil revenue to be about the same as the old tax system because of lower oil prices. But, if prices increase, then the revenue would, too.
Legislators and others opposed to last session's oil-tax cut support an initiative expected to be on the 2014 election ballot. The initiative would invalidate the new tax.
It won't be until well after that election that it becomes apparent whether the new tax had the desired effect of reducing the revenue decline anticipated under the old tax.
Alaska simply has to deal conservatively with its finances regardless of which tax structure is in place. It already expects to depend on its $16 billion in savings to maintain state government in years to come, and it cannot exist on reserves forever. Reserves will expire, too, if not replenished.
Alaska, with its oil wealth, can look at other states in serious financial straits and be relieved not to be in their situation at this time. But it cannot remain confident it won't be in a similar situation if it doesn't deal with its pension liability and revenue — the latter being addressed with the tax change.
At the same time, it must not allow the state to disintegrate as a desireable place for economic development, which means building and maintaining infrastructure required by business and industry.
The track ahead looks like one with less capital-project spending and more paying down debt. That's as it should be. First, Alaska pays for what it has already bought. Then, it can buy new stuff. That is the way to a long-standing, economically sustainable state.