The September 14 advisory vote on the Balanced Budget Plan is fast approaching, and many Alaskans have asked me what will happen if this plan proposed by the Legislature and the Governor is rejected at the polls. The answer is complex.

In the short term, meaning the next two years, Alaskans should expect to see "business as usual." The Legislature will continue to make incremental reductions in state spending. However, these reductions will not be sufficient to close the staggering fiscal gap.

How big is Alaska's fiscal gap? A recent surge in oil prices has shrunk this year's projected budget deficit to "only" $630 million. However, estimates of future world oil prices coupled with declining North Slope production tell us that Alaska can expect to see a recurring, annual fiscal gap in excess of $1 billion.

To appreciate the magnitude of a $1 billion fiscal gap, consider that if every state general fund employee were laid off, it would not generate enough savings to close the gap. Or, to use another scenario, if the Legislature terminated all funding for K-12 public schools and the university system, we would still fall short of $1 billion in savings.

Since spending cuts alone will not do the job, the Legislature will continue to borrow money from the Constitutional Budget Reserve (CBR), as it has for the last several years. Unfortunately, our savings in the CBR are being depleted rapidly. Including the current fiscal year, the Legislature has been forced to borrow nearly $4 billion from the CBR since 1993 to keep state government solvent. At this rate, the CBR balance may be down to zero in about 2 to 4 years.

When the CBR is gone, how will the state of Alaska balance its budget? There are at least three possibilities, none of which are very attractive.

Option 1: Taxes, The Legislature could enact a personal income tax and/or a statewide sales tax. However, the tax rates would have to be staggeringly high to raise $1 billion. For example, a flat rate personal income tax of 9 percent would be required to close the fiscal gap. That means if you earn an annual salary of $25,000, the state would take $2250. If you earn $35,000 a year, the state would take $3150 - more than twice the amount of the record high 1998 dividend check ($1540). Similarly, a sales tax of greater than 16 percent would be required to raise $1 billion. Either tax, or a combination of the two, would have a devastating impact on the Alaska economy. For example, economic research shows that a sales tax raising $235 million would lead to an estimated loss of 3,500 jobs. An income tax raising $300 million would cause an estimated loss of 3,700 jobs, and an income tax that raised $1 billion would terminate 10,000 jobs. This is the predictable result when hundreds of millions of dollars are siphoned out of the private sector economy and diverted to government. Under this tax scenario, the job losses would have a severe impact on the real estate market and the retail sector, likely leading to a major recession.

Another problem with taxes is that a whole new bureaucracy must be created to collect the money - further increasing the size and cost of government. An absurd scenario thus unfolds in which one state bureaucracy would exist to send out money (the Permanent Fund Dividend Division) and another tax-collecting agency would take the money right back. Finally, despite all the talk about making out-of-state workers "pay their fair share," the hard reality is they would pay less than 10 percent of the revenue raised from a personal income tax. I'm concerned because the overwhelming majority of the tax dollars raised - 90 percent - would come out of the pockets of working Alaska families.

Option 2: Massive Spending Cuts. Most Alaskans agree that state government is too big, and the Legislature will continue to reduce state spending regardless of the outcome of the September 14 vote. General fund spending has been reduced more than $200 million over the last four years, and per capita state spending is at its lowest point since 1979. The Legislature has committed to cutting another $30 million next year. However, it is simply unrealistic to expect that $1 billion can be cut from the budget without having a significant impact on the core public services the state provides: public safety (including the prison system), transportation, and education. It is my view that another $200 million in reductions could be implemented. However, a reduction of $1 billion would require chopping state general fund spending by 43 percent. That goal is simply not politically attainable unless there is a profound change among the citizenry of this state regarding what services they expect government to provide. Also, cutting $1 billion will have a negative impact on the private sector economy, where much of the state money is spent. Just as new taxes would cause job losses and a recession by siphoning out millions of dollars in spending from the private sector, a massive reduction in state spending will produce a similar effect.

Option 3: Use Earnings of the Permanent Fund. It is unlikely the Legislature will use this option if voters reject the Balanced Budget Plan on September 14. The use of PF earnings is one component of the plan - but it is linked to other structural changes that would significantly increase the annual earnings potential of the Permanent Fund. This linkage is critical to the plan's success. If the state simply spent money from the PF earnings without making the other structural changes, it would not work as a long-term solution. Here's why: the Legislature is legally allowed to tap certain portions of the Permanent Fund, even though it has chosen not to do so. The PF earnings reserve account (valued at $2.6 billion) and the PF unrealized gains ($3.5 billion) can be legally accessed to help fund government services. In contrast, the principal of the Permanent Fund ($18.9 billion) is constitutionally off-limits for government spending. If the state begins tapping the earnings reserve account in 2002 (when the CBR is depleted), but does not adopt the other structural changes called for in the Balanced Budget Plan, the earnings reserve account will be exhausted by 2007. Then the state would begin cashing in on the unrealized gains, until this portion of the Fund is depleted in 2011. Because of the formula used for calculating the dividends, the exhaustion of these accounts would cause the dividend to plunge from an estimated high of $2500 in the year 2011 to almost zero in 2012. This sudden drop would produce economic shock waves among Alaska families, which is a scenario I do not support.

The Balanced Budget Plan avoids this "zero dividend" pitfall by consolidating the Constitutional Budget Reserve Account with the Permanent Fund, thus increasing the Fund's earnings potential. It also adopts a more realistic formula for calculating the annual PFD, which will ensure the state can continue to pay dividends in the long run, even if at a slightly smaller amount.

Further information about the September 14 vote and the Balanced Budget Plan is available on the Internet. The Alaska Permanent Fund Board of Trustees has produced an excellent "questions & answers" publication; go to www.apfc.org to access this document. The State of Alaska has extensive information available at www.gov.state.ak.us/ balancethebudget.html. Finally, the non-profit Fiscal Policy Council of Alaska has information available at www.fiscalak.org. If you do not have Internet access, you can obtain further information by calling my office at 269-0240. I encourage readers to learn as much as possible on this important issue before voting.

Senator Loren Leman represents northwest Anchorage and Elmendorf Air Force Base. He is a member of the Senate Finance Committee and previously served as Chairman of the Senate Labor & Commerce Committee and the Senate Resources Committee.