Alaskans just got some good news and some bad news. First, the good news: The state’s budget deficit — estimated at $2.4 billion just a few months ago — has been cut by more than two-thirds, to $700 million. It is still large by state standards, but enough to convince Standard and Poor’s to revise its outlook, to stable from negative, on the state’s debt. Now the bad news. Reducing the deficit required Gov. Bill Walker and the state legislature to do something Alaska has never done before. It is dipping into the Alaska Permanent Fund — the state’s oil wealth — which is supposed to belong to its citizens. As a result, the annual dividend that every man, woman and child receives from the fund will drop this year to $1,600 from the original estimate of $2,700. Many families depend on those annual checks to help offset Alaska’s exorbitant cost of living. A loaf of bread in Juneau costs more than $5; energy bills in Fairbanks can run $500 per month.

Workers position a mounting shoe for a pipeline under construction outside a BP Plc production facility in Prudhoe Bay, Alaska, U.S., on Thursday, Feb. 16, 2017. Daniel Acker | Bloomberg | Getty Images

Such is life in Alaska, which drops to last place in CNBC’s 2018 America’s Top States for Business rankings as the state struggles to extricate itself from what Walker has called “the gravest fiscal crisis in state history.” The drop in oil prices that began in 2014 devastated the state, which derives roughly 85 percent of its revenue from oil and gas taxes and fees. The sharp rebound in prices in recent months has helped, but not enough to undo the damage — or solve the budget crisis.

Alaska Governor Bill Walker Brad Quick | CNBC

But Walker could pay a heavy price politically. Seeking a second term in November, he is widely considered to be one of the most vulnerable incumbent governors in the country. Challengers, including former U.S. Senator Mark Begich, a Democrat, as well former Lieutenant Governor Mead Treadwell and former State Senator Mike Dunleavy, both Republicans, all say they plan to make the dividend cuts a central issue in the campaign.

The domino effect from plunging oil prices

The way Walker sees it, Alaska had no choice but to radically restructure its finances — a change he has been pushing almost since he took office in early 2015. “Everybody needs to participate in some way,” . “You know, like I say about the plan we put together, there’s something there for everybody to not like. There’s parts of it I don’t like.” But there are no guarantees the gamble will pay off. Standard and Poor’s analyst Timothy Little, in removing the negative outlook from Alaska’s debt, praised the move to tap into the Permanent Fund’s earnings, which he said “should allow for sustainable draws from the fund in future budgets.” But he warned that Alaska’s dependence on oil — whether through taxes or the Permanent Fund — carries some big risks. “The reliance on such economically sensitive revenues will likely make it more prone to future pressure,” Little wrote in his June 8 report. “The state’s rating could further benefit from economic diversification.” Policymakers in Alaska talk a lot about diversification, especially when oil prices are low. But there is little consensus on how to go about it. As a result, Little said, the state needs to keep plenty of money in the bank.

The state’s rating could further benefit from economic diversification. Timothy Little Standard and Poor's analyst

“Upward movement on the rating will depend on the state’s ability to grow and maintain its reserve levels,” he wrote. For now, the trends are moving in Alaska’s favor.

Oil rig afloat on the waters in Alaska Tim Aubry | AFP | Getty Images