It will take a lot to bring the state budget out from the red, Wrangell residents learned at a special presentation on Oct. 21.
Alaska expects to run a budget deficit of $2.9 billion this fiscal year, even after a round of significant cuts made to departments and capital project spending. When they meet for the next regular session in January, the state’s legislators will have to figure out how to curb spending in future budgets before the government empties its coffers.
In an effort to prepare the public for the debates ahead, the Alaska Department of Administration has been holding a series of talks around the state which focus on the budget. Gov. Bill Walker’s office has developed a pair of programs for the talks, budget simulations that allow people to apply different cuts and revenue sources in an effort to even out the state’s finances.
ADA deputy commissioner Mike Barnhill gave Wrangell its presentation at the Nolan Center, using its main projection screen to show residents how the simulator worked. He began on a down note, laying out the precarity of Alaska’s financial situation.
“The state’s in the middle of a profound fiscal crisis,” Barnhill began.
The cause of the recent crisis is rooted in oil. Some 90 percent of revenue for Alaska’s discretionary spending is derived from royalties and petroleum-related taxes. With the sharp decline in the price of oil from $110 per barrel in summer 2014 to around $50 per barrel in January, the state found itself with a sizable hole in its budget, with only $2.2 billion of the $5.1 billion needed to cover its education, pensions, agency and public services obligations.
Even with a rebound in price, oil revenues will be insufficient to keep up with state spending due to declining oil production. Production in Alaska has been steadily declining since before the 1990s, and currently sits at around 500,000 barrels per day. At this rate, the “break-even” price of oil needed to
match state spending is set at $110 per barrel – at current prices. Production would have to rise to an unlikely 1.6 million barrels per day, which
would make Alaska the 19th greatest producer in the world, according to the U.S. Energy Administration. However, Barnhill explained even these production levels are expected to continue dropping.
The state does have savings it can fall back on to temporarily offset the deficit. At its
disposal Alaska has Constitutional and Statutory budget reserve funds (CBRF and SBRF), which serve as a spending reserve for its operations. At the start of the current 2016 fiscal year these together stood at around $10 billion. But despite their size, at the current rate of spending the two funds will be exhausted in a little more than three years.
Barnhill explained the goal of the budget simulator is to extend the life of the CBRF and SBRF, which would buy the state some time to pursue other revenue-growers, like the gas pipeline venture currently being debated by the Legislature in special session.
“Once you push it out to 2029, you’re starting to get on the road to sustainability,” he said.
Part of the solution will be through cuts. This year’s budget already includes reduced expenditures, primarily through cross-agency efforts and increased intra-agency efficiency. Other cuts, such as to the state ferry system, are being felt through trimmed service and held projects.
The most significant reductions were to agencies, in the 20 to 35 percent range, such as the Alaska departments of Fish and Game, Revenue, Law, Administration, Environmental Conservation and Transportation. In monetary terms, Transportation received a $34 million cut from its budget, plus a $15.5 million fuel cut.
But even these cuts will not be enough to cover the budget, and legislators will have to look at increasing revenue.
“There is no one silver bullet to this. It’s going to take a combination,” said Barnhill. Using the simulator, residents were invited to tweak existing rates and add new taxes, which affected the CBRF and SBRF by different degrees.
One item in consideration for change is the oil and gas tax credit program meant to stimulate exploration and production, which added up to around $700 million this year. Also for possible consideration is a natural gas reserves tax, which was taken off the table at this week’s special legislative session.
Other options are to modify non-petroleum taxes, such as increasing those on corporations, mining and fisheries operations and motor fuel or the imposition of additional “sin taxes” on marijuana, alcohol and tobacco.
The re-imposition of an income tax and the establishment of statewide property and sales taxes may also be considered, if not necessarily popular options. Barnhill said there are unintended effects from different taxations to consider as well, impacting the economy and even driving away residents and businesses for little gain.
“Tax just sort of heads to complexity,” he said. “Each of these generates a comparatively small amount of money.” He added: “There’s no combination of these things that people are going to be satisfied with.”
The biggest change would be to repurpose the state’s Permanent Fund Dividends. The state currently has in its fund $10 billion in earnings and $42 billion in trust or $52 billion in all. For more than 30 years a percentage of invested earnings from the fund have been annually distributed to residents. The annual PFD is unique to Alaska, and is also an expensive program: The $1.4 billion to be distributed next year will actually exceed education spending by about $100 million.
In the simulator, with the addition of various taxes and cuts, a cap of PFD payouts to $500/person and withdrawal rate of about four percent were about able to balance state spending. The latter change was the most noticeable, extending longevity of the CBRF and SBRF by more than a decade.
Rep. Dan Ortiz participated in the presentation as well, passing out survey materials to the audience as part of a wider drive to gauge his constituents’ opinions. A mailed survey will be going out to about half of District 36 residents within the coming weeks.
His staff will plug all the answers into a spreadsheet for reference, which will give him some guidance going into the next session Jan. 20. So far the survey is a third of the way through.
“None of the revenue options have more than 50-percent support,” he said.
“The primary objective is just to raise awareness,” Barnhill said of the presentation. Changes to the budget will impact every Alaskan, and he said it will be important for the public to stay engaged and be informed on the issues.
“That’s really why we’re here,” agreed Ortiz.
The governor’s draft budget is expected to be released on Dec. 15. Those who were unable to attend the presentation can access the simulator and informational materials online at http://gov.alaska.gov/Walker/priorities/transition-2014/sustainable-future/the-conversation.html.
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