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The State of Alaska’s Fiscal Circumstances – Updated 1-2017

This collection of facts is numbered for ease of reference.  (Unless otherwise noted, the figures below come from the Alaska Legislative Finance Division and describe the Unrestricted General Fund (“UGF”), which is what people in Alaska usually mean when they say “the budget” or “State spending.”)

  • Do you see any of these facts as incorrect?
  • Which of these facts do you see as most important?
  • Which additional facts—if any—do you consider important in addressing the State of Alaska’s fiscal challenge?
  • What specific steps do you support to address the State of Alaska’s fiscal challenge?
  1. The budget is $4.4 billion in the current fiscal year (Fiscal Year 2017— “FY17”—which runs July 1, 2016-June 30, 2017) under the traditional definition of Unrestricted General Fund, and the revenues under that definition are projected to be $1.5 billion in FY17.
  2. The resulting deficit of $2.9 billion works out to about $3,900 for every man, woman, and child in Alaska for FY17.
  3. With a proposed Governor’s budget of $4.4 billion and projected revenues by the Alaska Department of Revenue of $1.6 billion, the deficit with no other action in FY18 (July 1, 2017-June 30, 2018) would be $2.8 billion.
  4. For five years in a row (FY13-FY17), the State of Alaska is financing its deficit by spending savings, primarily the Constitutional Budget Reserve Fund.
  5. Assuming the current level of spending and the current revenue laws as well as the Alaska Department of Revenue’s most recent revenue projections, those savings spendable by the Legislature outside the Permanent Fund Earnings Reserve Account will be exhausted no later than June 30, 2019 (and very likely by December 31, 2018).
  6. That definition of “those savings spendable by the Legislature outside the Permanent Fund Earnings Reserve Account” used in the previous paragraph includes all the money in “undesignated reserves” such as the Constitutional Budget Reserve Fund, the Statutory Budget Reserve Fund, and the Alaska Housing Capital Corporation Fund plus all the money in “designated reserves” such as the Alaska Capital Income Fund, the Alaska Higher Education Investment Fund, the Revenue Sharing Fund, and the Power Cost Equalization Endowment.
  7. If the State of Alaska spent the entire Permanent Fund Earnings Reserve Account in addition to spending all the other savings spendable by the Legislature described in the previous paragraph, the Alaska Legislative Finance Division’s model shows that the State of Alaska would be out of savings outside of the Permanent Fund principal no later than the end of Fiscal Year 2025—assuming the current level of spending and the current revenue laws as well as the Alaska Department of Revenue’s most recent revenue projections.
  8. The earnings of the Permanent Fund go into the Permanent Fund Earnings Reserve Account, which has since the first payment of the Permanent Fund Dividends in 1982 has almost entirely used either to pay Permanent Fund Dividends or for inflation-proofing the Permanent Fund principal.   Under current law leaving the Permanent Fund Earnings Reserve Account empty without replenishment would mean no Permanent Fund Dividends.
  9. The Governor’s proposed budget for Fiscal Year 2018 (July 1, 2017-June 30, 2018) reclassifies revenues and expenditures involving Permanent Fund earnings from “Designated General Funds” (“DGF”) to UGF.   Adopting this reclassification or redefinition changes the numbers for UGF spending, UGF revenues, and the budget deficit.
  10. The budget as traditionally defined has been cut by 44 percent ($3.5 billion) between Fiscal Year 2013 and Fiscal Year 2017.
  11. The budget as traditionally defined was $4.2 billion in Fiscal Year 2007 and is $4.4 billion in Fiscal Year 2017.
  12. Adjusted for inflation and population, the budget as traditionally defined in Fiscal Year 2017 is the lowest it has been in 10 years.
  13. More than 55 percent of the Fiscal Year 2017 budget goes for K-12 education and the Department of Health and Social Services.
  14. All State of Alaska employees could be laid off, and the State of Alaska would still have a deficit.   (To explain this apparently counterintuitive fact, note that the expenditures for K-12 education and Medicaid are mostly paid as grants—not salaries to State employees—and that debt service on State bonds is paid to bondholders, not State employees.)
  15. The Alaska Department of Revenue has reported that the price of oil (Alaska North Slope West Coast or “ANS West Coast”) has ranged between $38 and $56 per barrel since July 1, 2016 (the beginning of Fiscal Year 2017).
  16. The price of oil (ANS West Coast) would have to average between $100 and $110 per barrel during Fiscal Year 2017 to balance the Fiscal Year 2017 budget without using savings.
  17. The Alaska Department of Revenue’s most recent forecast (Fall 2016 Sources Book) projects that oil prices for Alaska will be below $89 per barrel in nominal dollars for each fiscal year through Fiscal Year 2026.
  18. The State of Alaska’s oil revenues fell more than 90 percent from Fiscal Year 2012 to Fiscal Year 2016, according to the University of Alaska Anchorage’s Institute of Social and Economic Research (ISER).
  19. Oil revenues provided an average of 90 percent of Unrestricted General Fund revenues for the period of Fiscal Year 2005 through Fiscal Year 2014, according to ISER.
  20. Oil production in Alaska is projected to average less than 510,000 barrels per day in Fiscal Year 2017, according to the Alaska Department of Revenue’s most recent forecast (Fall 2016 Sources Book).
  21. Oil production in Alaska is expected to drop every year from Fiscal Year 2017 through Fiscal Year 2025, according to the Alaska Department of Revenue’s most recent forecast (Fall 2016 Sources Book).
  22. The Alaska Department of Revenue projects that by the end of Fiscal Year 2018 (June 30, 2018), there will be approximately $1 billion in oil and gas production tax credits eligible for repurchase outstanding.   The amount legally required to be paid each year (the statutory minimum appropriation to the Oil and Gas Tax Credit Fund) under a statutory formula set out in AS 43.55.028(c) was $30 million in Fiscal Year 2017, and that is the amount that was paid for that type of oil and gas tax credit.
  23. The Alaska Department of Revenue’s Fall 2016 Sources Book shows that the statutory minimum appropriation to the Oil and Gas Tax Credit Fund is $74 million for Fiscal Year 2018, and also shows that the amounts for that statutory minimum appropriation for Fiscal Years 2019 to 2026 range from $54 million to $102 million per year.
  24. Oil production in Alaska averaged more than 2 million barrels per day in Fiscal Year 1988 (the peak year for Alaska oil production), according to the Alaska Department of Revenue.
  25. Pursuant to a formula set out in state statute, the Legislature appropriated $1.362 billion from the Permanent Fund Earnings Reserve Account to pay Permanent Fund Dividends in the fall of 2016.   The Governor vetoed $666.35 million from that amount, leaving $695.65 million to be paid in Permanent Fund Dividends (pending a legal challenge to the veto).
  26. The money in the portion of the appropriation for Permanent Fund Dividends that was vetoed by the Governor stayed in the Permanent Fund Earnings Reserve Account.
  27. The Permanent Fund Dividend is a form of universal direct distribution of cash to residents, and Alaska is the only state that has it.
  28. Alaska is the only state with no form of state income tax paid by individuals and no statewide general sales tax, according to ISER.
  29. Alaska had a graduated (progressive) income tax paid by individuals between 1949 and 1980.
  30. Imposing an income tax of 15 percent of federal tax liability would raise $571 million per year, according to the Alaska Department of Revenue in 2015.
  31. Imposing a three percent sales tax without exemptions would raise $418 million per year, according to the Alaska Department of Revenue in 2015.
  32. Alaskans pay the lowest broad-based state taxes in the country, according to ISER.
  33. Alaska has the lowest gasoline tax of any state, according to the Tax Foundation.
  34. To eliminate the deficit with marijuana tax revenues alone, every person over 21 years of age in Alaska would have to buy more than nine pounds of legally taxed marijuana each year, according to the Alaska Department of Revenue.
  35. The earliest year for production from the proposed Alaska Liquefied Natural Gas (AK LNG) project is projected to be 2025, according to the Kenai Peninsula Borough (the local government where the southern terminus of the project’s pipeline segment is located)

Prepared by: Cliff Groh   Chair, Alaska Common Ground

Updated Big-Picture Truths Regarding Alaska’s Fiscal Challenge

by Cliff Groh

Let’s review some enduring truths about Alaska’s circumstances.

  • The long-term decline in Alaska oil production and the collapse the last two years in world oil prices have combined to create major and continuing challenges for both Alaska’s government and Alaska’s economy.
  • The State of Alaska’s oil revenues fell by more than 90 percent in the last four years (Fiscal Year 2012 to Fiscal Year 2016) and are projected to continue to fall during the current fiscal year (FY17). That large reduction in oil revenues is a big problem given that oil revenues provided an average of 90 percent of Unrestricted General Fund revenues for the period of Fiscal Year 2005 through Fiscal Year 2014.
  • This sharp drop in revenues has contributed to big structural deficits both this year and in the future. The deficit is approximately $3.1 billion this year (FY2017), and that number is equal to almost about ¾ of the budget (as conventionally defined as Unrestricted General Fund spending).
  • The State of Alaska’s ability to finance deficits using the Constitutional Budget Reserve Fund—the savings account traditionally used to fill the gap—is going away fast, as that fund will go to zero in less than two years at the current burn rate.
  • Although still probably the highest per capita among the states, Alaska’s state budget has fallen and continues to fall. As reported by the Alaska Legislative Finance Division, the total operating and capital budget has been cut by more than 40 percent in the last four years and is now below the level it was eight years ago—without accounting for population and inflation.
  • The State of Alaska’s top two expenditures are for K-12 education and health and social services.
  • Alaskans are the lowest-taxed people in the U.S. Alaska is the only state with no form of state income tax and no form of statewide general sales tax.
  • The restructuring of the Permanent Fund earnings system under the most frequently discussed proposals will still likely leave Alaska with a substantial deficit.
  • The existence of the Permanent Fund—and even more the Permanent Fund Dividend—make fiscal politics in Alaska more difficult and complex than in other states.
  • The Permanent Fund and the Permanent Fund Dividend raise unusual questions of equity, both among classes and among generations.
  • Critical questions relevant to the fiscal challenge include “What is the Permanent Fund for?” and “How long do you intend to live in Alaska?”
  • Alaska perhaps faces a future of battles in court over levels of government funding.
  • Resolving Alaska’s fiscal challenge is a question of values as well as a question of numbers.
  • Alaska’s challenge is psychological or cultural as well as fiscal and political. Alaska needs to move from imagining easy prosperity to find fiscal sustainability in an era likely to feature increasing scarcity.

Big-Picture Truths Regarding Alaska’s Fiscal Challenge

by ACG Chair Cliff Groh written for the Alaska Bar Rag on page 7 of the April-June 2016 edition.

Let’s look past the legislative impasse as of this writing (May 10) to review some enduring truths about Alaska’s circumstances. At the end of this piece, there’s an invitation to a free event to help you learn even more.

The long-term decline in Alaska oil production and the deep slump in world oil prices over the past two years have combined to create major and continuing challenges for both Alaska’s government and Alaska’s economy.

The State of Alaska’s oil revenues have fallen more than 90 percent in the last four years (Fiscal Year 2012 to Fiscal Year 2016, which ends June 30, 2016). That large reduction in oil revenues is a big problem given that oil revenues provided an average of 90 percent of Unrestricted General Fund revenues for the period of Fiscal Year 2005 through Fiscal Year 2014.

This sharp drop in revenues has contributed to big structural deficits both this year and in the future. The deficit is approximately $4 billion this year (FY2016), and that number is equal to about ¾ of the budget (as conventionally defined as Unrestricted General Fund spending).

The State of Alaska’s ability to finance deficits using the Constitutional Budget Reserve Fund—the savings account traditionally used to fill the gap—is going away fast. The Constitutional Budget Reserve Fund (CBR) will fall to zero in less than two years at the current burn rate.

Although still probably the highest per capita among the states, Alaska’s state budget has fallen and continues to fall. Adjusted for inflation and population, the operating budget is the lowest it has been in 10 years.

The State of Alaska’s top three General Fund expenditures are for K-12 education, health and social services, and refundable oil tax credits. Refundable oil tax credits—which represent only a subset of all oil tax credits offered by the State of Alaska—cost $500 million this fiscal year (FY2016). As of this writing, refundable oil tax credits are projected under current law to cost $775 million in Fiscal Year 2017 (July 1, 2016-June 30, 2017), which works out to more than $1,000 per Alaskan.

Alaskans are the lowest-taxed people in the U.S. Alaska is the only state with no form of state income tax and no form of statewide general sales tax.

The restructuring of the Permanent Fund earnings system under the most frequently discussed proposals will still likely leave Alaska with a substantial deficit.

The existence of the Permanent Fund—and even more the Permanent Fund Dividend—make fiscal politics in Alaska more difficult and complex than in other states.

The Permanent Fund and the Permanent Fund Dividend raise unusual questions of equity, both among classes and among generations.

Critical questions relevant to the fiscal challenge include “What is the Permanent Fund for?” and “How long do you intend to live in Alaska?”

Alaska perhaps faces a future of battles in court over levels of government funding.

Resolving Alaska’s fiscal challenge is a question of values as well as a question of numbers.

Alaska’s challenge is psychological and cultural as well as fiscal and political. Alaska needs to move from imagining easy prosperity to find fiscal sustainability in an era likely to feature increasing scarcity.

Alaska’s legislators face a particular challenge. The Big Oil era in Alaska has made it relatively easy for lawmakers in Alaska to accommodate a lot of requests and desires for spending.  Now the sharp decline in oil revenues is forcing legislators to transition to a new reality of picking winners and losers (or at least relative winners and losers).

The transition is not going well so far. One or more of the following impulses seem to be driving a number of legislators: hope; expedience; desire to inflict pain; and blame-shifting.

The hope is for higher oil prices. Oil prices have increased in the last few months, but—as always—it is critical to focus on scale. World oil prices would have to more than double and—given the forecasted continued declines in oil production—keep going up in real terms to solve Alaska’s fiscal problem through price increases alone.

The expedience comes in with the wish of a number of lawmakers to put off big decisions until after the general election in November. Although there is a benefit to delay if that passage of time allows Alaskans to better understand the actual facts and options, the major cost is that the longer Alaskans wait to address the fiscal challenge, the lousier their options become.

The desire to inflict pain comes from the expressed belief of some legislators that big and difficult decisions need to come after their constituents feel the hurt of more cutbacks.

The blame-shifting part arises because a number of legislators feel a need to blame any unpopular decisions on somebody else or on some external event. One risk for Alaskans is that this external event might be a recession exacerbated by the Legislature’s actions and omissions this year.

You can join other Alaskans—including probably some legislators—in learning more about the continuing fiscal and economic challenges at an event Saturday, October 1, at the Wendy Williamson Auditorium on the University of Alaska Anchorage campus. This event is free, open to all, and sponsored by Alaska Common Ground. Attending it will allow you to get more information about the facts and options as Alaska confronts the reality of paying for public services and maintaining a good economy in a new environment.

________________________________

Cliff Groh is a lifelong Alaskan, a lawyer, and a writer. He is also Chair of Alaska Common Ground, a non-partisan and non-profit public policy organization focused on helping Alaskans seek consensus on the major issues facing the state. He worked on oil tax legislation while serving as Special Assistant to the Alaska Commissioner of Revenue in 1987-1990 and was the principal legislative assistant on the legislation creating the Permanent Fund Dividend in 1982.

 

Update from the Chair 2016

Download letter here.

Dear Alaska Common Ground Members,

You did it, and I thank you. Your membership has helped Alaskans confront difficult issues affecting our state and helped Alaska Common Ground reach its 25th year! I am writing to invite you to a special celebration and to ask you to renew your membership.

The support you have provided in membership dollars and volunteer hours has allowed Alaska Common Ground to organize and hold well-attended and important events over the past year:

  • A highly regarded health care forum at our annual meeting in May, 2015;
  • A well-received forum on Alaska’s fiscal and economic challenges in September that attracted well over 300, including over 20 percent of the Alaska State Legislature, the Director of the Governor’s Office of Management and Budget, and members of the Governor’s cabinet;
  • An informative and well-attended forum addressing Alaska’s changing climate featuring many experts and Alaskans from around the state;
  • We also cosponsored a panel on the history and future of refugees in our state in conjunction with the Anchorage Concert Chorus during the Defy Fear week, this on the same evening we supported a Let’s Talk Alaska program on “Making Ends Meet” hosted by Bill Hall. Earlier in the year we cosponsored another panel exploring our place in the global economy with the Alaska World Affairs Council.

To celebrate your support as members of Alaska Common Ground, we are hosting a membership reception to celebrate Alaska Common Ground’s 25th anniversary. We will look back over 25 years and forward to the next 25. Please come join us on Tuesday, May 17, at Cyrano’s Theatre at 411 D St. in Anchorage from 5:30 to 7:30 pm. 

This event will be fun! (As if our usual gatherings are not….) Instead of focusing on a single issue, we are celebrating 25 years of successes and looking forward to the issues that will shape Alaska for the next 25 (or more) years. We want to hear from you about what Alaska Common Ground has done well in the past and what issues you would like to explore in the future.

With your ongoing support we are also planning a follow-up forum on Alaska’s fiscal and economic challenges in the fall of 2016 and are beginning to plan other forums and events. 

We want to thank you, our members, for your continued support. Alaska Common Ground is a member-supported organization. It takes lots of time, energy, and money to put on our forums, and we are expanding and growing our organization so that we can continue to put on multiple forums each year.

We encourage you to renew your membership and consider upgrading your membership to a higher level, or contributing financial support for a particular forum to support this work.

As always we invite your ideas and suggestions and welcome you to participate in planning and presenting these events. Thank you for your continued support! It’s what keeps us motivated and able to present forums on important Alaskan public policy issues.

Sincerely,

Cliff Groh, Chair

P.S. Links to the audio and video of the events on health care, Alaska’s fiscal and economic challenges, and Alaska’s changing climate are available at our website at www.akcommonground.org.

P.P.S. We look forward to seeing you on May 17th at Cyrano’s!

Think you’re savvy about Alaska’s plight? Take this test.

Take this quiz from Cliff Groh, Chair of AK Common Ground published in the Alaska Dispatch News, Sunday, September 13th, 2015

Wondering why the University of Alaska is implementing budget cuts? Remember the Legislature’s drawn-out efforts to pass a state budget? Tracking what’s happening in the oil industry? Looking at house prices in Anchorage? If you answered “Yes” to any of these questions, you are warmed up for even more fiscal and economic questions. You could also win a free lunch at the Forum on Alaska’s Fiscal and Economic Future set for Saturday, Sept. 19, at the Wendy Williamson Auditorium at the University of Alaska Anchorage from 9 a.m. to 4 p.m.

1. At the current rates of spending and projected revenues under current law, when does the Alaska Legislative Finance Division project that the state of Alaska will run out of savings outside of the Permanent Fund?

a. Between July 1, 2016 and June 30, 2017
b. Between July 1, 2017 and June 30, 2018
c. Between July 1, 2018 and June 30, 2019
d. Never

2. At current oil prices, what is the size of the annual deficit during this fiscal year (July 1, 2015-June 30, 2016) per Alaskan (that’s every man, woman, and child in the state)?

a. $2,457 per Alaskan
b. $3,213 per Alaskan
c. $3,684 per Alaskan
d. $4,479 per Alaskan

3. What percentage of state employees would need to be laid off to balance the state budget during the current fiscal year (July 1, 2015-June 30, 2016)?

a. 10 percent
b. 40 percent
c. 100 percent
d. This number does not exist

4. At currently projected oil production levels, what price of oil did Gov. Bill Walker identify in July of 2015 as the price needed for the state of Alaska to balance its budget?

a. $42 per barrel
b. $86 per barrel
c. $109 per barrel
d. $146 per barrel

5. What have prices for Alaska North Slope crude oil been since July 1, 2015?

a. Between $31 and $42 per barrel
b. Between $45 and $62 per barrel
c. Between $78 and $91 per barrel
d. Between $122 and $159 per barrel

6. Recent trading in contracts for crude oil in September of 2020 imply that oil prices will then be:

a. Between $35 and $40 per barrel
b. Between $45 and $75 per barrel
c. Between $90 and $120 per barrel
d. Between $130 and $160 per barrel

7. At currently projected oil price levels, what daily oil production level did Gov. Bill Walker identify in July of 2015 as the level the state of Alaska needs to balance its budget?

a. 700,000 barrels per day
b. 850,000 barrels per day
c. 1.2 million barrels per day
d. 1.6 million barrels per day

8. What has Alaska North Slope oil production been since July 1, 2015?

a. Between 380,000 and 490,000 barrels per day
b. Between 750,000 and 900,000 barrels per day
c. Between 1.1 million and 1.3 barrels per day
d. Between 1.4 million and 1.5 million barrels per day

9. What year did the CEO of Royal Dutch Shell (“Shell”) identify in July of 2015 as the year that Shell plans to start offshore oil production in Alaska?

a. 2018
b. 2019
c. 2022
d. 2030

10. What is the earliest year that the Alaska Department of Revenue has projected in a public document that revenues could come to the state of Alaska from the operation of the Alaska Liquefied Natural Gas project (also known variously as “AKLNG,” “the big gasline,” or “the gasline”)?

a. 2018
b. 2020
c. 2024
d. 2028

11. When the multiplier effect is included, how many jobs did the University of Alaska Anchorage’s Institute of Social and Economic Research (ISER) estimate in February of 2015 that a $1 billion cut to the state of Alaska’s budget would cause to be lost in the Alaska economy?

a. 3,000
b. 6,000
c. 9,000
d. 15,000

With the will to act, Alaska need not repeat late 80s oil crash

Janet McCabe, September 9, 2015, Alaska Dispatch News

OPINION: Our economic situation echoes the dark days of the late 80s, but we have the means to pre-empt a crash.

“This city was dying!” That’s what Rick Mystrom said about the time between 1986 and 1989 when the Anchorage Organizing Committee made a valiant effort to be chosen to host the Olympic Winter Games.

I lived in that dying city, and watched loss pile upon loss, during the spread of the self-reinforcing economic decline caused by the combination of oil industry reductions and cuts in state spending. Former Mayor Mystrom’s comment accurately reflects the prevailing mood of the community during the late 1980s. It was easy to believe that the only thing that could save Anchorage was a huge infusion of funding from Outside sources.

In the end, economic rescue came from a disastrous accident, rather than joyous Olympic Games. On March 24, 1989, the Exxon Valdez oil spill caused environmental damage that resulted in a four-year infusion of new money into Alaska — $2.1 billion according to Exxon. As the headquarters of cleanup operations, Anchorage was yanked out of the economic doldrums.

The biggest difference between 1986 and today is that we have revenue options that, if quickly implemented, will prevent the same kind of downward economic cycle that builds on itself and gains momentum. Alaska has the natural and human resources, the location on a global crossroad, and, yes, even the climate, that can give our state a very bright future. Though still petroleum-dependent, our economy is more diversified. The Permanent Fund has grown from $6 billion in the 1980s to $52.3 billion today.

But this is still a precarious time for Anchorage and Alaska, a fact affirmed by the recent downgrading of the outlook for Alaska bonds from “stable” to “negative.” Most of us know about ripple effects that occur when a major source of new money spent in the community is cut off. When the prospective military (JBER) cuts were announced earlier this summer, government leaders immediately expressed concern about the effect on the service and supply sectors of the economy. Cuts in state spending work in the same way. Unlike individual or family budgets, changes in a public budget are not contained; instead, they spread a series of ripple effects throughout the community.

If the impact of major cutbacks in state spending and oil industry spending is large enough, the ripple effect can create an economic whirlpool that will affect the whole state, especially headquarters communities such as Anchorage.

That is what happened to Anchorage when the economy tanked between 1986 and 1989. Before the crash, when state income was buoyed by oil lease sales and increases in oil revenue, the Legislature spent lavishly, granting benefits to Alaska residents unheard of in other states. In 1980 the personal income tax was repealed, and the Permanent Fund dividend program was established. Legislators competed to include projects in the capital budget for their communities. Project 80s gave Anchorage the Sullivan Arena, the Egan Center, the Coastal Trail, the Loussac Library, the Alaska Center for the Performing Arts and more. The construction industry soared.

Then, in 1986, crude oil prices fell from an inflation-adjusted all-time high of $107 per barrel to $31 per barrel, a 71 percent decline. As a young state with few other options, the Legislature cut the state spending to balance the budget. The effect on the economy was not immediate. Uncompleted “Project 80s” construction projects had a brief sustaining effect, but soon the Anchorage economy started to wither.

The sudden loss of jobs, from state spending cuts and oil industry cuts, forced many Anchorage residents to leave town or reduce their own spending. This loss of new money circulating in the economy impacted the service sector, and owners of restaurants, gas stations, saloons and beauty salons, automobile companies, retail stores, architectural firms, and construction and maintenance companies, to name a few, found they had less business. They, in turn, were forced to cut staff or close and more people lost their livelihoods, found ways to spend less, or left Alaska.

As the ripple effects spread and people left town or downsized, housing supply exceeded demand. Streets had rows of “for sale” signs, and property values collapsed. Many people found that their mortgage obligations exceeded the value of their property. Frequently they were unable to sell. If a work-out was possible, the forgiven debt became taxable income in the eyes of the IRS. Under these circumstances, some homeowners simply drove away. One bank employee told me he hated to open the drop box on Monday because it would be full of house keys.

Burdened by bad debt, banks were hard hit. The Federal Deposit Insurance Corporation stepped in and merged failing banks into Alliance Bank, but within a short time that bank failed also. In the end, FDIC was left holding $359 million in bad or shaky loans. Eight banks, or 40 percent of all banks in Alaska, failed during the late 1980s.

The downward ripples continued. Losses in local property values meant losses in municipal tax revenue. Street cleaning, snow removal, park maintenance and educational services were reduced and yet more jobs were lost. Thousands of people left Anchorage, and more from Fairbanks, Kenai-Soldotna and the Matanuska-Susitna Borough.

The crash had huge human costs in terms of broken dreams and broken relationships. Families split up and friends left forever. A favorite bumper sticker in those days referenced the famous 1969 oil lease sale to read, “Oh Lord, please give me another $900 million. I promise not to p— it away.”

In 1989 the Exxon Valdez oil spill “rescued” the economy of Anchorage, but it was not until 2004 that oil prices started to climb. This year, the circumstances are hauntingly similar to 1986. We have seen a drop in oil revenue of over 50 percent in one year, with little likelihood that the price of oil will increase. What’s worse, oil production has fallen steadily since the late 1980s, leaving Alaska producing less than a quarter of what the state produced a quarter-century ago.

Today however, unlike 1986, we have revenue options that can take us off the merry-go-round of dependence on oil prices. Timing is of the essence. The Legislature needs to act now — immediately — to put Alaska’s economy on a stable footing. The Rasmuson Foundation’s recent poll of Alaska’s registered voters provides statistically sound information that voters favor revenue sources over additional cuts. The poll offers a basis for bipartisan legislative action to adopt revenue options while they are still available.

To understand the choices and their importance to all Alaskans, you are encouraged to attend a free forum on Alaska’s Fiscal and Economic Future sponsored by Alaska Common Ground and the UAA Institute of Social and Economic Research from 9 a.m. to 4 p.m. on Saturday, Sept. 19,  in the Wendy Williamson Auditorium at UAA.

Janet McCabe and her family have lived in Anchorage since 1964. A community planner specializing in employment and population projections, she was actively involved in numerous forums dealing with the 1980s fiscal crisis. She is a member of Alaska Common Ground.

List of Things Alaska Could Do Legally to Address the Fiscal Challenge

By Cliff Groh (Download PDF here)

The deep slump in oil prices since the summer of 2014 has exposed and exacerbated underlying structural problems in the State of Alaska’s fiscal system. These problems include:

  1. The dominant role of oil in the state budget—taxes and royalties from oil production account for more than 85 percent of the State of Alaska’s Unrestricted General Fund revenues (the Unrestricted General Fund is what most people mean when they say “the state budget”).
  2. The long-run decline in oil production that has left the Trans Alaska Pipeline System (TAPS) carrying less than a quarter of the oil it was carrying in the late 1980s;
  3. Increasing costs of producing that oil on the North Slope; and
  4. Partly because of (2) and (3) above, the unlikelihood of oil prices rebounding enough to bail Alaska out of this dilemma.

With revenues sharply down, matters are complicated by the desires many Alaskans have for more state spending in various areas.

Add it up, and you have an ugly picture. The budget this year (Fiscal Year 2015—or FY2015—which runs July 1, 2014-June 30, 2015) balances at oil prices of about $117 per barrel. Oil prices are below $50 per barrel as of this writing, and the Alaska Department of Revenue has reduced its oil price forecast to $65 for the rest of FY2015 and $66 for FY2016. With an approximately $6 billion state budget and revenues looking likely to be approximately $2.5 billion this year, the budget deficit at current oil prices and production would be close to $3.5 billion in FY2015. This means that the State of Alaska would have a budget deficit of more than 50 percent in the current fiscal year.

What follows is an attempt at a comprehensive catalogue of the steps the State of Alaska could take to address the fiscal challenge. This is an exercise in description, not prescription. No endorsement of any course of action is intended, and there is no discussion here of the many pros and cons of these approaches, whether philosophical, practical, or otherwise. Some of these items are obviously far less politically or practically possible than others.

Note also that although the list below includes dollar estimates for amounts possibly gained or saved regarding some of the items listed, not all of the fiscal impacts are easily predictable.

The items below can be grouped into four categories, with a more detailed list following:
1. Change spending
2. Collect more revenues
3. Use our savings accounts and/or money generated by or in the Permanent Fund
4. Get someone else to pay

I. Change spending
A. Reduce the budget as compared to the previous year’s spending (Notable facts about the budget include: 1. The State of Alaska’s budget is widely understood to be No. 1 in per capita spending among the states; 2. Roughly two-thirds of the budget is composed of three items—K-12 education, Medicaid, and retirement assistance; 3. The capital budget is only about 10 percent of the budget; 4. cuts could either be either targeted or across-the-board)

B. Re-allocate unspent and/or lapsed appropriations in the General Fund

C. Impose another constitutional amendment limiting spending (Alaska has had a constitutional spending limit since 1982)

1. Limit spending as a percentage of revenues somehow defined
2. Limit spending as a percentage of savings somehow defined

II. Collect more revenues
A. Adopt broad-based tax paid by individuals (Alaska is the only state in the union without either a general statewide sales tax or any form of a state income tax paid by individuals. Alaska had a state individual income tax until it was repealed in 1980; Alaska has never had a statewide sales or property tax paid by individuals. Note that a deficit of $3.5 billion works out to more than $4,500 per Alaskan, including children. According to Prof. Scott Goldsmith of the University of Alaska Anchorage’s Institute of Social and Economic Research, U.S. Department of Commerce figures show that combined state sales and income tax per capita averaged $1,812 for the U.S. as a whole in 2010.)

  1. State income tax (A 2010 legislative report estimated that an individual income tax in Alaska taxing 2.8 percent of adjusted gross income on a flat-tax basis would generate $500 million annually. This estimate was based on 2006 IRS data for Alaska residents and thus does not count income that could be collected from non-residents working in Alaska.)
  2. Statewide sales tax (That same 2010 report estimated that a state sales tax of three percent without exemptions would bring in $450 million a year.)
  3. Statewide property tax
  4. Others

B. Expand and/or increase selective sales and/or excise taxes

  1. Alcohol
  2. Tobacco
  3. Fuel
  4. Marijuana
  5. Others

C. Adopt other taxes, such as head tax or estate tax

D. Increase fees

E. Increase petroleum taxes

F. Impose and/or increase taxes on other industries

  1. Fisheries
  2. Mining
  3. Tourism
  4. Others

G. Increase the intensity of auditing of tax and/or royalties returns filed by petroleum producers

H. Increase the rate of return on the state’s savings

I. Promote economic development that allows the collection of additional revenues under existing taxes

  1.  Increase petroleum production
  2. Arrange for gasline/LNG export project to go into service
  3. Others

III. Use our savings accounts
A. Spend easily spendable savings—the Statutory Budget Reserve and Constitutional Budget Reserve contain together more than $10 billion as of January of 2015, and the Legislature could spend all of that money in the budget
B. Spend funds or accounts outside the General Fund, the Statutory Budget Reserve, the Constitutional Budget Reserve, or the Permanent Fund
C. Use Permanent Fund earnings in the budget in significant amounts (The Permanent Fund holds as of this writing more than $51 billion in assets. Of that more than $51 billion, the Permanent Fund Corporation’s most recent balance sheet (November 30, 2014) posted on its website shows $38.2 billion in the constitutionally protected principal (also known as the “corpus contributions and appropriations”) and another amount of more than $5.9 billion “not in spendable form—unrealized appreciation on invested assets.” More than $1.19 billion of Permanent Fund earnings are being distributed in Permanent Fund Dividends this year, and more than $660 million is reserved for inflation-proofing this year. Another sum of more than $5.55 billion is “assigned for future appropriations,” with $4.55 billion of that amount in realized earnings and the rest in unrealized appreciation on invested assets. The Permanent Fund’s principal is constitutionally protected and could only be spent by a vote of the people, while the earnings are as a legal matter available for legislative appropriation. The earnings of the Permanent Fund have traditionally been used almost entirely for the payment of Permanent Fund Dividends and inflation-proofing the Permanent Fund itself, with a fraction being used in the budget for functions related to the payment of Dividends.)

  1. Reduce share of earnings going for Permanent Fund Dividends
  2. Reduce share of earnings going for inflation-proofing
  3. Adopt a version of a Percent of Market Value (POMV) approach through a constitutional amendment that would both change how the Permanent Fund is protected against inflation and also change the allocation of Permanent Fund earnings in a way that would allow spending of significant amounts of Permanent Fund income in the budget

D. Amend the constitution to allow spending of Permanent Fund principal in the budget

IV. Get someone else to pay
A. Shift responsibilities from the State to local governments
B. Shift responsibilities from the State to the federal government
C. Borrow more money, perhaps through collateralization or from the Permanent Fund itself
D. Securitization, perhaps by selling shares in the revenues from a gasline/LNG export project

There are variations on these basic steps. Some of the most frequently discussed variations are:

1. Pump up the Permanent Fund’s principal to facilitate a slide into explicit rentier status, where the State of Alaska would finance its operations entirely or almost entirely through the use of Permanent Fund income (the word “Norway” has become shorthand in Alaska for this approach, apparently from a misunderstanding of Norway’s fiscal system)
2. Keep the Permanent Fund Dividend while bringing back the individual income tax
3. Guarantee some level of Permanent Fund Dividends in the constitution as a trade for using some Permanent Fund income in the regular budget
4. “Cash out” part or all of the Permanent Fund principal in lump-sum payments to all Alaskans as a trade for using Permanent Fund income in the regular budget
5. Cap the Permanent Fund Dividend to reduce the amount of money distributed each year so that the money not paid out can be used in the regular budget; such capping could occur either as a percentage of Permanent Fund income or as a hard dollar cap on either the size of the Permanent Fund Dividend or the amount of Permanent Fund income going annually to the Permanent Fund Dividend

The long-term decline in Alaska oil production—now compounded by the recent sharp drop in oil prices—poses tough questions for Alaska. Those questions are made tougher by the effects that the journey down the Prudhoe Bay Curve will have on the economy as well as the government, given that the oil industry accounts—directly or indirectly—for approximately one-half of all the jobs in the state. Alaskans need to think deeply and carefully about the implications of the various steps we could take to address these questions.

————————————————–

Cliff Groh is a lifelong Alaskan and a lawyer and writer. Groh authored a chapter for the 2012 book Exporting the Alaska Model: Adapting the Permanent Fund Dividend for Reform around the World (Palgrave Macmillan, 2012), and some of the material in this essay overlaps with that chapter. That chapter was one of four chapters Groh authored or co-authored for that book or for the 2012 book Alaska’s Permanent Fund Dividend: Examining its Suitability as a Model (Palgrave Macmillan 2012). Groh was involved in the creation of the per capita Permanent Fund Dividend Alaska has today while serving as an assistant to the Alaska Legislature in 1982. Groh was also Special Assistant to the Alaska Commissioner of Revenue in 1987-1990 and a delegate to the Conference of Alaskans in 2004. A board member of Alaska Common Ground for almost two decades, Groh became that organization’s chair in May of 2014.

Update from the Chair – Spring 2015

 

We invite you to Alaska Common Ground’s annual membership meeting followed by a forum on Healthcare Costs in Alaska on Saturday, May 9 at the BP Energy Center, 900 E. Benson Blvd. in midtown Anchorage.

Doors will open at 8:30 am for coffee and snacks, with the annual business meeting beginning at 9 am. We’ll bring you up to date on our successful forums and events this past year as well as what we’re planning for the upcoming year. As always we will elect board members and have time for member input and discussion.

Our forum on Healthcare Costs in Alaska will run from 10 am to noon. We will explore the high cost of healthcare in Alaska, discuss possible solutions, and drill down on how healthcare costs affect Alaska’s fiscal future. Forum panelists include Dr. Mouhcine Guetabbi, ISER; Deb Erickson, Executive Director of the Alaska Health Care Commission; Greg Loudon, member of the Health Care Commission, Insurance Broker and Health Benefits Consultant; and Doug Eby of Southcentral Foundation. Mark Foster of the Anchorage School District will moderate the panel. Forum co-sponsors include ISER, Anchorage Public Library, AARP, and the League of Women Voters of Anchorage.

On September 19, we will hold a second forum on Alaska’s fiscal future, building on our previous forum on this topic. In November, either the 7th or 14th, we will hold a forum on climate change, focusing on climate change impacts in Alaska and what a climate change policy for our state might look like.

Mark your calendars for all of these forums!

This past year was busy for Alaska Common Ground. Click here for a list of the forums we held and co-sponsored and related public and media events during the past year. We think you will join us in celebrating a successful year!

We want to thank you, our members, for your continued support. Alaska Common Ground is a member-supported organization. It takes lots of time, energy, and money to put on our forums, and we are expanding and growing our organization so that we can continue to put on multiple forums each year.

We encourage you to re-new your membership and consider upgrading your membership to a higher level, or contributing financial support for a particular forum to support this work.

As always we invite your ideas and suggestions and welcome you to participate in planning and presenting these events. Thank you for your continued support! It’s what keeps us motivated and able to present forums on important Alaskan public policy issues.

Mary Lu Harle, Acting Chair

Update from the Chair – Fall 2014

We have been busy these past few months and hope that you were able to attend one of our forums are came to our annual meeting last May. As you know, our organization put on five well-attended and well-received forums on Alaska’s important issues. Four of these five non-partisan forums covered the ballot propositions Alaskans voted on this year. The fifth was an all-day event addressing Alaska’s biggest and most complicated problem—the fiscal challenge caused by falling oil production and the threat of oil prices lower than expected.

These events had an extensive reach:

  • More than 800 people saw these events in person
  • More than 100 listened on audio livestreams
  • More people listened and/or viewed these events on Alaska Common Ground’s website
  • Thousands more got the chance to see or hear media coverage before or after the forums

Links to the audio and video of each of these five forums are available on this website under Forums.

Along with doing all this in 2014, we also sponsored the Let’s Talk Alaska dialogues on Wednesday evenings and held our annual meeting in May.

Alaska Common Ground was fortunate to have a lot of help in putting on these events. All our forums were co-sponsored by the Anchorage Public Library, the League of Women Voters of Anchorage, the League of Women Voters of Alaska, and Alaska Integrated Media. The University of Alaska’s Institute of Social and Economic Research (ISER) partnered with us on the Forum on Alaska’s Fiscal Future, which was also co-sponsored by Northrim Bank, First National Bank Alaska, Commonwealth North, and C.M. Bidwell and Associates. The co-sponsorship of Alaska Integrated Media (AIM)—a company owning five radio stations—led to the airing of more than 2,000 commercials promoting the forums, significantly increasing our visibility to audiences not typically reached by Alaska Common Ground.

Alaska Common Ground is a small non-profit organization run by and for Alaskans. Most of our work is accomplished by our volunteers—both our board of directors and our members—but some of what we do necessarily costs money. Alaska Common Ground needs money, for example, to pay for advertising for our events and for wages for our part-time staff member. Some of that money comes as grants from institutional sponsors, but most of it comes from individual members like you.

After much consideration—and after not raising the levels for a number of years—Alaska Common Ground has increased the membership levels to reflect the amount and quality of the work we do. This year the membership levels are:

  • Individual $50
  • Supporter $75
  • Contributor $100
  • Sustainer $250
  • Benefactor $500

In addition, we still offer our $10 membership for a person on a limited budget or a student.

I thank our existing members, and I welcome our new members for their support of Alaska Common Ground and this important work. I urge you to send us a check or go on-line to renew your membership—today. Please consider upgrading your membership category to help Alaska Common Ground to continue to put on high-quality, unbiased events of importance to Alaskans.

Thanks again, and I look forward to seeing you at an Alaska Common Ground event soon.

Sincerely,

Cliff Groh
Chair, Alaska Common Ground

P.S. One of the accolades for our events making me most proud came from Alaska Dispatch News columnist Mike Dingman. Writing about Ballot Measure No. 1, the oil tax referendum on the August ballot, Dingman commented “…I would encourage you to watch the Alaska Common Ground forum on the topic. That forum is different than most because it was two hours long, and allowed a significant amount of time for the answers to questions and tasked the spokespeople for each side with posing questions to one another.”

Public forum will ask how Alaska’s fiscal future can live with less

Gunnar Knapp and Cliff Groh, October 1st, 2014, Alaska Dispatch News

The debate over oil taxes and recent annual state budget deficits of more than $1 billion have drawn attention to one of the most important and difficult challenges facing Alaska: how we will balance falling oil revenues with growing demands and obligations for state spending.

In recent years oil revenues have accounted for about 90 percent of the state’s unrestricted general fund revenues which pay for most state government services, capital projects, and debt and retirement obligations. Although nothing about the future is certain, it’s very likely that our oil revenues will decline in the future — because it’s very likely that oil production will fall, and that oil prices won’t rise enough to make up for the decline.

Alaska’s North Slope oil production has been falling for a quarter century — at an average annual rate of 6 percent per year for the past ten years — because production from new fields isn’t enough to offset the decline in production from existing fields. Optimistic forecasts are that new investment might keep North Slope oil production level for a few years — but it’s a lot more likely that production will fall.

For most of the past decade, the effects of falling oil production on state oil revenues were offset by a dramatic increase in oil prices — from $45/barrel in 2005 to $113/barrel in 2012 — as well by as tax changes which increased the state’s share of oil production value. But we can’t count on oil prices to keep rising. Oil prices are driven by global oil supply and demand, and new technologies are driving big increases in global oil production — including production from Lower 48 states. This year’s revenue forecast assumed an average price of $105/barrel, but last week prices were about $95/barrel. For every dollar fall in the average annual oil price, Alaska loses about $90 million in oil revenues.

Regardless about how optimistic you are about future Alaska oil production or prices, it would be foolhardy to deny that our future state oil revenues could decline significantly, or that we need to think about the choices lower oil revenues could force us to face.

Read more here.