By Cliff Groh
To see why the State of Alaska’s fiscal system requires more change, let’s review familiar facts.
Alaska oil production has fallen by 75 percent in the last three decades. Oil prices have not been high enough to compensate for the fact that the State of Alaska now has so much less oil production from which to collect royalties and taxes. Oil prices bounce around a lot and in the last five years have been substantially below what they were from mid-2009 to mid-2014.
A major problem arises from the combination of three things: the long-term decline in Alaska oil production; oil prices well under historical highs; and the State of Alaska’s decision in 1980 to repeal the personal income tax and thereby hitch our fiscal wagon to oil. From the early 1980s to 2018, our fiscal system was based on having very large amounts of new oil money come in each year, a system that has stopped working.
The Alaska Legislature adopted in 2018 Percent of Market Value (“POMV”) legislation that provides for the structured use of substantial amounts of Permanent Fund earnings to pay for conventional public services. That big change to our fiscal system, however, is not enough, given that the Alaska Legislative Finance Division’s expert projections show that our state government faces a deficit of more than $1 billion each year as far as the eye can see if we try to keep all the elements of our fiscal system together.
Even with POMV’s heavy injection of Permanent Fund earnings into the conventional budget, the massive drop in oil revenues in the absence of unrealistically high stock market returns or an apparently unsustainable long-term run-up in oil prices means that the State of Alaska still lacks sufficient revenues to pay for the public services a majority of Alaskans seem to want—plus a Permanent Fund Dividend paid under the formula set out in Alaska statutes—without instituting a broad-based tax and/or raising oil taxes. (The State of Alaska could always finance itself for a while by going through all its spendable savings, but that is of course a short-term strategy at best.)
Alaskans have long hoped that various rescuers will arrive to save us from having to make additional difficult fiscal choices. Those potential saviors have included the opening of the Arctic National Wildlife Refuge (ANWR); a gasline or liquefied natural gas (LNG) project to develop Alaska North Slope (ANS) natural gas deposits; taxation of non-residents only; and relatively small and painless budget cuts.
Regarding revenues from economic development, the Legislative Finance Division uses Alaska Department of Revenue projections that factor in the best available estimates of future income from potential petroleum as well as hard-rock mining projects. And no matter how popular, it is clearly unconstitutional to tax non-residents only.
That leaves the proposition that Alaska’s fiscal challenge can be solved entirely or mostly by relatively small and painless budget cuts. Note several facts. First, the budget without Dividends has fallen 48 percent in the last seven years after accounting for population and inflation. (These figures come from the Legislative Finance Division’s analysis of Unrestricted General Fund (UGF) spending, the traditional measure of the State of Alaska’s budget.) Second, that real per capita budget is now lower than it was in Fiscal Year 1977 (the year before the Trans Alaska Pipeline System delivered any oil to Valdez) and is in fact lower than it has been in all but nine of the last 45 years.
Finally, those who assert that budget cuts will mostly or entirely eliminate the deficit need to identify just what parts of the budget should be cut. K-12 education, Medicaid, payments for unfunded liabilities of the state government pension systems, and the University of Alaska are the four biggest non-Dividend items and comprise 56 percent of the conventional budget.
Given that the easy ways out seem unavailable, how do we proceed?
Cliff Groh is an Anchorage lawyer and writer as well as the legislative assistant who worked the most on the bill in 1982 that created the Permanent Fund Dividend we have today. He also designed a course he taught at the University of Alaska called “Navigating Alaska’s Fiscal and Economic Challenges.” This is the seventh installment of a continuing series on the Permanent Fund Dividend and Alaska’s fiscal system.