In June, Randy Hoffbeck flew to Fairbanks for a conference on Alaska’s mounting budget crisis. For two days, Hoffbeck, who is the state’s revenue commissioner, and other fiscal experts laid out the problem and discussed possible solutions: cutting spending, raising taxes, reducing an annual oil-fund payout that nearly all Alaskans have received for more than three decades. He left feeling optimistic that Alaskans were at last facing up to the need to make difficult decisions about the state’s future.
In a taxi back to the airport, however, Hoffbeck heard himself on the radio talking about the need for the state to raise more revenue.
“That guy,” the cabbie said, not knowing who was in the back seat, “is an idiot.”
Faced with falling oil production, low crude prices and billions of dollars in deficits, state leaders are considering once-unthinkable changes to the way the state raises and spends its money. In coming weeks, Gov. Bill Walker, a political independent, will likely propose a cut to annual oil payments, the imposition of a new broad-based tax and tens of millions of dollars in cuts to state services. But it remains to be seen whether Alaska voters — and the legislators who must face them in November — will accept the need for such radical steps. If they don’t, experts on both ends of the political spectrum agree, the eventual reckoning will be far greater.
Alaska’s finances are unlike those of any other state. It has no income tax, no statewide sales tax and among the lowest per capita tax burdens in the U.S. Instead of from taxes, its money comes overwhelmingly from two sources: oil revenue, which provides close to 90 percent of the discretionary budget, and federal funds, of which Alaska has historically been among the top per capita recipients.1
Revenues have slumped along with oil prices, however. In fiscal 2012, when oil prices spent much of the year above $100 a barrel, general fund revenues topped $7 billion. This year, with oil prices down to about $40 a barrel, the state expects to collect just $2.2 billion. Even after billions of dollars in budget cuts in the past two years, the state still faces an estimated $3 billion shortfall heading into the next fiscal year.
Alaska’s problems go beyond oil prices. Federal funding has fallen since stimulus funds dried up after the recession, and the state’s influence in Washington has waned since the electoral defeat of longtime U.S. senator Ted Stevens in 2008. The prices of other natural resources, such as gold and salmon, have also declined. Most significantly, the state’s oil production has been falling for decades, dropping below 500,000 barrels per day in 2014 from a peak of more than 2 million barrels per day in the late 1980s. Lower production means it takes higher prices to generate the same amount of tax revenue; the state estimates that it would take prices of $110 a barrel or more to balance the state budget at current production levels.
Making matters more difficult: Alaska may be entering a recession, if it isn’t in one already. “It’s at that point where my gut says we’re tipping toward recession,” economist Jonathan King of Anchorage consulting firm Northern Economics said earlier this week.
On Friday, the federal Bureau of Labor Statistics reported that after two months of job losses, Alaska added about 2,000 jobs in October compared with a year earlier. But the oil industry continued to cut jobs, as did the government, which makes up a larger share of employment in Alaska than in any other state but Wyoming. Alaska’s unemployment rate, at 6.4 percent in October, is well above the national mark of 5 percent.
Alaska still has plenty of options for solving its budget crisis. After decades of saving a share of its oil revenues, the state has about $65 billion in the bank. Most of that money, more than $50 billion, is set aside in a special account called the Permanent Fund that can’t be touched under the state Constitution. That fund generates billions of dollars in annual investment income that isn’t similarly restricted. But most of that income goes to dividend payments that are sent to every Alaskan each year.2 The payments vary from year to year based on investment returns and other factors; this year’s dividend, which is being paid this month, is $2,072.
Reducing or eliminating the annual dividend payments could free up $1 billion or more for the state to spend. Alternatively, the state could impose an income or sales tax, either of which Hoffbeck said could raise about $500 million a year while still keeping the state’s tax burden among the lowest in the country. In other words, Alaska might have to look a bit more like every other state in the country.
“There’s something a little surreal about people saying we’ve got a terrible fiscal crisis here when the drastic steps that people are being asked to contemplate are essentially reducing the Permanent Fund dividend payout and actually paying state taxes, which we don’t,” said Gunnar Knapp, a University of Alaska economist who runs the school’s Institute of Social and Economic Research. “Most states would like this problem.”
But as Hoffbeck’s cabbie made clear, any effort to raise taxes or cut the dividend will likely face deep resistance from many Alaskans. The politics are complicated: Many rural residents depend on the dividend as a primary source of income, while higher-earning urban residents would rather give up their dividend than pay income taxes. Then there are people like Brad Keithley, an oil-industry consultant and the founder of Alaskans for a Sustainable Budget, who believe the state should close its budget gap by further cutting spending, not raising revenue.
“Alaska has the opportunity to have a bright fiscal future if we can just get spending down to sustainable levels,” Keithley said.
Hoffbeck and most independent experts call that approach unrealistic. The state has already eliminated hundreds of government jobs and cut spending by $3 billion in the past two years. Making further cuts won’t be easy: Education and Medicaid spending eat up essentially all the state’s current revenue.
“You just can’t do it with cuts alone,” Hoffbeck said.
To convince Alaskans of that, Hoffbeck and other administration officials have been crisscrossing the state giving presentations to anyone who will listen. They’ve even developed a Microsoft Excel model that lets Alaskans try out their own set of solutions to balance the budget. Most people, Hoffbeck said, quickly figure out that there is no way to eliminate the deficit without some combination of taxes and dividend cuts. But he has to get them to listen first.
“Alaskans over the last 30 years have developed an entitlement mentality that there’s no taxes and I get my dividends,” said David Teal, the fiscal analyst for the state legislature. Public opinion is beginning to shift — an August poll showed growing public support for revenue increases over further cuts — but change has been slow.
The clock is ticking. Alaska started the year with about $15 billion in savings outside of the Permanent Fund. Taken together, those cash piles generate enough income to allow the state to balance its budget with comparatively modest tax increases and a partial cut to the dividend. That plan, or some version of it, is what Walker is expected to propose next month. But big deficits are rapidly eating away at that nest egg; once it’s gone, the state will have to make much bigger changes to pay its bills. If the state doesn’t act soon, Teal said, “instead of losing half your dividend, it’s going to have to all go away.”
But, he added, “I just don’t know that people believe that.”