As time closes in on the end of the Legislature’s regular three-month session, budget solutions are still unclear, especially for the decision on new sources of revenue.
Despite multiple years of budget cuts and set of vetoes from Gov. Bill Walker last year, one of which halved the Permanent Fund Dividend check payouts to help pay for state government, the Legislature is still grappling with an approximately $3 billion budget deficit. With oil hovering around $50 per barrel, less than half of what the state’s budget would need to balance out through royalty and tax payments, legislators are having to ask where to cut and where to ask Alaskans to pay taxes to support their government.
Gov. Bill Walker’s plan included two major new revenue sources — restructuring the Permanent Fund earnings to use some of the earnings for state government and a motor fuel tax increase. Both have been highly embattled at the Legislature this session.
Public morale about the state’s direction is also majority negative, according to a recent poll commissioned by the Alaska Chamber of Commerce and presented to the joint Alaska Chamber, the Alaska Support Industry Alliance and the Resource Development Council on March 30. In 206, 71 percent of Alaskans said the state was on the wrong track; that figure in 2017 was little changed, at 69 percent, according to the poll.
There’s no perfect plan, but one thing’s clear: the state can’t rely on oil any more than it currently does. Kenai Peninsula Borough Mayor Mike Navarre outlined the reasons why in a town hall presentation Saturday at the Challenger Learning Center in Kenai, the first of a series of meetings around the peninsula this week.
“Everyone would like to go back to the way it was — we had two million barrels (of oil production) a day, we had higher prices, we had excess revenues, we could basically pay for all of our costs with oil resources,” he said. “Now we’ve got to compete for some of that investment. We need to keep that in mind.”
Navarre, who served 12 years in the state House of Representatives before being elected mayor in 1996 and then again in 2011 and 2014, has been giving presentations to the local chambers of commerce and legislators on the same topic. He said he didn’t intend to push anyone in any particular direction but to “broaden the conversation.” The town hall was relatively sparsely attended, with a few city and borough officials scattered among the 25 or so members of the public.
Former University of Alaska Anchorage Institute of Social and Economic Research economist Scott Goldsmith joined Navarre for the presentation Saturday. Goldsmith, who has been studying Alaska’s economy for nearly four decades, walked the attendees through the basics of Alaska’s unrestricted general fund problem.
“In our current fiscal regime, as you all know, we have a very unstable fiscal policy, because we rely almost entirely on oil revenues,” he said.
Suggested budget fixes such as axing oil and gas tax credits, further cutting state services or implementing a broad-based income tax will only partially solve the problem, but individually, none will come close to filling the entire budget gap, Goldsmith said. The most practical solution is to use some of the earnings of the Permanent Fund, which is not politically popular, he said.
Both he and Navarre emphasized that hoping oil will pull the state out of its fiscal crisis is unrealistic. One is that production has fallen so far and the overhead costs for oil companies has increased so much that the industry in Alaska just isn’t as profitable as it once was. Another is that improved technology has allowed oil companies to extract from shale oil fields, also known as tight oil, in the Lower 48, where the discoveries are large and the cost of business is much lower. The oil companies have been planning more capital investment in those areas than in Alaska, and it’s important for Alaska to have a stable tax and fiscal plan to encourage oil companies to invest, Navarre said
“Not having comprehensive fiscal plan not only is a disincentive to investment in oil and gas, it’s a disincentive for investment in Alaska in and of itself,” he said.
Goldsmith added that the wellhead value in 2016 dollars was about $6 billion in Alaska. If the state wanted to squeeze out enough money to cover its deficit, that would be about half of the total wellhead value, which is impractical, he said.
“This just underscores the fact that we’re not going to be able to go to the oil industry and say, ‘You’re just going to have to pay more,’” he said.
Locally, the borough is going to feel the impacts of significant cuts to state government, Navarre said. Every year, the borough gets about $104 million from the state, more than half of which is support for the Kenai Peninsula Borough School District. Without that contribution, it would increase the local property taxes to about 12 mills, or 12 cents in borough sales taxes, Navarre said.
The borough is working through its budget process before presenting a plan to the assembly in early May. Navarre said he planned to propose raising the mill rate by half a percent and to increase funding to the school district. Taxable sales in the borough were also down about 3 percent in the most recent quarter, he said. Taxable sales are not the same as gross sales — the borough has a sales tax cap of $500, so any spending above that cap in a single purchase is exempted from tax.
As part of its budget process this year, the administration will also consider eliminating some borough employee positions to reduce the budget, he said. Although the borough has a fund balance that could make up a difference between spending and revenue in the budget next year, it’s not responsible to hand over the borough operations to a new administration with that burden in October after Navarre leaves office, he said.
“I could say, ‘We can get by without any taxes, we’ll just spend down our fund balance,’” he said. “But that is really not responsible in my opinion, so I’m going to propose a small mill rate increase.”
Navarre will host similar town hall-style meetings in Seward at 5:30 p.m. Wednesday at the K.M. Rae Building and in Homer at 5:30 p.m. at the Islands and Ocean Visitor Center.
Reach Elizabeth Earl at firstname.lastname@example.org.