Governor eyes ‘major paradigm shift’ in budget ruled by oil

By Margaret Kriz Hobson | 12/10/2015 07:37 AM EST

ANCHORAGE — Alaska Gov. Bill Walker (I) announced yesterday that the nation’s most oil-dependent state is facing a dark economic horizon that requires a new round of cuts in government spending, imposition of unpopular new state taxes and fundamental changes to Alaska’s cherished annual oil dividend system.

Speaking to a group of 100 industry, union and local government officials at an air cargo hanger in Alaska’s largest city, Walker said that after decades of relying on oil revenues to underwrite most of its annual budget, the state has seen plummeting petroleum prices and declining state crude production result in a $3.5 billion budget deficit.

The governor called for "a major paradigm shift" in the way Alaska handles its finances.

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"We cannot continue with business as usual and live solely off of our natural resource revenues," he argued. "Never before has the state faced a deficit so large that we are draining more than $9 million from savings every day."

Walker, who was elected last year as the bottom was falling out of the oil market, warned that unless the state quickly adopts significant fiscal reforms, continued spending over the next five years would wipe out the annual Permanent Fund oil dividend that now goes to each state resident.

Inaction would also damage Alaska’s credit rating at a time when the state anticipates borrowing money for a natural gas pipeline project, he said.

"We’ve heard loudly from the bond market saying we cannot continue to keep a high bond rating, a AAA bond rating, on the path that we’re on," the governor explained. "We need to make a change."

Walker called for dramatic changes to avoid the type of economic crisis that hit Alaskans during past oil price crunches. "When oil prices fell in the 1980s, deep state spending cuts triggered a devastating recession and real estate crash," the governor noted in an opinion piece in an Anchorage newspaper.

"Thousands of Alaskans lost their homes, their jobs, their shirts. I don’t want to see that happen again," he said. "And there is no need for it to happen."

Untying budget from oil prices

To help Alaska weather low oil prices, Walker insisted that the state should radically "re-plumb" the way oil revenues are used in the state by relying on the Alaska Permanent Fund to finance the majority of state government.

State officials estimate that restructuring the fiscal system would cut the budget deficit by $3 billion a year.

Traditionally, the Alaska government has been funded directly through North Slope oil royalties and production tax revenues. Some of those revenues have also been directed into the state’s Permanent Fund, which was created during in 1976 to save oil money for future generations of Alaskans.

Over the years, the Permanent Fund has grown as oil funds were invested by an independent state corporation. Part of those earnings have been distributed to state residents through an annual oil dividend check. This year, Alaskans each received a $2,072 dividend.

That fiscal arrangement worked well as long as world oil prices remained high. But with oil prices crashing and funds for the annual budget evaporating, Walker said the time has come to change the flow of oil money in the state.

The governor is proposing to fund the state budget through earnings from the Permanent Fund, a step that would make the budget less dependent on volatile oil prices.

Under that plan, half of the state’s annual oil revenues would be used to fund the Alaskans’ annual dividend, with the other half funneled to the state’s Permanent Fund. The change would tie the state’s annual dividend to oil revenues for the first time since the dividend was created in 1982.

A transitional 2016 dividend would be set at $1,000. Walker predicted that future dividends also would remain in the $1,000 range "based on current estimates of future royalty revenues."

The governor said the new system would create a sovereign wealth fund similar to one adopted by oil countries such as Kuwait and the United Arab Emirates to remain financially stable when oil prices fluctuate.

New taxes, new cuts

To further reduce the state budget deficit, Walker proposed new cuts to state government spending programs and adoption of an array of new taxes and funding programs. He also is proposing to phase out the state oil and gas tax incentive program and switch to a low-interest loan program for future oil development projects.

Those changes were immediately criticized by industry representatives and members of the Republican-lead state Legislature.

Alaska Oil and Gas Association President Kara Moriarty argued that the governor’s plan would discourage new oil and gas development in the state.

"At a time of low oil prices, now is not the time for the state to increase taxes or reduce incentives to the oil and gas industry in Alaska," Moriarty said. "Increasing taxes and removing important incentives will not lead to more production."

But Walker insisted that the current system of state oil tax incentives is unsustainable.

"We’re not trying to send a message at all to the industry other than the fact that we’re all in this together," he said. "And we will continue to see what we can do to minimize the impact on that industry, which is very important for the state."

The governor noted that over the last year, his office has slashed the general fund spending by $1 billion and eliminated 600 state jobs. Now he’s proposing another $100 million in cuts for fiscal 2017 and is considering privatizing some government services.

However, he warned against more dramatic cuts to state programs. "We’ve heard from consultants that if you laid off every state employee, you could not balance the budget," he noted. "Certainly more cuts are in line, and we’re going to propose them. But we cannot balance the budget this way."

Instead, Walker called for a variety of new revenue sources, including a 1.5 percent income tax on Alaska residents and increases to the state’s alcohol, tobacco and motor fuel taxes.

Alaska has not had an individual income tax since 1980, shortly after the Trans-Alaska Pipeline System was built to tap into the state’s vast North Slope oil reserves. Since then, Alaska has been the only state without either a state sales tax or income tax.

State Sen. Anna MacKinnon (R), co-chair of the Alaska Senate Finance Committee, called Walker’s proposal "a starting point for the Legislature to build on and craft a fiscal plan that takes a more balanced approach.

"We must be mindful of our economy, jobs for Alaskans and keeping our people safe and secure when making these decisions," she said.

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