With surprising suddenness, it’s back to the future for the state budget. After a decade of relative affluence, we’ve returned to fiscal conditions that resemble those of about a decade ago.
Fortunately, there is one significant difference. This time around, we have a lot of money stashed in accessible bank accounts.
Those savings explain how Gov. Sean Parnell on Thursday could propose a fiscal year 2014 budget that exceeds expected income by more than $1 billion while also asserting that “we are not in dire straits.”
Nevertheless, those savings won’t last long. So it’s worth looking at the debate that occurred the last time the state faced a billion-dollar budget hole, because the same debates are coming to a Legislature near you. It might be a few years before the discussions get serious, but they’re coming if oil prices don’t save us again.
In 2002, the state’s fiscal situation got so bad that the House approved both an income tax and the use of investment earnings from the Alaska Permanent Fund.
It was a bipartisan solution. Rep. John Davies, D-Fairbanks, designed the income tax and House Speaker Brian Porter, R-Anchorage, endorsed it. Without that income tax, Porter said at the time, the Legislature soon would have to make up budget shortfalls with permanent fund earnings alone, which would have ended the dividend program. Then-Gov. Tony Knowles endorsed the plan. However, the Senate declined to pass the measures, so neither option was adopted.
Frank Murkowski won the governorship later that year with a campaign that skirted the immediate tough budget questions and focused on the long-term potential of resource development; when he got to Juneau, he had to make a number of unexpected budget cuts, including the elimination of the longevity bonus for seniors. With an administrative pen stroke in early 2005, he also increased oil revenues by consolidating small fields into Prudhoe Bay for taxation purposes. In 2006, he and the Legislature agreed on new higher oil taxes, the petroleum profits tax.
In the wake of the Veco corruption scandal, the Legislature revisited the oil taxes the next year and increased them dramatically through Alaska’s Clear and Equitable Share, pushed by then-Gov. Sarah Palin. When oil prices spiked in 2008, the state received a huge windfall and socked away billions.
Now we’re about to start spending those billions, and quickly. Oil production has fallen so far that, even with per barrel prices above $100, tax revenues are meager.
The low revenue isn’t directly caused by the oil tax cut approved earlier this year in the More Alaska Production Act, pushed by Parnell and approved by the Legislature in hopes of reversing the production decline. Rather, state revenues are declining because production continues to drop, prices aren’t as high as predicted and oil companies are spending a lot of money on the North Slope. The state’s oil tax system, to encourage investment, allows that spending to be deducted. The revenues would have dropped under ACES as well, because it also allowed those deductions.
There’s argument about whether the oil companies would have been spending and deducting so much had MAPA not passed; it seems too soon to declare anything on that score yet.
In any case, there’s no denying that the state’s budget situation is worrisome. Welcome to the state of Alaska, circa 2002. The one bright spot is that legislators and governors actually saved some money in the intervening years. We’re going to need it.
— Fairbanks Daily News-Miner,