On Thursday, the Alaska State Senate passed its operating budget, and it’s slightly smaller than the one proposed by Gov. Sean Parnell. Parnell hopes to see more budgets like that in the future. He’s proposed a five-year commitment to keep state general fund spending at $6.8 billion annually. Combined with his oil tax plan, the proposal could mean a combination of belt-tightening measures and big withdrawals from Alaska’s savings accounts.
Highways, libraries, port projects: Alaska got plenty of these things over the past few years. Since 2008, the state has spent $7 billion on capital projects. Thanks to a major injection of oil revenue, the legislature was also able to pad its savings all the while. That’s about to change.
“It’s going down. We’re going to be drawing from reserves,” says Karen Rehfeld, the director of the Office of Management and Budget.
Rehfeld is part of Gov. Sean Parnell’s budget team, and their goal is to stop the growth of state spending and then ultimately bring it down. Their proposed fiscal plan is in response to forecasts that show revenue declining as less oil comes through the TransAlaska pipeline.
The state was authorized to spend $8 billion from the general fund this past year, and now Parnell wants to see a cap of $6.8 billion. But even that cut doesn’t avoid a deficit. According to analysis by the state’s legislative finance division, the state still may have to draw $61 million from its reserves this year with the smaller budget passed by the Senate. That’s a base number that doesn’t factor in the costs of new legislation or projects that the legislature would like to see.
Complicating matters is the governor’s oil tax proposal, which would cut taxes on producers as an incentive to increase throughput. If that overhaul passes, legislative finance anticipates that the draw from reserves will be closer to $1 billion because of a loss in revenue. That figure is expected to be even larger next year.
Rehfeld says the administration is prepared to dip into the state’s $16 billion reserve funds, but they would like to offset those withdrawals down the road.
“The hope is that we would get [an oil tax] bill to pass, and then we will see some production increases, and that’s the whole point,” says Rehfeld. “But we know that we have to plan for and manage the use of reserves here, at least in the short term.”
With the state already obligated to cover many of operating costs like retirement payouts, the place in the budget that’s easiest to cut is the capital side.
“Certainly I think we’re going to see much smaller capital budgets,” says Rehfeld. “But I think if you go back, and in our history we’ve had very small capital budgets. In the 1990s, we were barely covering what we needed to just capture federal highway funds.”
That could have some unintended consequences, though. Sitka Republican Bert Stedman was co-chair of the Senate Finance Committee for six years, and he managed an aggressive increase in capital spending during his tenure. He credits that capital growth with creating jobs in Alaska while the rest of the country faced a financial crisis.
“Alaska weathered the economic storm very well,” says Stedman. “In fact, if you looked at the data you’d hardly even see there was an economic recession in Alaska at all. Yet there was mass unemployment and foreclosures in the southern 48.”
Stedman says that capital spending could be dialed back now that the national economy is improving. But he warns that a major draw down in capital spending could still have ripple effects on the state’s economy. Stedman, a critic of the governor’s tax plan, also says he doesn’t see the trade off between lower oil taxes and a larger capital budget as being appropriate.
“The public will understand budgetary constraints when they’re needed. They do it in their homes. They do it in city hall. They’ll do it in the state,” says Stedman. “But if you give up substantial revenue when it’s not warranted, it will be a very hard sell.”
On Monday, the Senate will be taking public testimony on the capital budget, while the House will hear comments on the oil tax proposal.
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