Gov. Bill Walker will unveil his upcoming budget Wednesday, and the backdrop isn’t pretty. Should the price of oil remain low, Alaska could face a deficit of $3.1 billion.
In an effort to get Alaskans on the same page, state budget director Pat Pitney has spent the past six months leading fiscal dialogues in communities throughout Alaska. Last week, she brought her talking points to Sitka, along with a wooden scale to simulate the state budget crisis.
Before a crowd of 50 Sitkans, Rep. Jonathan Kreiss-Tomkins played Pat Sajak. He stood at a spinning wheel, which represents the price of oil, and explained, “We live on risk in Alaska. Because we don’t know what the price of oil is going to be next year and so it’s literally a game show that we’re playing.”
While not as flashy as the one on Wheel of Fortune, where it lands has big consequences. Kreiss-Tomkins sets the wheel in motion. It clicks to a halt at $60 a barrel. “That would be great,” Kreiss-Tomkins said. He spins it again and it lands on $50 a barrel. “Also good.”
Lately, the price of oil has been at $40 a barrel, which leaves the state with a $3.1 billion dollar gap between revenue and spending. It’s a problem so big you have to see it to believe it.
Kreiss-Tomkins handed the microphone to Pat Pitney.
“We are almost entirely dependent on oil price and production for our budget. And at $40 barrel of oil, instead of $109 barrel of oil, that is what creates that budget gap,” she said.
It’s a message state financial officers have been taking on the road and Sitka is stop number 52. The dialogue began with a PowerPoint presentation, filled with a parade of sobering charts.
Pitney argued that if legislators don’t break the oil habit now, Alaska could drain its savings and potentially hurt its credit score.
“Everyone is afraid. This is a huge change for Alaska. Anybody that’s not 60 has never paid an income tax in this state. I mean, it’s huge. It’s a sea change,” she said.
Pitney transitioned to the wooden scale in front of her, inviting Sitkans to literally balance the books. Kreiss-Tomkins joined her in explaining how it works. Loaded on either side of the scale are blocks of different colors.
Each of these blocks represent $100 million. Together, they depict life as we know it in Alaska. On the left side of the scale is how much money the state spends: $5.1 billion dollars total. On the right side is revenue. The scale is balanced for this year, but there’s a catch.
“Our current budget is balanced on the back of our savings,” said Kreiss-Tomkins. He motioned to a pile of white blocks, which represent part of Alaska’s Constitutional Budget reserve, or rainy day account. It’s pretty big, $7 billion, but won’t last if the state continues to drain it to keep the budget balanced.
Of the CBR, Pitney added, “If we do nothing, this savings is gone in two years. Then the next choice is to go to this savings pile, which is the earnings reserve.”
The earnings reserve is the money that can be spent from the Permanent Fund. Permanent Fund Dividend checks come from here. The blocks are gold with a white dot on them, but if Alaska drains all that too, the dividend checks will stop. That is a future Pitney doesn’t want to come to pass.
“We don’t like that picture at all. We want to do something sustainable now,” she said.
Pitney couldn’t go into detail about Gov. Bill Walker’s budget. But her presentation did provide a glimpse of how the administration wants to close the gap in the long run. They’re looking at the power of the Permanent Fund, which at $51 billion is so big it earns more money on interest than the state deposits in revenue. The return on investment follows the stock market, which in general has a more consistent performance than the price of oil.
“Over the life of the Permanent Fund, it’s earned almost 10 percent, 9.75 annually,” Pitney said. “Yes, you could have a 2008 and it could be bad for a period of time, but on average over time, this is the better investment model.”
The administration calls the strategy the “Sovereign Wealth Model.” If the state can agree to funnel all new resource revenue – from oil royalties to petroleum production taxes – into the Permanent Fund, it can become a renewable pool of money to run the state. PFD checks would continue, but be cut at smaller amounts. Extra bonus if the state can create some new taxes.
Now, it’s well and good to simulate this in the game, but in her travels, Pitney has learned that not all communities want the same solutions. Southeast seems to not mind a smaller dividend check, but in the North Slope the proposal elicits a different reaction. Audience there are fine with an income tax.
“But the idea that the dividend would be less is harder to handle because they’re more dependent on it. Or you go into the Kenai area and they’re very comfortable with a sales tax, but not an income tax. Or a motor fuel tax is really problematic,” Pitney said.
Kreiss-Tomkins scans the audience for a willing participant, telling the crowd to applaud and boo just like voters do on election day. The comparison is a comical one, especially in front of a live audience. “You are a legislator and you either get thrown out like a bum, or you get the electorate’s approval and you get to do another budget,” he said.
Hahlen Barkau, a teenager, steps forward. He enacts a 2 percent sales tax, but restores funding to health and human services. The audience cheered. “Halen, you just got re-elected,” Kreiss-Tomkins said.
The event was co-sponsored by the Island Institute and the Greater Sitka Chamber of Commerce.
A few days later at the Backdoor Cafe, Blossom Twitchell tussled with the imbalance herself. The game is set up in the middle of the lunch rush.
Twitchell imposed an income tax and took a deep breath before plopping the blocks on the scale. “This is new territory for me and as a mother and an Alaskan I’d rather look into try to get revenue somewhere,” she explained.
And just by comparison, taxes on alcohol and marijuana are tiny blocks. They barely tip the scale. And that’s really what the game – designed by Gunnar Knapp and Ian Laing of Anchorage – is all about: weighing what you think you know about the budget against the working reality. By bringing the scale to the people, voters can begin to understand the magnitude of the hard times ahead.
Annika Ord of the Island Institute oversaw the game play. “Numbers don’t really resonate with me. I’ll forget them 10 minutes from when I read them. But seeing the process, you just really get to see the physical changes, which is a lot more memorable,” she said.
Ord added that not everyone is an eager contestant. “I asked a few people if they wanted to balance the budget and they’re like, ‘Well, that sounds depressing.’ And it kind of is, but it’s the reality.”
A reality that will soon be in the hands of the Legislature, when they meet for regular session in January and hold something far more precious than blocks in their hands.
Curious to try this yourself? The Institute of Social and Economic Research at the University of Alaska Anchorage developed an online tool – an interactive Excel spreadsheet – that allows you to attempt balancing the budget too.
