The debate over oil taxes and recent annual state budget deficits of more than $1 billion have drawn attention to one of the most important and difficult challenges facing Alaska: how we will balance falling oil revenues with growing demands and obligations for state spending.
In recent years oil revenues have accounted for about 90 percent of the state's unrestricted general fund revenues which pay for most state government services, capital projects, and debt and retirement obligations. Although nothing about the future is certain, it's very likely that our oil revenues will decline in the future -- because it's very likely that oil production will fall, and that oil prices won't rise enough to make up for the decline.
Alaska's North Slope oil production has been falling for a quarter century -- at an average annual rate of 6 percent per year for the past ten years -- because production from new fields isn't enough to offset the decline in production from existing fields. Optimistic forecasts are that new investment might keep North Slope oil production level for a few years -- but it's a lot more likely that production will fall.
For most of the past decade, the effects of falling oil production on state oil revenues were offset by a dramatic increase in oil prices -- from $45/barrel in 2005 to $113/barrel in 2012 -- as well by as tax changes which increased the state's share of oil production value. But we can't count on oil prices to keep rising. Oil prices are driven by global oil supply and demand, and new technologies are driving big increases in global oil production -- including production from Lower 48 states. This year's revenue forecast assumed an average price of $105/barrel, but last week prices were about $95/barrel. For every dollar fall in the average annual oil price, Alaska loses about $90 million in oil revenues.
Regardless about how optimistic you are about future Alaska oil production or prices, it would be foolhardy to deny that our future state oil revenues could decline significantly, or that we need to think about the choices lower oil revenues could force us to face.
But while state oil revenues are likely to decline, demands for state spending are likely to grow. Why? Partly because of inflation. Partly because Alaska's population keeps growing. Partly because our debt and retirement obligations are likely to grow. Partly because of growing operations and maintenance costs for the roads and buildings we've built in the past. And partly because many Alaskans want more spending: more and better state services, from education to public safety, or new capital projects such as roads, bridges, energy projects and a huge natural gas export project.
These kinds of demands are why state general fund spending more than doubled from $2.6 billion in 2005 to a projected $5.8 billion in 2015. Combined with declining oil revenues, they are why we face a potential $2 billion deficit this year.
We will pay for that deficit by drawing down our savings reserves. But we can't go on paying for deficits indefinitely. At current projected revenues, our reserves of $15 billion could run out in less than ten years -- or a lot sooner if oil prices fall farther.
That's why Alaska faces hard fiscal choices. Within a few years, in all likelihood we will have to choose between spending less money, finding new revenues, or the (hugely unpopular) option of using Permanent Fund earnings. And the longer we delay, the harder the choices will be.
Alaska's fiscal choices are not abstractions. They are about our schools, our university system, our roads, our ports, our fish and game management, our state troopers, our child welfare services, our prisons, and our health care.
And because state spending is a major driver of Alaska's economy, our fiscal choices are also about our jobs -- whether we work for state or local government or any Alaska service industry. Unless you plan to leave Alaska soon, Alaska's fiscal choices will affect you, whether we cut state spending or raise state revenues.
To help Alaskans better understand the fiscal choices we face and their implications, Alaska Common Ground and the University of Alaska's Institute of Social and Economic Research (ISER) are holding a free public forum on Alaska's fiscal future Saturday, October 4, at the Wilda Marston Theater at Loussac Library in Anchorage from 9 a.m. to 5:30 p.m.
The forum will feature presentations and discussion by numerous experts familiar with Alaska's fiscal history, current situation and future outlook, including analysts from the Alaska Department of Revenue and the Legislative Finance Division and ISER. The forum will focus first on the facts: our historic and current revenues sources, spending, and savings reserves. It will then address the outlook for future state revenues, and the potential implications of future state spending obligations and trends for state revenues, deficits, and reserves. Finally it will address the fiscal choices we will face going forward, including a wide variety of perspectives on these choices.
Example of questions the forum will raise include:
• What is the range of potential future state oil revenues?
What have been the drivers behind the increases in the state budget over the past decade, what upward pressures are likely to exist in the future, and what are the constraints to cutting state spending?
• How might big-ticket capital projects like the proposed large-diameter natural gas pipeline/LNG export project, the Susitna-Watana hydroelectric project and the Knik Arm Crossing affect future state spending and revenues?
• What are the pros and cons of targeted budget cuts vs. across-the-board budget cuts?
• How much revenue could Alaska raise from new taxes, and what are the pros and cons of different kinds of taxes?
• What is the Permanent Fund for? How are our uses of Permanent Fund earnings -- including dividends -- related to our other fiscal choices?
• In addressing Alaska's fiscal challenges, what are the relative philosophical and distributional implications of budget cuts, broad-based income or sales taxes and reductions in Permanent Fund Dividends?
• What would a sustainable state fiscal system look like, and how could we get to it?
• What steps could Alaska take to make the transition to "living with less" less painful?
The purpose of the forum is not to advocate for particular fiscal choices. Rather the purpose is to help Alaskans understand the kinds of choices we are likely to face, the complexity and difficulty of the choices, and some of the arguments for and against different choices. The speakers will present a wide variety of perspectives on these issues. Attending the forum -- or even just part of it -- will help you begin to understand the challenges that living with less will pose for Alaskans. In a lunchtime "fiscal choices exercise" you will also have the opportunity to examine the implications over time of your own fiscal choices for future state revenues and spending.
This free public forum is co-sponsored by the League of Women Voters of Alaska, the League of Women Voters of Anchorage, the Anchorage Public Library, Commonwealth North, and Northrim Bank. Lunch will be available for purchase. More information about the forum can be found at www.akcommonground.org.
Gunnar Knapp is Director and Professor of Economics at the UAA Institute of Social and Economic Research (ISER). Cliff Groh is a lawyer, a writer, and Chair of Alaska Common Ground.
The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)alaskadispatch.com.