As Their Purse Tightens, Alaskans Disagree on a Solution

SAN FRANCISCO — A budget deficit pushing 20% of the general fund.

In some states, that would be a recipe for bad credit and voter insurrection. Not in Alaska, where it’s simply standard operating procedure.

But critics warn that Alaskans must soon face the fiscal music, because the special fund that subsidizes that deficit is running low. And that could force a change in the relationship Alaskans have with their state government.

That relationship is a fairly unusual one by the standards of the Lower 48. In most states, people write checks to the government to pay taxes. In Alaska, it’s the government that writes checks to the people, a system made possible by the oil that flows south from the North Slope though the Alaska pipeline.

“Oil and gas is really where the bread gets buttered,” said John Manly, press secretary for Gov. Frank Murkowski.Alaska has no state sales or income tax, and oil and gas taxes supply more than 80% of the state’s general fund revenue. It’s not enough to keep the state from running a chronic general fund deficit.

When Murkowski proposed his 2005 budget this week, he portrayed himself as thrifty for keeping the deficit — or as they call it in Alaska, the “fiscal gap” — under $400 million.Of his proposed general fund spending of $2.3 billion, more than 17% will be deficit financed — a per-capita structural deficit higher than California’s.

Alaska can run such a fiscal gap because of something other states don’t have — an account called the Constitutional Budget Reserve, created by voters in 1990 with $7.9 billion in one-time settlements from disputed oil and gas royalties and taxes.

Now, after running deficits for 11 of the last 13 years, the state has only $1.9 billion left in the reserve.

The governor’s goal of drawing down less than $400 million is an effort to prolong the life of the reserve based on simple arithmetic, Manly said.

In five years, according to projections, the state will begin to see the payoff from the new governor’s resource-friendly policies to encourage new oil and gas development. The idea is to make the Constitutional Budget Reserve last until those new resource revenues kick in, Manly said.

“We had about $2 billion in the Constitutional Budget Reserve,” he said. “Dividing that by five gave $400 million, and we set that as our target.”

The fiscal imbalance hasn’t punished the state’s credit rating. Its April issuance of $461 million in general obligation bonds drew ratings of AA with a stable outlook from Standard & Poor’s, Aa2 with a negative outlook from Moody’s Investors Service, and AA from Fitch Ratings.

It was Alaska’s first GO issue in 20 years, and all three rating agencies — while acknowledging the fiscal gap — cited the state’s low debt burden as a positive.

“They also have a significant amount of reserves to provide them time to correct that imbalance,” Moody’s analyst Ray Murphy said yesterday. “The negative outlook reflects the challenge that entails, because the balances won’t last forever.”

During the 1980s, as oil began flowing from the North Slope, the state financed most of its capital requirements with cash, said Deven Mitchell, Alaska’s debt manager. During the 1990s, as money became tighter, the state began using its largest tax-exempt issuer, the Alaska Housing Finance Corp., to issue debt for various purposes, including non-housing-related state capital projects, Mitchell said. The state finally decided to again issue GOs in 2003.

At this point, the administration isn’t planning any further GO issues, according to Mitchell.

Murkowski, a Republican, took office in December 2002, replacing Democrat Tony Knowles. Not everyone agrees with his vision for the state’s financial future.

“Hokey” is the one-word review from former state representative Andrew Halcro, who served in the Republican House majority from 1998 to 2002. “The state is just putting itself at the mercy of [oil and gas] producers and saying ‘we’ll just sit here and wait for the phone to ring.’ ”

Halcro believes the state needs to take strong medicine in two forms.

One is a broad-based tax, such as an income tax or sales tax. That avenue is politically difficult, Halcro admits.

The GOP-dominated Legislature and Murkowski have instead raised revenues in piecemeal fashion. Last year the state taxed tires and car rentals, while making cuts to programs like the “longevity bonus” that sent checks to older residents. This year the governor has proposed higher taxes on cigarettes and taxes on hotel stays, cruise ship passengers, and guided tours, and proposed cutting more than 450 positions from state government.

“The ideas out there are so nutty,” Halcro said. “You can nickel-and-dime people, and still not solve the problem. What the Murkowski administration is doing is nickel-and-diming.”

The other medicine Halcro favors is a major shift to the state’s biggest oil-funded account, the Alaska Permanent Fund Corp.

The fund was created to preserve Alaska’s oil wealth for future generations. It has more than $23 billion in assets and its primary role today is to cut a check to Alaskans every year. This year, it was $1,107.56 for each resident.

State law prohibits the fund from touching its principal, allowing it only to distribute its earnings every year.

The fund’s board of trustees has recommended a change in that formula, allowing it to distribute up to 5% of its market value in any given year. If the fund achieves its projected 8% rate of return, the formula will keep it inflation-proof in the long run, supporters say.

The change would require a constitutional amendment, something Alaska voters must approve.

Halcro said the obvious solution is to adopt the so-called “5% solution” and split the money 50-50 between dividend checks and state government expenses. That would raise about $600 million a year to close the fiscal gap, at least in the short term.

“It’s the quickest piece of low-hanging fruit,” he said.

Murkowski endorsed the change to the fund’s payout formula, but stopped well short of supporting the allocation of any of the money to government operations.

Any change that Alaskans see as a threat to their dividend check is a political hot potato, according to Halcro, who’s been receiving dividend checks since he was a college freshman in 1983.

“I’ve received $22,000 and some change just from walking to the mailbox in October,” he said. “There’s a whole generation that knows nothing about paying taxes and just gets a wonderful check every year.”