Alaska's budget crisis: myth or reality? Alaska's emerging fiscal and economic opportunities.

• Author: Von Imhof, Natasha

There are many people who are well aware of the magnitude of our fiscal crisis and are trying to engage the public to help develop a path through this financial quagmire. However, I fear these leaders may be afflicted with what my grandfather used to call "Cassandraism." This is to describe the fate of Cassandra, daughter of the king of Troy. She was granted the spirit of prophecy but got crosswise with the Greek god Apollo. The latter could not take away her gift, but ordained that her prophecies would never be believed.

For many, it's difficult to accept that hard times are ahead when the past was so rosy. In the last decade, Alaska State general fund spending grew from $2.1 billion in FY2004 to $4.4 billion in FY2014, a 109 percent increase. To put it in perspective, inflation increased only 30 percent during that same time, and population increased just 11 percent. (1)

Alaska has been very fortunate to hold vast reserves of oil, which has contributed to unprecedented levels of revenue and spending on a plethora of public service programs and capital investments. Oil revenues started pouring into Alaska's coffers in the mid- late 1970s after the Trans Alaska Pipeline System was completed May, 1977. In a few short years, the state treasury was facing a $1 billion budget surplus, which spurred two events. First, Alaska voters approved a constitutional amendment establishing the Permanent Fund. Second, Governor Jay Hammond eliminated the state income tax in September 1980.

Since then, Alaska is the only state in the union that does not collect either a state sales tax or levies an individual income tax. Instead, every Alaskan receives a payment each year from the $54 billion Alaska Permanent Fund. On top of that, the per capita spending is higher than any other state in the union; the state of Alaska spends about $16,000 per resident. The average for the United States is about $5,300 per resident. (2)

In a nut shell, oil revenue has allowed Alaskans to grow accustomed to a certain level of amenities, conveniences, and infrastructure, without paying as much personally as typically seen in other states. For Alaska communities that don't pay local property taxes or municipal sales taxes, this is particularly evident.

Plutus, the God of Wealth in ancient Greek religion, can be identified as the one bearing the cornucopia--horn of plenty. Thanks to oil revenue, Alaskans have been able to enjoy our own "horn of plenty" since the pipeline days.

Many Prophesize Future Oil Prices

There has been much speculation that the price of oil will rebound sooner rather than later. Some say if we just hang on until then, we will be okay. Unfortunately, it is extremely difficult to project future oil prices, as we can see in the slide below. For the last decade, the future price estimates are just that, estimates. We can't assume that the 2015-plus price projections are right either. Future prices could be lower.

But that doesn't stop people from trying to emulate Cassandra and predict the future. The Wall Street Journal published an article in May 2015 that states the Organization of the Petroleum Exporting Countries (OPEC) doesn't see oil prices consistently trading at $100 per barrel again in the next decade. In fact, OPEC's most optimistic scenario pegs oil at $76 a barrel in 2025. (3)

Rex Tillerson, the Chairman and CEO of Exxon Mobil, recently spoke at the 2015 IHS CERAWeek (IHS Cambridge Energy Research Associates) this past April. Tillerson muses that the 2015 price decline is due to several factors coming together. First, demand is weakening in Europe; second, China's demand was overestimated; and lastly, there has been a significant influx in supply from North America shale oil. "The freight train of North American shale tight oil just kept on delivering." (4) He went on to add, "This is going to be with us for a while. People need to settle in for a different price environment for the next couple of years."

Both a Fiscal Problem and a Political Problem

No state government likes to downsize. On a good day it's difficult. On a bad day, it's devastating. But considering our current fiscal predicament, trying to maintain the same level of spending as previous years without making any material changes in behavior will drain Alaska's reserves much faster than necessary and cause for much greater heartache down the road.

Spending too much now limits options and flexibility later on. What if as a state, we eventually decide to invest in an All Alaska gas-line? We might not have the money to do so if we continue to allocate our savings towards operations. Targeted investments can sometimes provide the economic stimulus to jumpstart the economy.

But, buyer beware, it all depends on the type of investment. A good investment has upfront costs, but ultimately should provide superior benefits such as improved efficiency and increased productivity, which could translate to cost savings or increased revenue opportunities. For example, the Alaska Industrial Development and Export Authority is investing $54 million in Pentex Alaska Natural Gas Company LLC to facilitate the transition to natural gas in and around Fairbanks. This can help lower energy costs considerably for interior residents, improve air quality, and potentially save the Fairbanks Northstar Borough $1.8 million a year in operating costs. (5)

Medicaid expansion is an investment as well. Yes, expanding Medicaid can help the state's economy by pumping millions of federal money into Alaska, similar to road projects. But many investments have hidden costs that sometimes offset and negate the benefits. Right now Alaska pays more for healthcare than any other state in the union. Why? It's due to low population, high transportation costs, geographic isolation, and extraordinary high cost differentials for specialized medical procedures. The convergence of all these factors is unique to Alaska and therefore makes state to state comparison difficult when trying to evaluate the costs and benefits of a Medicaid expansion here in the 49th state.

Federal money also only covers the service rendered. There are other...