A Barrel and a Hard Place: An overview of the state's fiscal dilemma and the implications of Ballot Measure 1.

• Author: Kreilkamp, Danny
• Position: OIL & GAS

If there was one takeaway from the Anchorage Economic Development Corporation's (AEDC) latest installment of its Outlook Report, it would be a theme of uncertainty.

As Alaskans, uncertainty is something we should be pretty comfortable with by now; our economy has witnessed, and firmly situated itself around, the rise and fall of oil prices since the first major commercial development on the Swanson River in 1957.

While any sort of economic prediction contains its share of variability and a certain degree of doubt, AEDC's verdict on the role that the oil and gas industry will play in overcoming our recession is especially unclear--and understandably so. The recent plummet in the price of oil. currently hovering around $40 per barrel, means that the portion of state revenue captured by the tax it collects on the industry--accounting in previous years for as much as 90 percent of the state's Unrestricted General Fund--will be insufficient alone to continue funding state services. And with additional uncertainty regarding the potential implications of Ballot Measure 1 lingering around the corner, Alaska finds itself in a tricky situation.

Fiscal Fiasco

Economist Mouhcine Guettabi helps break down the state's fiscal dilemma.

"Obviously, the state economy was in a recession for three years before moving into positive territory in 2019," says the UAA associate professor, referencing the recession that followed a dramatic and drawn out drop in oil prices and resulted in the loss of roughly 12,000 Alaska jobs. Despite a positive turn for the economy in 2019, state budget deficits continue and have been impacted again, in part, by lower oil prices at the onset of COVID-19.

Guettabi says the state has options to cover the deficit.

One of them is to overdraw from the permanent fund savings account--not exactly the sustainable solution Jay Hammond envisioned when developing the social wealth fund back in '76. But while this solution would give the state some time--perhaps a few years or so until the remaining $11 billion savings reserve runs dry--Guettabi believes this would simply be "kicking the can down the road." and the state would still have to hope for a miraculous increase in oil prices in the near future.

Guettabi says another option is to do what Governor Mike Dunleavy tried to do last year: implement drastic cuts to bring down expenses in line with revenues. Or, Guettabi continues, the state can increase revenues.

"When we say revenues, we...