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An Alaska-sized conundrum -- filthy-rich but a state falling into a fiscal hole

Alex DeMarban
For the first time in years, the Legislature this last session agreed to draw from the state's reserves. By the time fiscal year 2014 ends 11 months from now, the state is expected to post a $667 million deficit.
Stephen Nowers illustration

Alaska has stashed away about $85,000 for every man, women and child in the state. So whatis there to worry about? Plenty, it turns out.  

And the fretting is getting worse, as economist Gregg Erickson said at a recent global energy conference in Anchorage, when he asked Outsiders to look at the Alaskans sitting nearby and witness the "tremor of the hand, the blinking in an erratic matter of one eye."

"These are the overt signs of deep-seated angst," said Erickson, only half-jokingly. That's because Alaska, despite savings accounts that hold about $63 billion, finds itself in an increasingly "precarious" place.   

It was a bittersweet moment for many Alaskans proud of the state's prudence, yet disappointed that even with all that cash, the economy remains a one-trick pony, dependent largely on oil production that's falling steadily.

With that introduction, Erickson and other economists started a discussion that ultimately sought to answer how Alaska should improve its financial fortunes, the outlook for which took a turn for the worse in the fiscal year that recently ended, with the state expected come up more than $100 million short once all the accounting is finished.

It's expected to get worse. For the first time in years, the Legislature this last session agreed to draw from the state's reserves. By the time fiscal year 2014 ends 11 months from now, the state is expected to post a $667 million deficit.  

The hole could grow in coming years as oil production dwindles and state revenues fall.

So how does Alaska get out of this mess? Not easily, according to the gathering of economists who attended the U.S. Association of Energy Economics meeting in Anchorage this week.

According to Erickson, there is no easy answer. "Every solution that is politically feasible is far from optimal," said Erickson, who has tracked Alaska's economy for 50 years and co-founded the Alaska Budget Report.   

Some short-term solutions that could one day help close budget gaps, such as replacing a smidgen of the state's dwindling oil revenues with an income tax or -- God forbid -- taking away the Permanent Fund Dividend, aren't yet seriously on the table.   

And while the Legislature significantly reduced capital spending, it didn't reduce expenditures to sustainable levels, something Erickson's fellow economist Scott Goldsmith advocated.

So, with revenues expected to be about $6.2 billion, the borrowing could easily reach $1 billion and more, said Goldsmith, another longtime Alaska economist.  

"We are not saving enough, if what we want to do is cushion the collapse, the downturn, when it comes," said Erickson, in a follow-up interview after the gathering.

That downturn may come faster now that the Legislature cut oil-production taxes by hundreds of millions of dollars a year, said Erickson.

Politicians and the oil industry have promulgated the myth that lower taxes will reverse the oil-production decline, Erickson said. But he believes oil production that has fallen for more than 20 years as the state's monster fields -- Prudhoe Bay and Kuparuk – are tapped will continue falling.

"It's a collective hallucination to believe that reducing the state's oil revenue by 10 percent would somehow reduce decline," he said.

"I believe in incentives, and taxes do make a difference," but examples around the world show the benefits to Alaska will be very small, he said.

The good news is the state has set itself up nicely. Alaska earned $104 billion in oil revenues between 1977 and 2010. Nearly one-third of that went into savings that have been boosted by returns on investments. One-third went into infrastructure and education. And just over one-third was consumed.

The state now has about $17 billion outside its $46 billion Permanent Fund. It can potentially draw on the savings without touching the Permanent Fund for several years.  

But the days of easy money -- when there was enough to satisfy every constituency -- may be over. Still, it's not all doom and gloom.

Opportunities, such as building the long-sought natural gas pipeline, remain uncertain -- but at least they're out there. And maybe there are big oil fields yet to be discovered in Alaska.  

Finally, the state's reserves should continue grow, though more slowly than in the past, Erickson said. That's assuming the state's investments, such as the Permanent Fund, increase by billions of dollars annually, as they've done in recent years.  

"Next year, Alaska will be more wealthy in its cash reserves," Erickson said.

Contact Alex DeMarban at alex(at)alaskadispatch.com