Business/Economy

Alaska likely to lose significant federal revenue in any budget deficit deal

The debate over raising the debt ceiling and cutting trillions of dollars from the federal budget has been playing out for weeks now. Political leaders have been warning that failure to raise the country's debt limit will create economic havoc. Interest rates will rise, car loans will be more expensive, mortgage rates will climb, national unemployment could surpass 20 percent and cities could go broke.

­But how does this affect Alaska specifically?

Experts say Alaska may well feel the pinch more than other states because it depends so much on federal money. Not only will Alaskans face the same fate as other Americans when it comes to car loans and home mortgages, but they can also expect a huge drop in the flow of federal dollars that helps keep the state economically sound.

Michael Linden, director for tax and budget policy for the Center for American Progress in Washington, D.C., Linden has been closely tracking the debt ceiling debate and what may happen if Congress fails to increase the limit by Aug. 2, the date the Treasury has pegged that the U.S. will begin defaulting on its obligations.

"Alaska disproportionately relies on federal funding and any time there are large cuts -- unless there are carve-outs or escape valves -- then Alaska is going to get hit hard," he said. The center's analysis, along with a Bipartisan Policy Center map shows Alaska's vulnerability compared to other states.

According to Linden, Alaska gets about three times as much federal grant money -- $5,200 per person annually -- than the median states, Wisconsin and Missouri, which receive about $1,700 per person annually. Wyoming is No. 2 at $4,100 per person per year.

How it all plays out: Alaska vs. other states

The national debate is going in two basic directions. The first, and most pressing, is whether Congress and President Obama will agree to raise the debt ceiling. If they do not, and the federal government in essence can't pay its bills, predictions are the government would have to cut 40 percent of its budget immediately.

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The Bipartisan Policy Center says if that happens Alaska could lose about $790 per capita, compared to Wyoming at $635 or North Dakota at $649.

"In general Alaska receives a much larger amount of federal money per capita so it's not surprising that it would stand to lose the most if the federal government had to slash 40 percent overnight," Linden said.

That situation holds true if the second, and more likely, scenario plays out. And that is that Congress and the president will reach a compromise that allows the debt limit to be raised in exchange for trillions of dollars in budget cuts over the next 10 years.

News reports from Washington late Thursday pegged the amount of cuts being negotiated by President Obama and House Speaker John Boehner at about $3 trillion.

Alaska very likely would still lose more per capita than other states, Linden said, because much of the money going to Alaska is "non-defense discretionary spending."

Alaskans could probably figure this out without the help of budget analysts just by thinking about it for a minute. As residents here know, we get a lot more money than other states from grants through Indian Health Services, the Federal Aviation Administration, the U.S. Fish and Wildlife Service and the National Park Service.

"These are things that would almost certainly be on the chopping block," Linden predicts. "Alaska is sort of unique in the realm of federal funding."

Alaska's political leaders say it's too early yet to drill down too far into the details of what might be lost as a slowdown in federal spending shakes out. But here are some specific things they're thinking about:

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Health care and veterans

State Rep. Mike Hawker, R-Anchorage, warns that spending on health and human services likely will fall because Alaska depends heavily on the federal government to support health care programs including Medicaid. He says that both state and national programs expanded significantly in the last couple "generations." Two years ago, Alaska saw "absolutely unanticipated growth in Medicaid services that pushed our budget over the edge again," Hawker said.

"I think we have reached a tipping point," he said, where the government is no longer able to meet the needs.

Sen. Mark Begich, D-Alaska, quickly ticks off the things that come to his mind right away when you talk about substantial federal cutback in Alaska, either immediate or over the long term.

"We have the highest percentage of veterans per capita in the nation, so veterans' benefits could be affected," Begich said. "Seniors. We have one of the fastest growing populations of seniors and the same thing's going to happen (with) Medicare and Medicaid."

Federal spending and the Alaska economy

Or the federal agencies that deal with oil and gas development. Begich says the regulatory process will certainly slow down and that means the main source of revenue Alaska relies on could stall, too. "We're going to get ourselves in a box," he said.

While defense and military spending may continue -- in other words soldiers will get their paychecks -- Begich thinks other defense spending will fall off, including construction at military bases. If the debt ceiling agreement falls apart and immediate cutbacks are necessary, that will hit Alaska even harder because construction season is upon us and work needs to be done now or wait until next year.

That's the same for highway construction projects, another big pot of federal money that comes Alaska's way and is seasonal, he said.

Social Security checks also amount to about $1 billion in Alaska every year, he said, and that money flows through the local economy.

Begich also notes that a blow to the U.S. credit rating -- if the government was to default -- would trickle down to local levels, including likely effecting seasonal businesses like fishing and tour company operators or lodges and resorts that often get short-term loans to meeting inventory or operating expenses then pay the debt off at the end of the season.

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And don't forget the Alaska Permanent Fund when it comes to financial conditions. Begich points out the Permanent Fund is heavily invested in the stock market. If the U.S. defaults and the stock market drops -- a likely scenario -- the amount of each dividend check will drop, too.

"It's such an impact," Begich said. "People who think 'that thing in Washington doesn't affect me,' but it really does."

There's no escaping the economic pain

Alaska Sen. Lisa Murkowski, along with Begich, is hopeful that an agreement will be reached on the debt ceiling increase and that an immediate financial meltdown will be averted.

But, she said, the country must take steps to rein in runaway federal spending that has gotten it to this point.

"We are not out of this," she said. "We are in the hole so far and so deep. We're going to feel the pain as we try to recalibrate."

Murkowski isn't sure Alaska will be harder hit than other states as that recalibration takes place. She said she will focus on trying to make sure that federal dollars flowing to Alaska are not disproportionately cut.

"I want to assure Alaskans that I am going to look out for their best interests every step of the way," she said, "but I have to be pragmatic and honest with them and tell them that in order for us to right our financial house right now there will be impact. And that that will be our reality."

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Gov. Sean Parnell is bracing for a new economic reality too -- one he thinks is long overdue. The government needs to live within its means and not keep racking up debt and promising to pay later, he said in an email:

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The Congress and President must put America on a path to financial sustainability by cutting spending and implementing policies that grow our economy -- that's what grows lasting revenue, not soaking taxpayers for some more shillings.

If Congress and the President fail in this and instead merely acquiesce to increase the debt limit without Washington changing its habits, we have condemned ourselves and our children to a mediocre (at best) economy and to greater dependency on whatever the federal government can afford to hand us.

State savings not enough

And even though Alaska has more than $12 billion in the bank, tucked away in various budget reserves and savings accounts, state leaders say it won't be enough -- nor should it be used -- to bail the state out.

"Our challenge is the expectation that state money will supplant lost federal funds," said Hawker. "And that's something we will not be able to do in the face of declining oil revenue."

Hawker said legislators have been keeping an eye on the federal situation and, even before the immediate crisis, have been talking about how to get Alaska on a better financial footing.

"Policy makers are extremely nervous right now," Hawker said of the federal debate going onin Washington, D.C. "We're all looking at the situation of economical critical mass and we don't know where we're going."

Contact Patti Epler at patti(at)alaskadispatch.com

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