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Decline of Alaska revenue sharing leaves communities vulnerable

  • Author: Devin Kelly
  • Updated: September 28, 2016
  • Published April 24, 2016

In the tiny Iliamna Lake community of Newhalen, the village's only health clinic has closed.

North of the Bering Strait, officials in Shishmaref held a vote to raise the local sales tax and also boosted rates for water use and equipment rentals.

And in Huslia, the Interior village of about 320 people, cutbacks in fuel, road maintenance and basic services have worsened, along with a gnawing dread of emergencies.

"Every year we have to decide where we're going to cut," said Elsie Vent, city administrator in Huslia. "It's pretty scary."

As Alaska's oil wealth income has dwindled, so has the state's revenue-sharing program, the pool of cash distributed to communities every year. The shockwaves have reverberated particularly in small villages that have come to depend on the money for basic services.

Soon the hurt will spread more widely. Faced with a $4.1 billion budget deficit, the Alaska Legislature has restructured the revenue-sharing program to pay out half the amount held in the fund since it was established in 2008. Without taking action, lawmakers say, the money would have run out in two years.

A second bill still in limbo would draw from the excess earnings of a rural energy subsidy program to help keep community payments afloat in the future.

Lawmakers are negotiating over the legislation, Senate Bill 196. If they can't agree, the future of revenue sharing will look even shakier.

Recent history of revenue sharing

As some individual Alaska households rely on Permanent Fund dividends for income, state revenue sharing money has become a lifeline for Alaska's local governments, both large and small.

State payments to Alaska communities date back decades, but the most recent version of the program was established in 2008 and drew from oil tax revenue, hence the name "revenue-sharing."

Between 2008 and 2015, the state sent $60 million to communities, one-third of the total amount in the revenue-sharing fund.

Even as the state's population has grown, in 2015, the distribution dipped to $57.3 million. This year, it's dropped to $38.2 million. Oil prices hit rock bottom, and lawmakers have decided not to add money to money already in the fund.

Senate Bill 210, which passed the Legislature on April 16 and is headed to Gov. Bill Walker's desk, has been described by some lawmakers as a stab at saving the program. The bill says the state intends to distribute $30 million each year, though lawmakers can raise or lower that amount.

Boroughs will get fixed base payments of $300,000. Cities and unincorporated communities will get fractions of that base amount.

After base payments are distributed, the leftover money is handed out based on population. Base payments used to be distributed on a sliding scale, but the amount is now fixed, which favors smaller communities.

The legislation, sponsored by Sen. Anna MacKinnon, R-Anchorage, also reverts back to an older name for the payments, from "community revenue sharing" to "community assistance." On the floor of the Senate, MacKinnon said the legislation was aimed at cutting state costs but also keeping the program alive.

The bill recognized that "we no longer have money we can share," MacKinnon said, but represents "an effort to support communities across the state."

Balancing larger cities

Anchorage will see the most dramatic reduction in the new "community assistance" program. The city of 300,000 has averaged payments of about $15 million a year since 2008.

By 2018, the amount will plummet to $4.5 million -- a decrease of about 70 percent from historic levels.

Anchorage Mayor Ethan Berkowitz didn't mince words in his criticism of the new bill.

"What it really is is an increase on taxpayers in urban areas," Berkowitz said in a phone interview. "That, to me, is deceptive budgeting."

He added: "There were absolutely different ways to handle this." He said the Legislature could have sustained the program for another year and bought more time to work out the details, with money that is instead being proposed to purchase lawmakers' Anchorage office building.

On the Senate floor during debate on SB 210 before it passed April 16, Sen. Bill Wielechowski, D-Anchorage, warned that the bill would either force property tax hikes or deep cuts to Anchorage city services.

MacKinnon countered that the revenue-sharing program only existed because the state had money to share. That's no longer the case, she said.

The Senate did, however, adopt a proposal from MacKinnon to decrease the base distribution amount, which allows larger cities to collect more based on population. That "softened" the blow to larger cities, Sen. Peter Micciche, R-Soldotna, said during the Senate floor debate.

Another city official paying close attention to the legislation was Kenai city manager Rick Koch. He and the Kenai finance director, Terry Eubank, sent a letter protesting the earlier calculation, which they said was tilted too heavily in favor of small communities. MacKinnon's proposal helped, Koch said.

About 7,300 people live in Kenai. The city is expecting to see about a $300,000 cut from current funding levels as a result of the legislation, Koch said.

Koch, who's also declared himself as a candidate to replace retiring Soldotna Rep. Kurt Olson, said that loss is manageable.

"While it's a ton of money around my house, it's not a ton of money to a city with a $16 million budget," Koch said. Anchorage is in the process of revising its $481 million budget, of which revenue sharing comprises less than 2 percent.

It's a different story for villages with fewer people than an Anchorage elementary school and limited taxes and local industries.

Small communities nervous

In Yakutat, an isolated Southeast community of about 600 people on the coastal lowlands of the Gulf of Alaska, revenue sharing makes up 16 percent of the city's $2.5 million budget. City manager Jon Erickson said he's having a hard time writing a budget without knowing whether there will be a stable funding source for the revenue-sharing program.

"If it was to go away, I'd probably have to cut half my administrative staff," Erickson said. That means going from four city officials to two.

About 200 people live in Newhalen, one of several small communities on the shores of Lake Iliamna in Southcentral Alaska.

Newhalen's vice mayor, Evelynn Trefon, said revenue-sharing money comprises one-third of the city's $185,000 budget for the upcoming year. State funding cuts contributed to the closure earlier this month of the community's only health clinic, Trefon said. She said clinic staff were transferred and residents will be able to drive a few miles up the road to the clinic in the neighboring village of Iliamna, but a janitor lost their job.

Jobs are important in Newhalen. In a letter to state lawmakers, Trefon said an estimated 80 percent of Newhalen's residents live below the poverty line. She also said the cuts have reduced the city's two full-time employees to part-timers.

"We have no other ways to generate revenues," Trefon said. "Our city government wouldn't exist without it."

Elsewhere in the state, taxes and resource development have helped cushion budget blows. The Southwest Alaska community of Togiak, with a population of about 900, levies a 2 percent raw fish tax on fish caught and processed within the community's boundaries, said city clerk Brice Eningowuk.

That boosts city coffers, though Eningowuk said low fish prices can cause downturns.

Eningowuk said the state money helps pay for government. He said the community is trying to plan ahead for future cuts, and is looking at raising charges for city services, like water, sewer and trash collection.

But, he said: "Places like Togiak, that have fisheries associated with the community, are usually a little bit more well off." His Bering Strait hometown of Shishmaref, he said, is not so lucky.

In Shishmaref, officials have responded to declining state money by raising rates for the heavy equipment it rents by $50 and also charging more for water use, said city clerk Zena Barr.

Shishmaref also held a special election to raise the local sales tax by 1 percent.

"We barely make it through the new fiscal year, as far as cutting staff hours," Barr said.

Shismaref's total operating budget is $932,000. Most of that is made up of local taxes, service charges, leases and rentals, but nearly 8 percent of the budget is state revenue-sharing money. The city is looking at a $40,000 cut in the revenue-sharing program in the upcoming year, Barr said.

She said city officials are only just beginning to discuss how to close that gap.

Bigger communities can sustain themselves, she said. "It's the smaller communities that will be hurting, for certain."

Looking to the future

Despite the cuts, some expressed relief the program wasn't killed entirely.

Kathie Wasserman, the executive director of the Alaska Municipal League, said her organization was far more worried about the state cutting pension payments on behalf of cities -- a proposal that was scrapped earlier in the session.

"Hey, I'm happy, I'm not complaining," Wasserman said. "There's a lot of other areas in the state that feel they got treated a lot worse."

Sen. Lyman Hoffman, D-Bethel, one of the Legislature's advocates for rural Alaska, said in a Senate speech that he co-sponsored MacKinnon's bill because it gave revenue sharing a chance to continue. In his sponsor statement for Senate Bill 196, which would use an endowment for the state's rural electricity subsidy -- Power Cost Equalization -- in part to make community assistance payments, Hoffman said it was time to use the fund's excess earnings for other purposes.

But that will itself depend on whether the fund has excess investment earnings. In a recent floor speech, Hoffman acknowledged that the community assistance program still may ultimately fade away.

For city managers and administrators in the small villages, that's a nerve-wracking prospect.

The city of Huslia used to have a savings account, said Vent, the city administrator. But she said that's dried up.

If the state payments ever disappeared, so, effectively, would Huslia's city government, she said.

"I have no idea what we're going to do," Vent said in a phone interview. "It's starting to be scary."

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