Financial Assistance
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5.1 What is it?

The Fiscal Gap is the result of state general fund recurring revenue not being large enough to pay for ongoing state general fund spending.

Fact: Alaska depends primarily on revenues from its oil resources (including royalties, severance, income and property taxes) to fund state government.

Fact: Oil production at Prudhoe Bay, the biggest oil field in Alaska, has been declining since 1989.

Alaska state general fund spending declined during the 1990s (see graph below) as have revenues into the Alaska general fund. State revenues fluctuate depending on the price of oil; however, revenue from oil is trending downward because of a decline in oil production and the average tax rate as older fields become depleted. In some years (such as 2000 and 2001) Alaska has been "rescued" by higher oil prices—the fiscal gap just about disappeared. However, in other years low oil prices exacerbate the decline in oil production. In eight of the last 12 years, revenues have been less than expenditures. In those years Alaska has used funds from the Constitutional Budget Reserve (CBR)—its "rainy day" fund—along with budget cuts to help cover state budget deficits. Through June 2002 the state had "borrowed" about $4.8 billion from the CBR to cover deficits in the state general fund during the last 12 years. At the current rate of withdrawal, the CBR will be empty in 2004 or 2005.

Source: Department of Revenue, Fall 2001 Revenue Source Book; Legislative Finance.

To close the fiscal gap, Alaska needs a plan that will provide a balanced budget in the face of fluctuating oil prices and declining oil production. Such a fiscal strategy would include some combination of the following:

• reduced spending
• use of Permanent Fund earnings
• economic development (i.e., growing the tax base)
• new broad-based taxes
• a buffer account to deal with fluctuating oil prices

Fiscal Policy Papers