7. Budget Myths
Excess Permanent Fund earnings is free money.
The budget could be balanced by cutting funds to education in
Alaska spending is five times the national per capita average.
spending per capital was 2.75 times the US average in 1999.
Combined state and local government spending was 2.24 times
the US average. After adjusting for the higher cost of living
in Alaska the combined state and local per capita spending
in Alaska was 1.85 times the US average.
not only for the concentration of public services at the state
level in Alaska and the high cost of living, but also the
unique Permanent Fund dividend, the high per capita level
of federal transfers, and the high level of debt service by
public agencies in Alaska (AHFC and AIDEA), Alaska per capita
state and local government spending was 1.46 times the U.S.
average in 1999. More
Top of Page
Economic development will produce the revenues needed to balance
the state budget without new taxes.
25 years of economic growth in Alaska has demonstrated that
this is not the case. Non-oil general fund revenues adjusted
for inflation are not much higher today than 25 years ago while
total employment has increased by more than 100 thousand.
a tax structure in place to capture some of the value added
generated by economic growth, economic growth is a drain on
the state treasury. This is because economic growth brings more
people into the state who need new schools and roads which must
be paid for from oil revenues, leaving less to go around to
pay for existing schools and roads. More
A growing public sector is a drag on the economy.
Public spending becomes "cash on the street"
just like business or household spending. We estimate the
$6 billion state budget directly and indirectly accounts
for about 100 thousand of the jobs in the economy. Thus
a growing state budget, particularly if the money to pay
for it does not come from taxes on Alaskans, means a growing
economy. This, in fact, has been the case since big oil.
The budget has grown because of large oil revenues, growing
federal grants, increasing Permanent Fund earnings, and
growing program receipts (like landing fees at state airports).
the budget in ways that do not reduce taxes on Alaskans
will reduce the number of jobs in the economy.
the budget reduces expenditures on public services and infrastructure
that enhance the quality of life for workers and reduce
the cost of doing business in the state. Evidence from other
states shows that a strong and growing economy needs to
strike a balance between private and public spending and
that states with smaller public sectors do not necessarily
have strong economies.
people argue that government hamstrings the economy since
it controls a large share of the land and other assets or
because regulations prevent business development. Whether
these appreciably prevent economic activity within the state
is a valid concern, but it is not an argument that government
itself is bad for the economy.
Top of Page
The Legislature cannot be trusted not to spend every cent
everyone else, legislators respond to incentives. When the
most powerful incentives are to spend state dollars, they
can be very creative in finding ways to spend. This was
certainly the case through most of the decade of the 1980s
when there seemed to be money enough to satisfy every need.
the 1990s, the incentives to hold the line on budget growth
have been getting stronger. Although the legislature has
needed to dip into the Constitutional Budget Reserve in
most years to balance the budget, the dipper has skimmed
off the top and left most behind. Although many would argue
that the incentives are not strong enough in the direction
of restraint, they certainly have been in evidence as reflected
by the fact that the general fund budget is about the same
size today as it was 10 years ago.
the legislature on several occasions has, at their own discretion,
made large deposits of money they could have spent, into
the Permanent Fund. In fact through 2001 more money had
been deposited into the Permanent Fund by legislative appropriation
than by the Constitutionally mandated avenue of automatic
royalty deposits. Top
Public officials say they are cutting the budget, but every
year it gets bigger and there are more state workers.
fund, that part of the budget that pays for most basic public
services like education, has not grown in the last 10 years,
and taking into account inflation and increase in population,
has actually fallen considerably. Fee-supported activities
like the International airports, federal grants, and the Permanent
Fund dividend has accounted for all the growth in the total
budget in the last decade.
has been some movement of spending from the general fund into
other funds to give the appearance that the general fund budget
is not growing, but the amount of this shifting has been modest
compared to growth from these other sources.
More Information Top
The oil companies can pay another $1 billion from their Alaska
The tax base from
petroleum is the value added that production generates (sales
minus production costs). The larger the share that the state
takes, the smaller the amount that gets returned to the investors
who put up the money to explore, develop, and produce the resource.
Because the return on investment in petroleum is uncertain,
risky, and different for every field, it is impossible to know
exactly how much the state can take as a share without scaring
potential investment dollars away.
The way our revenue
structure works, when the price of oil is high, investors are
getting a higher return than they would need to keep pumping
more investment dollars into the state. At those times some
folks think we should change the tax structure to capture more
of that return. However, when the price of oil is low, investors
are getting a lower return than necessary to justify reinvestment.
State revenues from
oil come from royalties—a payment because the state owns
the land where the oil is located—and taxes. Since royalties
are determined by contract in advance of production, the state
cannot unilaterally change the terms.
The state could increase
the production, or severance tax, rate to try to increase revenues.
One component of the tax, the economic limit factor, could be
adjusted to try to collect more revenues from the most profitable
fields and less revenue from the least profitable or "marginal"
fields. The danger is that oil companies would react by reducing
new investments in exploration and development, thus resulting
in less rather than more revenue to the state in future years.
Special Fund revenues could be channeled into the General Fund.
the General Fund pays for discretionary spending, most state
spending comes from non-General Fund sources—federal funds,
Permanent Fund earnings, and special funds (program receipts
from fee-supported activities, like the international airports).
These revenues are tied to specific programs (otherwise they
would go into the General Fund). Trying to redirect them into
the General Fund would result either in the loss of the funds
(for example, federal grants) or the elimination of the programs
they are currently supporting (without landing fees there would
be no revenues to cover airport operations).
fund spending has been growing rapidly. A small part of that
growth is due to shifting of some spending out of the General
Fund, partly to give the appearance that we have been cutting
the budget (General Fund). However, most of the special fund
growth is due to program receipt growth tied to expanded economic
activity, like airport landing fees, as well as growing federal
grants and Permanent Fund dividends. More
Taxing the Unorganized Borough would balance the budget.
are the Alaska equivalent of counties in other states, but some
parts of Alaska have not been organized into boroughs. This
is the Unorganized Borough, and about 80 thousand people, or
12 percent of the population live there. (This is less than
the number living in the Fairbanks North Star Borough).
a sense that people who live in the Unorganized Borough pay
no taxes, but the truth is more complicated. Of the 16 boroughs
in the state, only 12 impose a property tax; and of the 147
cites, 13 of those located outside of boroughs do impose a property
years new boroughs have formed around any new commercial activity
that springs up—like the Denali Borough around the entrance
to Denali National Park—and outside the organized boroughs
there is not much tax base against which to impose a tax. So
the amount that could be collected from a property tax on the
Unorganized Borough would be quite small—a few million
dollars at best after the expense of administration. Furthermore,
the largest tax base in the Unorganized Borough is the oil pipeline,
which the state does tax and which produces over $30 million
annually in state revenues.
a tax—even if it did not generate a lot of revenue—would
create an incentive for people to take more interest in an efficiently
run government. Top of Page
Taxes on nonresidents could pay our bills.
favor a personal income tax thinking that a large share would
be paid by non-resident workers. In fact non-residents account
for only about 10 percent of total wages paid in Alaska and
most of that goes to low wage seasonal workers in the tourist
and fishing industries. We estimate about 6 percent of an income
tax would be paid by non-residents. The situation is about the
same for a general sales tax. We estimate that about 7 percent
would be paid by tourists and other visitors since they account
for about that percent of total sales.
do not realize that nonresidents already contribute to state
and local revenues in many ways. At the state level they pay
a share of fuel, alcohol, and tobacco taxes. At the local level
they pay part of the sales and bed taxes in some communities.
Non-residents also bear some of the burden of local property
taxes since businesses and landlords pass those taxes onto their
customers and tenants as higher prices. More
There are lots of big pots of money that could sustain us for
financial and other assets of $63 billion, Alaska clearly is
not a poor state. Furthermore, the legislature has on many past
occasions "found" pots of money to pay for critical
programs during times of need, supporting the presumption that
many more pots continue to be hidden in various corners of state
over time the number of big pots has been diminishing and most
of the $63 billion in assets is restricted in how it can be
used. If we net out the Permanent Fund, Constitutional Budget
Reserve, and the state pension funds (for retired state workers
and teachers), there is about $15 billion in other accounts.
This estimate does not take account of the liabilities of some
of these accounts either. So if the assets of one of our public
corporations were sold off for the cash to pay for government,
a lot of that cash would need to go to pay off the bond holders
who have lent the corporation money. There is also no guarantee
that anyone would be interested in buying some of the state
billion is mostly tied up in public corporations, trust funds,
and smaller special accounts. These assets could be cashed out,
but doing so would usually require legislative action if not
a vote of the people. Each corporation, trust, and special account
has been established to serve a particular purpose (although
the original need may have long since disappeared) and cashing
out its assets would do away with the programs it supports.
The budget should be cut to match revenues. That is how households
balance their budgets.
If a household
that has been living off its savings suddenly discovers that
there is no longer any money in the bank to support basic living
expenses, some of the family members will go to work. Most would
agree this is a preferred solution to not working and not being
able to pay the rent or clothe the children.
the situation that Alaska now finds itself in. For over 20 years
state government has been funded largely through the conversion
of our oil assets to cash—drawing down our bank account
(or cashing out our tax base). The bank account is now running
dry and we need to go to work to pay for basic public services
required by the constitution like education, public health and
safety, a court system and University. Top
The travel budget is out of control.
In Fiscal Year
2002 the travel portion of the operating budget was $51 million,
about 1.1 percent of the total. The share of each department’s budget
that is travel depends on the activities of that department. As
one might expect the Legislature tops the list as the agency that
spends the largest share of its budget on travel, but it only amounts
to $2.6 million in total. Travel per employee is tops for public
safety, at over $6 thousand.
In the largest
state in the nation we would expect there to be a considerable
amount of travel, particularly for some departments. This is reflected
in high travel per employee in Environmental Conservation, Public
Safety, Fish and Game and the Governor's office. More
The welfare budget is huge.
of Health and Social Services (HSS) has the largest budget of
any state agency. About one-third of its $1.5 billion operating
budget is paid out of the state general fund with the rest coming
mainly from federal grants to the state. Public assistance is
a little more than $200 million of total department spending.
The biggest part of the budget is spent on medical assistance
for 4 target groups—the disabled, the elderly, children in need,
and adults in need. Another big chunk of the budget targets family
and youth services, alcohol abuse, mental health, and developmental
disabilities. The rest of the budget is spent on general public
health activities such as the state medical examiner.
Of the general
fund portion of the budget, medical assistance (Medicaid) and
public assistance are the biggest components. Federal law and
the Alaska constitution restrict our ability to cut some parts
of the HSS budget. At the same time the groups served by the programs
in this department—like the elderly—are increasing in numbers.
If every program
in this department could be eliminated except Medicaid and public
health, it would save the general fund about $300 million—in the
short run. In the long run the cost to Alaska would be much greater
than this short run savings. More
Information Top of Page
The huge budget of the Department of Administration shows there
is plenty of fat in state government.
Department of Administration is charged with providing
centralized management and technology services
to state agencies. But in addition to that mission,
a large part of its budget goes to provide programs
that promote the independence of Alaska's seniors.
Finally, the Department is also in charge of vehicle
licensing and legal and advocacy services for
general fund portion of the FY 2002 Department
of Administration budget was $154 million, and
of that, $75.5 million was allocated to the Longevity
Bonus and Pioneers' Homes. The division of motor
vehicles was allocated $9.3 million. A further
$30.4 million was allocated to other senior services
and legal and advocacy services.
left $38.9 million allocated from the general
fund for administrative activities. The rest of
the Department of Administration budget of $128
million came from interagency receipts and other
funds and was used primarily for administration.
One measure of the administrative cost of government,
counting both the part of the General Fund for
administration and all the other funds of the
department, would be $167 million, about 2.5 percent
of a $7 billion budget. Of course, each department
also has its own administrative section, so the
total administrative cost of government is larger
Getting rid of all the unproductive state bureaucrats—paper
pushers—would reduce the budget.
Every large institution,
be it public, private, or non-profit, requires an administrative
structure to carry out its functions in an efficient and effective
manner. Not every employee of an oil company is drilling for oil
or processing crude into gasoline. There are large staffs of "bureaucrats"
and "paper pushers," ranging from the people who hire
the drillers to the engineers who decide where to drill for oil
to the accountants who manage cash flow, pay the bills, and balance
the books. If the company were to get rid of these seemingly "unproductive"
workers, it would collapse virtually overnight.
Running an operation
of the size and complexity of Alaska's state government—with
an annual budget of about $7 billion, financial assets of more
than $50 billion, physical infrastructure valued at billions of
dollars scattered over the largest state in the nation, and stewardship
of 100 million acres of land as well as the natural resources
on the land and in the oceans—cannot be done without people.
A little over 1/4 of
the operating budget goes into personnel costs. The budgets of
the largest state agencies—Health and Social Services and
Education and Early Development—devote the smallest shares
to personnel expenditures, 12 percent and 3 percent, respectively,
because most of their funds are distributed as grants to local
governments and non-profits or paid directly to individuals. The
agencies devoting the largest share of their operating budget
to personnel expenditures are the Courts, Department of Law, Legislature,
Department of Transportation, and the Governor.
About 1/3 of all state
employees can be found in the University of Alaska system (over
3.6 thousand) and in the Department of Transportation (over 3.5
thousand). The Office of the Governor has the smallest number
of employees--about 200.
Move the capital and save the cost of moving the legislature and
having state offices in such an out-of-the-way corner of the state.
Since a growing majority
of the population lives in the Railbelt, sending the legislature
to Juneau every year, a community without road access, is expensive.
Many argue that its inaccessibility also makes the legislature
less responsive to the people. Finally, having most of the administrative
offices in Juneau is also inefficient because they are a long
way from most Alaskans.
In fact the travel
budget of the legislature is less than $3 million and offsetting
any savings in travel costs from moving the legislature would
be the additional costs of a facility to house them. And since
it makes sense for the administrative offices to be close to the
legislature when it is proposing new laws and reviewing the activities
of the agencies, it would not make sense to move the legislature
without also moving many of the state workers now in Juneau. Housing
these workers would be an additional expense.
In 1982 there was a
ballot proposition for moving the Alaska state capital to Willow,
and a cost estimate was prepared for a full-blown capital move
that included construction of important buildings (legislative
offices, a capital building). The cost at the time was estimated
to be $2.5 billion, and adjusted for inflation to today, the cost
would be over $4 billion. Even a "bare bones" move involving
no buildings or indemnification of Juneau residents for economic
losses to that community would be $74 million. More
Privatization can cut the cost of government.
still has to pay if services are privatized. It may be through
a user fee rather than a tax, but the cost will not disappear.
cost may be less with privatization, but the quality of the service
may be compromised. "You get what you pay for" applies
just as much with public as with private services.
public remains ultimately responsible for the adequacy of the
service, including making sure that public funds are spent wisely.
The expense of management and oversight of the activity may offset
any cost savings from giving the job to the private sector.
often made for privatization is that the private sector is more
efficient than the public sector. However, for many public services
the objective of fairness has priority over efficiency. For example,
our legal system is not the most efficient way to deal with alleged
criminals, but it is the fairest system yet devised.
recently conducted a study of privatization, and produced a report
entitled Commission on Privatization and Delivery of Government
Services (21st Legislature, January 2000). The report pointed
out many activities of government are already privatized. There
were no estimates of the possible cost savings from implementation
of the recommendations in the report. The Commission compiled
a list of 20 recommendations, including the sale of land and moving
the capital, but none have been implemented. More
The tax burden on households and business is excessive.
pay federal (income) and local (property and sales) taxes, but
no sales tax, and since it was repealed in 1980 we have no state
personal income tax. Although state government delivers services
that in other states are the responsibility of local government,
households are not asked to pay.
For most Alaskan
households, Permanent Fund dividends return more in cash than
local property and sales taxes take away so the net cost of state
and local government combined is close to zero. Household
Tax Burden FAQ
the tax burden for a typical family in the largest city in each
state routinely show Anchorage with one of the lowest tax burdens
because of the absence of any broad-based state tax. Tax
Comparison to Other States
that are organized as corporations pay the state corporate income
tax. Collections in recent years have amounted to less than 1/2
of 1 percent of the value added generated by private industries
in the state. Some industries are singled out for special taxes,
like seafood and mining, but legislative studies have consistently
shown that Alaska basic industries pay less in taxes and fees
than the cost of the public services that directly benefit them.
of Alaska corporations as well as businesses that are not organized
as corporations (such as fishermen and lawyers) pay no state income
and businesses do pay taxes associated with fuel, tobacco, and
liquor. Our fuel tax rate is among the lowest in the nation but
our "sin tax" (tobacco and alcohol) rates are near the
top compared to other states. More
Legislative pet projects are the problem.
budget has historically contained lots of goodies for everyone,
but most of the projects are financed by federal dollars. These
federal dollars come with strings attached—they have to
be spent in ways determined by federal guidelines. If we tried
to spend that money in other ways, the federal government would
take it back no matter how much more useful we might think these
other projects were.
federal dollars provide a boost to economic activity in the state,
and turning them away would take away a lot of high wage construction
On the other hand,
federal dollars cannot be used to pay for operations and maintenance
of capital facilities. The financial obligations to operate and
maintain these facilities can be an added burden on the state
budget. These obligations can indeed be part of the problem. More
Top of Page
Public sector employment continues to grow.
the growth in public employment in the last 20 years has not been
at the state level. It has been in local government—the
level of government responsible for hiring the teachers, police,
firemen, and other workers providing services most directly linked
to population. State government employment has increased much
more slowly and, unlike local government, has been declining as
a share of total employment. This may reflect the capture of some
"economies of scale" in state government operations
as the population grows. More
Reducing public sector pay scales to private sector levels would
balance the budget.
sector wage in Alaska, after adjusting for the higher cost of
living, is just about equal to the U.S. average today, although
in years past it was above the U.S. average. There is also no
evidence that the wage for particular occupations in the public
sector is out of line with the private sector, although differences
in benefits make it complicated to make this comparison. If the
public wage were to fall below what the rest of the market were
offering—either the private sector or other states—then
the quality of workers the state could attract and hold would
fall. The best workers would be attracted by the highest wages.
wage in the public sector is higher than the average wage in the
private sector because of the different occupational mixes in
the two sectors. This is the case everywhere, and not only in
Making all government workers put in a 40-hour week would balance
state worker hours per week, without compensation, from 37.5 to
40 hours per week would decrease their hourly wage rate and would
be greeted very unfavorably. Aside from the impact on the morale
of state workers, this would produce only a modest cost savings.
Under the best of circumstances (that the work force could be
eventually cut by 6.25% to offset the increase in total hours
worked), the eventual savings would be 6.25% of the wage bill.
Top of Page
Excess Permanent Fund earnings is free money.
no such thing as a free lunch. Permanent
Fund earnings can be divided into two parts: inflation proofing
and the rest.
to maintain the purchasing power, or real value, of the Fund,
it needs to be inflation proofed by adding an amount annually
equal to the erosion in Fund value from inflation during the
previous year. If inflation has been 3 percent, we need to add
back into the Fund the share of earnings equal to 3 percent
of the value of the Fund. If we don't do this, the Fund will
decline in real value by 3 percent and next year, although the
number of dollars in the Fund would be unchanged, those dollars
will only buy 97 percent of what they were able to buy a year
earlier. Although that does not seem like much of a loss, it
would quickly compound and before long the loss in Fund value
would be very large indeed. Furthermore, if the inflation rate
were higher, the erosion of the Fund would be faster.
of the earnings of the Fund can be spent without eroding the
value of the Fund itself. Most, but not all, currently goes
to pay the dividend.
left after inflation proofing and payment of the dividend has
been periodically added to the Fund balance, but it could instead
be used to pay for public services (or for any other purpose
chosen by the legislature).
spent today will not be available to add to the size of the
Fund or to spend at some future time. When these earnings should
be spent depends on when they will produce the most benefit
for Alaskans—which could be today, or it could be some
time in the future. Top
The budget could be balanced by cutting funds to education in
foundation program, which funds K-12 education throughout the
state, is the largest program paid for out of the state General
Fund—about $638 million in 2001. The amount of funding to
each district is based upon a complicated formula that takes into
account the number of students, cost, and many other factors.
The bottom line is that the support for each student varies considerably
across the state.
In 2001 the
average support in urban areas was about $4,200 while in rural
parts of the state, with 30 percent of the students, it was about
$6,400. There are a number of reasons why the support for rural
students has been higher than for urban students.
If in 2001
we had reduced the support in rural areas—everywhere except
Anchorage, Fairbanks, Juneau, the Kenai Peninsula and Mat-Su—to
the urban average, the foundation program budget would have fallen
by $89 million or 14%. More
There is always a year-end spending spree, so there can't be
managers will always plan to have a little extra money "just
in case" some unexpected expense comes up during the year.
This is true in the world of business just as much as in the
public sector. When the year ends, those same managers will
spend any leftover funds rather than let them revert to the
General Fund. This may appear to be a spending spree, but in
most cases the amounts are small and they are spent on priority
items that contribute to the agency mission.
Each year the legislature
always adds some spending to the budget for the year that is
almost over. These "supplemental" appropriations have
a place in the normal budgeting process since they allow for
changes in the level of spending to take account of changing
circumstances that could not be anticipated at the start of
the year. However, there has been some misuse of the "supplemental"
appropriations process in recent years. More
Top of Page
If we were efficient, government would cost the same as in other
with other states are usually based on spending per person. Alaska
spends more even after adjusting for the higher cost of living,
special programs like the Longevity Bonus and management of public
lands and other resources, and the fact that state government
here is delivering services that are handled by local governments
in most other states.
This is due
to our size, dispersed population, location, and climate. Our
population density is about 1 person per square mile, compared
to a national average of about 76. For example, we have about
4 times the miles of highway as Rhode Island, but only half the
population. If we were to maintain our roads at their per mile
rate, it would cost us 8 times as much per capita. Only the largest
communities, like Anchorage, have a concentration of population
that allows us to take advantage of "economies of scale"
in the delivery of public services.
There is no fiscal problem.
spends about $1 billion each year more than it collects in revenues,
and the shortfall, or fiscal gap, is growing every year. This
is because of our heavy reliance on revenues from oil production,
which has fallen 50% from its peak of 2 million barrels per day
in 1988. Basically, for every 50 cents we collect in revenues,
we spend $1. Of course, that can go on only as long as there are
cash reserves we can use to make up the difference. We have used
about $5 billion in cash reserves over the last decade to fill
the gap, and they are just about gone. When they have all been
spent, we will have to find some other revenue source virtually
overnight. In the mean time, if oil revenues (our main revenue
source) fall, as they have often done in the past, we will have
More Information Top
Budget cuts won't affect me.
3 ways that massive budget cuts would impact all Alaskans. First,
basic public services—education, road maintenance, public
safety, health, and resource management—would be cut. Second,
businesses that provide services to the government would lose
business and lay off workers. Third, the loss of income to the
families of laid off public employees would depress the entire
economy, and the multiplier effect would cause a further reduction
in spending, jobs, and income. If severe enough, the economy could
contract, causing population and property values to fall. More
Rising oil prices will save us.
are quite volatile, moving up and down with some regularity based
on market conditions. When the price is particularly high, there
is market pressure for it to fall, and it always does. When it
is low, there are market forces that drive it up, and this has
always been the case. The price for Alaska North Slope Crude over
the last 10 years has averaged about $20 per barrel without any
upward or downward trend. However, during that time, it has been
as low as about $9 and as high as about $32. Unfortunately, when
the price is high, people mistakenly think it will stay high;
and also when it is low, people mistakenly think it will stay
ANWR and the Gas Line would produce enough revenues to fund government.
of oil in the Alaska National Wildlife Refuge (ANWR) or construction
of a gas line to bring the natural gas reserves on the North Slope
to market are big projects that could produce hundreds of millions
of revenues for the state. At best neither one can begin generating
revenues for many years, perhaps before 2010, and neither one
is a "sure thing". ANWR is currently closed to development
and requires a Congressional decision to open it. None of the
gas line proposals (over the top, along the highway, or down into
Cook Inlet) is yet economically feasible and none will be built
until it is.
estimate the revenues that either of these projects could produce
for the state at this time, but none of the studies that have
examined these projects suggests revenues of a magnitude that
would together likely generate $1 billion per year. Because of
this uncertainty, we cannot rely on them as a revenue source.