Thursday, January 15, 2015

Fiscal Responsibility in Alaska: On the Challenge of Falling Oil-Tax Revenue

With West Texas Intermediate (WTI), the U.S. benchmark oil price, at $46.07 on January 12, 2015, lawmakers in Alaska were getting nervous because the government was relying on oil-industry taxes to cover 89% of the government’s operating revenue.[1] At the time, the government had a $3.5 billion deficit in the $6.1 billion budget.  How the governor, Bill Walker, planned to deal with the shortfall can give us a glimpse of what fiscal responsibility might look like in government.

In spite of the huge deficit relative to the total budget, Walker was asking government agencies to reduce their respective budgets by only 5% to 8% for the coming fiscal year. To cover the rest, the governor planned to “dip heavily” into Alaska’s $14 billion in reserves.[2] Merely having reserves is itself fiscally responsible. In California, Gov. Jerry Brown had contributions to a “rainy day” fund as part of his budget even as the University of California clamored for $100 million more in funding—a request the governor rejected as exorbitant.

The fiscal responsibility goes even further in Alaska. The government was diverting only $300 million of the $6.76 billion in oil-tax revenues it expected to collect over the two-year period ending June 30, 2015 toward operating costs—the rest of the revenue going to trust funds, capital projects, and local governments.[3] The continued contributions to the trust funds strike me as particularly responsible, given the political temptation to skimp on them in order to obviate budget cuts of even 5 percent.

In short, Alaskan fiscal responsibility can be characterized as balanced, with budget cuts going along with tapping reserves and continued contributions to trust funds. A return to higher oil prices would signal attention to making up for the reserves’ depletions and adding still more to increase the reserves. In the long term, the reserves could reach a level at which the operating budget is funded entirely by the reserves’ investment revenue. With enough self-discipline to forge ahead with a sustained fiscal responsible policy, governing officials can make taxes obsolete.

[1] Ana Campoy, Mark Peters, and Erica Phillips, “Energy-Heavy States Get a Crude Awakening,” The Wall Street Journal, January 13, 2015.
[2] Ibid.
[3] Ibid.