WASILLA, Alaska—This state has more money in the bank than most small countries. Decades of collecting royalties and revenues from the companies that drilled for oil on its slopes have endowed Alaska with a $50 billion savings account. Residents pay neither income nor sales tax, and every October, they get a check from the government simply for living in Alaska—this year, the check could total $2,000.
But the years of plenty may be coming to an end. As the price of oil has fallen from more than $100 a barrel to around $40 and oil production slows, Alaska is seeing the downside of relying on natural resources to pay the bills. For every $5 drop in oil prices, the state loses $120 million, according to Randall Hoffbeck, Commissioner of the Alaska Department of Revenue.
For years, 90 percent of the state’s general-fund budget was supported by oil revenues (now it’s closer to around 85 percent). Now, after years of depending on oil companies, Alaskans are faced with the prospect of actually having to pay for the basics, such as roads and universities, themselves. It’s going to be a difficult shift.
“People are used to paying little or nothing for their government services,” Hoffbeck said. “It’s just going to be a change of mindset.”
Just how to get residents to cough up money in one of the most conservative, anti-tax states in the union is another question. General fund revenues have fallen around $6 billion, or 81 percent, since 2012, according to Gunnar Knapp, a professor of economics at the University of Alaska, Anchorage. And already, Standard & Poor’s downgraded its outlook for Alaska from “stable” to “negative” because of the state’s fiscal woes.
“Everybody realizes we just can’t go on like this. We cannot keep running deficits of this size. Our savings are going to run out soon, unless we do something drastic,” Knapp told me. The state spends about $6.1 billion a year, but is expected to bring in just $2.2 billion this year, leaving a gaping deficit. It needs to either make more money, or spend a lot less.
There are a few obvious options to filling the hole, but none of them are politically palatable. One is to cut the budget. The state legislature already tried to do that at the start of the fiscal year in July, slashing $600 million in spending. It decreased the capital budget, which is used to build roads and schools, and cut back education spending and marine ferry service. As part of the cuts, the Alaska Bureau of Investigations shut down its four-person Cold Case unit. But it soon became clear that the state couldn’t cut its way out of its budget problems, since even those relatively small cuts were extremely unpopular. School children and teachers protested education cuts outside state legislative buildings in April, and some even staged a sit-in. After an uproar after funding to a state homelessness program was cut, Governor Bill Walker restored some of the cuts.* Residents of Cordova, a town only accessible by plane or boat, rallied against cuts to the Marine Highway, a ferry system linking Alaska’s coastal communities.
Alaska is the only state in the union besides New Hampshire without sales or income tax. Levying taxes would be a quick way to bring in revenue, but Republican lawmakers have been quick to call for more spending cuts before any new taxes are introduced.
“As we continue down the trail of talking about other kinds of revenues, we have folks where I come from saying we haven’t even begun to scratch the surface,” Lynn Gattis, a Wasilla state Representative, told the Alaska Dispatch News.
New budget negotiations will begin in 2016, but that’s also an election year, which means that legislators will likely be even more reticent to push for cuts or new taxes.
Which leads to what has often been a third rail in Alaska politics—the state’s Permanent Fund. The Permanent Fund was created by a constitutional amendment in 1976 at a time when the state was making so much money from oil revenues it didn’t know what to do with it. The idea behind the fund was to save much of this money for future generations, in case the oil money ever dried up.
The Fund’s value is now more than $50 billion. The state is only allowed to spend the earnings from the fund, which is invested in various stocks, bonds, and real estate. Those earnings usually amount to about $2 to 3 billion a year, a figure that is expected to increase (The state also has a separate Constitutional Budget Reserve, worth about $10 billion now, that was funded by the state surpluses in the boom years of the mid-2000s).
Permanent Fund Balance, by Year, in Millions
But just because the state can spend that Permanent Fund earnings doesn’t mean it has done so. The legislature puts a chunk of it back into a fund called the Earnings Reserve Fund, which is now worth about $7 billion. It has also, since 1982, sent part of those earnings to every man, woman, and child in Alaska. Between 1982 and 2010, the amount of that check — called the Permanent Fund Dividend—averaged about $1,100 a year.
Every fall, when the Dividend checks come out, Alaska’s stores experience an economic boom akin to the one the rest of the country sees around tax-refund season. Alaskans wait to buy washing machines and refrigerators and snow machines, and businesses respond by offering special Permanent Fund Dividend sales and promotions.
To an outside observer, it might be obvious that a state that doesn’t ask its residents to pay any taxes and is now experiencing a giant budget deficit should just stop writing residents checks, or at least use some of the earnings from its $50 billion in the bank to pay its bills. Since the Permanent Fund is projected to continue to make more and more money from its earnings, the state could still spend a portion of earnings and keep the reserve fund well-endowed. Or the state could put a cap on the yearly amount of Permanent Fund dividends (the amount of the dividend is currently calculated by a formula based on the average of the Fund’s income over five years).
But Alaskans are fiercely protective of their checks, and of their state’s savings. This might be the most tight-fisted state in the union.
“The only thing that could make you less popular than raising taxes is stealing the dividend checks,” Knapp told me.
I hung out in a supermarket parking lot in Wasilla, famously known as the one-time home of Sarah Palin, and asked residents how they thought the state’s fiscal problems should be solved. None of them wanted to see their Dividend check go away.
“Leave the permanent fund alone—once they get their mitts on it, they’ll spend it all,” one Wasilla resident, Suzie Swanner, told me.
But others in the state are worried about what further budget cuts could mean. They include Lisa Sauder, the executive director of Beans Café, a day shelter for homeless people in Anchorage. This summer has seen a spike in homeless deaths in Anchorage—half a dozen deaths in two weeks—which police say is linked to the use of the synthetic drug Spice. Spending on homelessness-prevention programs was cut in an initial version of this year’s budget and then later restored, but Sauder worries that any cuts to the state budget will have a big impact on the state’s poor. Already, people flock to Anchorage from Alaska’s small towns when the economy slows down and find themselves out in the street because of the high cost of housing, she told me.
“I think we’re only hitting the tip of the iceberg and it’s very scary,” she said.
It’s becoming clear even to the state’s Republican governor that the state may need to tap into the Permanent Fund to remain solvent.
“Governor Walker recognizes that no one solution will resolve Alaska’s $3.5 billion budget deficit, and that a combination of additional revenue, continued cuts, and utilization of existing wealth will be necessary to ensure future financial security for the state,” the governor’s spokeswoman, Katie Marquette, said in a statement.
Hoffbeck, of the state revenue department, and representatives from the governor’s office have been traveling around the state talking to residents about the budget problems and preparing them for the start of the new legislative session in January, when legislators may have to make some unpopular choices.
“People aren’t just going to blindly say ‘Yeah, okay, take part of my dividend,’ they’re going to have to understand why,” he said.
It could be a good exercise for the future. Alaska can’t rely on oil forever, and will need to eventually find new ways to bring in revenue. The state is currently in transition from depending on oil revenues to depending on investments of oil revenues for cash flow. But that isn’t sustainable, either.
“At some point in time, we’re going to have to have broad-based taxes,” Hoffbeck told me. “We’re going to have to fund ourselves like everybody else does.”
But for the time being, Alaskans seem to want to hang on to the good old days for as long as they can, scrimping and saving despite having billions in the bank.
* This article originally identified Scott Walker as the governor of Alaska. The state's governor is Bill Walker. We regret the error.
This article was originally published at http://www.theatlantic.com/business/archive/2015/08/alaska-budget-crisis/402775/