Five years and $14 billion later, Alaska faces a tougher but manageable challenge
Five years ago, Gov. Sean Parnell said Alaska had just won the trifecta.
First, the Alaska Legislature had cut the budget to $6.8 billion. Second, lawmakers had approved Senate Bill 21 to cut oil taxes. Third, the Legislature had advanced a natural gas pipeline plan.
"We accomplished all three. That was the trifecta," Parnell said in a speech on May 21, 2013 celebrating his signing of SB 21 and the budget. "It was a big, big lift. Less spending, more oil production, and Alaskans’ gas for Alaskans. It involved a lot of work and hundreds of hours of study, and some action."
In the high-flying years before that declaration, legislators had stashed nearly $16 billion in reserve funds and the Alaska Permanent Fund had grown to $45 billion. Oil was selling for more than $100 and the backers of SB 21, which Parnell started calling the More Alaska Production Act, said that more oil would be flowing in the pipeline. The next five years would be great.
"Our five-year fiscal plan: there is no doubt that our state government must spend less, especially while we ramp up oil production in Alaska," he said. The Parnell plan was to freeze annual state spending at about $6.7 billion for five years.
"You know with our vast resources, cash reserves, spending reductions, and a five-year fiscal plan, Alaska is on more solid financial ground than we were before. With the More Alaska Production Act, we did something meaningful for Alaskans’ benefit to turn around guaranteed production decline," Parnell told the Anchorage audience.
The state budget plan, conjured up at a time when Alaskans counted on oil prices staying above $100, envisioned reserves that would swell to $22 billion by this year under the right circumstances.
But it was not to be. Much of what happened during these last five years contradicted key tenets of the trifecta dream.
Oil production in Alaska is lower now than it was when SB 21 was approved. Oil prices are nowhere near $100 and the idea of a sustainable budget of $6.7 billion is a distant memory. The gas pipeline is still a talking point.
The trans-Alaska pipeline carried about 532,000 barrels a day in 2013. For the fiscal year that ends this month, the average daily production has been about 10,000 barrels lower than it was five years ago.
A year ago every oil company lobbyist with a pulse was claiming that oil production had increased for two straight years, without mentioning that it was still below the levels of 2013-2014.
There are North Slope projects on the horizon and oil production may have stabilized, but the 2018 reality is still short of the 2013 vision or the claims made during the 2014 campaign to keep the tax cut from being repealed.
While hyping the five-year fiscal plan five years ago, Parnell said it "reflects the real possibility that the price of Alaska oil can drop."
What it didn't reflect was that oil prices would collapse, budgets would be cut back and $14 billion from the reserve funds would be gone in five years. The reductions in state spending have taken many forms, some of which will create more costs in the future, such as skipping maintenance and allowing facilities to deteriorate.
The budget signed by Gov. Bill Walker on Wednesday, which makes use of some Permanent Fund earnings for government services for the first time, is about $2 billion lower than what Parnell predicted for the final year of his fiscal plan.
The state plans to spend about $4.4 billion in unrestricted general funds in the next fiscal year, but the sustained drop in oil revenue means that about half of that will be covered from the Permanent Fund and the ever-dwindling Constitutional Budget Reserve.
The biggest loss from these last five years is the immense earning power of the billions taken from reserves—exacerbated by the refusal of the state Senate to compromise and raise taxes. There are still those who promote giant budget cuts, but it is a false promise as they are unable to identify those cuts.
The biggest gain is that at $65 billion, the Permanent Fund has become the foundation of state finances. Oil remains in the picture, but the transition has been brought about by the economic turmoil of the past five years.