With the oil boom over, Alaska scram­bles to make ends meet

With oil rev­enue off, Alaska may be out of sav­ings in two years “If the price I pay is to end my po­lit­i­cal fu­ture, that’s fine”

Bloomberg Businessweek (Asia) - - CONTENTS - Jen­nifer Old­ham

On an early morn­ing in late March, a Beechcraft tur­bo­prop plane takes off from Juneau, Alaska, the only U.S. state cap­i­tal not ac­ces­si­ble by road. As the air­craft heads north over Amer­ica’s largest na­tional for­est to Fair­banks, 700 miles away, Alaska Gov­er­nor Bill Walker yawns and stretches his long legs. Across the aisle, wrapped in a fleece blan­ket, sits his wife and clos­est ad­viser, Donna. Easter is com­ing up, and the two dis­cuss what to in­clude in their grand­chil­dren’s bas­kets. Donna sug­gests putting a $1 bill in­side each plas­tic egg. “A dol­lar each?” the gov­er­nor asks in­cred­u­lously. “We’re in a bud­get cri­sis here.”

Amer­ica’s Last Fron­tier is in trou­ble. The 40-year oil boom that turned Alaska from a frigid back­wa­ter into one of the na­tion’s rich­est states is over. Not only have petroleum prices crashed, but Alaska’s sup­ply of crude is run­ning out. Thirty years ago the state was pump­ing 2 mil­lion bar­rels a day, a quar­ter of all U.S. out­put. But over the past decade, the Prud­hoe Bay oil field, once the largest in North Amer­ica, has started to reach the end of its life. Alaska’s out­put has fallen to 500,000 bar­rels a day, enough to fill only one-quar­ter of the ca­pac­ity of the state’s main eco­nomic artery, the 800-mile Trans-Alaska Pipe­line Sys­tem.

With 90 per­cent of the gen­eral fund rev­enue tied to oil, the col­lapse has been dev­as­tat­ing. Alaska, fac­ing a $4 bil­lion bud­get deficit, is one of four en­ergy states that have slid into re­ces­sion over the past year be­cause of cheap oil. The state’s rainy day fund is burn­ing through $11 mil­lion a day. If that keeps up, it will be out of

emer­gency funds within two years.

The un­en­vi­able task of fix­ing this mess rests with Walker, a 65-year-old for­mer car­pen­ter who won the gov­er­nor’s of­fice by about 6,000 votes in 2014 as an in­de­pen­dent af­ter leav­ing the Repub­li­can Party. Walker came in with big plans that in­cluded ex­pand­ing Med­i­caid and build­ing a nat­u­ral gas pipe­line, all with­out rais­ing taxes. He’s since had to switch to a pro­posal that rewrites the so­cial com­pact at the heart of Alaska since it achieved state­hood in 1959: Its 738,000 res­i­dents en­joy the coun­try’s low­est tax bur­den and high­est per capita rate of state spend­ing.

Walker is push­ing law­mak­ers to im­pose an in­come tax for the first time in 35 years. He wants to dou­ble the ga­so­line tax and slash the gen­er­ous sub­si­dies that en­ergy com­pa­nies get. He’s also propos­ing

go­ing af­ter the earn­ings of the $53 bil­lion Alaska Per­ma­nent Fund. Es­tab­lished in 1976 by a con­sti­tu­tional amend­ment, the fund col­lects a quar­ter of the state’s oil roy­al­ties and each year re­dis­tributes a por­tion of the earn­ings from its in­vest­ments to Alaskans. Last year ev­ery man, woman, and child got a check for $2,072. Walker wants to cut that in half. The whole idea of the Per­ma­nent Fund was that it would be used to fund gov­ern­ment when the oil fields ran dry. Law­mak­ers can’t touch the prin­ci­pal. But its in­vest­ment earn­ings are fair game.

To sell his plan to the state’s fa­mously in­de­pen­dent vot­ers, Walker has be­gun an ex­ten­sive road­show. High­ways reach only about a third of Alaska’s 570,000 square miles, so he flies—on Black Hawk he­li­copters, on prop planes, in coach on com­mer­cial jets. (He likes the mid­dle seat.) He knows his plan has po­lit­i­cal risks, but he doesn’t care. “If the price I pay is to end my po­lit­i­cal fu­ture, that’s fine,” he says as the plane ap­proaches Fair­banks two hours later. “That’s a small price to pay to fix Alaska.”

Polls show a ma­jor­ity of Alaskans fa­vor his plan, which seeks to re­duce the state’s de­pen­dence on oil to 20 per­cent of gen­eral fund rev­enue within two years. At a town hall hosted by re­gional may­ors, one of five events Walker at­tends in Fair­banks that day, sev­eral au­di­ence mem­bers tell him not to cut their div­i­dend checks, since they rely on them to de­fray high heat­ing and gro­cery bills. Oth­ers say they’d forgo the pay­ment to save the econ­omy. “Ev­ery other state in the union pays for their gov­ern­ment,” a sup­porter tells Walker dur­ing a Q&A ses­sion. “We’ve had 40 years of a free lunch.”

The gov­er­nor’s big­gest task is per­suad­ing Repub­li­cans who con­trol the Alaska leg­is­la­ture to go along with him. The GOP ma­jor­ity has re­fused to de­bate many of the 18 bills he in­tro­duced in Jan­uary. Lead­ers in Alaska’s House and Se­nate in­sist oil prices will rise—al­though they can’t say by how much. Walker pro­posed tap­ping the Per­ma­nent Fund’s in­vest­ment earn­ings to raise $3.3 bil­lion of ad­di­tional rev­enue each year. Repub­li­cans coun­tered with a sim­i­lar mea­sure that would draw $2.8 bil­lion a year from the fund’s earn­ings. Nei­ther plan would en­tirely close the bud­get gap this year.

This spring the leg­is­la­ture has been wrestling over whether to raise taxes on big oil pro­duc­ers and how quickly to scale back sub­si­dies to smaller ones. The cur­rent sys­tem is clearly un­af­ford­able. The oil tax credit pro­gram is set to pay out $775 mil­lion in sub­si­dies to small oil and gas com­pa­nies in the next fis­cal year, more than the state is fore­cast to col­lect in to­tal oil pro­duc­tion taxes. In March, Repub­li­cans pro­posed rais­ing $100 mil­lion by trim­ming en­ergy sub­si­dies; Walker wants to raise $500 mil­lion by re­duc­ing cred­its for smaller oil and gas com­pa­nies and rais­ing pro­duc­tion taxes to 5 per­cent from 4 per­cent. As of early May, they’re still a few hun­dred mil­lion dol­lars apart. The state con­sti­tu­tion gives law­mak­ers un­til May 18 to fi­nal­ize a bud­get.

Which­ever plan Walker and the law­mak­ers adopt, Alaska is in for tough times. Al­ready, peo­ple are leav­ing. The state lost more res­i­dents than any other in 2015. “We are sort of damned if we do, damned if we don’t,” says Gun­nar Knapp, an econ­o­mist at the Univer­sity of Alaska at Anchorage who’s ad­vised Walker. Cut­ting spend­ing or re­duc­ing the div­i­dend would take money out of a weak econ­omy, he says. But us­ing the state’s sav­ings to plug the deficit only de­lays the in­evitable. “We face a trade­off, and it’s not like we have a lot of time,” Knapp says. “The hurt is go­ing to come any­way.”

Gov­er­nor Walker is seek­ing a tax over­haul to fix Alaska’s bud­get

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