Alaska Editorial: Big reserves mean that Alaska's fiscal future is manageable

Posted: Friday, January 09, 2009

When Gov. Sarah Palin submitted her budget for next fiscal year, she also prepared a snapshot of how state finances will look over the next 10 years. This 10-year analysis was required by legislation pushed through by Anchorage Rep. Mike Hawker.

The good news: In the coming decade, Alaska should be able to deliver state services that keep up with population growth and inflation, without new taxes - provided oil sells for between $70 and $80 a barrel. What makes it possible is the $6 billion now socked away in state reserve funds.

The bad news: It's impossible to know if oil will in fact average $70 to $80 a barrel. It could be $30 a barrel. It could be $130. Right now, it's down around $40.

The good news: Even if oil prices don't hit the $70 to $80 range, Alaska still has a sizable financial cushion.

In Gov. Palin's scenario, Alaska would still have $4 billion left in reserves at the end of 10 years, without drawing on Permanent Fund earnings. Those earnings - more than $2 billion if financial markets have a decent year - would continue to pay dividends to Alaskans and fund reinvestments to protect the fund from inflation.

Gov. Palin's 10-year financial snapshot is not a mindlessly optimistic spin, aimed at deferring talk about hard choices. It doesn't pad the income projections with any revenue from future North Slope gas production, for example. The analysis says the operating budget will grow 3 percent a year, a reasonable projection, if somewhat on the low side. It's slightly less than projected inflation and population growth. The Palin administration's 10-year plan admits there are big challenges that could cause trouble in future budgets. They include rapidly rising costs for Medicaid and other health care, high energy costs, catching up on deferred maintenance, coping with climate change, and preparing roads and other infrastructure to support gas line construction. If the gas line prompts a population boom, the state could feel a much bigger strain on public services than currently projected.

"It's your best estimate of where we're at, at this point in time," says John Boucher, senior economist in the governor's budget office. "It's going to change as we move forward."

That's for sure. As Boucher notes, "A year ago, two years ago, in your wildest imagination could you have foreseen both $140 oil and $30 oil?"

"You wouldn't normally design a state fiscal system on that reality," says Boucher, a career state economist. "We have to take a step back and ask how prepared are we for (oil price) swings one way or another."

According to Palin's 10-year plan, which Boucher helped prepare, Alaska is reasonably well prepared. We can't rely on those $6 billion reserves to fill budget gaps indefinitely but they can be a bridge to a post-Prudhoe Bay future.

That's the way Gov. Palin's fiscal blueprint views the situation. The plan is intended to carry Alaska forward until North Slope gas comes into production. In the ideal scenario, huge volumes of gas fill the state treasury as oil once did, when production was triple today's level, before Alaska drains its financial reserves.

How realistic is that scenario? That's the key question as the governor prepares future updates of the plan each year.

For now, Gov. Palin's plan is right to note that Alaska is in a relatively enviable position, with $6 billion of reserves in the bank. But it's also true that Alaska is looking at a very different picture if oil prices don't rebound or North Slope gas remains locked in the ground.

Future 10-year fiscal plans should help Alaskans understand what will happen if fortune doesn't keep smiling on our state. What adjustments will the state have to make if oil prices stay lower or the North Slope gas line isn't moving forward?

Hint: Alaskans will be looking at smaller (if any) Alaska Permanent Fund dividends, new statewide taxes and even lower-quality state services than we get now.

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