With commencement of the Alaska Gasline Inducement Act process, Alaska has finally begun to realize the long-held dream of building a pipeline to transport natural gas from the North Slope to markets in the Lower 48. Though we're off to a good start, we have much to do before the dream becomes a reality.
In preparing for construction of the North Slope gas pipeline, it is crucial that the state recognize and apply the lessons learned during construction of the trans-Alaska oil pipeline. That project, which still ranks as the largest in Alaska's history, had a significant fiscal effect on the physical and social infrastructures of both state and local governments. It is certain that construction of the gas pipeline will have similar effects, and it's critically important to be aware of this.
The bulk of funding for state government operations and state funding of municipalities currently comes from oil royalties. In the past, the magnitude of these has not always matched the state's actual revenue needs during a given fiscal year. This fact has been painfully demonstrated during periods of revenue shortfall since 1990.
Fortunately, such was not the case during construction of the oil pipeline. At that time, Alaska's primary revenue source was a state income tax. With the income tax in place, as pipeline construction proceeded, the state's coffers began to fill with tax receipts from the ample paychecks of pipeline construction workers and others associated with the project. These revenues were key to funding the response to the fiscal demands posed by the massive project.
These demands were considerable. For example, the tens of thousands of outsiders looking for pipeline work who descended on the state put a considerable strain on social service agencies. Similarly, free-spending pipeline workers, who on break would arrive in Anchorage to party, posed significant demands for the criminal justice system.
Clearly, so long as oil royalties remain Alaska's primary revenue source, it cannot be assumed that funding will necessarily be available to meet similar effects of the gas pipeline project. Therefore, it is critical that the state begin setting aside funds now to deal with these. Under the most optimistic conditions, gas line construction will not begin until 2013. So, there should be enough time to accumulate sufficient funds. But, we must start as soon as possible.
The $2.6 billion and $1 billion deposits to the constitutional and statutory budget reserves, included in the supplemental budget that was recently passed by the Senate, represent a good first step. Future Legislatures should continue making deposits. Hopefully oil prices and North Slope production levels will remain high enough to make this feasible. In addition, Alaska Permanent Fund earnings, in excess of what is needed for dividends and inflation-proofing, could likewise be deposited.
To determine what level of funding will be needed, the state will have to do some fairly detailed research with all state departments and local governments participating. Whether accomplished in-house or by an outside consultant, it is important that this be done as soon as possible.
In the end, failure to set aside adequate funds in advance might place the Palin administration and the Legislature in the position of being forced to impose a statewide sales or income tax, and/or reduce or eliminate the permanent fund dividend to address the massive project's fiscal effects. If this were to happen, the dream the pipeline project represents could turn into our worst nightmare.
John F. Schlicting was employed by the state of Alaska from 1969 until his retirement in 1990. From 1969 to 1974, he was the Department of Labor's market analyst and editor of its publication, "Alaska Economic Trends."