Alaska's second-class cities fight to survive

Smaller municipalities raising taxes, cutting basic services; some are even disbanding

Posted: Wednesday, July 13, 2005

FAIRBANKS - More than half of the state's 113 second-class cities are struggling since the governor cut the flow of state dollars to local governments in 2003.

The administration's decision to stop sharing a portion of the state's oil revenue has forced many small cities to raise taxes and cut basic services. Others, facing mounting debts with the IRS or state, have been forced to disband.

At least 13 communities have shut down their city governments in the last two years, since the end of the state's municipal revenue-sharing and safe communities program, and municipal matching capital grant program. Another 57 city governments face severe financial problems that could push them into insolvency within two years, according to a list of failing cities published by the Alaska Department of Commerce, Community and Economic Development.

Rising costs for fuel, state retirement contributions and municipal insurance have exacerbated the situation and thrown into doubt the future of a growing number of Alaska's smallest communities.

"Ultimately, it's going to be very widespread," said Kevin Ritchie, executive director of the Alaska Municipal League. Nearly all of the villages in Western Alaska have been impacted by the loss of state revenue sharing, said Myron Naneng, president of the Association of Village Council Presidents.

Communities that are predominantly Alaska Native often transfer their services to the village tribal government when their municipal governments run out of money. AVCP, a tribal nonprofit that provides social services to 56 communities in Western Alaska, has seen that occur in Quinhagak, Mekoryuk, Kwethluk and Russian Mission.

Naneng expects more villages to disband their municipal governments this winter when the cost of doing business increases with the price of diesel fuel, which rural communities rely on to make electricity.

In Anderson, a community of about 300 located 76 miles southwest of Fairbanks, city clerk Nancy Hollis said they are staying afloat thanks to a state grant that's allowed them to cover some employee salaries.

The loss of $50,000 in revenue sharing, though, is making it difficult to continue to meet environmental and other state and federal requirements.

"It's harder to keep going," Hollis said. "The regulations are still there for us to comply with, but we don't have the money."

City governments provide the most basic of services: water, sewer, trash collection, road maintenance and police protection. The cost of running a small municipality averages $180,000 a year. Some of that money is raised through a combination of local sales tax and revenue from gaming. But it falls far short of covering a municipality's entire operating budget, Ritchie said.

The average sales tax in rural communities is 4 percent, which provides small cities with about $50,000 a year in income from sales at local general merchandise and fuel retailers. But many residents turn to stores in Anchorage and Fairbanks for their purchases, denying local municipalities badly needed revenue.

"They have sales tax, but they don't have any sales," Ritchie said.

Gaming brings in an additional $30,000 on average for communities that decide to offer bingo and pull tabs. That leaves a large gap that had been filled by the state's revenue-sharing program, said Kathie Wasserman, policy coordinator for AML and former mayor of Pelican.

Revenue sharing was established in 1969 to share Alaska's oil wealth with municipalities across the state. Murkowski eliminated revenue sharing when the state faced a $300 million deficit, but skyrocketing oil prices have postponed that doomsday prediction.

AML officials say the state should use some of that windfall to replace assistance to municipal governments.

"When oil prices are at an all-time high, the state gets more money, but the people in the municipalities don't see any of that money to help run their basic services," Ritchie said.

The governor's response has been to provide $24.5 million in one-time funding to cover increases to energy costs and the municipal contribution to the state's public employee retirement system.

Becky Hultberg, spokeswoman for Murkowski, said the administration would continue to address the needs of municipalities on a "case-by-case basis," but there's no plan to revive direct revenue sharing.

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