Oil Plunge Forces Soul-Searching on How to Pay Alaska’s Bills

Oil has been Alaska’s lifeline. The collapse of crude prices could change everything.

Lawmakers are embroiled in a stalemate over how to fill a $3.5 billion deficit after oil’s plunge sapped two-thirds of the state’s revenue. If oil remains near a six-year low, as some analysts project, it will deplete Alaska’s $10 billion reserve fund by 2018.

The nation’s second-youngest state depends more than any other on royalties and taxes from oil production, which fund 90 percent of its budget. Governor Bill Walker, an independent, is preparing for a government shutdown amid the impasse and has called on policy makers to consider how a state without income or sales taxes will pay its bills. He’s even said a lottery is an option.

“Self-determination was at the heart of our quest for statehood,” Walker wrote in a May 31 opinion piece in the Juneau Empire. “Once again, Alaska is at a decision point. With oil revenue alone unable to sustain us, how do we chart a new course?”

Alaska isn’t alone. Other oil-rich states such as North Dakota have had to dismiss employees, raid rainy-day funds and revisit how they tax energy firms.

Plumbing the icy, remote tundra for natural resources is expensive and time-consuming, a process that has fueled a years-long debate over how to tax companies without discouraging drilling.

Lower crude prices caused Alaska to award more tax relief to small energy companies than it received in oil-production revenue in fiscal 2015 and 2016, a tax structure Walker has called “irresponsible” and “unsustainable.”

Delayed Payments

House Democrats, a minority, oppose deeper cuts to social programs as the state is taking in less in production-tax revenue than it gives out in credits. They proposed delaying $200 million in credits for several months. Republicans rejected the idea.

“We are living with a broken oil tax that’s bankrupting our state,” said Representative Les Gara, a Democrat from Anchorage who sits on the House Finance Committee. “The big issue is how to you write an oil tax that raises enough money so Alaska doesn’t always live in deficit mode, but treats oil companies fairly.”

Alaska’s largest producers, Exxon Mobil Corp., BP Plc and ConocoPhillips, which deduct credits from their tax liability, wouldn’t have been affected.

The current tax structure, narrowly upheld by Alaskans in an August ballot measure, is equitable and predictable, said Kara Moriarty, president of the Alaska Oil and Gas Association, adding that her members are struggling to sustain production in a low-cost environment.

“Every other time in Alaska’s history, the price of oil has been able to save us,” she said. “For the first time, the oil price is not going to solve the fiscal situation. We have to look at how we can generate additional revenue.”

With revenue in a free fall, lawmakers can’t agree on cuts to erase the deficit. Walker warned 10,000 workers Monday they may be furloughed if a deal isn’t reached by July 1.

Government Shutdown

The Senate’s Republican majority, the House Democratic minority and the House Republican majority each have different views on which programs should be scaled back.

Consent from all three groups is needed to attain a three-quarters vote to tap the reserve account to fill the gap. They remain at odds over how to fund kindergarten and other education programs and whether to provide pay raises to workers.

The governor said he’s planning to close government absent a solution. The Department of Transportation and Public Facilities said it would dock its 11 ferries, cutting off dozens of communities not connected to roads. Oil permitting would face delays.

The impasse between Tea Party legislators and liberal Democrats is the closest the government has come to shutting down, said Gunnar Knapp, a professor of economics at the University of Alaska at Anchorage.

“It’s unprecedented,” Knapp said. “The clock is ticking and neither side wants to give in.”