Alaska’s oil money hangover

For Alaskans, Christmas comes twice a year. Once in December and again when their Permanent Fund Dividend checks arrive. That extra bump in Alaskans’ bank accounts has been a sign of the state’s prosperity from oil revenue since 1982. There’s a problem, though. The state is running a $2.5 billion deficit and the days of the oil boom seem like nothing but a fond memory.

Tim Bradner, University of Alaska Anchorage’s new Atwood Chair of Journalism fielded questions about the future of the state’s oil economy after giving a brief history of the Permanent Fund Dividend on Nov. 9. Photo credit: Young Kim

On Nov. 9, Atwood Chair of Journalism, Tim Bradner, gave a talk at UAA called “Where is All Our Oil Money Going?” He discussed the history of Alaska’s oil revenue, the Permanent Fund and the urgent need to find new ways to pay for the state government.

For a complex topic, Bradner’s answer to where the money went was simple.

“We all took the money,” Bradner told the audience. “We all spent it and it was kind of a big party for many years. There were some high times. We enjoyed it while it lasted, but now, we have a bit of a hangover.”

When the Trans-Alaska Pipeline became operational, oil money started pouring into state coffers, exceeding expectations to the point of the treasury having an extra billion dollars that wasn’t budgeted for.

“The floodgates were open and that started things off and it was really party time, because the money kept coming in and it was a billion, two billion, three billion,” Bradner said. “All this money piled up.”

With years of pent up demands on the state, Alaskans started putting pressure on their legislators to spread that money around. With so much revenue, there seemed to be enough money for everything. Each year, revenue continued to increase and everyone seemed to think oil prices would never stop rising.

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“People couldn’t figure out how to spend the money fast enough,” Bradner said.

Legislators were even running out of ideas on how to spend the money, calling home to ask for suggestions. Constituents, mayors and city council members would call their legislators with ideas and lobbyists clogged the hallways between the House and Senate chambers.

Eventually, the spending turned “topsy-turvy.” Capital projects had no backup or written justification with little to no foresight.

“It was just a mess,” Bradner said.

Citing State Department of Revenue numbers, Bradner said that since 1977 the state collected about $145 billion in oil revenue from taxes and royalties. According to a 2012 study, the state saved about a quarter of that income and the rest went into the general fund and was ultimately spent on various projects, he said.

The savings went into the Constitutional Budget Reserve and the Statutory Budget Reserve — essentially, savings accounts the state has depended on to subsidize the budget over the last five years.

“That’s kind of given us this cushion to ride through the recession and the rapid decline in oil revenues without seriously disrupting the state programs,” Bradner said.

There’s about $5 billion left in those accounts, but that money wont last long. With oil production down compared to the good old days, the state is long-overdue to find a solution to solve its financial predicament.

“The past three or four years has been a very, kind of, painful reckoning for us,” Bradner said.

With the billions of dollars sitting in the Permanent Fund, using that money on the state might seem like an easy solution to solving the budget crisis, but doing so worries legislators in that it would “take the brake off” increasing spending.

“Without some constraining influence on budgets, they’re going to go up, because people want services and you’re going to have a constant upward pressure on budgets for some reason or another,” Bradner said.

“The best constraint on budget is to just not to have any money,” he added, providing some levity to the situation.

Using the Permanent Fund to subsidize state spending can be a touchy subject, but Brander thinks it’s a solution to funding the state without relying on oil revenue is to tap into some of that money.

“The bottom line is that it will have to be used to help support the state budget. I mean, there really is no other solution than that,” Bradner said.

Clinton Boyer is a finance and property management student at UAA and was in the audience. He’d like to see Alaska build a natural gas pipe line and draw income from that, because if the state were to impose an income tax or he were to end up losing his Permanent Fund Dividend for whatever reason, he would find somewhere else to live.

“Because why [would] I want to live here if you took away the incentives?” Boyer asked. “[If] you take it all away, I have no motivation to be here.”

Merry Engebretson works in the oil industry and showed up to the talk to learn more about the subject.

“We’re the ones who need to be taking over the conversation, because a lot of the [older] demographic that was in that room, they wont be around to speak for this in 20, 30 years,” Engebretson said.

Regardless of what the solution to the state’s fiscal woes ends up being, it’s the younger generation who will ultimately reap the rewards of the future or face the consequences of the past.