Understanding Alaska State Finances

Institute of Social and Economic ResearchUniversity of Alaska Anchorage

February 20, 2003

ISER 04/22/23

Topic 1.1 Where does the money come from?

State Budget by Source, FY'02

State Unrestricted

Funds35%

Federal Funds31%

Permanent Fund Earnings

20%

State Restricted

Funds14%

Total: $7.4 billion

1/3 of the state budget is state general purpose funds.

1/3 is federal matching funds.

Source: Legislative Finance, Summary of Appropriations FY02/03

ISER 04/22/23

Topic 1.2 Where do state unrestricted funds come from?

State Unrestricted Fund Sources, FY'02 Draw from

CBR32%

Oil54%

Rents and Royalties

0%

Program Receipts &

Other7%

Non-oil Taxes7%

Total: $2.5 billion

More than 1/2 were from oil

1/3 came from the Constitutional Budget Reserve

Source: Legislative Finance, Summary of Appropriations FY02/03 – includes supplementals

ISER 04/22/23

Topic 2.1: How does the state spend the money?

More than half of all state spending is for general government operations

Source: Legislative Finance, Summary of Appropriations FY02/03

State Spending FY02, All Sources

Operations57%Capital

19%

Permanent Fund Dividends

& Inflation Proofing

20%

Debt & Other 4%

Total: $7.4 Billion

ISER 04/22/23

Topic 2.2: What is in the operating budget?

1/3 of the operating budget is for education.

Source: Legislative Finance

Total: $4.5 billion (State and Federal Funds)

State Operating Budget FY02

University of Alaska11%

Education and Early Development

21%

Natural Resource Management

5%Public Safety

8%Health and Social

Services30%

General Government9%

Labor and Community Development

5%

Debt Service and Special Appropriations

6%

Transportation & Public Facilities

5%

ISER 04/22/23

Topic 2.3: What are the largest operating programs?

FY02 Operating Budget -- Ten Largest Programs

0 100 200 300 400 500 600 700 800

Medicaid Services

K-12 Foundation Support

University of Alaska

Public Assistance

Corrections

Public Health Services

Teaching and Learning Support

Public Assistance Admin

Marine Highway System

Highways and Aviation

Millions of dollars

State General Fund

Federal

Other Restricted Funds

Source: Legislative Finance and ISER

ISER 04/22/23

Topic 3: Who gets the money? Two thirds of total state spending (all

funds) goes directly to Alaska businesses, households and local governments.

Source: ISER

Type of Spending, FY99

Purchases from Alaska Businesses

27%

Payments to Households

25%

State Payroll18%

Grants to Local Governments and

Non-Profits15%

Debt Service and Other15%

ISER 04/22/23

Topic 4.1: How has state spending changed over time?

Source: Legislative Finance

State Spending, 1982-2002

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002Fiscal year

Milli

ons

of

Dolla

rs

Permanent Fund DividendsFederal FundsState Restricted FundsState Unrestricted General Funds

ISER 04/22/23

Topic 4.2: How has real, per person state spending changed?

When we adjust for inflation and population growth, the state’s

buying power (excluding PFDs and federal funds) has declined 14% since

1992

Source: ISER

$0

$5,000

$10,000

$15,000

$20,000

$25,000

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Fiscal Year

Rea

l per

Cap

ita S

pend

ing

14%

ISER 04/22/23

Topic 5.1: Why is there a budget deficit?

80% of unrestricted revenues are from oil Oil revenues are declining

Source: Legislative Finance and Alaska Department of Revenue

State Unrestricted GF Revenues and Spending

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

Fiscal Year

Mill

ions

of D

olla

rs

Deficit Spending

Oil Revenues

Non-oil Revenues

ISER 04/22/23

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019Year

Bar

rels

per

Day

Topic 5.2: Why are oil revenues declining?

NPRA

Other NS

Northstar

Colville R

Badami

Duck Island

GPMcIntyre

Milne Pt

KRU.IPA+Sat

PBU.IPA+Sat

Cook Inlet

Source: Alaska Department of Natural Resources

Prudhoe Bay

Kuparuk

Oil Production 1969 - 2022

ISER 04/22/23

Topic 6.1: How does the state cover the deficit?

The budget deficit has been covered by funds withdrawn from the Constitutional Budget Reserve Fund.

The CBR has $2 billion.

Source: Alaska Department of Revenue

ISER 04/22/23

Topic 6.2: When will the CBR run out of money?

Source: Alaska Department of Revenue Fall 2002 Revenue Sources

Projected Budget Deficits and CBR Balances

0

500

1000

1500

2000

2500

3000

2003 2004 2005 2006 2007 2008 2009 2010

Fiscal Year

Mill

ions

of D

olla

rs

Budget Deficit

CBR Balance

ISER 04/22/23

Topic 7: What can we do about the deficit?

Budget cuts Economic development Business or excise taxes or

user fees Permanent Fund earnings Sales or income taxes

ISER 04/22/23

Topic 8.1: What would happen if we just cut the budget?

The $900 million deficit is 1/3 of the state General Fund budget

Small cuts will not close the gap Large cuts would eliminate

essential services and entitlements

Source: ISER

ISER 04/22/23

Topic 8.2: How would cuts affect the state’s economy?

On average, every $1 million in state budget cuts will cost: $900 thousand in federal funds;10 state and local government jobs

8 private sector jobs.

Source: ISER

ISER 04/22/23

Topic 9.1: Will economic development solve the problem?

Other than oil, Alaska resource industries are small and marginal

ISER 04/22/23

Topic 9.2: How much does a new job cost government?

New jobs cost state and local governments more than they generate in tax revenues.

ISER 04/22/23

Topic 9.3: What about raising oil revenues ?

A ten percent increase in production by 2010 might raise $100 million in revenues

New discoveries take years to produce The state receives less than half as

much production tax per barrel of new oil as from Prudhoe Bay

Major new taxes would discourage investment in new fields

ISER 04/22/23

Topic 10: Can we raise user fees and excise taxes?

Increasing excise taxes and user fees would raise less than $100 million.

Source: Revenue Sources Spring 2002, with ISER calculations

  (in millions)Raise gas taxes to match Rhode Island $63.0Levy cruise ship passenger fees of $25 $17.5Increase user fees five percent $16.0

Total new revenues $96.5

ISER 04/22/23

Topic 11.1: What about using earnings from the Permanent Fund?

ISER 04/22/23

Topic 11.2: What will happen to my dividend if we use PF earnings?

There are not enough earnings to inflation proof the principal, fill the fiscal gap AND pay dividends.

Source: Alaska Department of Revenue and ISER

Projected Dividend if PF Earnings Are Used

$0

$500

$1,000

$1,500

$2,000

2002 2003 2004 2005 2006 2007 2008 2009 2010

Fiscal Year

Use only $300 million

Fill whole gap

ISER 04/22/23

Topic 12.1: How much would I have to pay with a sales or income tax?

Half of Alaskans would pay less in taxes under an income tax than under a sales tax.

Source: Institute on Taxation and Economic Policy

$0

$1,000

$2,000

$3,000

$4,000

$0 $50 $100 $150Income (in thousands)

Taxe

s (in

dol

lars

)

Flat Tax on FederalTaxable Income

General Sales Tax

median income = $51,571Two Broad Based Taxes Collecting $300 Million:

ISER 04/22/23

Topic 12.2: What share of my income would I pay?

Lower income people pay a higher percentage of their income in sales taxes.

Source: Institute on Taxation and Economic Policy

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

$0 $50 $100 $150Income (in thousands)

Taxe

s as

% o

f Inc

ome

Flat Tax on FederalTaxable Income

General Sales Tax

Two Broad Based Taxes Collecting $300 Million:

median income = $51,571

ISER 04/22/23

Topic 13: How much would non-residents and the federal government pay?

Source: Institute on Taxation and Economic Policy

Alaskans who itemize can deduct state income taxes from their federal tax return.

Shares Paid by Alaskans, Non-residents and the Federal Government

$0

$100

$200

$300

$400

Sales tax Income tax

Tax

Colle

ctio

ns in

Mill

ions

Collections fromnonresidents

Reductions in federaltaxes paid by itemizers

Collections from Alaskahouseholds

ISER 04/22/23

Topic 14: How would each alternative affect the state’s economy?

Job Loss from Five Fiscal Policy Alternatives $900 million in Cuts, Taxes or PF Earnings

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Budget Cuts Sales Tax Income Tax PF Earnings PF Earnings &Income Tax

Jobs

Los

t

Source: ISER

ISER 04/22/23

Topic 15: How would you fill the fiscal gap?

Budget cuts ________Economic development and taxes on industry

________

User fees and excise taxes

________

Permanent Fund earnings

________

Sales taxes ________Income taxes ________ Total

$900 million

ISER 04/22/23

Topic 17: Where can I go for more information?

For comprehensive information, explanation and analysis, look for ISER’s forthcoming Citizen’s Guide to the Budget Web site

For current budget numbers see the Legislative Finance Web site: http://www.legfin.state.ak.us/

For revenue projections and analysis see Revenue Sources at: http://www.tax.state.ak. us/SourcesBook/SOURCES.htm