By Johan Soto
Over the course of the pandemic, Alaska’s revenue has plummeted, reigniting the conversation on how the state should balance its budget. The following charts provide some background for the fiscal troubles in Alaska, as well as focusing on some of the major areas of present spending.
Source: (From left to right) Alaska Department of Revenue – Tax Division, Crude Oil and Natural Gas Prices, 2010–2020; U.S. Energy Information Administration, Alaska Field Production of Crude Oil, 2010–2019; Legislative Finance Division for the State of Alaska, Historical Operating Data, 2011–2021.
It is helpful to look at the origins of the problem to determine the best path forward. The graphs above show a side-by-side comparison of crude oil prices, oil production, and Alaska’s state budget. The takeaway here is that Alaska’s budget has grown by approximately 27 percent in the same time period that oil production fell by 23 percent, and oil prices nearly halved. Taxes on the oil industry account for over 80 percent of Alaska’s state government revenue, and with oil production at a 40-year low, raising taxes is not a viable solution.
Source: Kaiser Family Foundation, Total State Expenditures per Capita, 2018.
Given that taxes will not fill the budget gap alone, Alaska must address its rampant spending. As it stands, Alaska spends more per capita than any other state when considering both state revenue and funds from the federal government (Figure 2). But where does all this money go? Figure 3 shows that there are three major agencies which combined account for more than 50 percent of the budget: Department of Health and Social Services (HSS), Department of Education and Early Development (DEED), and the University of Alaska (UA) system. Although a comprehensive solution to the budget crisis should address spending across all departments, reducing spending in the big three will have the greatest impact.
Source: Legislative Finance Division for the State of Alaska, 2020 Legislature – Operating Budget, Agency Summary.
Source: Legislative Finance Division for the State of Alaska, Historical Operating Data, 2011–2021.
As shown in Figure 4 above, the HSS budget has grown by 53 percent over the past decade. Expansions to Medicaid, which account for over two-thirds of the HSS budget, is a major contributor to this growth. Combined with the fact that Alaska’s per enrollee spending on Medicaid is the second highest in the nation, Medicaid expenses cost billions of dollars. Alaska’s government is directly responsible for up to 50 percent of Medicaid spending with the federal government covering the rest.
In addition to the HSS budget, DEED also constitutes a sizeable portion of state spending. Most of that spending is concentrated within one segment which accounts for nearly 80 percent of the DEED budget, K–12 Aid for School Districts. This comes despite research that greater spending does not necessarily improve educational outcomes.
Finally, there’s the UA budget. The UA stands alone as the only agency in the big three to decrease its budget over the past decade, if only by 3 percent. The UA independently allocates its funds into many departments and various programs, so it is distinctly difficult to analyze its spending.
At a fundamental level, Alaska is suffering from a case of irresponsible deficit spending. Rather than raising taxes on industries that are already struggling, Alaska should look to rein in its spending and pursue a long-term plan for fiscal responsibility.
Johan Soto is the Fall 2020 Policy Analysis Intern at Alaska Policy Forum. He is currently studying nuclear science and engineering at the Massachusetts Institute of Technology.