The Governor released the proposed state budget for the next fiscal year just before Christmas. If you are like most Alaskans, you were focused on celebrating the holiday and may have missed it. In this post, I will summarize what is in the budget and provide some interpretation of what it means.
Like in previous years, Alaska will spend more than we take in as revenue, and we will deplete our savings accounts to do so. Most people who have been in this situation with their personal finances understand that this plan is unsustainable in the long term, but our legislators in Juneau have been unable to address the situation. Legislators get elected when they spend money in their districts, and with the Democrats now in charge of our State Legislature, don’t expect any positive moves in this regard; in fact, the problem of deficit spending will probably get worse.
To help you understand the state budget, I will split this report into two parts. Part one will focus on revenue coming to the state, and part two will focus on what we spend it on.
The governor’s budget summary at the top of this post contains lots of fine print, which can intimidate readers. It is difficult to read and understand, but don’t worry; it isn’t as complicated as it looks. I have summarized Alaska’s revenue sources in Table 1 below.
If you look at our budget, Alaska gets revenue from just four sources. There is income from our royalty oil payments, most of which are from the North Slope oil fields. There is a significant draw from the permanent fund, which has occurred every year since the administration of former Governor Bill Walker.
There is income from other taxes, fees, etc. However, the most significant source of revenue for our state budget is the money we get from the federal government. Unfortunately, most of those federal funds are restricted in how they can be spent. Much of it is used to pay for Medicaid for low-income Alaskans, a program that runs a deficit every year.
It wasn’t always that way; we were once flush with oil revenues, and even our legislature couldn’t spend it fast enough. Income from the oil industry paid for a profligate state government and is the reason for many extravagant public works projects around the state, such as the world-class high school we have here in Homer. We even put some of that income into rainy-day accounts for use by future Alaskans.
Unfortunately, as you can see in Chart 1 above, crude oil production from Alaska’s North Slope has declined since the late 80s. We get far less revenue from oil production now than we have in past years. The chart doesn’t tell the full story since oil prices must also be factored in, but the chart gives you a quick idea of the problem. Oil revenues are declining, but Alaskans are used to being able to afford a costly government. Unfortunately for us, the declining oil production will no longer allow that. It isn’t that we are broke now. Our state will still take in $15 billion in revenue this year. The problem is that the governor proposes to spend $16.772 billion. This is more than we have revenues to cover, leaving the state with a deficit of $1.52 billion.
So, where will Alaska get the money to fill the deficit? Previous legislatures were farsighted enough to set aside funds in two savings accounts: the Permanent Fund and the Constitutional Budget Reserve. As of November 30, 2024, those accounts hold $80.8 billion and $2.7 billion, respectively. As mentioned above, the governor’s budget already taps the Permanent Fund earnings for $3.8 billion, but they can only spend the fund’s earnings; the principle is protected, and the use of the earnings to pay for state government reduces the size of the annual PFD check Alaskans receive.
The Permanent Fund was established in 1976, and the founders knew that future legislatures would be tempted to spend it. So, they wisely enshrined in the Alaska Constitution language prohibiting spending its principle, making it safe from a raid by spendthrift legislators. Only the earnings can be used – more on that in part two of this series.
That leaves the smaller Constitutional Budget Reserve, where all the action is when there is a budget deficit, as there is every year now. The Constitutional Budget Reserve was set up in 1990 as a fund for the legislature to make up deficits in annual budgeting. Interestingly, it requires a three-fourths majority in each house to withdraw funds from the CBRF, which gives the minority party in each house of the legislature power to control the budget every year. Without the consent of the minority party, no funds can be taken from the CBRF, resulting in an even more significant budget deficit.
If you want to know why the Democrats have so much power in Juneau despite being the minority party, this is one of the reasons. They hold the Republicans hostage to the three-fourths majority requirement for spending the CBRF.
Even if the legislature continues using the CBRF, it is no long-term funding solution. The legislature has been tapping it for several years, reducing the reserve account value. Despite once having over $10 billion in the fund, it is down to $2.7 billion now, and it will not last long if we keep depleting it to the tune of $1.5 billion every year.
Alaska’s per capita state budget is almost $20,000 per resident, nearly double that of the closest state. We are still a wealthy state with significant revenue sources and two large savings accounts. You would think that we could find a way to pay for a smaller and more efficient state government to live within our means. However, despite the state’s wealth, our Legislature has not been able to adjust to the declining oil revenues and has resorted to deficit spending and raiding savings accounts. This is a short-term strategy that will run out eventually.
Future legislatures will be eyeing the Permanent Fund and trying to take away all of your annual PFD checks entirely; once they do that, they will attempt to find a way to spend the fund’s principal balance. I don’t believe most Alaskans want that to happen, but that is the direction we are headed unless fundamental changes are made in how we spend our state revenue.
In part two of this series, I will discuss how Alaska spends its money and what can be done to live within our means, taking inspiration from Argentina’s President Milei. When faced with a similar problem last year, he took a chainsaw to his country’s budget and restored fiscal sanity. Alaska should do the same.
The views expressed here are those of the authors. Read more posts at Seward’s Folly substack.
12 Comments
This isn’t the budget for Alaska. This is a copy a portion of the budget. Income to the state is oil, fish, mining and small industries. Remember that the Permanent Dividend Fund is also income. The budget hasn’t been released to the public yet. Dunleavy is a lying, mealy mouthed henchman just like the people he puts on boards and commissioner status. So, don’t get \your knickers in a twist. Wait for it! Wait for it! It’ll happen but the few that will promote him will want to have your attention in their own marketing fashion. This is not the budget.
Just to add: Schedule 1, Form 1040 titled, “Additional Income and Adjustments to Income” has additional income section that lists the Alaska Permanent Fund dividends as income. This is the IRS tax filing every year, so if anyone files taxes, the filing should show your PFD you received as additional income on your taxes. Ask the IRS about this form if you are unsure.
“…….Remember that the Permanent Dividend Fund is also income……….”
This is the exact opposite of the truth. The PFD is not income. It is an appropriated expenditure. It is a huge portion of the problem. As Mr. Hickey correctly outlined, the budget deficit is $1.52 billion. Last year’s PFD was just shy of $1 billion. Thus, ending the PFD giveaway eliminates @ 65% of the deficit. But what we are already beginning to hear are demands for income or sales taxes so that the freebies can continue. It’s pure insanity. The first thing that needs to go is the free money scheme. Then cutting the fat from the state budget further (I’d suggest the University of Alaska appropriations) is the second thing to do.
OMG! I apologize to Mr Sarber for incorrectly attributing his excellent column to somebody else!
Look to the Form 1040, Schedule !, titled Additional Income and Adjustments to Income
Alaska Permanent Fund dividends is listed under Additional Income
Federal Tax Filing that we use and file every year by April 15.
Check it out and hope you have caught up paying your taxes and filing them. If not, you are in a heap of trouble.
I agree that the PFD is reportable income on federal individual income taxes. I don’t understand how that applies to Alaska’s state fiscal problems.
Another great article by Mr. Sarber. A good overview and well explained. Our state government needs to be reined in just as also our federal government. It is stunning just how much of an entitlement state we have become.
Problems with this article:
1) this is minor but you have the income in billions. $15,251.8 billion is really $15.2618 trillion. Just an FYI.
2) “They (Democrats) hold the Republicans hostage to the three-fourths majority requirement for spending the CBRF.” This is beyond false. You either have to be stupid or lying. The REPUBLICANS hold THEMSELVES hostage to CBRF. They won’t balance the budget. If they did that, they could pay the full PFD which is the law AND not worry about the democrats.
And I suppose I might be a little harsh on the “stupid or lying” part. My apologies
The PFD is compensation for taking away Alaskans subsurface rights to become a State back in 1959. The PFD was also, created to keep the Alaska State Legislators in checks and balances. Governor Bill Walker broke the check and balances with his PFD raid. How about the State of Alaska gives us our mineral rights back and they can keep the PFD; otherwise, they need to keep up with the compensation and give us our PFD. It’s not a free hand out, research the history on it.
“Subsurface rights” only applies to property owners, not every individual who breathes Alaskan winter air. The PFD is a free hand out. Period. It is being touted by open socialists world wide as the only current functional example of Universal Basic Income (you might want to research that phrase and Democrat U.S. presidential candidate Andrew Yang’s 2024 campaign). And the PFD is just another appropriation, no different than any other: it’s debated in the Legislature annually, presented to the Governor as a budget bill, then either signed or vetoed. It has been kept at below”statutory” levels by both the Legislature and two governors now. Oh, and Alaskans have “mineral rights”; more than a century of mining history under both federal and state law proves that.
Governor Dunleavy did try to make the hard cuts when he first became Governor…then Alaskans we’re upset and started a petition to get rid of him as Governor.