ISER: State payments to local governments doubled over decade

  • A $7.6 million cruise ship berth rehabilitation project at the Ketchikan Visitors Center is seen after completion by Orion Marine Contractors for the city in 2013. Despite ranking as just the seventh-largest Alaska borough, Ketchikan’s budget relies on state assistance for only 7 percent of its budget thanks to sales and lodging taxes that bring in major revenue from about a million visitors per year. This project was paid for with the city’s share of cruise ship head taxes. (Photo/Courtesy/Orion Marine Contractors)

State spending has grown to comprise nearly 30 percent of all revenue for Alaska’s local governments in recent years, according to a report from the University of Alaska Institute of Social and Economic Research published June 19.

State support to Alaska’s 19 boroughs and municipalities grew from a near-term low of 12 percent of the average borough budget in 2004 to an average of 28 percent in 2015, the most recent year for which adequate data was available, study author and ISER economist Mouhcine Guettabi said.

Guettabi and other ISER researchers examined audited borough financial reports to gather data for the study as a means of consolidating the most consistent, accurate figures possible.

It ultimately shows that the State of Alaska’s spending habits have a dramatic effect on the amount of money available to its local counterparts.

“Overall, state spending is very sensitive — or has been over the last few years — very sensitive to oil prices and that certainly makes its way down to borough government revenues,” Guettabi said in an interview.

In 2000, the first year the study examined, state money paid for an average of 19 percent of borough budgets. At that time, oil prices averaged roughly half of what they are currently in nominal terms; however North Slope oil production was also more than double what it was in 2015.

Unsurprisingly, the largest local governments in Alaska were generally the least dependent on state aid, as they have populations that are able to generate enough tax revenue to make them mostly self-sufficient.

Between 2000 and 2015, state money made up just 4 percent of the Municipality of Anchorage’s budget, according to the study. For the Matanuska-Susitna Borough, the like figure was 11 percent, while Juneau and the Kenai Peninsula Borough each drew 14 percent of their revenue from the state over the period. The Fairbanks North Star Borough had the largest share of state support in its budget at an average of 15 percent.

Conversely, the some of the smallest and remote regions of the state relied most heavily on the State of Alaska. The Bristol Bay Borough in Southwest Alaska, which doesn’t include the regional hub of Dillingham, used state funds for 31 percent of its revenue, and in the adjacent Lake and Peninsula Borough the figure was 37 percent.

Haines in Southeast and the Northwest Arctic Borough each had the highest shares of state-sourced revenue in their budgets at an average of 38 percent over the study period.

The outlier was the Ketchikan Gateway Borough. With about 13,700 residents in 2015, Alaska’s southernmost borough was the just the seventh-largest but state money averaged only 7 percent of its overall revenue since 2000.

Ketchikan has local property, sales and lodging taxes, and the latter two capture revenue from the roughly 1 million tourists that visit the city in busy years.

Guettabi said state appropriations for capital projects often made up the largest portion of state money in local budgets over the study period.

Given that, it is worth noting that the 2015 fiscal year was the last year of significant discretionary spending in the state’s capital budget before oil prices and state revenue collapsed. The 2016 and 2017 capital budgets have subsequently lacked almost any purely state-funded projects.

The study also examined how much boroughs would have to raise in taxes to replace the state dollars each received in 2015.

Despite getting $74.3 million of state money in 2015 — more than double what any other borough received — the Municipality of Anchorage’s relatively large population means it would only have to come up with tax revenue equal to $248 for each of its nearly 300,000 residents to go state money free.

The Fairbanks North Star Borough, which got $27.4 million from the State of Alaska in 2015, was the next lowest at $278 per person.

To the contrary, the 887-resident Bristol Bay Borough would have to generate $4,874 per person to offset the state support it received in 2015.

Many of the boroughs fell in the $1,000 to $2,200 per person range.

“It makes it clear small places would have to levy very, very high taxes to replace how much (state) money they’re getting,” Guettabi said.

What is the appropriate level of state support for local governments has become a conversation inside of the larger state budget debate as lawmakers have tried to resolve annual budget deficits that have been at least $2.5 billion annually over the last three budget cycles.

Guettabi said ISER is also working on another report examining State of Alaska spending per capita and why it is generally the highest in the country.

“The health of local communities is something that needs to be part of this conversation as we’re thinking about the right size of government and thinking about how to fund government,” he said. “I think that understanding the ramifications of those choices on these borough economies is paramount to the next few years.”

To that end, Department of Revenue Commissioner Randy Hoffbeck said to the House Finance Committee in February that 46 percent of the total state budget is “cash out the door” to fund programs and services statewide.

Currently, $1.6 billion of the state’s roughly $4.2 billion operating budget goes to assist communities in paying school debt, employee retirement obligations, education and general revenue sharing statewide, according to the Revenue Department.

More than $1.2 billion of that is in the state’s base student allocation education funding formula. Alaska is unique in that the state constitution requires the state to fund public education.

However, just eliminating the roughly $300 million in state payment assistance for school debt and retirements would “implode” the budgets of most of Alaska’s smaller communities, Hoffbeck said.

He was testifying on state income tax legislation passed by the House that failed in the Senate, but that Gov. Bill Walker’s administration generally supports as part of a broad-based revenue fix to the deficit.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

Updated: 
06/21/2017 - 12:54pm

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