Sheffield first, and last, governor to cut state budget

Photo/Michael Dinneen/AJOC

Editor’s note: This is the first in a two-part series profiling former Alaska Gov. Bill Sheffield by Journal reporter Tim Bradner, who has been covering the oil industry and state politics for more than 30 years. Coming next: An unsuccessful effort at impeachment, success at the Alaska Railroad, and problems at the Port of Anchorage.

Legislators and state officials are wrestling with some old issues in Juneau: How to control the growth of government, how to build strategic infrastructure, and how to plan, if it can be done, for a collapse of oil prices and state revenues.

It all sounds complex, and the collapse part is scary, but realistic.

However, we’ve been there before. It was in the 1980s. Bill Sheffield was governor. He was at the helm when oil prices collapsed, and he took action.

Sheffield’s decisions were unpopular but he saved the state from going off the cliff financially. Politicians who do the right things, that are unpopular, typically get unelected. That’s the price Sheffield paid.

Sheffield notched up a string of other accomplishments besides saving the state financially. He can also be credited for creating more strategic infrastructure, all of it successful, than probably any other governor. To his credit, Sheffield also shut down some big boondoggles, and with decisiveness.

Elected in 1982 by a big margin, Sheffield came to Juneau with the credentials of a successful businessman and the aspiration of instilling financial discipline to a state government that was awash in billions of dollars of surplus oil revenues, and with spending that was wildly out of control.

Experienced in business, Sheffield came in “with a mission to run state government like a business,” recalls Pete Spivey, Sheffield’s press secretary. Expectations became more modest after the new governor tangled with the Legislature.

A reporter asked the governor if he still thought government should be run like a business at the end of Sheffield’s first legislative session.

“No, I don’t. But government can still learn some things from business,” Spivey recalled as Sheffield’s reply.

Sheffield and his key staff were new to government, but they went at their mission with energy and passion even with a certain naïveté as to how things work in Juneau, Sheffield now admits.

One early success, however, was getting the state Department of Transportation and Public Facilities to locate several billion dollars of capital project money the agency had literally lost track of.

The state was flush with the first big surge of oil revenues and the Legislature, under intense public pressure, had opened the floodgates for money.

“Money was just being thrown at the DOT,” for projects, Sheffield recalls.

The agency was not able to keep track of when projects were completed, how much was spent and whether there was money left over.

Sheffield formed a special audit group and the funds were eventually accounted for. DOT got new computer systems to track funds, and the financial controls put in place have functioned well since then.

Spending discipline

Sheffield’s biggest challenge, which he wrestled with all through his term, was trying to instill discipline into the Legislature’s spending. At the time, hundreds of millions of dollars were being spent on projects many in the state administration felt were frivolous.

This battle was only partly won — Sheffield can be credited with some reforms — but the fight that ensued with powerful legislators would cause the governor real problems later on and fueled a push for impeachment.

One practice Sheffield went after early on was one that had become entrenched when state began receiving massive oil revenues in 1979 and 1980. It was the “one-third, one-third, one-third” split of the state capital budget, which was in the billions by the early 1980s.

Under this, the House got a third, with a promise of no tampering by the governor or the Senate; the Senate got a third with a promise of no tampering by the governor or the House; the governor got a third for the administration’s priorities with a promise of no tampering by the House or Senate.

Ray Gillespie, who was on Sheffield’s staff early on, recalls the first run at this. Sheffield’s budget staff, themselves new to government, tried to persuade the Legislature to simply approve an overall amount of money for the budget and to let the administration decide the which programs were funded.

“There was actually talk of a 15-line budget bill,” Pete Spivey remembers. Legislators angrily rejected the idea, or any interference of the governor in their decisions on spending.

It was a stormy wake-up call for Sheffield’s budget staff. Spivey recalls one memorable meeting with the late Al Adams, an influential Native legislator then on the House Finance Committee, pounding his fist on the table defending the one-third, one-third, one-third practice. 

Sheffield persisted in efforts to slow the pace of capital spending, making heavy use of his veto power.

“We were worried they would spend all the money,” Spivey said. “The Permanent Fund wasn’t that big then,” and Sheffield was worried that the state’s new oil windfall would soon be dissipated with little of it saved.

Sheffield vetoed $700 million worth of legislators’ projects the governor felt were frivolous, and when legislators screamed the governor put the freed-up funds into the Permanent Fund, a gutsy move legislators were afraid to block.

“I put the money into the Fund in increments,” Sheffield recalls. “Every time they (legislators) did something to piss me off, I put in another $100 million, until it totaled $700 million.”

Sheffield couldn’t end the one-third, one-third, one-third tradition — a version of it continues today — but he caused it to become less formal and with more control by the executive branch.

Reversing re-appropriation

One simple reform Sheffield is proud of, and which continues, is for communities or groups asking for capital appropriations to fill out a form to explain what they want the money for. Even that had previously been lacking.

However, even today these forms are not public. The requests, with written rationale, go to legislators and eventually to the House and Finance committee chairs.

The first public viewing of which requests are approved comes in the closing days of the Legislature’s session when drafts of the budget, which are public, are published.

One particularly sloppy practice Sheffield took aim at, and where he scored a hit, was a procedure where legislators approved a project in a capital budget bill, then re-appropriated the funds in a second budget bill, and sometimes re-appropriating the money again in a third budget bill, all in the same session.

“It happened so many times people just lost track of where the money went,” Gillespie remembers, except for those lawmakers who knew the inner workings of the budget. “The custom was that legislators got to pick the projects for re-appropriated funds in their districts.”

This smoke-and-mirrors act was meant to confuse people, particularly the administration.

Gillespie recalls this particularly brought Sheffield into combat with Sen. Frank Ferguson, a powerful senator from Northwest Alaska, who had mastered the re-appropriation maneuver. There were heated closed-door meetings in the governor’s office. 

Gillespie recalls one: “The governor had called Ferguson, Sackett and Al Adams to a meeting in his office to say ‘no more’ and that he would veto.” 

Gillespie wasn’t in the room — he was right outside the door — but he remembers Ferguson storming out in a rage. He went on the Senate floor that day to attack Sheffield in a floor speech, Gillespie said.

It was tough going, but progress was made.

“Just airing the re-appropriation abuses had the effect of cleaning things up,” essentially ending the practice, Gillespie said.

Ferguson was a master at budget maneuvers. Sheffield recalls finding an appropriation for a bridge at Selawik, in Ferguson’s district, tucked into an Anchorage appropriation.

Legislators themselves were appalled at the spending, and the difficulty in controlling it.

“One thing I finally realized was that if there’s money on the table, the Legislature is going to spend it,” recalled John Binkley, a former state senator from Bethel, who chaired the Senate Finance Committee.

Floor fights 

There were lighter moments in all this, though they seem so only in hindsight. Relations got so bad between the administration and Republicans in the Legislature that at the end of the 1982 session the Republican-led House refused to attend a joint session with the Senate to confirm the governor’s cabinet appointments.

When the members of the House were “called,” a procedure where legislators can legally compel other legislators to attend a floor session to vote, several lawmakers hid out so the confirmation session couldn’t be held.

Following established practice, State Troopers were sent to find the wayward lawmakers. Jerry Ward, then an Anchorage House Republican, taunted the troopers, calling them from a mobile phone.

Ramona Barnes, another Republican House member who walked out, was located by the troopers but Sheffield ordered them not to arrest her.

“I didn’t want to put her through that,” he said.

Sheffield emerged from the scrap with considerably more dignity than the Legislature. The confirmation session was eventually held and all of Sheffield’s cabinet members were confirmed, Gillespie recalled.

Tempers were heated, though. Ward got into a fistfight with Lt. Gov. Steve McAlpine in the capitol building.

Averting financial disaster

Besides his work to rein in spending, Sheffield had some accomplishments in his years as governor, and two are remembered widely today. One was his quick action to sharply cut spending when oil markets crashed unexpectedly in 1986 and prices dived to $9 per barrel. What he did, though painful, saved the state financially.

Another was to shelve the massive Susitna hydroelectric project that had become hugely expensive and was flat unaffordable, as it was configured then with two large dams. A scaled-down version of the project with one dam, now called Watana, is being pushed today.

One other of Sheffield’s better-known actions was to terminate the costly and controversial Delta barley project, a state-sponsored agriculture project. Sheffield ordered it shut down virtually as soon as he took office, although by then hundreds of millions of dollars had been spent on clearing land and recruiting farmers from the Lower 48.

Special grain cars were purchased for the Alaska Railroad and a grain terminal was ordered for Seward.

“We didn’t let them even take it (the terminal parts) out of the boxes,” Sheffield said.

The project had been poorly planned from the start. Not only was Delta a poor growing environment for grain — it was too high and cold — but no one in the state had even done research as to whether there were buyers interested in the barley. Also, no one ever considered the wild buffalo herds that happily ate about half the barley crops that were grown, and have done so since.

Another accomplishment Sheffield is really proud of is his successful pursuit of getting Alaska all on one time zone. Previously there were five Alaska time zones, a huge nuisance for Alaskans, particularly those in commerce.

Sheffield is also proud of the purchase of the Alaska Railroad from the federal government, a priority for his administration, and his own action of insisting that it be run as a business in a stand-alone state corporation, managing its finances free of legislative and political control.

That allowed the railroad, the backbone of strategic transportation infrastructure for Alaska, to earn profits and reinvest those in rebuilding tracks and other assets that had run down during the years of federal ownership.

Sheffield is sometimes criticized today for letting the Susitna project lapse in the 1980s, but the project, which then involved two large dams, would have generated power far in excess of any demand.

Alaska’s population and economy are larger now and a smaller, reconfigured project is now planned, and is right-sized for the need.

But in the 1980s, it was a runaway train. 

“It was crazy. There were just a bunch of guys who wanted to build big dams with little thought as to whether it all made sense,” Sheffield said.

Susitna’s death was really ordered by the financial community, however.

Sheffield had travelled to New York to meet with the bankers.

“They looked at the economics and told me the only way they would fund it would be if the state put up the Permanent Fund as collateral. That made it an easy decision for me,” he said.

It was actually hard to kill, though. Even after Sheffield made the decision supporters of the big project, mainly contractors, continued lobbying to get money back into the budget. It took a while to root out the hidden appropriations, Sheffield recalls.

The biggest, and most painful, task during Sheffield’s governorship was his emergency action to quickly slash the budget a billion dollars to preserve core state programs after oil markets crashed in 1986.

This was uncharted territory. “No one saw this ($9 per barrel oil) coming, Gillespie remembers.

“The Legislature had left town after approving the budget, based on $22 per barrel oil. In a matter of weeks oil suddenly went to $9 a barrel. Half our revenues were gone, and we were a billion dollars short paying for the budget,” Gillespie said.

“We had to quickly find 1,100 jobs to eliminate.”

Sheffield moved quickly to develop a plan.

“My advisors told me it was political suicide but it was the right thing to do,” Sheffield said. “I felt I was elected to protect the state and protect people who depend on public services.”

The cuts were mostly to the state capital budget, to preserve the available cash for programs in the operating budget, to the greatest extent possible. As a symbolic gesture, Sheffield cut pay for commissioners, division directors and staff in the governor’s office by 10 percent and cut his own salary 15 percent.

It was here that Sheffield’s business experience and detailed knowledge of the budget became critically important, recalls John Shively, the governor’s former chief of staff.

“As a businessman Sheffield was interested in numbers and he had become intimately familiar with the budget, far more than many of the budget analysts we had, spending hours reviewing the budget line by line with our group of budget analysts,” Shively recalled.

Armed with that knowledge, Sheffield “knew where to go (in the budget) to keep the government solvent,” he said.

It would have been simpler, but more destructive, to slash spending across-the-board, but Sheffield made cuts selectively after consulting with local officials.

They mostly understood.

“They all worked with us,” Sheffield said.

Not everyone cooperated, though. Some cuts to school funds were contested by municipalities. The courts eventually ruled Sheffield overstepped his authority by impounding funds without legislative approval, although the Legislature had adjourned.

The state would have run out of money by late fall had Sheffield not acted. The oil price crash turned out to be relatively short-lived, fortunately. By spring oil prices rebounded somewhat. Very few state workers were actually laid off, but capital projects were cut. 

The reductions were hugely unpopular and they contributed to Sheffield’s defeat in his reelection bid in 1987. Today, Sheffield says he feels good about his actions.

“We did what we had to do,” he said.

Tim Bradner can be reached at [email protected].

02/06/2013 - 12:10pm