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As Oil Prices Fall, Alaska’s New Governor Faces a Novel Goal, Frugality

Governor Bill Walker of Alaska addressed the budget problems caused by falling oil prices last week.Credit...Mark Thiessen/Associated Press

JUNEAU, Alaska — As a crowd of lawmakers and staff members bustled up and down the central staircase here at the State Capitol on the opening day of Alaska’s legislative session last week, a string quartet could be heard on a landing above, sweetly playing in backdrop to a midafternoon cookie-and-crudités reception.

“Maybe it’s the band from the Titanic,” a wiseacre on the stairway sniped, to an eruption of laughter.

Alaska is not a sinking ship, but no one needed an explanation of the gallows-humor remark, as a record-setting sea of red ink has flooded the state budget amid a global collapse of energy prices. Taxes paid by oil companies account for 90 percent of the state’s operating budget, and those revenues have sunk with stomach-churning suddenness and depth, echoing other oil-patch states, like Texas, but with uniquely Alaskan scale and implications.

The result, historians and economists say, is beyond the experience of this state, or probably any other in modern times: more than half of the tax base — predicated on crude oil selling at around $110 a barrel — is simply gone in the whirlwind of $50 oil, as though it never existed. A spending plan of $6.1 billion for 2015, passed by the Legislature last year, will fall $3.5 billion short, or more, if oil prices keep falling. Alaska collects no state sales or income taxes to pick up the slack; a savings fund from past oil earnings will help, but it cannot fully fill the gap either.

“Even if you lay off every state employee, that only saves us a billion,” said Representative Chris Tuck, a Democrat and the minority leader in the Alaska House of Representatives, putting the problem in context. “We’d still have $2.5 billion to go.”

Governor Bill Walker, an independent who took office last month after beating the Republican incumbent, Sean Parnell, has inherited this Alaska-size problem. And his solo act without a party has created the other swirling dynamic that is gripping the state. At a time of soul-searching assessment about government priorities and potential shock to the economy from layoffs or spending cuts, is a political maverick just what the doctor ordered, or a recipe for havoc?

In his speeches to the Legislature last week, Mr. Walker proposed a 5 percent to 8 percent spending reduction across all state agencies, and a possible 25 percent reduction over four years if oil prices do not recover. He hinted that new taxes — unspecified, but probably including sales or income taxes — might have to be considered. He said that a natural gas pipeline, long delayed, will get fast-track priority, though it could not be finished, or help the state’s revenue picture, until 2023 at the earliest.

“I’m talking about deep cuts, and they will hurt,” Mr. Walker said in a prime-time address last week.

Republicans who control both chambers of the Legislature — many of whom were Parnell allies — are already signaling that they may not embrace Mr. Walker’s ideas for solving the crisis. A 63-year-old businessman, lawyer and former Republican, Mr. Walker had a Democrat as his running mate, and last held elected office in the 1970s, as mayor of the small town of Valdez.

“We might agree to disagree,” said Mike Chenault, the Republican Speaker of the House. “I’ve tried to keep an open mind and keep all avenues of conversation open, and I’ll continue to do that until we either decide that we can make this work or we can’t.”

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Energy revenues are crucial to the state and projects like the Trans-Alaska Pipeline.Credit...Luke Sharrett for The New York Times

Democrats, long accustomed to being on the outside looking in at power in this right-leaning state, have almost nothing but praise for the new governor and his proposals.

“He’s in a beautiful position in some respects, because he doesn’t owe the traditional political establishment anything,” said Senator Berta Gardner, a Democrat and the Senate minority leader. “He’s not a politician, and that’s going to create some hurdles for him, but he has made some very good choices.”

The new governor, for his part, has said that Alaska’s distinctive political culture, economy and history — its days as a territory before statehood in 1959 still fresh and resonant, its relatively small population accustomed to politics with a homespun accessibility — will make for a unique, if tough, solution.

In one respect, Alaska is also extremely lucky: lawmakers set aside about $14 billion in savings during the fat years, which Mr. Walker has called “a bridge,” which must be trod gingerly. Tapping too little of it, he said, would force even more drastic spending cuts; spending too much could deplete the fund before the crisis has past.

“Before we had money, we had guts,” he said in a recent speech, quoting Walter J. Hickel, the former Alaska governor and United States interior secretary, whom Mr. Walker has called a personal hero and mentor.

But an alternative model for the new Walker administration has also emerged — a surprising one, perhaps — in Sarah Palin. Mr. Walker and his allies say the current moment harks back to her election as governor in 2006: She was outside her party establishment, though nominally a Republican, and worked with a coalition of Democrats and Republicans after a spate of scandals involving the oil industry. (Ms. Palin endorsed Mr. Walker last fall, though they have not communicated since the election.)

“She took on an incumbent governor, as I did,” Mr. Walker said in an interview. “She did it within the party, I did it outside the party — so there could be some comparisons.”

Alaska still has billions of dollars of accumulated and untapped wealth. In the last decade, as much of the rest of the nation was staggering through recession, the state was in fact booming as oil prices surged. A $53 billion fund from past oil revenues, which pays dividends to residents from investment earnings, has churned along as well, with last year’s payment of $1,884 per person one of the biggest ever. That fund is wholly separate from the state budget.

Oil production, meanwhile, has slid — to barely a fourth of what it was at its peak in the late 1980s — as old wells drilled a generation ago produce less. Declining oil sales have compounded the impact of the price declines.

The governor’s secret weapon, though, his allies said, might be public support — if he can sustain it and use it as a lobbying force.

In building his administration, he enlisted hundreds of ordinary residents and experts in his transition team. In looking for budget solutions, he threw the door open to suggestions, rewarding the five best ideas with lunch with the governor and the lieutenant governor, Byron Mallott. Thousands of ideas have come in, Mr. Walker said.

“That’s my challenge and my opportunity — to reach out to those folks and let them know we have an open door,” he said. “We have to turn our cards face up.”

A version of this article appears in print on  , Section A, Page 13 of the New York edition with the headline: As Oil Prices Fall, Alaska’s New Governor Faces a Novel Goal: Frugality. Order Reprints | Today’s Paper | Subscribe

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