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As state funding dries up, boroughs are left to foot the bill

July 14th 3:54 pm | Shady Grove Oliver Print this article   Email this article  

It's just a matter of time before Alaska's fiscal crisis begins to have a serious effect on the financial stability of local governments because of their dependence on state dollars.

Many of the borough governments in Alaska, including the Northwest Arctic and those in the southwest, rely heavily — and in some cases, predominantly — on funding from the state in order to operate, according to a recent report from the University of Alaska Anchorage's Institute of Social and Economic Research.

"Alaska provides three main kinds of aid to local governments: aid for general government operating expenses (revenue sharing), grants for public works projects, and aid for schools. It has mostly relied on its oil wealth to fund that aid to local governments. Revenue sharing helps ensure that all areas of the state can pay for basic public services and have reasonably equitable and stable local tax rates.

Aid to schools is a major part of the state's budget, and it pays for a large share of school costs. State grants for local capital projects can vary sharply by year," the report noted. "In the years when oil prices were high — much of the time between 2008 and 2012 — those grants were large. Since then, the state capital budget has shrunk to a small fraction of what it was a few years back."

The state's budget revenues have plummeted by more than 90 percent over the last five years as oil prices tanked. With more than 90 percent of the state's funding tied up in the oil and gas industry, Alaska's finances go where industry goes.

The domino effect of financial instability at the state level could leave local governments needing to either cut services or pick up the slack not too far in the future.

The report examines each of the 19 boroughs' sources of funding and evaluates what kind of taxes would need to be levied on local residents to make up the difference, should state funding be cut entirely.

The Northwest Arctic is one of the two most dependent boroughs, alongside Haines, which is No. 1, but just barely. The Northwest has, on average from 2000-2015, relied on state money for 38.09 percent of its revenues; Haines averages out at 38.72 percent.

The Lake and Peninsula Borough is a near third with 37.29 percent of its revenues, on average, coming from state sources. Bristol Bay is fourth with 30.87 percent and Aleutians East Borough is fifth at 26.9 percent.

The North Slope Borough was not included in this particular aspect of the study as much of its funding was classified as "intergovernmental," meaning a mix of state and federal monies, the report noted. However, the Slope does bring in about 82 percent of its funding from "internal sources," a category which includes taxes, the majority of which are for oil and gas properties.

In stark contrast, the Northwest Arctic only brought in about 26 percent of its revenues from internal sources in 2015, which was the final year the study looked at. As it levies no local taxes, that comes from money collected under the payment in lieu of taxes (PILT) agreement for the Red Dog Mine.

"Aleutians East Borough had a population of 3,047 in 2015 and only one internal source of revenues—a fish tax that generated $3,998,104. That amounted to 35 percent of overall borough revenues. Bristol Bay has a bed tax, a personal and real property tax, and an alcohol tax, which generated 52 percent of its total 2015 revenues," the report stated. "The Lake and Peninsula borough has a bed tax and raw fish tax, making up 28 percent of total borough revenues in 2015."

The study's authors are clear that these figures are estimates.

However, they also note the numbers have been going up over the last decade-and-a-half, with reliance on state sources of funding more than doubling statewide between 2004 and 2015.

While the numbers have fluctuated over time, they've definitely risen significantly during those years in places like the Northwest. In 2000, only 8.82 percent of the borough's revenues came from the state. In 2013, it had spiked to more than 61 percent. The following two years, it was just above 50 percent.

In 2015, Aleutians East and Bristol Bay derived 33 percent of their revenues from the state. Lake and Pen was more dependent at 49 percent.

"[T]he sharp decline in the state's revenues in the past few years means that the amount of money flowing to these areas will more than likely decline in the next few years," the report stated. "This, in essence, tells us that the boroughs will either need to replace a portion of these revenues through taxes, or reduce the services they provide their citizens."

As part of what the study's authors called a "thought experiment," they calculated how much money the boroughs would need to tax citizens to maintain all current services, in the event state funding was cut entirely.

"This is an extreme example — state aid is not all going to disappear — but it allows us to see the scale of the problem and the potential difficulties boroughs may face as they grapple with state revenue declines," they noted.

With a smaller ratio of state dollars to number of citizens, Anchorage would only need to tax each taxpayer $248. Likewise, Aleutians East Borough would see a fairly small tax of $342 per person.

On the other end of the scale, the Lake and Peninsula Borough would need to charge each person $1,978. The Northwest Arctic would be even higher at $2,268. Finally, Bristol Bay would need a whopping per person tax of $4,874 to make up the difference.

Another component of this puzzle is employment in these dependent boroughs. Many of the most dependent local governments also have the highest percentage of jobs tied up in local government.

In 2015, 61 percent of the jobs in Lake and Pen were local government, compared to 59 percent on the North Slope, 37 percent in the Northwest Arctic, 34 percent in Aleutians East, and 29 percent in Bristol Bay.

"The relationship between changes in revenues and changes in employment are mostly in the expected direction: we see an increase in local government employment as a result of an increase in local revenues," the report noted.

On the North Slope, 75 percent of wages in the borough came from local government jobs in 2015. In Lake and Pen, it was 78 percent of wages. The Northwest Arctic saw about 41 percent of its wages tied up in local government, compared to 30 percent in Bristol Bay and 33 percent in Aleutians East.

As the report outlined, the state's fiscal crisis has yet to significantly hit borough budgets, but that trickle-down effect is inevitable, at least to some degree.

"Since 2005, local governments have become more reliant on state dollars. But this boom period is coming to an end. On the employment front, it is obvious that the employment and wages of local government are crucial to the health of those economies," the report noted. "Going forward, it will be crucial for the vulnerable economies to balance the needs of providing services and imposing taxes that fall on their residents."

More information about the study can be found at www.iser.uaa.alaska.edu.

Shady Grove Oliver can be reached at sgoarctic@gmail.com.

 

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