The story I hear most often is that when oil prices topped $100 a barrel, the Legislature went on a shopping spree. That sounds like a plausible story, but let’s check the data just to be sure.

Budget Growth

Here is a plot of the budget over time, according to Legislative Finance.

These numbers represent the UGF share of “agency operations,” “statewide items,” and the “capital budget,” which I’ve said before is what most people mean when they say “the budget.”

Right away we can see the issue and confirm the premise.

After a ramp up in budget activity once oil started flowing in 1977, the budget appears to have been fairly stable at around $2.5 billion for two decades. Then it exploded, starting around FY06. It grew rapidly to a peak in FY13. After that, things started to come back to earth.

That timeline more or less matches what happened with oil prices. Since oil prices are the largest driver of State revenues, the shopping spree analogy may check out.

For completeness, we should ensure that this budget growth isn’t an artificial product of inflation or a necessary increase due to a larger population.

Here is the same graph adjusted for inflation and population growth.

Although the larger budgets during the 1980’s become more obvious, the finding is the same.

Where We Increased Spending

The UGF budget grew by about $4.5 billion (133% increase) from 2006 to 2013.

Roughly $550 million of that can be attributed to inflation. The rest warrants further study.

Let’s look at what we bought with this additional funding.

Capital Projects

Clearly, the largest source of budget growth came in the capital budget. In typical Dutch Disease fashion, the UGF portion of that budget increased from $400 million in 2006 to over $2 billion in 2013.

As you can see, over 80% of the capital budget increases came from just 3 agencies. So let’s take a closer look at those.

Keep in mind that there are several other small projects that add up to a lot of money. I’m not ignoring them here, just trying to save space. Feel free to take a closer look on your own here.

Commerce, Community, and Economic Development

The largest single item in the capital budget went to the Alaska Energy Authority. That was $95.2 million to support the Susitna Dam project. Another $36 million also went to AEA for other projects around the State.

AIDEA received $57.5 million for the Fairbanks natural gas project and another $10 million for Ketchikan shipyard improvements.

Pretty much all of the rest of the money went to municipalities through 865 individual grants. For comparison, there were 245 individual capital budget grants to municipalities in 2006. And just 15 in 2005.

The largest municipal grant in 2013 was $48.5 million for the Port of Anchorage expansion project. The other 864 are a variety of projects that benefited the community that received them. They range from libraries to artificial turf on soccer fields and beyond.

Transportation

The State increased the UGF portion of the capital budget for transportation by over $200 million in 2013 versus 2006.

This included increased matching funds for the Federal highway and aviation programs, a new $40 million road in Petersburg, some improvements to address congestion areas in Anchorage and Mat-Su, and several deferred maintenance projects across the state.

University

The simple explanation for the $130 million increase in the University’s capital budget is new engineering buildings at UAA and UAF.

State Obligations

For the time period we have been looking at, there are over a billion dollars of UGF increases to statewide items that must be explained.

And the explanation is easy. They came from tax credit purchases and retirement fund contributions that didn’t exists in 2006.

Oil Tax Credits

In the 2006 budget year, there was no such thing as oil tax credits. That is the year the legislature passed an oil tax reform bill called PPT, which was revised in 2008 into the system known as ACES.

One of the hallmarks of the ACES program was very generous tax credits up front, in exchange for very high tax rates on the back-end.

Under normal circumstances, the tax credits would reduce the amount of tax revenue the State would receive. This is the same way a coupon reduces your bill at the register. You probably wouldn’t expect to count those discounts as part of the store’s budget. It’s more likely you would count the discounted price as the revenue.

However, some companies did not yet have production, and therefore did not have any revenue from which to deduct the credits. So, in order to “level the playing field” for these small companies, the legislature decided to purchase these tax credits from these small companies.

This structure turned these tax reductions into budget items. This process is more like paying the sticker price at the register and then getting a refund in the mail. By doing so, the store must book the full price of the item as artificially high revenues, and then count the refund of that over-collection as an expense.

In 2006, the State collected $1.2 billion in oil production taxes and purchased zero credit certificates. In 2013, Alaska’s oil production tax collections topped $4 billion and the State purchased $400 million of credits.

The result is that rather than saying we collected $3.6 billion in revenues, we say we collected $4 billion in revenues and had “budget growth” of $400 million.

Retirement Contributions

The move away from a defined benefits program started in 2005. So, in the 2006 budget, there was only a very small contribution by the State into the retirement funds.

The legislature began transferring money into the retirement accounts in 2008. By 2013, the issue of an unfunded liability had become a major issue. As a result, a combined $600 million was transferred to these accounts to help address the problem. 

So, this also counts as a “budget increase,” although it is hard to call this government growth. It’s really just a rearranging of how we account for employee retirement accounts.

Education

It appears that we spent some extra money on education from 2006 to 2013, which contributed to about $400 million dollars of our budget growth.

Of that, about $200 million was required to offset inflation. Of the other $200 million that represents true budget growth, $188 million went to foundation funding.

Health and Social Services (HSS)

Of the grants that are distributed by HSS, about 80% are for the Medicaid program. Being a Federal program, the Federal government pays for over half of the program (70% now, with Medicaid expansion).

However, there is a matching requirement. So, the program cannot grow without the State contributing more money.

The UGF portion of the HSS budget grew by $623 million between 2006 and 2013. The majority of that money went toward funding the rapidly growing Medicaid program.

Staffing

Comparing the cost of personnel between 2006 and 2013, there was an increase in cost to the tune of $752 million. About $478 million of which was paid from UGF revenues. 

Part of the growth came from increased staffing levels. There was an increase of 2,110 full-time employee positions over this time period. 858 of which occurred within the University system (a 22% increase in staffing).

 

 

The Department of Corrections (the third largest department by staffing levels) grew by 16%. HSS grew its staff by 9% and Transportation grew by 7%.

The other Departments grew slightly over the period as well, with the exception of the Departments of Natural Resources and Labor.

However, the number of employees isn’t the only thing that drove up personnel costs. The cost of each employee also rose over the time period.

 

After adjusting for inflation, it was not wages that increased by much. It was benefits. This was mostly due to increasing healthcare costs, which raised the cost of providing health insurance.

So, the $752 million increase can be explained by the four factors mentioned here:

Paying for Personnel Cost Increases

But, not all of the cost increases were paid with unrestricted general funds. Some of those new positions were part of Federal programs or were paid with some form of restricted funds.

To track down how much should be attributed to “the budget” the way we have defined it, I broke the personnel costs into funding source by assuming that the share of personal services within a line item are proportional to the funding for that line item. This isn’t perfect, but it is illustrative. Here is what I found:

About $478 million of funding increases hit the UGF portion of the budget. Of that, $209 million was used to keep up with inflation. The rest was growth, partly in head count and partially in wages and benefits.

Wrap-Up

Comparing the 2006 spending levels to 2013 shows us where the budget growth occurred. By understanding where it grew, logic suggests it will point us toward where we can cut to get back to those levels.

When I do the comparison between these 2 budget years, this is what I find:

1. We spent a lot of money on community capital projects. Those should be temporary expenditures that can be reversed quickly – by simply putting down the checkbook.
2. The tax credit program was created during this period, which also generated a lot more tax revenues. Calling this budget growth is a little misleading. And, the program has since been repealed. These costs will go away once the backlog of credits is cleared.
3. Contributions needed from the State to fully fund the pension program increased when new employee contributions became separately managed and stop flowing into the pension fund. This unfunded liability is going to be an issue for many more years.
4. We invested some additional money on education during this period of higher revenues. This could be reversed if that was deemed necessary, but cutting education is always politically challenging.
5. We also invested in higher education through the University system. The construction costs for the engineering buildings are sunk, and future budgets without new buildings in them will automatically be lower. On the other hand, the increase in staffing is recurring. As you’ll see next week, most of these new positions were later cut.
6. Many agencies saw some staffing increases, but this was a minor portion of the budget growth.
7. Medicaid funding has increased quite a bit as more and more people qualify for those services. It might be possible to cut back on these costs, but it will not be easy.

Takeaway

As you can see, there was a combination of coincidence and extravagance that lead to a doubling of the budget between 2006 and 2013. A third of the growth was the consequence of laws that were passed around 2006. Another third was from passing a Christmas tree capital budget when revenues were high.

Of the rest, inflation explains about a third of the growth. Federal matching requirements explain another third. And the rest was deliberate growth of government services being provided.

But, since 2013 the budget has been reduced. In the next article, I will compare 2013 to 2019 in order to see what cuts actually happened.

Stay tuned.