Now that we’ve explored how the budget increased when oil prices were high, let’s take a look at what got cut when oil prices crashed.

Budget Cuts

The time period of interest for this article is from the highest budget year (2013) to the most recent budget (2019). In this first graph, we are only looking at UGF spending on agency operations, statewide items, and the capital budget. The PFD payments are not included as UGF here.

As you can see, the UGF portion of the budget was reduced by 40% during this time period. But let’s look closer and how this was accomplished. First, let’s break down the UGF budget into three major categories.

Now we have a better idea of when and where those $3 billion of UGF cuts occurred.

$1.9 billion came from reeling in the capital budget, $0.8  billion from curtailing statewide items, and $0.3 billion from trimming agency operations.

Let’s dive deeper into each.

Capital Budget

The first thing to get cut when revenues fall, is the capital budget. It’s true with private corporations and it’s true with the government. These are usually things that would be nice to have, but that we can live without.

It’s also important to remember that this are mostly one-time purchases (we don’t need to build a new engineering building every year), so they show up as an increase in one year and then a decrease in the next.

Since these are not recurring items, it’s a little strange to think of buying capital items as “budget growth,” and thinking about a smaller capital budget as a “budget cut” is a little odd.

For example, you don’t say your household budget for electronics went up when you buy a new tv. Rather, you consider it a one-time purchase with no expectation it will be in the next budget.

Canceling your cable would be a budget cut. Deciding not to buy a second television doesn’t really fit that same definition.

In reality, the $1.9 billion of “capital budget cuts” that we saw from 2013 to 2016, are better described as fiscal restraint. It was really just telling people “no” when they asked for things they wanted.

Statewide Items

The next major group can be divided into four sub-groups. Debt service payments, fund capitalizations, retirement contributions, and tax credit purchases.

Debt Service Payments

When looking only at UGF spending, there was a reduction in debt service from $215 million in 2013 to $171 million in 2019.

But this reduction was not a choice to live without something. It was the result of the simple fact that we made the last payment on some bonds during the previous year.

Fund Capitalization

In the 2013 budget, the Community Revenue Sharing funding was a UGF line item for $60 million. In 2019, that program was converted to a $30 million deposit into a designated account called the Community Assistance Fund.

The result is a $30 million transfer from UGF funds to “other” funds. The other $30 million could be considered a cut.

During the same period, the REAA school fund was increased by $40 million.

The net result is a $20 reduction in UGF funding, but a $30 million increase in other funding for these programs.

State Retirement Contributions

The UGF money put toward the unfunded pension obligations in 2013, was around $614 million per year. In 2015, the State made a lump sum transfer from our savings account to buy-down those annual payments.

With that additional funding, the actuarial calculations now show a much smaller required contribution each year. Since 2016, those transfers have been closer to $250 million. In FY19, it was $271 million.

So, the $343 million budget reduction between 2013 and 2019 is the result of the 2015 prepayment of these costs.

Tax Credit Purchases

As I said last week, the correct way to think of these tax credits would be as a refund of previous over-collections. The State already collected the money to purchase these credits during the years of higher oil taxes. But, when oil prices crashed, the governor vetoed these purchases.

Just like choosing not to pay your electric bill when money is tight, that veto was not a budget cut. It just shifted the same obligation from one time period into another one.

The remaining credits will still be used or purchased at some point. We’ve just kicked that can down the road. But, it does give the appearance of a $300 million reduction in UGF spending.

Agency Operations

Now we finally get to the real budget cuts. Things we can actually call hard decisions and true reductions in the size of government.

Let’s take a look at where those $300 million of budget cuts occurred.

Staff Reductions

Between 2013 and 2019, a total of 1,522 full-time positions were eliminated from the budget. Another 311 part-time and 333 temporary positions were also cut. Here is a breakdown of position reductions by Department:

The agency that suffered the largest number of staff reductions was the University (-734 full-time positions). These were mostly reversals of the added positions during the 2006-2013 timeframe.

Almost every other department also lost positions. The notable exceptions are the Department of Correction (which increased staffing at the Goose Creek Correctional Center) and the Department of Administration (who took in 121 positions from other departments as part of the “shared services” initiative).

These staffing cuts were difficult to make. And the grand total UGF savings from these position deletions adds up to $120 million. But, we need to look at the total expenditures on personnel to see if we are really saving any money.

While most departments did take reductions in UGF spending for staff, they also saw increases from other fund sources. The net result is a true reduction of only $20 million (plus the absorption of merit pay increases, higher benefit costs, and inflation adjustments).

Grant Reductions

The largest grant reduction came from in Health and Social Service programs. Public assistance funding was cut by $70 million, Medicaid funding was reduced by $15 million, and another $25 million was eliminated from other programs.

In addition, $30 million was cut across the Departments of Administration, Labor, and Commerce.

But, those cuts were offset by a $123 million increase in foundation funding for K-12 education.

If looking only at UGF funding, there was a net reduction of $17 million. But, after accounting for DGF and other state funds, the total grants given in 2019 were $10 million higher than 2013.

Contractual Services

The other $150 million of UGF reductions to agency operations occurs in the “contractual services” object of expenditure.

But, as we’ve seen with the other categories, we have to be careful when only looking at UGF. Here are the net changes across all State fund sources.

All of the hard work to reduce costs throughout the Departments was swallowed by increases in management fees for the State’s financial assets.

That is not necessarily a bad thing. Investment management firms typically charge a percent of assets under management as a fee. So, this increase is partially due to the fact that the Permanent Fund has grown since 2013.

While there is a meaningful reduction in UGF spending, the net effect on the budget still showed a net increase in costs.

Big Picture

Here are the UGF budget reductions by Department.

The data show that we increased funding for public schools and hired some correctional officers, but every other agency had a budget reduction. The Department of Transportation was hit especially hard.

But not so fast.

When looking at the other portions of the State funded budget, every department (except corrections) saw an increase in their non-UGF funding.

Some of these costs were offset by increases in designated revenues, some were inflation adjustments to contracts, and some were due to growth in programs. But, some of these increases were the result of shifting costs from UGF funding to DGF and other sources.

Here are the net funding changes of the departments when we look at all sources of funds.

When you add it all up, all those hard cuts were mostly made to cover increases elsewhere.

Permanent Fund Dividends

I’ve excluded the PFD as part of this conversation. But, for completeness I should at least address it.

In 2013, the very bad stock market crash of 2009 was still included in the 5-year-average PFD calculation. As a result, the PFD distribution was only $573 million in FY13.

In the FY19 budget, the calculation benefited from a strong market for the five previous years. The result would have been a distribution of nearly $2 billion if paid according to the formula. The legislature ultimately decided to reduce that distribution to a little more than half that amount.

But, even though the PFD was cut, it would still show up as a budget increase over 2013, if I were to include it here. So, none of the budget cuts we are looking for can be attributed to the cutting of the PFD.

Conclusion

When you look closely at the $3 billion of budget reductions, almost none of them can truly be called reductions to the size of government. Most of the “cuts” came from things that shouldn’t really have been called “growth” in the first place. And most of the real cuts were offset by growth in non-UGF spending.

Here are the reasons for the budget reductions we saw:

The major “cuts” happened in the capital budget. But resisting the urge to buy new things is not the same as a reducing government.

Neither is refusing to pay the bill on something that is owed. That just moves the money into a different time period.

And paying the state retirement contributions in advance did just the opposite. It just moved the payments into a different time period.

I don’t want to belittle the hard work that was done and the incredible stress the process placed on state employees over the last few years. But, I think this shows just how hard it is to make significant real reductions to the budget. I’ll explore that a little more next week. 

I also think this demonstrates the complexity of the current budget process. And, how technically correct statements can be very misleading to the public.

And finally, it shows why trying to hit a budget “target” is a fundamentally bad approach to the problem; one that lends itself to moving around the numbers to give the appearance of success, but doesn’t actually accomplish anything. We can do better.

One thought on “Exploring Alaska’s Budget: Part 4 – What Did We Cut?

  1. Thank you for the clear picture of the State budget reductions. I do not know what the answer is except perhaps downsizing government by eliminating positions, combining agencies and looking closely at travel. I do believe children and education come first as does public safety.
    I would like to be a State resident who is involved in the budget. I do not think the legislature is doing the job they need to be doing and they are ducking or postponing hard choices.

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