Post Date: June 24, 2015
Alaska’s North Slope Borough was incorporated in 1972, several years after giant oil deposits were discovered in and around Prudhoe Bay. The Borough raises most of its revenue from property taxes; oil and gas property such as processing equipment, pipelines and other equipment account for roughly 98 percent of total property valuation (local governments in Alaska may not apply property taxes to the oil produced or the minerals in the ground).
Alaska’s boroughs are structured similarly to counties in other states but, unlike most other regions we have examined, the North Slope Borough provides nearly all local government services, including education, roads, water and wastewater. Municipalities in the Borough provide more limited services focused on recreation, boating and cemetery maintenance.
In 2014, property taxes provided nearly $350 million of the Borough’s $570 million in total revenues. The Borough’s other major source of revenue comes from its earnings from an investment fund worth roughly $600 million, which generated $88 million in 2014. Because of these revenues and its small population (fewer than 10,000 in 2013), the North Slope Borough generates an extremely large level of revenue per capita relative to other Alaska local governments such as Anchorage.
But because of steadily declining oil production, there are fiscal concerns on the horizon for the North Slope Borough and the cities within it. For the Borough, reduced investment in Prudhoe Bay and surrounding oilfields could reduce property tax revenues, and local officials are considering a move to fund government operations primarily from their investment fund rather than property taxes. However, they estimate that this would require an investment fund balance of roughly $10 billion, far beyond the current level of $600 million. While the Borough invests a portion of revenues into this fund each year, it appears unlikely that revenues will be sufficient to reach $10 billion without large new investments.
For North Slope cities such as Barrow (pop. 4,400), the northernmost city in the western hemisphere, fiscal concerns center primarily on revenue raised from oil production by the state government. The state of Alaska supports local governments through annual allocations of anywhere from $25,000 to $500,000 per year. These sums are modest for larger municipalities such as Anchorage or the North Slope Borough, but for small municipalities like Barrow, these annual allocations from the state are a crucial source of revenue. In addition, local governments such as Barrow rely heavily on grants from the state to support a variety of projects such as recreation.
In turn, the state government relies on taxes from the oil and gas industry for over 90 percent of revenues to its general fund, the source of these allocations and grants to local governments. Annual collections have been steadily declining along with oil production and, as oil prices dropped sharply in 2015, the state government fiscal situation has grown precarious. This year’s expenditures are projected to be more than twice as large as revenues.
With oil production in the North Slope projected to continue its decline in the coming years, the state plans to phase out its revenue sharing program, creating major fiscal challenges for small local governments across Alaska. Oil production across the state is unlikely to approach the levels of previous years, even under a scenario with high oil prices. In fact, oil production could approach zero within 20 years if oil prices remain low and shipments of oil cannot be made through the Trans-Alaska Pipeline System, which requires a certain amount of oil to operate properly.
This declining production presents fiscal challenges for Alaska’s state, borough and city governments. Currently, state lawmakers are exploring options to return the state to a stable fiscal outlook. However this is to occur, it appears likely that the state and its local governments must find new ways to raise revenue or will all have to substantially cut services.