Gov. Mike Dunleavy and his team sat down with Clarion reporters Brian Mazurek and Victoria Petersen on March 25 to discuss his recently proposed budget, education, local industry, public safety and more. In the final installment of this series, we look at the governor’s approach to the economy.

Many aspects of Gov. Mike Dunleavy’s proposed budget would have impacts on local government and the economy. The governor has proposed a bill, SB 57, that would allow the state to absorb local taxes on oil and gas properties within municipalities. The Kenai Peninsula Borough Assembly recently passed a resolution asking that the state modify the bill to allow the borough to maintain portions of the property taxes. The borough has said losing the revenue the borough receives from local oil and gas property taxes could result in higher local taxes to cover the costs of essential borough services.

Clarion reporter Victoria Petersen: Part of your campaign was creating no new taxes. Our local borough has said that SB 57 could drastically increase local property taxes, sales taxes and potentially cause new taxes. How do you expect local municipalities to make up for the shortfall that could be coming from the loss of that revenue?

Dunleavy: I think we all have decisions we have to make. Again, the devil’s in the details. Is the local community looking at taking on all of the programs funded at the levels that they are funded right now, is that what they’re talking about? Because I’m not really sure what the local communities are wanting to take on, or willing to take on, or choosing to take on. These are questions I guess they would have to have a discussion with. My campaign commitment was no taxes and that was from a statewide perspective. What they do at the local level — and I live in a municipality up in Mat-Su — that’s a discussion for those folks at the local level.

Clarion reporter Brian Mazurek: People have voiced their concerns about the budget as it’s proposed. One of the biggest concerns that I’ve found with people here on the peninsula — this is a very conservative district, people voted for you on a two to one ratio down here — is how Alaska can work on diversifying revenue sources going forward, so we don’t encounter these types of budget problems in the future. We all know that Alaska’s revenue is not very diversified. Most of it comes from oil and gas. I’m wondering what kinds of ideas you or your administration may have to simulate that diversification of revenue?

Office of Budget and Management Director Donna Arduin: Starting with diversifying the economy in order to have additional sources of revenue.

Dunleavy: The way you diversify the economy is you get your spending under control. Very few industries are going to want to come into an environment or a state, city, county, borough — doesn’t matter — in which there is a real possibility they will be taxed as soon as they get in there, to pay for spending that is not in control. We just mentioned that between 2007 and today, the spending has increased by about 5 percent a year and from 2007 to 2013 it increased by about 15 percent a year. Something to think about, from about 1988 until 2006, our spending increase every year was about 2-2.5 percent. Basically flatlined. We had a decent economy during that time. We had an unemployment rate that at times, it was lower than it is today. For 2007 until today, we have spent $29 billion above that 2-2.5 percent. That $29 billion could have built 14 Anchorage-sized ports. It could have fed the homeless forever, and could have provided free electricity, et cetera, et cetera, et cetera. Where am I going with this? I’ve had conversations with businesses, industries, and investors down in Lower 48 and they said to me, they’re not really interested in coming to Alaska until we can get our spending under control. So we can talk about diversification of revenues, but the way you really provide more revenue is you grow your economy. You do that through a fiscal regime that isn’t going to say to anyone and everyone that wants to — including individual Alaskans — ‘come to Alaska, we’re going to tax you because we don’t want to control our spending. We don’t want to get it down.’ So we can talk about the diversification of revenues, but until we get our spending under control is going to want to invest in Alaska. That’s the message I was given loud and clear down in the Lower 48. People in Alaska have told me if we’re going to diversify the revenue stream if we’re going to tax them and take their PFD, they’re going to seriously think about leaving. New York faces this. California faces this. Illinois, New Jersey, Connecticut, all those outfits are losing people because of their tax regime.

Mazurek: How can we diversify the economy, bring new industries to the state?

Dunleavy: The way we do that gets our spending under control, but also work on how we can lower the cost of health care and electrical rates, not just for Alaska but for potential business. We’ve got to make sure we don’t add additional taxes because again, folks that invest want to make some sort of a profit or living in an environment that’s not going to take what they make. So it’s a combination of factors. One of the things that we’re doing in the Department of Commerce is we’re putting together a team that is working on going down to the Lower 48 and actually recruiting businesses, having conversations with them to see what it would take for them to come to Alaska and bring jobs to Alaska. That’s what we need in Alaska.

Petersen: There are a lot of people on the peninsula that use the ferry service regularly, such as in Seldovia and Homer. What alternative transportation do you envision for communities who rely on this system?

Arduin: We’re running a system that has boats that aren’t full, have one person on them. They’re supposed to be transporting automobiles. We now how barges to do that. We have competition of boats, competition from lower-cost airfare. So the system that we have been running is very expensive and it loses about $100 million a year. We have to do something about it. It’s subsidized greater than the other transportation that we provide anywhere else in the state. The department has already looked in and determined just by changing the way they might schedule ferries because they could run through the system at a quarter of the cost. We have a consultant to look at outside investment. Can we outsource operations? For example, maybe sell some boats, maybe own infrastructure, but outsource some other routes. We believe private operators can do it better than we can. The state failed to make money on providing meal services, we failed to make money running bars, so we just warehoused all the liquor and stopped selling it. We failed to make money by providing housekeeping services. Again, there are alternatives. People aren’t really using them as much as they had, but we still see there’s a possibility to run the system better.

Petersen: And that would be privatizing it?

Arduin: Privatizing it, outsourcing operation … We’ll see when the consultants come in.

Dunleavy: The consultants might also say there may be some runs we hang on to as a state. OK. We’ll take a look at that as well. We’re looking at a whole host of ways to make this more efficient. The consultants are going to help us really take a look at this and come up with some ideas.

Arduin: There are alternative sources of transportation for all of the runs. People are using air. If there are places where we should have additional roads available, then that should be a part of the transportation plan.

Mazurek: I would like to ask sort of a broader question. Given Alaska’s position with the fossil fuel industry and it’s precariousness in terms of how climate change could affect the state what is your administration going to do to address this issue?

Dunleavy: Well, we don’t have a smokestack industry in the state of Alaska. Our contribution to the climate change footprint is incredibly small, probably smaller than any other state in the country. We don’t have manufacturing. We really don’t have an economy except for government and oil. So we know we’re dealing with a smoke issue in Fairbanks. The thing that I think we need to focus on is having a discussion as to what are we gonna do with some of our communities that are facing erosion. In terms of our contribution to carbon in the air, it’s minimal. We didn’t feel at this time, given what we have going on with the budget issue, that running a climate committee with an individual from outside in Seattle was worth the time and money at this point. Again, our contribution is minimal. We’re more interested in focusing on what to do about those communities that are facing erosion

Mazurek: I understand our impact may be minimal, but the impact that communities are going to see, especially along the coast in Alaska, they’re going to see a lot of erosion as you mentioned. That’s happening here in Kenai. The bluff is eroding at the rate of 2 or 3 feet per year. Does your administration have anything in place or do they plan to propose anything that will deal with these coming issues?

Dunleavy: So there’s always been erosion and I’m not trying to be a wise guy, but there’s always been erosion. Rivers change, you see oxbow lakes, there are cut banks. What’s happened on western and northern Alaska, however, is the sea ice that used to come earlier and stay longer. It used to buffer some of the fall storms. I can’t speak to what’s happening on the Kenai River and that’s a different ballgame than what was happening in northern, western Alaska because of the sea ice. But again, we’re always going to have discussions. Every state has discussions now. In Nebraska, Iowa, they’re experiencing a 100-year flood. They’re going to have erosion. They’re going to have all kinds of issues. We would just have to continue to have those discussions and see what resources we have available to deal with that issue and prioritize those issues. We’ve always had that. We’ve always done this. We’ve always looked at the issues, rank the issues, and then if we had the funding we would fund and try and address these issues.

This interview has been edited for clarity.