Our Take On Alaska’s Current Budget Crisis, A Component Of the 49th State’s Omnibus Fiscal Crisis

by

Dave Harbour

The citizens of Alaska are sitting at the edge of their chairs, watching for the outcome of a budget battle building in their isolated capital of Juneau.  It could be decided as we write this and cigar boxes could open; or, July 1 could come and go, complete with untold tales of woe, and decision makers will undoubtedly console themselves that they did their best.  But we know that activity does not equate to accomplishment: “close, but no cigar”.

Lawmakers and the Governor are searching for personal and political fiscal victories, though any victory at this point could be pyrrhic.  They have not been able, through the Spring-early Summer legislative sessions to agree on an operating budget that spends too much but takes in too little.

The state takes in too little revenue these days because the Trans Alaska Pipeline System (TAPS) is carrying only a quarter of its capacity and because of low world oil prices.  It spends too much because — as we discussed yesterday — for 40 years it has ignored its overdependence on oil and become what is arguably the largest socialized, welfare state in the nation.  To boot, its debt and unemployment rate are high; its murder and suicide rates are high; and, its opioid dependence and homelessness are through the per-capita roof.  Its its scholastic achievement is low.  Tax and royalty revenue from the oil commodity is down, not only because world oil prices are down, but because its state, local and national leaders have over taxed and regulated the oil goose that nurtures the golden eggs.  Finally, Alaska’s operating budget is over 80% dependent on this one Prudhoe Bay, depleting source of income.

Question: does the great Arctic state, over twice as large as Texas with untold oil, gas, mining, commercial fishing, timber and tourism potential learn to control its rapacious spending growth…or further tax its wealth builders to maintain demands of countless dependent constituencies?  Alaskans are facing this dilemma because the prospect of a state government shutdown on July 1 threatens every segment of society and the economy: from education to wildlife protection to public safety, retirement health benefits and pensions, etc.  The mere fact that Alaska, with billions of dollars in reserve and an overspending, unsustainable state government should be at loggerheads over raising new tax revenue or right sizing government – or some compromise — is a bad signal to potential investors who are always seeking stability for their investments.

Here is an email alert we dispatched yesterday to almost 10 thousand of our readers:

Dear John:
This week we cheer the oil industry’s 40th anniversary of Prudhoe Bay success!

We also lament that a misguided coalition of Alaskan legislators is instigating a government shut-down during a fiscal crisis.

In fairness, Alaska’s fiscal crisis was created by the unrestrained spending of leaders from both major political parties over the past four decades.  But the current budget crisis — a subset of the state’s omnibus fiscal crisis — rests clearly at the feet of a mostly democrat-led coalition, with help from a few “republicans” in Alaska’s House of Representatives.  (We observe that this House coalition seems committed to increasing taxes on oil and gas, mining and other investors rather than  ‘right sizing’ an unsustainable state government.)
We also highlight a very unhappy fiscal omen for the 49th state.  Just as the creditworthiness of the sunny Puerto Rico Commonwealth’s economy is shaded under a Mid-C rating category, oil rich Alaska’s far north rating is plummeting southward as well.
Alaska has strayed from its recent AAA credit rating.  It’s ranking has slipped, among the three major rating agencies, into the AA+ and Aa2 categories.  It has also attracted negative credit watches hovering above its faltering economy like dark specters.
Declining creditworthiness affects not only a state’s (or commonwealth’s) cost of capital, but also erodes its attractiveness as a private sector investment destination.
Finally, can we agree that a faltering economy needs more and not less support from private investors along with less and not more government spending?

Below you will see that one of the reporters receiving our email alerts texted us a question last night.  He asked, “Dave, is it possible to ‘right size’ state government and no longer be in a deficit situation without additional revenue? I haven’t seen any math that does that without taking from savings. Do you have a plan?”  Here is our response:

Hi XXXX:

Glad to hear from you and thanks for the question.
To respond to your inquiry, I offer the following (edited version, 6-22-17):
  • I actually didn’t claim that a sustainable budget (i.e. right sizing) could be obtained without additional revenue.  Being painfully aware of my own limited expertise, I observed that House leadership, “…seems committed to increasing taxes on oil and gas, mining and other investors rather than ‘right sizing’ an unsustainable state government”.  I believe that statement is a virtual given since 1) that has been the House Majority’s direction, and 2) since various House and Senate efficiency proposals have been denied consideration. Had there been hearings on those proposals and/or robust joint conferences timely conducted, you and I might better know if efficiencies/freezes/cuts, etc. could bring sustainability and whether or how great any new revenue measures might be required.  In short, the House leadership still has homework to do before any of us can conclude that, “… it is or is not — or partially is — possible to “right size” state government and no longer be in a deficit situation without additional revenue?”
  • Neither you nor I have seen any math that gives either direction to the Legislature and Governor nor peace to citizens.  That is the problem.  There has been plenty of rancor and numbers thrown about but there’s not been adequate, collegial, serious legislative exploration of your question: “Is it possible to ‘right size’ state government and no longer be in a deficit situation without additional revenue?”
  • As to whether I have a plan.  Well, I had one when many of us 35 years ago put together two years worth of Republican/Democrat programs in which we all agreed that making our economy almost totally dependent on one volatile commodity needed to be modified.  Out of those meetings that involved my friends Governor Egan, Governor Hickel and scores of others from around the state, came a proposed constitutional amendment to ADEQUATELY limit government spending.  When it finally passed, legislators included so many loopholes that it had virtually no final impact on a policy of rather carelessly spending on virtually every program any legislator wanted.  You might find our non-partisan work useful.  We produced 2 documents over two years in the 80s.  One was called, “The Challenge of Plenty”, followed by, “The Challenge of Shortage”, when oil prices started to drop.
  • Then, there were warnings of fiscal crisis in the late 80s, early 90s by ISER, wherein Dr. Goldsmith offered a “plan” later referred to as a “safe landing” that could have been accomplished with little effort (i.e. “Fiscal Policy Paper #1” on August 1, 1989.)
In conclusion, XXXX, I think those of us offering commentary, hopefully based on fact and logic, could
  1. urge the legislature and governor to adopt a one month interim operating budget at current levels, during which thoughtful conferences could commence, if Members can agree; and then
  2. encourage all parties to expedite conference committee negotiations and politely hear/consider all legislators’ suggestions for obtaining reasonable government efficiencies.  With those “numbers” then in hand, they will have a clear path forward re: imposition of new or increased taxes.  But new revenue, to properly plan for and not over tax the economy, should only occur after every operating budget efficiency has been fully and collegially evaluated.
You always ask solid, honest questions, XXXX.  Thanks for getting this out of me.
Dave
P.S.  If I have included in this hurried, after dinner response, any errors of fact or logic, please correct me so that I can avoid multiplying any such errors with my readers.  🙂

Yesterday, we focused on the omnibus fiscal crisis and the current budget crisis within it.  Here, from Must Read Alaska is another take on the budget crisis issue, with more to follow below.  

Commentary by Scott Hawkins, Senior MRA Contributor.

Gov. Bill Walker and the House Democrats are promoting a false crisis in order to enact a very bad solution.

They want Alaskans to believe that the state really, really needs a personal income tax. Right now.

Although Walker recently proposed a smaller income tax and misleadingly labeled it an “education head tax,” the gambit is clear: Get the proverbial camel’s nose under the tent.

Interestingly, the plan landed with a dull thud in both the Senate and House, with House Democrats objecting that it does not go nearly far enough in taxing Alaskans.  (Contribute to Must Read Alaska and read balance of Hawkins’ commentary here)