6-4-16 Alaska’s Fiscal Crisis: Problems With Kicking the Can Down the Road

Brad Keithley, NGP Photo by Dave Harbour

This morning our friend, Brad Keithley quotes a member of the Finance Committee in an exchange we also witnessed recently:  Brad Keithley.

Lynn Gattis, NGP Photo by Dave Harbour

“Saturday’s ‘First Post’ from Alaskans for Sustainable Budgets: Here’s the quote certainly of the day, probably the month and possibly the entire #‎AKleg‬ session. It comes this morning from Representative Lynn Gattis, a member of HFIN, in response to a post by another on the Governor’s various tax (which we believe applies also to the PFD tax) proposals: ‘Once we backfill with taxes (aka revenue) there will be no will structurally to make government smaller.’

“Sums up perfectly the decision the #AKleg is facing,” noted Keithley.

We agree and would add that Juneau leaders have known this crisis was coming for years, decades even.

Some of them would say they have made great strides toward a sustainable budget (i.e. To us a sustainable budget process would be one that avoids ‘fiscal crises’ arising from predictable events like volatile commodity prices, a trend of lower volumes of oil production, overspending and a specter of unpredictable tax policies, etc.)

During the current special session of the Legislature, however, well intended republicans have been outmaneuvered by well intended socialist-leaning democrat legislators (i.e. remember that Alaska democrats have voted to support a socialist for President of the U.S. and their their major constituencies include anti-development environmental activists, certain public employee groups and entitlement recipients, among others).

Once again our moniker has been reinforced, namely, that “democrats never compromise; republicans always compromise”.

Instead of demanding large cuts in agency operating budgets and entitlement costs — before considering other alternatives to the budget deficit — republican majorities have been goaded into keeping the overall budget and deficit at near record levels.  This is because, both the Senate and House consist of politically unstable bi-partisan coalitions that include liberal republicans and democrats who could defect.  They could defect if the republicans cut sacred cow constituencies too deeply, or, if coalition leaders chose to subsidize the deficit spending with available “earnings reserve” dollars vs using the “constitutional budget reserve (CBR)” that requires a super majority.  Acquiescing to use of the CBR puts majority republicans in the position of having to buy enough votes to create a super majority and that, in turn, runs the budget up again.  The republicans also don’t want to go home in election season giving the democrats ammunition to accuse them of: “making horrible, UNCOMPROMISING, inhuman cuts to essential programs that harm the citizens of Alaska.”

Some republicans are “going with the flow”, expressing fear that, O.M.G., “the governor might call us back into another expensive special session if we don’t vote ‘yes’ (i.e. which also would prevent legislators from getting back to jobs, enjoying summer activities and families.)”

One could suggest to the Alaska republican legislators that they not make the same mistake Congressional republicans have been making.  They could try to do what their constituents elected them to do, no matter what personal or political risks they encounter, and, “reduce the size of our unaffordable government”.

If they don’t do what their constituents expect, they might avoid opposition criticism at election time.  And, they might retain control of their fragile coalitions, but find their own constituency too disappointed in their performance to turn out to the polls.  After all, if the result is nearly the same whether they are in power or not, why go out and vote?

Wouldn’t they be better off telling the democrats and governor that they will consider only substantial cuts to entitlement and state agency operating budgets before holding hearings on any proposals to increase existing tax rates or institute new ones.  And, shouldn’t they be prepared in a non-defensive, well studied, articulate way to describe at a press conference or television interview why, “Cutting government programs may have been the hardest thing to do, but here’s why it was the right thing to do for our economic survival…and for our kids?”

Shouldn’t they articulate why increasing taxes — keeping government operations and entitlements whole — at the expense of the private sector further injures the economy, including every single Alaskan family?  Doesn’t discouraging individual and business investment endanger even the viability of government itself, which depends on a robust economy?

If a republican majority were to be successful in passing a budget with reasonable cuts, closer to the scale of the huge losses in oil revenue, and the Governor were to veto it, couldn’t legislators be prepared to articulate to Alaskan families far and wide why the Governor’s irresponsible veto is what is, ‘shutting the government down’?

The result of budget responsible legislators not courageously standing their ground, compromising at every roadblock is frightening.  For, Alaska’s economy — already losing thousands of employees — is fiscally unstable and will likely continue to repel corporate investors looking for ‘predictability’ and invite more and more layoffs.

Meanwhile, until the state goes completely bust, the bureaucrats, entitlement beneficiaries and environmental activists will continue to flourish and grow in income, numbers, and strength … demanding more and more from depleted government coffers and a dying economy.

Afterthought

Representative Lynn Gattis may be 100% right … but maybe kicking the can down the road is the only strategy.  If supporters of big government realistically have the leverage to keep budgets and deficits high, why not “go with the flow?”

This will cause state savings accounts to be depleted within a couple years.  And yes, as Gattis points out, filling the deficit gap with taxes (i.e. or, we would add by relying on diminishing savings), diminishes the will to cut spending to sustainable levels.

So as the third budget cycle approaches, either 1) Providence will provide manna from heaven along with higher oil prices and robust Trans Alaska Pipeline System (TAPS) throughput or, 2) investors will experience higher taxes that discourage investment, and/or 3) the state will be forced to make cuts that will be much more draconian then, than they would have been if the cuts had begin earlier. On the other hand, it will be much easier then to convince the populace that the Alaska Permanent Fund revenue really has turned into a “rainy day fund and has to be tapped along with absorbing the cuts and/or other measures.”

The only problem with can kicking, is that while demanding special interests may have their sacred cows protected temporarily, natural resource industry investors will continue to be more and more reluctant to trust a state fiscal regime wherein, “a deal is not a deal“.

As we pointed out yesterday, Alaska’s future economy, society and political structure will soon be very different, depending on which budget path we take forward from this summer’s special session of the Alaska State Legislature.