Breaking Bad: House Finance starts “sponsoring” talks on taxes and the PFD …

Screenshot 2015-03-29 14.48.29Last Thursday the House Finance Committee sponsored — not just presented or hosted, but sponsored — a “lunch and learn” entitled “Fiscal Reality – Exploring Scenarios to Reclaim Budget Solvency.”  A video of the presentation is available here

As the Alaska Dispatch reported after, the presentation focused mostly on options to raise revenue.

New revenues could come from things like income taxes, sales taxes or other taxes, he said. … Teal also showed several options for using the Permanent Fund to close the gap. One option is spending the earnings reserve, which the Legislature can do now legally but not necessarily politically. It could also switch to an endowment-type system called percent of market value ….

Toward the end of the presentation, Rep. Steve Thompson, the House Finance Co-Chair who moderated the presentation (Vice Chair Rep. Dan Saddler is in the picture above next to him) said one reason for the presentation was because he and others were concerned that cutting state spending too deeply could “crash” the economy, and that it was time to start discussing options to avoid that.

But neither Rep. Thompson, Rep. Saddler nor anyone else during the presentation acknowledged that taking money out of the private economy — which both taxes and cutting the Permanent Fund Dividend would do — would simply transfer the pain to private sector participants, and potentially leave Alaskans as a whole far worse off.  

Taxes and other steps (like diverting the PFD) are not a “costless” solution.  The resulting increase in government spending is funded by pulling money out of the private economy.  And government and private spending focus on different things.  Government spending goes to recipients chosen by government; private spending goes to those chosen by individuals.  Sometimes they overlap, but often they do not.

As a result, pulling money out of the private side of the economy in order to fund government may help avoid “crashing” the government economy, but comes at the expense of those who are adversely affected by the offsetting drop in private side spending.  Avoiding a government crash simply creates a private side equivalent.

And its not even a zero sum game.  Choosing one category of recipients over another may hurt Alaska and Alaskans even more.

For example, as ISER economist Dr. Scott Goldsmith  explained in a 2010 paper, taking money out of the private economy injected through the Permanent Fund Dividend in order to increase government spending likely would leave most Alaskans worse off:

Whatever the pattern of purchases and consumption over time, most of the cash from dividends will ultimately find its way into the Alaska economy to increase employment, population, and income. A rough estimate of the total (direct and indirect) macroeconomic effects of this increase in purchasing power is 10 thousand additional jobs, 15 to 20 thousand additional residents (drawn to the state because of the jobs), and $1.5 billion in additional personal income. …

[If the dividend instead had been diverted to state government,] the most likely alternative use of the PFD would probably have been to increase capital spending by state government. … If the money appropriated for dividends had instead gone to capital projects, economic activity would have been generated, just as has been the case with the dividend; but both the macro- and microeconomic effects would have been different. Capital spending would have generated less employment and increased income inequality.

That concern and others like them when the focus turns to taxes was nowhere to be seen during the House Finance presentation.  It’s as if no one even realized the relationship.  The attention was entirely focused on “saving government,” not “saving Alaska.”

House Finance has taken some positive steps this session with respect to the FY 2016 budget for which they deserve — and I have given — significant credit.

But they are starting off badly as they turn toward next steps.  As I have written repeatedly, Alaska has the potential for a bright future (see. e.g., Morning in Alaska, Sept. 8, 2013).  The drop in oil prices has not eliminated that.

Properly understood, even with the recent oil price decline Alaska’s long-term sustainable spending level from the state’s existing sources of revenue still remains at $4.5 billion, more than enough to fund the state’s constitutional obligations. (Teal badly misstated the sustainable budget approach at the beginning of his presentation.)

We don’t need to impose new taxes — or generate additional government revenue — to achieve it.

But the state won’t achieve that future by turning on its own citizens, and the state’s private economy, through taxes and a raid on the PFD.  As President Reagan and others have said, government can’t tax and spend its way to prosperity.  It’s a lesson Alaska government — and evidently at least some of the members of House Finance — needs to take to heart as they start looking at the future.  If they don’t, voters likely will begin searching for others who will.

The Alaska budget, the state legislature, percentages and other significant numbers …

The Alaska State Capitol building, Downtown Juneau, Alaska.Percentages and other numbers are interesting things.  By selecting different sets you can make things look small or large.

For example, Rep. Lora Reinbold defended her vote last Thursday against the Operating Budget in part using a percentage, claiming that the proposed budget only cut 5% from spending.  Looking at the actual numbers compiled by the Legislative Finance Division (LegFinance) tells a different story, however.

Using LegFinance’s analysis of the final House bill as a base, Rep. Reinbold’s percentage is right if you focus only on certain categories of state spending (what collectively are referred to as “Agency Budgets”), and compare only what those familiar with these things refer to as the FY 16 Adjusted Base (essentially the spending level for FY 2015 adjusted for “normal” year to year changes) against the proposed FY 2016 spending level before the House Continue reading

My thoughts on the final House Operating Budget …

APE-Government-Spending-610x406Wednesday the full House Finance Committee, and last night the full House passed CSHB 72(FIN), the Committee Substitute for the Operating Budget submitted earlier this session. As readers of these pages know, I have followed and commented extensively on state fiscal matters generally, and the progress of this year’s Operating Budget specifically.  My comments on this year’s Operating Budget have been reflected most recently here and here,  My thoughts on the votes taken this week — and even more importantly, where we go from here — are captured Continue reading

The coming week in House Finance …

APE-Government-Spending-610x406The House Finance Committee this week is scheduled to mark up and take action on a Committee Substitute for the proposed Operating Budget.

Given the state’s current fiscal situation, this is a critically important week in Alaska’s history.  As proposed by the Governor, the Operating Budget stands at $5.47 billion, 97 percent of proposed state spending this year and as a result, responsible for driving the budget not only well beyond sustainable levels, but even well beyond the first step the Governor previously has said must be taken in the near term to reduce spending to sustainable levels.

Through substantial efforts, collectively the House Finance Subcommittees early last week proposed substitutes which bring the total within sustainable levels.  But public testimony Wednesday and Thursday was filled with those affected by various of the proposed cuts, seeking reinstatement of “just their piece” of course, but in the aggregate proposing to drive spending back over sustainable levels. Continue reading

A note to the House Finance Subcommittee Chairs …

APE-Government-Spending-610x406After following and reviewing closely the collective work of the House Finance Subcommittees last week, as finalized and presented early this week to the full House Finance Committee, I sent the following note this morning to the Chairs of the Subcommittees.  The results of their efforts are available here; a  good summary is here. Continue reading

My turn on “Boring Talk” with Pat Race …

Pat Race's Boring TalkJuneau’s Pat Race, aka Twitter’s @alaskarobotics and one of the most perceptive of Alaska’s up and coming generation, has started a new podcast series on his blog called “Boring Talk.”

As Pat describes it:

Boring Talk is a podcast where I’ll be exploring Alaska politics through long, boring conversations. This is a personal thirst for understanding but I’ll be sharing my (largely unedited) conversations because I think civic discourse is important in the age of Twitter and maybe there’s some information here that will be valuable to other Alaskans.

At his request, I sat down with him while in Juneau last week for a discussion on state fiscal issues and a few questions about what I perceive as my role in them. The result is available here.  It should come with a warning — it’s 30 minutes and likely lives up to the title (“Boring Talk”) unless you are either my mother, or really into these things.

If Pat does what he is capable of doing — asking penetrating questions and bringing interesting people into the studio (present company excluded, of course) — it’s a series that will be well worth following.   The one he posted a couple of days ago with Katie Moritz, the Juneau Empire’s new — and very good — political reporter is an excellent example.

You can follow the series on his website — alaskarobotics.com — or, again, by following his posts on Twitter @alaskarobotics.

The Urgent Need for a Sustainable Alaska Budget

The following ran as a Community Perspective piece in both the online and print editions of the Fairbanks News-Miner (Wednesday, January 28, p. A6)   under the headline “Gov. Walker on track to sustainable budget,” as a Commentary in both the online and print editions of the Anchorage Dispatch News (Thursday, January 29, p. B4) under the headline “The urgent need for a sustainable Alaska budget,” and as a My Turn piece in both the online and print editions of the Juneau Empire (Tuesday, February 3, p. __) under the headline “Urgent need for a sustainable budget.”

Alaskans for a Sustainable Budget (9.22.2013)During the fall, a large number of candidates campaigned on the theme of putting in place a sustainable budget.  For example, on his campaign website Governor Bill Walker said this, “I will make the hard choices necessary for a sounder fiscal future, including putting in place a sustainable budget.”

When asked during the campaign what they meant by sustainable budgets, most candidates, including Governor Walker, referred to work on the subject by Dr. Scott Goldsmith of the University of Alaska-Anchorage’s Institute of Social and Economic Research (ISER).  According to Goldsmith, a sustainable budget is a spending level which, if implemented today can be maintained indefinitely into the future, adjusted for inflation and population growth.

In other words it is a baseline revenue level which both current and future Alaskans can count on indefinitely without resorting to income or sales taxes or a diversion of the permanent fund dividend. Continue reading

Alaska Fiscal Policy: Where we are headed …

Co-Chair (and Chugach Electric Association, Inc. General Counsel) Mark Johnson and I closed the books yesterday on another exceptional two-day conference on “Energy in Alaska” (retitled this year, “Energy Markets and Regulation in Alaska”) put on annually by Law Seminars International.  We have been co-chairing the seminar since … well I am not quite sure I can recall.

As we shuffled the deck a bit in light of the election and other recent events, I ended up giving a set of remarks focused on Alaska’s current fiscal situation, which incorporated for the first time a look at the “work in progress” FY 2016 budget prepared by the Parnell Administration and transferred to Governor Walker’s Administration as part of the transition.  That proposed budget, and what the Walker Administration has to say about it, is available here.

My presentation is above.  My comments on the “work in progress” budget are at slide 10.

The conference always results in great discussions with serious people during the breaks and after each day’s set of presentations are completed.  This year’s was no exception.

At the reception following the first day’s events I appreciated the opportunity to explore in detail each of the five options for closing this year’s budget gap.  They are, in no particular order — cuts in spending, use of remaining savings, “raiding the PFD” (either directly or indirectly by spending from one of the accounts used in the calculation of the PFD), income taxes, sales taxes and transfer of increased responsibility (and cost) for government services to local government.

At the conclusion I came to realize that a realistic solution to “where we are headed” necessarily will involve all five.   I will be writing — and talking — about that more in the coming weeks.

Parnell propsed FY 2016 budget contains a $3+ billion deficit …

Fiscal CliffLast Friday the Walker Administration released the proposed FY 2016 budget that former Governor Parnell had been working on prior to the election and transmitted to the new administration as part of the transition process.

While there will be more — likely much more — to say about the proposed budget in the days ahead, it is worth noting a few highlights at this point to help start a needed conversation on the state’s current fiscal situation and the choices going forward. Continue reading

Fiscal leadership needed now …

Fiscal Cliff (pulling back)In August 2006, staring into a potential fiscal abyss created by an unplanned shutdown of the entire Prudhoe Bay field due to leak issues,  then Governor Frank Murkowski immediately announced two steps designed to curb state spending and reduce the potential drain on state savings, while additional analysis was being done.

The first step was an immediate freeze on new state hires.  The second was to direct the Office of Management and Budget to review the then-current capital budget to prepare a list of capital projects that could be “phased” (i.e., deferred) until the potential fiscal problems created by the shutdown were “better defined.” Continue reading

With election over, time to realize Alaska faces huge fiscal challenge …

Fiscal CliffMy appreciation to the Alaska Dispatch News for running the following op-ed piece in both its online and print editions (Tuesday, November 18, p. B4), and to the Fairbanks News-Miner for doing the same in both its online and print editions (Wednesday, November 26, p. A8). The piece ran under the headline “Governor-elect will have to cut deep to keep Alaska budget sustainable” (ADN online), “Walker must cut deep to make budget sustainable” (ADN print), and “State entering bleak budget times” (FNM online and print).

Sometimes the buzz created by election campaigns tends to mask what is going on in the “real world.” The most recent Alaska election cycle is a good example. While the Walker and Parnell campaigns debated through the fall about whether the state budget should be cut in the next year by 5 percent, 16 percent or something in between, in the real world state revenues have been plummeting to levels that make those numbers seem like artifacts of ancient history. Continue reading

The elephant in the room …

Last evening, at the first session of the Walker Mallott Transition Team, what some have called the “elephant in the room” — the state’s fiscal situation — took center stage.  To Governor-elect Walker’s credit the session was designed specifically to do that.  As he had told KTUU’s Austin Baird earlier in the day, Continue reading

Alaska Fiscal Policy: Dealing with $80 oil …

At the request of the (Anchorage Municipal) Budget Advisory Commission, yesterday (November 5) I made a presentation on Alaska Fiscal Policy.  When I was first asked to give the presentation the working title was “The need for implementing sustainable budgets.”  Due to dramatic changes since then in the oil markets, however, by the time I gave it yesterday the title was “Alaska Fiscal Policy:  Dealing with $90 $80 oil.” Continue reading