The most important slide in this election … and why I have contributed to Mike Dunleavy and Jeff Landfield

Toward the end of the Special Session earlier this year, the director of the state’s Office of Management & Budget (“OMB”), Karen Rehfeld, was asked to testify before the House Resources and Energy Committees about the impact on the budget of the Governor’s proposed oil tax bill introduced at the beginning of the Special Session.

One of the slides from her presentation is the most important in this year’s election.  The slide shows four lines.

The first – in red – is OMB’s forecast of revenues under the status quo, before the potential implementation of “HB 3001,” the Governor’s proposed oil tax bill.

The second, in blue, is the level of state spending from the General Fund as projected in OMB’s FY 2013 10-year plan.

The third, in green, is OMB’s forecast of revenues in the event the Legislature passed HB 3001.

The fourth, at the bottom in black, shows the projected deficits each year in the event the Legislature had passed HB 3001.

The fourth line shows that the state budget would have started running a deficit immediately this Fiscal Year if HB 3001 had passed. To repeat, the Governor’s own OMB Director testified that if the Legislature passed the Governor’s proposed tax reform legislation, it would put the state budget immediately into the red. The slide projected that the deficit would grow to more than $1 billion annually by FY 2018.

While that is bad enough, the slide actually understated the problem. It used “Scenario 4” from OMB’s FY 2013 10-year plan as its baseline, which was prepared before the FY 2013 budget was finalized and underestimates the final rate of spending included in that budget by over a billion dollars. “Scenario 4” also assumes $109.47/barrel oil for FY 2013, when in fact it is likely to end up below – perhaps significantly below – $100/barrel.

Adjusted for a realistic oil price and the final FY 2013 spending plan actually passed by the Legislature and signed by the Governor, the  deficit for FY 2013 alone if HB 3001 had passed would likely have approached $2 billion.

The slide is not significant, as some have claimed, because it demonstrates that the Governor’s proposed oil tax reform was overly generous.

The slide is the most important in this year’s election because it demonstrates how insensitive many – indeed, a majority – in the Legislature have become to the level and impact of state spending.

In essence, the slide demonstrates that state spending has increased to such a level that the state cannot afford to undertake needed reforms to its oil policy until fiscal reform goes first and state spending levels are significantly reduced.

Those candidates in the coming election who claim that they are for oil reform without also addressing fiscal reform are merely spouting rhetoric; they either don’t understand the state’s fundamental problems or are unwilling to address them.

Which brings me to two political contributions that I made this week. The contributions are to Mike Dunleavy and Jeff Landfield, Republicans who are running in the primary against — and for the Senate seats currently held by — fellow Republicans Linda Menard and Lesil McGuire.

As I will explain in a moment, the contributions are not necessarily full endorsements of Dunleavy and Landfield, nor absolute condemnations of Senators Menard and McGuire.  They do reflect serious concerns about both incumbents, however, and are my way of furthering a public conversation on state fiscal policy that I believe needs to occur in the closing weeks of the primaries.

Both Senators McGuire and Menard have said that they favor oil tax reform. Yet both have contributed significantly to the very problem that now prevents it – gross overspending.

For the last two years Senator McGuire has been a member of the Senate Finance Committee, one of the most powerful if not the most powerful Committee in the Legislature.  That Committee is responsible for initiating the Capital Budget and for reviewing the Operating Budget that is initiated by the House.

Together with its counterpart in the House, the Senate Finance Committee is effectively the final filter for any legislation with financial implications for the state.

For her part, Senator Menard has been the Chair for the last two years of the Legislative Council and a member for the same time of Legislative Budget & Audit. The Legislative Council conducts the business of the legislature when not in session and holds a wide variety of powers and responsibilities. By statute, LB&A has the power to “review revenue projections, state agency appropriation requests, the expenditure of state funds, including the relationship between state agency program accomplishments and legislative intent, and the fiscal policies and procedures of state government … and make recommendations concerning appropriations, their expenditure, and the fiscal policies and procedures of state government.”

All three committees play critical roles in developing and implementing state fiscal policy. For the past two years, all three committees – and the Senators on them – have been failing miserably in restraining state spending to sustainable levels.

Indeed, as I have written extensively on other occasions, during the last two years the Finance Committee — and subsequently, the Legislature — have passed the two largest General Fund spending bills in Alaska’s history.  Both the Legislative Council and LB&A have acquiesced in that process, neither raising concerns nor using their power to point out the direction in which the spending bills are taking the state.

While there are a number of  issues involved, one of the contributing reasons for the size of the budgets is that they have been stuffed with what, at a federal level, would be referred to politely as “earmarks,” or less politely as “pork.”

Both Senators McGuire and Menard have actively participated in the stuffing.

As the Anchorage Daily News, Fairbanks News-Miner and, embarrassingly, even the Houston Chronicle reported, one of Senator McGuire’s accomplishments this past year was to obtain a $1.5 million earmark of state money to pay for a “parking improvement project” at a privately owned facility — the Dome.

As columnist Paul Jenkins said about Senator McGuire’s appropriation in a piece entitled “Republicans need to back up talk and cut spending,” “[u]narguably the Dome is good for Anchorage — and needs parking — but that begs the obvious: Why are Alaskans paying for the bulk of this $2 million project? … It is politics, and the big hogs [those on the Committees] are first to the trough.”

In her own words, Senator Menard claimed credit during the legislative session for “securing an impressive list of projects. The Capital Budget, when combined with the G.O. Bond package (Senate Bill 163), will bring almost $100 million to the Mat-Su Valley.” Multiply that by the 20 members of the Senate, and that explains everything about this past year’s $2 billion spend from the General Fund for capital projects.

For its part, the so-called “House Special Committee on Fiscal Reform” recently has tried to explain away these and other expenditures as “necessary.” In its website entitled “Understanding Alaska’s Budget,” the Special Committee argues that “Alaska’s operating budget has been increasing at about 9% per year for the last decade and is expected to continue on this path. Even with tighter budget control, the budget will need to increase as population increases and to adjust for inflation just to maintain current levels of service.”

But as I have explained elsewhere, that is just foolishness.

Just six short years ago, prior to the passage of “Alaska’s Clear and Equitable Share” (or “ACES”), state spending levels were much lower. During FY 2004 – 2006, for example, General Fund spending averaged only $2.5 billion. Since the passage of ACES, however, state spending has exploded. During FY 2008 – 2011, General Fund spending averaged $4.5 billion, nearly double the levels in effect prior to the passage of ACES.

In the last two years, spending levels have exploded again, to $6.72 billion and $7.6 billion, triple the level of General Fund spending only 6 years before.

During that same period, however, increases in both population and inflation levels have been minor. Contrary to the Special Committee’s assertion, they do not explain the increases.

Instead, the one fact that explains the increased spending during that period is simply that there has been more money to spend. As Paul Jenkins put it about the budgeting process, “There is something for just about everybody — except discipline.”

How does this relate to my contributions to Mike Dunleavy and Jeff Landfield?

Both understand these fundamentals and have made fiscal reform a key issue in their races against the incumbents. But both of their campaigns are underfunded for purposes of running a race against an incumbent and have been challenged in getting their message out. In response, the incumbents have been able largely to avoid dealing with the most important issue – and the most important slide – in this election.

The purpose of my contribution to each is to help them get their message out in the final weeks of the campaign. If the challengers are able to broadcast their messages broadly in these final weeks, the incumbents will continue to ignore them at their peril.

As I said above, these contributions are not necessarily full condemnations of either incumbent or full endorsements of either challenger.

There are things about both incumbents that I respect.  Senator McGuire is someone I have supported in the past and who has offered what I consider to be important legislation.  For example, I previously have characterized Senator McGuire’s proposed Senate Concurrent Resolution No. 4, a piece of legislation that she offered at the beginning of the 2011 session and continued to push during the 2012 session, as having “the potential to become one of the most significant pieces of long-term legislation passed this session.”

That legislation, which I discuss again in a recent post, is an attempt at creating a public body charged with creating a forward looking radar for Alaska oil policy.  I commend Senator McGuire for having the foresight to propose the legislation even though, at the time, she took some shots for doing so.

For her part, Senator Menard was a participant in last year’s oil policy fact-finding mission to Norway, sponsored by the Institute of the North.  As I and a co-author have suggested elsewhere, it’s time for Alaska to step up and begin investing in the development of its own resources.  (The short version – it’s not enough for Alaska to be a passive “Owner State”; it also needs to become an “Investor State”).

The fact-finding mission to Norway was a useful step in identifying important policy issues and potential solutions related to Alaska’s potential investment in the development of its own resources.  Senator Menard should be commended for having the foresight to take a leadership role in the effort, even though she also took some shots for doing so.

But Senators Menard and McGuire have lost their way on Alaska fiscal policy. Because of its importance, all other issues pale in comparison.

In my view it is time for them to step up and address the most important issue – and most important slide – of this election. Hopefully, my – and other’s contributions – will help Mike Dunleavy and Jeff Landfeld make that happen.