Alaska Fiscal Policy| Vote No on Bonding Proposition A …

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In addition to the 59 legislative races that have been — and will continue to be — widely discussed between now and election day, there also are two statewide measures that will appear on the election day ballot.

One is the question, required by the Alaska Constitution to be included on the ballot every ten years, of whether there shall be a new Constitutional Convention called.

The second is “Bonding Proposition A,” which asks the question “Shall the State of Alaska issue its general obligation bonds in the principal amount of not more than $453,499,200 for the purpose of paying the cost of state transportation projects?”

I intend to vote “no” on Bonding Proposition A.

Why am I voting “no”?  Well, it almost has nothing to do with the fact that the bill turned into a legislative “Christmas tree” as it worked its way through the Senate, although that should make a difference to Alaska fiscal conservatives who have criticized the same approach when done at a federal level.  (For background, see “$453.5M in transportation bonds on ballot,” Alaska Journal of Commerce, Oct. 1, 2012).

And, it  almost has nothing to do with the fact that a report, important to understanding the merits of one of the significant projects included in the bond issue, is being withheld from public release until after the election, although that should make a difference to those Alaskans who believe open and transparent government — and understanding the merits of what they are voting on — is important.  See “City to get draft of port study, but details secret until after bond vote,” Anchorage Daily News, Oct. 15, 2012.

Instead, I oppose the bond issue solely because Alaska can’t afford it.

Certainly, some quickly will criticize that position.  “They” will suggest that Alaska state government revenues never have been higher, that Alaska has run “surpluses” the last two years and that the latest state projections predict at least a few more years of “surpluses” before Alaska’s fiscal situation becomes tight.

But, “they” would be wrong.  Viewed correctly — over the span of time that current revenues need to support Alaskans if we are to avoid state income, sales and property taxes — Alaska already is engaged in deficit spending.  The deficit — and taxes — won’t show up this year or next, but given the State’s current spending approach and rates, those days are quickly on their way.

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One graphic, from a recent study by the University of Alaska Anchorage’s Institute of Social and Economic Research (“ISER”), crystallizes the point.

The chart on the left, taken from a paper published by ISER earlier this year, reflects what passes for, in effect, as Alaska’s current fiscal plan. On the chart, projected revenues — almost entirely from oil — are represented in green, spending is represented by the black line and draws from Alaska’s Statutory and Constitutional Budget Reserves are represented in red.

The gap of white between the black line (which is continued spending levels) and the green (which is the continuing level of oil revenues) is Alaska’s fiscal deficit.  If current  spending patterns continue, that deficit is as certain as snow on the ground this coming winter in Anchorage.  It hasn’t stuck yet, but we know that point is coming and will soon arrive.

The chart shows that, by drawing down the Budget Reserves, Alaska is able to continue to finance current spending only until roughly 2023, when the Budget Reserves are spent. At that point Alaska drops off the fiscal cliff into the abyss. Once that occurs, the state will be able to provide only one-half (roughly, $4 billion v. $8 billion) of the goods and services it had just two years before, and the level of state services will continue to decline from there.

By focusing only on one, two or indeed five years, “they” might say that Alaska is in “good” fiscal condition, in the sense that, with the help of the Budget Reserves, the state has the cash currently to be able to pay, for that period, for the anticipated levels of spending.

In the long term, however, that view is incredibly short sited. Viewed over its full term, Alaska’s current fiscal situation — its current fiscal plan — is nothing short of a ticking time bomb, designed to go off precisely when future generations — what some have termed the post-Prudhoe generations — will need a continuing revenue stream to avoid the onset of statewide income, sales and property taxes.

The future doesn’t have to be this way.

Another graphic from the ISER study demonstrates an alternative future.   The fiscal approach incorporated in that graphic makes two significant changes in what passes for the current fiscal plan.

First, it reduces state spending to “sustainable levels” calculated under the formula proposed by ISER.  Sustainable levels are those which, with a redesigned approach to state finances, are able to be sustained indefinitely — indeed, perhaps permanently — into the future.

Second, it takes the two Budget Reserves and the additional savings realized from reducing current spending to sustainable levels, and puts them into a “nest egg,” not to be drawn down as assumed under the current fiscal plan, but to be invested — in the same manner as the Permanent Fund — to produce revenues down the road, when oil production is no longer sufficient to fund the sustainable spending levels.

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The result, as shown on the chart to the left, is that revenues continue to match spending throughout the period — and indeed, indefinitely into the future.

As before, oil revenues are shown in green and draws from earnings produced by the various Budget Reserves — which by then are throwing off sufficient revenues to avoid depleting the “nest egg” — are shown in red.  Additional potential revenues  from the state’s share of possible North Slope gas sales are shown in blue, but those are largely irrelevant to the analysis.  Current and future spending levels could be reduced slightly to account for the failure of that source of revenues to materialize.

Under this approach, future Alaskans are treated the same as current Alaskans.  Both benefit from roughly the same level of state spending.  Neither is required to pay state income, sales or property taxes to maintain state services.  The state achieves the goal of utilizing the state’s resources for the benefit of all of its people, not just those in the current generation.

How does that relate to the Bonding Proposition on the November 6th ballot?

The key to achieving the alternative future shown in the second chart — and avoiding the disaster shown in the first — is reducing spending immediately, while oil revenues continue to exceed sustainable spending levels and, as a result, can be used to build up the state’s “nest egg.”  If current spending is not reduced to sustainable levels immediately, then the “nest egg” will not build to the level necessary to sustain spending in the future and, as a consequence, future spending levels will either need to be reduced significantly — on the order of the levels shown in the first graphic — or statewide income, sales and property taxes will need to be implemented in order to reduce the gap.

Rather than build toward this goal, the last two state budgets have actually put Alaska deeper in the hole.  Adjusted for the Permanent Fund Dividend — which the ISER plan contemplates retaining — the ISER study indicates that the currently achievable “sustainable spending” level — assuming the plan was implemented tomorrow — is $5.6 billion.  Last year the number was $5.3 billion.

The last two legislatures, on the other hand, have passed — and the Governor has signed — General Fund budgets of  $6.7 and $7.6 billion, roughly $3.5 billion above the sustainable levels for the two years combined.  As the ISER report puts it, such a practice transfers a significant “fiscal burden” to future generations.

Indeed, by depleting the “nest egg” by $3.5 billion (and assuming it would have otherwise earned an average 7% return over time), the last two legislatures have irrevocably cost Alaskans at least $245 million in future annual revenue.  And, the actual number is likely much higher, as under the ISER plan the $3.5 billion would  continue to compound until needed to maintain future spending levels.  If the “nest egg” wasn’t needed until 2022 — as the ISER study currently predicts — the amount lost simply because of the legislature’s actions the  last two years is nearly $500 million in annual revenue.

The $453.5 million bond issue simply adds to the problem.  If the bond issue passes, spending approved in the current fiscal year will total nearly $8.1 billion.  That will increase the level by which the nest egg has been depleted over the last two years to nearly $5 billion, and add a likely additional loss to future revenue of nearly $70 million annually.

“They” will attempt to argue that this concern overstates the case.  “They” will point out that the bond issue is to be paid back over a number of years, and suggest as a result that spending can be reduced in those future years to “sustainable levels,” to avoid any negative effects.

Future reductions may or may not occur, but even if I was certain now the future would turn out that way, I still would vote against the bond package now.  The reason is passing the bond package now automatically prioritizes those projects over other spending that, compared with the bond projects in a constrained, “sustainable budget” environment, may be much more important.

For example, assume for a moment that next year the legislature adopts a sustainable budget of $5.6 billion and the required payback on the bond package is roughly $80 million.  Given the growth in the Operating Budget, at the end of the day it may be that making room for the required payback on the bond package will require a $40 million reduction in community revenue sharing, which ultimately may result in a further tightening of the municipality’s contribution to the Anchorage School District.

Is that a good trade in budget priorities?  I doubt it, but in any event it is one that should be made at the time next year’s budget is drawn, not preempted now by passing the bond package.

As the first chart demonstrates, now is not the time, literally, to be putting concrete around Alaska’s budget flexibility.  If the projects included in the bond issue are good and deserve priority, they can be included in future state budgets once Alaska has put its fiscal house in order.  Approving them now is simply putting the cart before the horse.  For that reason, I am voting “No” on Bonding Proposition A.

3 responses to “Alaska Fiscal Policy| Vote No on Bonding Proposition A …

  1. Brad, this is an incredibly off base analysis. You assume all spending is equally valuable? This transportation infrastructure is critical to the functioning of our economy. 90% of our goods come in by water and 95% of our exports leave by water. You, yes I am saying YOU, could not survive in Alaska without the goods brought in by the Port of Anchorage. Does that start to ring a bell? Or were you thinking that it was the little elves that brought those goods in the middle of the night?

    Last bond issue the state did, the interest rate was 2.6%. You are never going to see money that cheap again. It is a temporary expense of about $50 million and I think a term of 15 years. When that is paid off there will be no continuing expense but those port facilities and roads will still be serving our economy. If you charted this bond issue on the charts you showed above, you wouldn’t even be able to see it.

    I guess you can count me in the faceless “they” you seem to despise so much.


  2. Pingback: An Exchange on the Bond Issue … | Thoughts on Alaska Oil & Gas

  3. Pingback: Alaska 2012 Bonding Proposition A Calls For Over $453 Million For Statewide Transportation Projects; But Anchorage Port Problems Make It A Tough Sell » New Online Course in Navigating Organizational Politics and Business