Alaska Senate: Hold that line …

An article from this morning’s Juneau Empire caught my attention as I was reading the papers from the day.  The headline was “Sandy Parnell among Juneau residents to testify on state budget” and reports on public testimony  given Saturday before the Senate Finance committee.

From the article, it appears that the hearing was composed primarily of a series of requests by various parties for restoration of various funding cuts made by the House Finance committee to the Governor’s original budget.  One of the requests was from the Governor’s wife, but the request that caught my attention most comes later in the story, when representatives from the Juneau school district testified.

Juneau School District … Superintendent Glenn Gelbrich … said he hopes to see “a sustainable, modestly increasing amount of money for public education in this state” every year.

Board of Education member[ ] … Barbara Thurston … urged senators to consider spending money out of the state’s large budget reserves to “invest” in public education.

“I know the budget’s tight, but an educated workforce is the best way to grow our economy … And I think this is an investment that’s worth making and worth pulling money out of reserves for.”

Two points are important to keep in mind when considering these comments.

First, an investment usually is a payment by someone for something in order to produce a financial return to that person at a later point in time.  Don’t take this the wrong way, but there is no  financial return to the state from making payments to education.

Alaska state revenue — its financial return — comes almost entirely from oil.  Alaska does not have a state income, sales or property tax.   So, there is no “financial return” to the state from investing in public education.  In some ways, it may improve the number of jobs that go to Alaskans over outsiders — and may improve the wage scale that those Alaskans receive — but because those employees don’t share those benefits with the state in terms of revenue, there is no financial return.

In stark economic terms, state payments to education simply are another form of subsidy to its citizens (or perhaps, the citizens of other states if the students end up moving Outside after their education is complete).  It is a payment made to improve their economic well being, not the state’s.

Second, as the University of Alaska-Anchorage’s Institute of Social & Economic Research (ISER) has pointed out, to the extent that current spending exceeds sustainable levels — as it will if the state starts drawing down reserves in order to fund current expenses — spending today is actually making tomorrow worse, not better as argued by those testifying.

Readers of this page will be familiar with ISER’s recent study on Alaska’s current fiscal situation.  Maximum Sustainable Yield:  FY 2014 Update (January 2013).   As readers will recall, the study concludes that “[i]n fiscal year 2014, Alaska’s state government can afford to spend about $5.5 billion. That’s an estimate of the level of Unrestricted General Fund spending the state can sustain over the long run ….”

As part of that study ISER analyzed the effect on future generations if the state continues currently to spend in excess of sustainable levels.  The following chart demonstrates the results.

To interpret, if the state spends $6 Billion in FY 2014, it will shift a fiscal burden of $500 MM to future Alaskans and ultimately reduce the size of the next egg by $12.5 billion.   If the state spends $6.5 Billion, which is Governor Parnell’s initial proposed budget, current Alaskans will shift a fiscal burden of $1 Billion to future Alaskans and ultimately reduce the size of the nest egg by $25 Billion.

Reducing the size of the nest egg is hugely significant.   As the ISER study explains, at some point in the future oil revenues will decline below the sustainable level and earnings from the nest egg will be needed to offset the shortfall in order to maintain future spending levels at the same level from that point forward.

Depleting — or underfunding — the nest egg undermines that approach, and means that future Alaskans will have less to spend than current Alaskans when the time arrives to use earnings from the nest egg as a supplemental source of revenue.  The long-term effect of a current shortfall is compounded significantly, because the intent is to take the contributions today, invest them and reinvest the earnings as they occur in order to grow the nest egg to the size it will need to be to sustain spending once oil revenues no longer are able to serve that function.

Because it undercuts that compounding effect from the start, overspending the sustainable budget level by $500 million this year will mean at the point at which Alaskans turn to the nest egg to fund government, they will have $500 million less annually to spend than current Alaskans.

Put another way, by overspending $500 million now in order to make their current life more comfortable, current Alaskans will make the life of future Alaskans $500 million less comfortable yearly.  In some contexts, that is called intergenerational theft — or stealing from Peter (future Alaskans) to benefit Paul (current Alaskans).

Certainly, I don’t intend to accuse those from the Juneau School District of bad acts.  They are doing what they think is right for their current students.

But they are being incredibly short sighted.   The course they are suggesting may make things slightly better for current students and faculty — and slightly easier for current administrators and board members — but it will come at the deep and continuing expense of those students and faculty that follow in the future.

The truth is, Alaska only can afford to spend so much.  Asking for more now comes at the expense of future Alaskans.  That is as true with education as it is all other areas.

Perhaps because it involves school, I was reminded of one other thing as I read the article — the old high school football chant of “hold that line.”  That is the chant appropriate when the other team’s offense is trying to break through and do very bad things to the home team’s defense.

That chant seems appropriate here.  “Hold that line,” Alaska Senate.  The state’s economic well being is at stake.