Alaska Oil Policy| The Governor commits an unforced error …

“Unforced error,” n.  in sports [or politics], a mistake made by the player and not due to the opponent’s skill or effort.

The Governor’s announcement Wednesday of a revised FY 2014 “spending cap” of $6.78 billion — a $300 million increase over the budget he proposed in December — comes as a surprise, and not a good one.  Indeed, it may somewhat serve to undermine his continuing case for oil tax reform.

As I have previously explained on these pages, restoring investor confidence in Alaska requires two things,  oil tax reform and fiscal reform.  Both are critical.

The case for oil tax reform has been made on these pages, in committee hearings and elsewhere.  I also have made the case for fiscal reform on these pages and in hearings, but its importance bears repeating.

As the University of Alaska Anchorage’s Institute of Social and Economic Research concluded in a report earlier this year, “[r]easonable assumptions about potential new revenue sources suggest [Alaska] do[es] not have enough cash in reserves to avoid a severe fiscal crunch soon after 2023, and with that  fiscal crisis will come an economic crash.”  The graphic and a link to the report is to the left.

Leaving a fiscal hole in Alaska’s future of the type anticipated by ISER — and confirmed by others — undermines the state’s ability to attract the very type of long term investment that the Governor claims he is seeking through oil tax reform.  Alaska will not attract significant long term investment tied to its natural resources as long as potential investors see the type of fiscal cliff demonstrated in ISER’s analysis and anticipate that, once reached, they will be expected to be part of the solution.

In December of last year the Governor announced a proposed budget of $6.49 billion for the upcoming fiscal year.   At the time I expressed concern about the size of the budget, arguing that it was much more than Alaska could afford in light of the developing fiscal issues.

Others agreed.  As ISER subsequently put it in its January report, “[i]n fiscal year 2014, Alaska’s state government can afford to spend about $5.5 billion.”   In addition to undermining investment, ISER explained also that spending more would pass on an increasing fiscal burden future generations.

After his December budget announcement, the Governor subsequently announced his proposed oil tax reform package, SB 21.  Surprisingly, no committee appears yet to have asked the Office of Management and Budget to assess what the impact passage would have on projected FY 2014 revenues. Based on the fiscal note accompanying the most recent version of SB 21, however, it is fair to estimate that if oil reform is passed along the current lines, FY 2014 revenues will drop to about  $6.1 – 6.2 billion from the $7 billion anticipated at the time of the Governor’s December budget announcement.  That will significantly worsen even further the fiscal outlook suggested by ISER in its January forecast.

Responding to both the concerns expressed by ISER and the anticipated revenue drop from oil reform, once the session got underway both the House and Senate Finance Committees  started doing the hard work to rein the budget back toward more realistic — if not yet entirely sustainable — levels.

Earlier this month the House Finance Committee initially proposed (col. 4) an operating budget totaling $5.6 billion, roughly $200 million below the Governor’s proposal.  By the time that the budget was passed by the full House, the budget grew (col. 5) another $120 million, to roughly $5.75 billion.  Both levels, however, remained below the Governor’s proposed spend of  $5.8 billion.

Yesterday, the Senate adopted an operating budget slightly higher than that passed by the House, but still slightly below that initially proposed by the Governor.  The operating budget will now return to the House for concurrence at a level around $5.8 billion, roughly $30 million below the Governor’s original request.

Of course, neither body has yet passed — or even publicly announced — the level of capital budget they are considering.  But from the efforts made through yesterday it appeared that both bodies have been working hard to bring restraint to a budget process that, as ISER’s January study makes clear, otherwise threatens to undermine the economic well being of future Alaskans.

Then Wednesday the Governor announced his revised “spending limit” for FY 2014 of $6.78 billion.  The revised number is roughly a $300 million increase over the level the Governor first aired in December and inexplicably appears to undercut the efforts that both legislative bodies have been making toward stabilizing, if not reducing, current budget levels.

It is unclear from the press release and subsequent statements what the Governor is thinking.  In the December announcement, the Governor proposed a capital budget of roughly $800 million.  Assuming the operating budget now remains in the general area approved by the House and Senate, one possibility is that raising the total is the first step in expanding the size of the capital budget he intends to suggest in the final days of the session to roughly $1 billion.

Regardless of his plan, that overall level of spending is unsustainable and undermines the Governor’s own case for oil tax reform.  Even if, as some are now predicting, oil reform results in production increases that ultimately stabilize state revenues at or near current levels, according to the ISER study the Governor’s original budget still exceeds the sustainable level by $1 billion.

The Governor’s decision to increase this year’s budget by $300 million makes the state’s fiscal problem worse, not better.  If the state is not going to take fiscal reform seriously — undermining the case for long term investment — some may see it as raising a serious question whether the state should make the effort to undertake oil tax reform.   Absent fiscal reform, oil tax reform begins to look a lot more like a near term drop in revenues without creating the conditions necessary to encourage increased, long term investment.

Up to this point, the House and Senate have appeared to take the state’s fiscal problem seriously and started to take the steps necessary to make investment in the state attractive again.  The Governor’s announcement Wednesday takes a large step backwards and undermines a significant share of those efforts.

As those watching March Madness (the annual NCAA basketball tournaments) realize, an unforced error is the worst kind.  It is a self-inflicted, morale busting and sometimes, momentum turning event.  The Governor’s announcement Wednesday was an unforced error.  Hopefully over the next few days he and others will realize that and chart a different path.