Alaska Fiscal Policy| Robbing Peter to pay Paul and why Alaska government is wrong to do it …

Yesterday I had a discussion about Alaska fiscal policy that brought into the open something that I only had heard murmured about before.  It epitomizes the warped thinking that underlies recent Alaska budgets and explains why this generation of Alaska budget-makers increasingly is likely to be viewed as among the worst in the state’s history by those that will follow, beginning as soon as ten years from now.

The discussion was around the justification for the out-of-control spending our current Governor has proposed, and, now, two different Legislatures have approved, over the last three years.  Up until FY 2011, Alaska government largely managed to keep state spending within “sustainable” levels.  (That means it kept state spending within levels which, by putting remaining revenues into long-term savings, could be maintained — i.e., sustained — indefinitely into the future).

The last three years, however, this Governor and the last two Legislatures have repeatedly violated that principle, in the process already spending roughly an accumulated $5.5 billion above long-term sustainable levels.  That sounds like a lot (especially crammed into just three short years) because it is.

By means of comparison, the balance of Alaska’s Permanent Fund, at least as of the time of this writing, is $47.6 billion.  If the excess spending instead had been saved into the Permanent Fund, the balance today would be at least 12 percent greater.   Put another way, excess spending by this Administration over the last three years, approved by the last two Legislatures, has cost Alaskans the equivalent of a 12 percent drop in the balance of their Permanent Fund.

And, potentially, that is only the tip of the iceberg.  In April, this Governor announced that he intends to keep spending at the same levels for the next five years.  If he does (and the legislature goes along), by the end of his next term he will have cost Alaskans at least another $6.5 billion in savings.  In short, between the two periods, he will have reduced the potential balance of the Permanent Fund by in excess of 25 percent.

The justification I heard yesterday that generates this column is that the spending has been appropriate because it has kept “more Alaskans working.”  The logic is that the excess spending has led to more government contracts (mostly for construction projects), which in turn has led to more government-funded jobs, which in turn has led to keeping “more Alaskans working” (… and oh, coincidentally, more government-funded profits for the owners of the companies that employ the workers, but that’s a story for another day).

If that sounds like the Obama Administration’s justification for excess federal spending — that’s because it is.  Essentially, the Parnell Administration is going down the same “stimulus” road using state funds as the Obama Administration is with federal funds, and this legislature is compliantly following along.

Why is spending more now to create more Alaska jobs (and coincidentally, more government-funded profits) bad?  Because it is coming directly — and I  mean absolutely directly — at the expense of basic government goods, services and jobs for tomorrow’s Alaskans.

In a recent study, the University of Alaska-Anchorage’s Institute of Social and Economic Research (ISER) summed up the effect of Alaska’s current course this way:

“Right now, the state is on a path it can’t sustain. Growing spending and falling revenues are creating a widening fiscal gap. In its 10-year fiscal plan, the state Office of Management and Budget (OMB) projects that spending the cash reserves might fill this gap until 2023, as the adjacent figure shows. But what happens after 2023? 

Reasonable assumptions about potential new revenue sources suggest we do 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.”

Yes, overspending creates jobs (and, again, government-funded profits for the owners) now.  But at what cost.  The ISER study answers that — at the cost of an economic crash next decade, which because Alaska largely will have run through all of its oil wealth by then, will thereafter permanently scar Alaska’s economic future.

Look at the chart above again for a moment.  The skins in the various shades of blue reflect projected state revenues (coincidentally, under ACES), some of which are highly speculative.  The black line reflects state spending.  In the early years covered by the chart (roughly the years remaining before 2020), state spending is able to remain at excess levels by using state savings (reflected in red).  But the savings are depleted by 2020.  At that point, government spending necessarily will plunge back to the level that can be sustained solely by revenues.

That plunge (whether in one year or spread out over two or three) will be dramatic.  Based on current projections, state spending necessarily will drop from roughly $11 billion to roughly $5 billion, and continue on down from there because the state will have depleted the “nest egg” which otherwise could be used to offset the continued drop in oil revenues.

And what about the jobs created by excess spending in the meantime?  Gone.  And the individual wealth created by all that excess government spending?  Likely, moved out of state in one of the largest out-migrations in Alaska’s history, caused by the resulting “economic crash” (ISER’s words, not mine).

And what will be left?  Substantially reduced government goods and services — and jobs — and likely the need to institute substantial sales, income and state property taxes even to pay for those.

As I wrote recently in a column carried in the Anchorage Daily News, Juneau Empire and Fairbanks News-Miner, it doesn’t have to be this way.  By keeping spending within sustainable levels, as the state had managed to do through most of its history up until the last three years, there can be a “Morning in Alaska” where state spending continues at sustainable levels virtually in perpetuity.

But that is not the course Alaska currently is on.  Instead, in an effort to squeeze out a few more jobs (and government-funded profits) in Alaska’s present, Alaska’s leaders are creating the conditions for an economic crash that will last for a long time into Alaska’s future.

They are robbing tomorrow’s “Peter” (Alaska’s future generations) simply to create a bubble economy for today’s “Paul.”

Article 8, Section 2 of the Alaska Constitution says “The legislature shall provide for the … development … of all natural resources belonging to the State .. for the maximum benefit of its people.”   It doesn’t say only the people here today.  Yet, that seems exactly the reading that this Governor and legislature are giving to the phrase.

Recently, some have speculated that I may be considering a run for Governor.  As I have said repeatedly — and repeat again here — I absolutely do not want to do it.  Already this year I am cutting short my time at one of my favorite annual music festivals to be back in the state in time for a couple of meetings in Fairbanks.  If I ran, I would need to miss it entirely next year, and thereafter for the following four years!!

But if I do, saving Peter from Paul will be the reason.  Today’s leaders have a fiduciary obligation to tomorrow’s Alaskans.  This year’s coming budget is an opportunity to demonstrate they understand that.  It also is an opportunity to demonstrate they understand  that creating jobs today through excess spending comes directly at the expense of destroying jobs tomorrow.

I sincerely, deeply hope they get it, and when they do, take care of business.  These pages will support them in that effort.  But if they don’t ….