After listening to Jimmy Carter ramble on inaccurately again about some issue during the single Presidential debate of 1980, Ronald Reagan turned to him, smiled, shook his head a little in the way that only Reagan could and said simply to Carter, “there you go again.”
That moment came to me the other day as I was reading yet another press release from Governor Parnell’s office claiming success in keeping “Alaska’s fiscal future strong.”
Clearly, Sean Parnell has become the Jimmy Carter of our time. When it comes to the state’s fiscal position, Parnell, like the Carter of old, seems capable only of repeating over and over again the same old, tired — and completely inaccurate — mantra. As President Reagan would have said to Parnell when reading his most recent press release, “there you go again.”
Earlier this month I published a column entitled The Real Parnell Fiscal Record (FY 2011 – 2015). In it I analyzed a previous assertion by the Governor that he and the Legislature exercised sound fiscal policy during the most recent legislative session.
The conclusion was both that the Governor’s claim is wrong, and, indeed, that it is monumentally so.
Combined with the actions taken during the previous session, the column demonstrated that, far from being fiscally conservative, the Governor and past Legislature were the most fiscally reckless in Alaska’s history — racking up back-to-back the two largest budget deficits in the state’s history and in one, brief two-year period draining $6+ billion (or 35%) of the state’s fiscal reserves (i.e., the “nest egg”) the state had banked before the Legislature walked in the door.
In short, the unspoken conclusion I reached from the standpoint of a fiscal conservative was with “friends” like these, who needs enemies.
The Democrats likely couldn’t have done any worse if they had been in charge of the Legislature, and in fact, the state may have been better off because then a Republican minority would have been intent on monitoring and publicizing the resulting fiscal profligacy, and a Republican Governor would have scored points by exercising the line item veto.
In contrast, during the past Legislature the Democratic minority mostly stayed quiet — and voted with the Republican majority on most fiscal issues — because the R’s were following spending policies even the D’s largely couldn’t find ways to “improve” upon.
Privately I received significant pushback after publishing the column from some in and around the Administration and legislature claiming that they deserved credit for continuing to push spending down toward “sustainable” levels during the last session. While I addressed — and refuted — that defense in the previous column, a deeper dive may be helpful to understand why that defense is so seriously deficient.
As usual, a graph helps.
The above graph charts the state’s actual spending levels since FY 2012 (in blue) against the state’s “sustainable” spending levels over the same period (in orange) based on the state’s asset and revenue base as it has evolved over time.
“Sustainable” spending levels are those which the state could sustain virtually in perpetuity from a specific point in time, adjusted going forward for inflation and population growth, if, like a retirement account that each of us are (or should be) building as individuals, the state saved the difference between current revenues and the sustainable spending level in each year, invested the accumulated savings wisely, let the resulting nest egg grow and then, again as with a retirement account, tapped the earnings from the nest egg in future years to supplement the state’s income as oil revenues declined.
As the University of Alaska – Anchorage’s Institute of Social and Economic Research (ISER) has repeatedly explained, maintaining spending at a sustainable level would truly secure Alaska’s fiscal future.
Continuing to spend above that level, however — as the state has done consistently for the last several years — is leading directly to a point, potentially as early as before the end of this decade (six years) and certainly by the start of the next, where maintaining even a moderate level of state spending will require “institution of a broad based [sales or income] tax and use of a portion of the earnings of the Permanent Fund” — in other words, taxes and a reduction in the PFD.
Responding to this situation, some in and around the Administration and legislature have claimed that they are “working toward” a sustainable spending level and deserve credit for the efforts.
But that is where the defense breaks down. “Working toward” — just like “hope” — is not a plan.
To put it simply, “sustainable spending” levels are not a static number that one can “work toward.” Instead, they are the result of a number of factors, most importantly for this purpose the level of the state’s “nest egg” at any given point in time. As that “nest egg” declines from year to year by being tapped for current spending, the “sustainable spending” level falls further and further away. By the time you get to where the sustainable spending level was, it has fallen to a lower level.
The reason that this fact is critically important to understand — and factor into current fiscal policy — is because in future years, as oil revenues decline, earnings from the “nest egg,” or the state’s fiscal asset will become increasingly important as a source of self-sustaining revenue levels. That is the essence of a sustainable budget — a portion of today’s cash flow is put into an account to be used as a fiscal asset in future years to throw off the same, sustainable level of revenue as the current generation is taking for itself.
If the state isn’t saving sufficient amounts of oil revenue now, there won’t be enough in the nest egg to support the same level of spending when earnings from it become the primary source of revenue. In other words, the lower the nest egg, the lower the future revenue level it is capable of producing and the lower the level of consistent spending that can be sustained now and in the future.
Conversely, the larger the “nest egg,” the greater the future revenue level it is capable of producing and the greater the level of revenues — and thus, spending — that can be sustained now and in future years. As ISER said in its seminal analysis of the FY 2014 sustainable budget level:
If Alaska had $117 billion in cash reserves and the Permanent Fund by 2023, the state would be on the path to sustainable spending far into the future. But … that’s twice what the state has in financial assets today [January 2013]. So the state needs to sharply step up its savings rate, starting now.
Unfortunately, given the intervening actions of the Governor and 28th Legislature, the state not only has not gained ground since that statement was made, it actually has lost ground. The state has not added to cash reserves, it has subtracted from them!
The result on sustainable revenue levels is demonstrated in the chart. From highs of $6.2 and 6.4 billion in FY 2012 and 2013, the sustainable revenue level has fallen steadily as deficit-ridden budgets have taken a continuing toll on the state’s “nest egg”.
As the chart shows, over the subsequent years the Governor and Legislature essentially have been chasing their tail. By not cutting spending to sustainable levels in each session, the sustainable level has continued to drop further to the point now that it is likely well below $5 billion — roughly the same distance below the projected FY 2015 spending level as it was when actual spending levels were much higher.
In short, by attempting to come at the problem slowly, the Governor and Legislature in fact have made the situation worse. During their watch, Alaska’s long-term sustainable spending level has fallen from $5.5 billion to, likely, something in the range of $4.75 billion looking forward to FY 2016.
Through their actions, in two years alone future Alaska generations have lost $750 million in annual revenue with which to support themselves.
The arrogance of the result borders on the appalling. While the current generation of Alaskans continues to lavish large state spending budgets on itself, increasingly they are leaving future generations with lower and lower state revenue levels from which to support themselves. Put bluntly, violating a basic principle of responsibility, this generation of Alaskans is in the process of leaving future generations far less well off than the current generation is treating itself.
Which brings me to one other Reagan quote from the 1980 Reagan/Carter debate. Addressing the voters at the close of the debate and asking them to reflect on the four years of the Carter Administration Reagan asked:
Are you better off than you were four years ago?
The answer in America at the time was no.
Here, you don’t have to go back four years, you just have to go back two. Looking at the loss in the sustainable spending level that Alaskans have suffered as they look forward to future years, the question is “are Alaskans better off than they were two years ago.”
The answer clearly is no. Jimmy Carter. Sean Parnell. In two quotes, Ronald Reagan nailed them both.