Wednesday, April 11, 2018

Our morning twitter storm ...

Our reaction this morning after reviewing DOR Commissioner Sheldon Fisher's testimony on HB 411 (Oil & Gas Production Tax; Payments; Credits) late yesterday afternoon. The overriding question: who is running this state and whose benefit are they running it for?

Sunday, April 8, 2018

Want to really control state spending? Use a flat tax.

Some argue that new revenues aren't required in order to resolve the state's current fiscal situation, or if they are the revenues resulting from the implementation of Governor Hammond's 50/50 plan are sufficient.

They argue that spending cuts will resolve the remainder of the problem.

That view is theoretically correct. Numerous groups, ours included, have repeatedly offered detailed proposals on how to curb spending to long term sustainable levels (i.e., without the need for various forms of "new revenues").

However, given the level of spending that the Governor, House -- and Senate -- have continually agreed to the last ten years, including the years even since the current fiscal situation has become apparent, relying on cuts alone to address the state's fiscal situation is no longer realistic. 

While various proposals to cut spending often have received lip service from legislators, in the end they all have been ignored. 

Indeed, this year the Alaska Senate itself is proposing a spending increase in at least one of the very categories -- the University system -- that would have to be cut back significantly further in order to achieve such an objective.

In short, while technically accomplishable, and while some from some parts of the state (MatSu comes immediately to mind) appear willing to cast the votes necessary to achieve at least some of it, the statewide political will just doesn't exist to take the steps necessary to achieve the required level of overall cuts, not even in the currently R-led Alaska Senate. 

As a result, a different question increasingly has taken precedence over the last two years -- if we aren't going to reduce spending to long term sustainable levels, what should we do instead.

Some, particularly those who are driven by concerns about a progressive income tax which would put the largest share of the burden on the Top 20% of Alaskans (but also some just looking for any easily accessible source of "new revenues" to fund government), argue in favor of PFD cuts. 

But that approach is just as biased as a progressive income tax, pushing a disproportionate share of the costs off on the Remaining 80% and leaving the Top 20% almost completely unscathed.

Moreover, PFD cuts have the "largest adverse impact" on the overall Alaska economy, are "by far the costliest to Alaska families" and, because they draw funds only from Alaskans, take the largest share of dollars out of the Alaska private sector than any other option.

As we have explained previously on these pages, we believe there is a better way, which uses Governor Hammond's 50/50 plan to help fill some of the gap, and then uses a broad based flat tax to fill the remainder. 
"Notes from the Alaska Fiscal Cliff: Our Proposed Fiscal Solution" (Nov. 2017).

A broad based flat tax results in ALL Alaskans contributing a proportionate share to pay for the costs of government instead of merely shifting the costs -- as do both a progressive income tax and a PFD cut -- from one bracket to another.

Moreover, because it is broad based the individual impact of a flat tax is much lower than other options, minimizing the adverse impact on the overall economy and all Alaska families. Because a broad based flat tax applies to income received by non-residents from Alaska sources, it additionally reduces the share of dollars taken out of the Alaska private sector.

Some have complained that, even if that approach has merit, it still involves a tax and that spending cuts would be better.

Our response is the same as above; that's just no longer realistic. But we also suggest that if some level of spending cuts remains a goal -- as it should -- that our approach is the best out there for accomplishing that as well.

As he did with other issues, Governor Hammond saw this one coming. As he said in Diapering the Devil, "the best therapy for containing malignant government growth is a diet forcing politicians to spend no more than that for which they are willing to tax." 

Put another way, want to motivate Alaskans to focus on actually reducing spending -- rather than just paying lip service to the objective -- tell them they will be taxed to pay for it if they don't.

To be effective, however, that consequence has to apply equally to ALL Alaskans. Threatening to raise revenues (i.e., tax) through PFD cuts motivates middle and lower income Alaskans, but as we have seen in the Alaska Senate, not the Top 20%. 

Instead, taxing the Top 20% at less than the cost of a Starbucks a day ($1100/365 = $3.01) results largely in a shrug.

On the other hand, using a progressive income tax, which would raise the largest share of revenues from the Top 20%, would have the same effect on those at the lower end of the scale. Using national figures as a proxy, if the Top 20% are going to pay nearly 90% of the resulting costs then why should others care about restraining continued government spending growth.

A broad based flat tax addresses that problem, by distributing the costs of government proportionally among all Alaskans. Under that approach, all Alaskans make an equal, proportionate contribution toward the costs of government; as a consequence, all have an equal, proportionate incentive to keep them as low as possible. 

So, in an era where it isn't occurring otherwise, want to really control state spending? Use a flat tax. Create an incentive for ALL Alaskans to engage in the effort, not just those on the receiving end of a biased approach that merely shifts the costs from one group to another.

Friday, April 6, 2018

The fallacy of Alaska State Rep. Dan Ortiz (and others) ...

A recent Facebook post by Rep. Dan Ortiz attempting to explain his vote for cutting the PFD from the $2,700 provided by statute to a relatively arbitrary $1,600 provides a good opportunity to analyze the claim made by him and others (Sen. Mia Costello comes immediately to mind) that "you have to cut the PFD to save it."

Rep. Ortiz's full post is hereThe crux of his argument is this:
The size of draw required to pay a full $2,700 dividend would require an additional [over the $1,600 passed by the House] $1 billion draw on the Earnings Reserve. The Commissioner of Revenue, the Director of the Permanent Fund Corp., and the Legislative Finance Director all ... have recommended a sustainable draw on the earnings reserve of 4.75% to 5.25%. The added draw from the Earnings Reserve to pay out the $2,700 would require a 6.7% draw on the market value of the fund.
Let's start with his last claim -- that "[t]he added draw from the Earnings Reserve to pay out the $2,700 would require a 6.7% draw on the market value of the fund."

Assuming -- as from his numbers seems to be the case -- that he is using the Permanent Fund's current $65 billion market value as the basis for his calculations, the draw required to pay out a PFD of $2,700 would only require a roughly 2.5% draw from the Permanent Fund, not the "6.7%" claimed by Rep. Ortiz. 

So where is Rep. Ortiz getting his numbers from, then? 

His numbers take as a given that the draw made from the Permanent Fund earnings goes first to fund state government at a specified level, and then treats the PFD as an incremental draw on top of that.

The House budget appropriates roughly $3.1 billion from the Permanent Fund earnings reserve.  That represents a 5.25% draw based on an average market value of roughly $59 billion (or a 4.75% draw on the current $65 billion market value Rep. Ortiz appears to be using). 

Of that, the House budget then rakes off the top two-thirds of that, or roughly $2.1 billion, for government. Rep. Ortiz treats that as a given.

His numbers then analyze the draws to fund the PFD as incremental to that. Adding the draw required to fund a $1600 PFD results in an overall draw of 5.25% (using an average Permanent Fund market value of roughly $59 billion). Adding the "additional $1 billion" which Rep. Ortiz claims would be required to fund a $2,700 PFD results in his claimed overall "6.7% draw on the market value of the fund."

There are several glaring problems, however, with Rep. Ortiz's analysis.

The most fundamental is that it not only ignores, but subverts, the current state statutes by treating the PFD as an incremental, rather than the base, draw.

The statutes could not be any more clear on this point. AS 37.13.145, the statute that governs "Disposition of Income" from the Permanent Fund, provides in relevant part as follows:
(b) At the end of each fiscal year, the corporation shall transfer from the earnings reserve account to the dividend fund established under AS 43.23.045, 50 percent of the income available for distribution under AS 37.13.140. 
(c) After the transfer under (b) of this section, the corporation shall transfer from the earnings reserve account to the principal of the fund an amount sufficient to offset the effect of inflation on principal of the fund during that fiscal year. 
Only once those two transfers occur is there any scope under the current statutes for a draw for government.

Rep. Ortiz not only entirely ignores that prioritization, his approach in fact reverses (i.e., subverts) it, taking the draw for government first and treating the draw for the PFD as what comes last.

If Rep. Ortiz followed the statutes in his analysis the blame for the excessive draw would fall directly on the government overdrawing its share of the Permanent Fund earnings, not on the PFD. But in order to justify his conclusion, he applies the statute exactly backwards.

Rep. Ortiz's failure to follow the statutes is at best disingenuous and, more fairly put, results in an outright false conclusion.

But that's not the only fallacy in his piece.  

Rep. Ortiz also attempts to justify his position by claiming that "[t]he size of draw required to pay a full $2,700 dividend would require an additional [over the $1,600 passed by the House] $1 billion draw on the Earnings Reserve."

It wouldn't. The House's calculation of a $1600 draw appears to be based on the assumption of roughly 615,000 recipients, the same number as last year. Adding an additional $1100 to bring the total to the statutory $2700 would only require an additional $675 million, not the "additional $1 billion" claimed by Rep. Ortiz.

Overstating the amount by nearly 50% is more than a mathematical mistake, it's an intentional scare tactic designed to prop up his already fallacious percentages.

Given the elevated spending levels that both the House and Senate appear to be on their way to adopting, we agree that some new revenues are required to make the budget sustainable over the long term. But subverting state statutes and using fake numbers to justify one approach over another is not the way to decide which approach is best for doing so.

According to ISER's undisputed economic analyses over the last two years, cutting the PFD has the "largest adverse impact" on the overall Alaska economy, is "by far the costliest to Alaska families," and because it takes money only from Alaska residents rather than other alternatives which would draw also on non-residents, costs the Alaska private sector the most of all of the various "new revenue" options.

In short, if you are concerned about the overall Alaska economy, Alaska families and the Alaska private sector -- which we would hope legislators are -- cutting the PFD should be the last option taken, not the first.

There are better ways. 

As we have discussed elsewhere, implementing Governor Hammond's original 50/50 plan for drawing funds from the Permanent Fund earnings, then using a flat tax to fill the remaining gap, not only has a smaller impact on the overall Alaska economy than other options, it also is less costly to Alaska families and, because it raises a proportionate share from non-residents receiving income in the state, also costs the Alaska private sector less. See Notes from the Alaska Fiscal Cliff: Our Proposed Fiscal Solution (Nov. 2017).

Rep. Ortiz doesn't even analyze that or other, similar approaches. He simply adopts the worst approach, first, and then seeks to cover his tracks using fallacious percentages and fake numbers.

Let's be crystal clear about one thing. Under the current state statutes it's not the level of the current PFD that is threatening future PFD levels; it's the government's overtake of its share of earnings.

We are deeply disappointed in Rep. Dan Ortiz (just as we have been previously with others that arguing similarly -- again, Sen. Mia Costello comes immediately to mind) for subverting the statutes and making up fake numbers to claim otherwise.

It's bad enough to make the wrong decision. It's worse to then try to cover it up by using fallacious reasoning and fake numbers.

Sunday, April 1, 2018

Let's be absolutely clear ...

Let's start by being absolutely clear about three things.

First, according to ISER's undisputed economic analysis, cutting the PFD has the "largest adverse impact" on the overall Alaska economy, is "by far the costliest for Alaska families" and, because it draws money only from Alaskans (as opposed to alternatives which result in contributions by non-residents) takes the most money out of the Alaska private sector of all of the so-called "new revenue" options.

Second, compared to a flat tax, the only segment of the Alaska population that benefits from PFD cuts are the Top 20%, which pay a slightly smaller portion of their income under a PFD cut (1.81%) than they would under a flat tax (2.65%). The Remaining 80% of Alaska families are worse off under PFD cuts than a flat tax. (See chart below.)

Third, contrary to what some claim, continuing to pay a PFD while implementing a flat tax does not mean that the income from the flat tax is being used to pay the PFD. 
The PFD always has and always will be paid from revenues earned off the Permanent Fund, period. A flat tax will go only to funding the costs of government. Those who suggest otherwise are using a fake argument to divert attention from the real facts.

With those three things in mind, here is what is really happening in the PFD debate

In order to avoid paying their proportionate share of the cost of government (which would happen under a flat tax), those in the Top 20% are making up arguments to justify cutting the PFD instead. The goal of those efforts is to shift the cost of government disproportionately to middle and lower income Alaskans so that upper income Alaskans continue largely to have a free ride.

To achieve that free ride, those in the Top 20% are willing to take the very step that has the

  • "Largest adverse impact" on the overall Alaska economy;
  • Is "by far the costliest for Alaska families;"and
  • Takes the most money out of the Alaska private sector
of all of the various new revenue options.

In essence, they are willing to undermine the overall Alaska economy and Alaska families just so that they are able to pay less than their proportionate share of the costs of Alaska government.

There is a better way -- a flat tax under which all Alaskans pay an equal, proportionate share of the cost of government

We previously have described how we would construct that approach. "ICYMI:  Designing a Flat Tax" (Sept. 2017). 

Under that approach ALL Alaskans -- including even those in the lower income brackets -- would pay a proportionate share of the costs of government. No income bracket would pay more proportionately than any other.

But those in the Top 20% apparently aren't satisfied even with that; they want middle and lower income Alaskans to pay more, so that the Top 20% can pay less and yet, continue to have the benefit of largely free government services. 

No wonder we can't get spending under control.

Governor Hammond had this right in Diapering the Devil: "the best therapy for containing malignant government growth is a diet forcing politicians to spend no more than that for which they are willing to tax." 

By avoiding paying a proportionate share of the costs of government, the Top 20% is trying to have their cake (continued government services) and eat it too (without paying for it). 

If those in the Top 20% aren't affected by those costs, they don't have an incentive to help push to control them. Indeed, because many are beneficiaries of continued government spending, they have a positive incentive to keep spending. 

In light of that, we have come largely to believe that their continued talk about "spending cuts" is just another diversionary tactic to keep some at bay while they continue pursuing their plan for "new revenues" through PFD cuts. "Are Alaskans being played" (Oct. 2017).

Want to do something about it? 

If you agree that we should be going in a different direction, we ask that you consider the approach taken in the Alaskans for Sustainable Budgets Fiscal Plan and, if you agree, recommend to your friends and representatives that they look into it as well. 

As outlined in Diapering the Devil, Governor Hammond's original vision for the Permanent Fund was simple and straightforward:
I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity. …[Once that was in place,] each year one-half of the account’s earnings would be dispersed among Alaska residents …. The other half of the earnings could be used for essential government services.
Building on that starting point, the Alaskans for Sustainable Budgets Fiscal Plan develops a long-term, sustainable budget approach that spreads the need for new revenues proportionately across all income brackets, and creates an equal and significant incentive for all Alaskans to restrain and reduce the costs of government.

Unless we all are in this together, some Alaskans will continue to seek advantages over others.  It doesn't appear to bother those that are seeking those advantages that their approach undermines the overall economy, Alaska families and costs the Alaska private sector more than other alternatives. Their only concern is that it benefits them.

Our plan to avoid such a selfish -- and harmful -- outcome is here: "Notes from the Alaska Fiscal Cliff: Our Proposed Fiscal Solution" (Nov. 2017). Read it and if you agree with us, let your representatives know you support the plan, then share and forward it to friends and ask them to do the same.

This battle is about the future of the overall Alaska economy and Alaska families. It's too important to remain on the sidelines.

Thursday, March 22, 2018

What draw rate should we use with a POMV approach?

One of the issues that has received some, but relatively little attention compared to others during the current fiscal debate is what the so-called draw rate should be if we start using a percent of market value (POMV) approach to establish the flow of cash from the Permanent Fund.

There have been various proposals. SB 26 (the Senate's version of a fiscal plan) uses 5.25% for a couple of years at the start, then reduces it to 5%. The Governor's most recent proposal uses 5% from the start. The House's proposed Constitutional Amendment (HJR 23) was originally 5%, but in the course of redrafting was lowered to 4.75%.

The rate used makes a difference.  The Permanent Fund has a current market value of roughly $60 billion. A draw rate of 5.25%, results in an annual draw of roughly $3.15 billion; a draw rate of 4.75% in an annual draw of roughly $2.85 billion, $300 million less. 

If split 50/50 between the PFD and government (as it should be), the use of the lower draw rate translates into $150 million less to the PFD, or, using last year's number of recipients, roughly $250 less per PFD. 

A lower contribution to the government also means increased pressure for the use of other options, such as taxes or a PFD cut.

The difference between a higher and lower draw rate increases with the size of the Permanent Fund. At a market value of $80 billion, for example, the difference between a 5.25% and a 4.75% draw rate would be $400 million, compared to the $300 million difference at a market value of $60 billion.

Generally speaking the draw rate is intended to equal the so-called "real" rate of return anticipated to be generated going forward from the investments made by the Permanent Fund. The "real" rate is equal to the overall rate of return, including inflation (the so-called "nominal" rate of return) anticipated to be generated by the Fund, less the rate of inflation.

Using the "real" rate of return is simply another (and in our view, better than the current) way of inflation proofing the Fund.

To this point in the discussion, all of the numbers have been based on the anticipated real rate of return -- that is the real rate of return anticipated to be earned in the future. That requires projections not only of the future overall rate of return that will be earned on the Permanent Fund, but also future inflation rates as well.

Generally speaking, the reason that projections are used under the POMV approach is because the goal of using a real rate of return is to keep the relevant fund protected against inflation into the future.  Thus, projections of future rates (both of return and inflation) are perceived to be more relevant than past experience.

But there also is a problem with using projected returns and inflation rates.

In a nutshell, that problem is that the future may not turn out as anticipated. Overall returns may turn out to be more or less than projected, and inflation rates may turn out to be more or less than projected.

For example, rather than the 7.5% overall return and 2.5% inflation rate anticipated by those who recommend using a 5% draw rate, the future may result in an 8% overall return and a 2% inflation rate, or a 7% overall return and a 3% inflation rate.

In the first case (8% overall, 2% inflation), a 5% draw rate will understate the 6% draw rate that actual experience demonstrates could have been used, leaving money "on the table" (i.e., in the Fund) that could have gone to support the current generation through higher PFD's and government support without penalizing those that come after.

In the latter case (7% overall, 3% inflation), a 5% draw rate will overstate the 4% draw rate that actual experience demonstrates should have been used, distributing money to the current generation that, instead, should have been retained in the Fund to protect future generations.

Normally, endowments and other institutions that use a POMV approach do not worry that much about inaccurate projections. As conditions change proving the original projection wrong, the boards of the relevant institutions simply change the draw rate to better reflect revised projections.

But the potential (even likelihood) that the future does not match projections creates a special challenge for establishing a draw rate for the Permanent Fund.  Especially if the draw rate is "constitutionalized," as proposed by HJR 23, for example, it may be hard, if not impossible, to make adjustments as conditions change, locking in permanent over or under draws and with it, potentially significant intergenerational consequences.

As a result, the more we have thought about it the more we have come to the conclusion that the better way to set a draw rate for the Alaska Permanent Fund is to use past experience, rather than a projected look. 

Using actual, past experience protects against over- or under-stating the amount which each generation may draw without impairing others. If the investment policies of the Permanent Fund Corporation result in higher than the anticipated real rate of return, as they have at many times in the past, both current and future generations will share in the resulting benefit, rather than shifting all of the benefit to future generations (and potentially leaving the current generation with higher tax rates than necessary).

If, on the other hand, those investment policies result in lower than the anticipated real rate of return, both current and future generations will share in the resulting burden, rather than shifting all of the burden to future generations.

One legitimate question about such an approach is what past period should be used in calculating the realized real rate of return. Actual real rates may vary substantially from year-to-year depending on a variety of circumstances. As with statutory earnings used in the current calculation, it is better to use an average calculated over time to smooth those out.

Changes in averages determined over time also tend to be gradual, providing the Permanent Fund Corporation with more predictability about what the draw is likely to be -- a key argument behind the use of a permanently fixed rate -- and government and residents receiving the PFD also with more predictability about what their receipts are likely to be.

In the following chart we have calculated, by year, the actual real rate of return realized by the Permanent Fund in every year since its inception, along with a rolling 5-, 10-, 15-, 20- and 25-year average.
Two things leap out (to us, at least) from charting the results in that way. The first is that the longer the time period over which the average is calculated, the smaller the year-to-year changes and the smoother the adjustments. 

The second is that every measure -- 5-year, 10-year, 15-year, 20-year, 25-year and full life (some 40 years) -- averages out to an actual, real rate of return of somewhere in the 6+% range. To us, the second point is important and raises significant questions about the substantially lower percentages (4.75 - 5.25%) that have been proposed in the current round of discussions for use in connection with the Permanent Fund.  

Recall that the lower the percentage, the lower the PFD and government draw (and the greater the potential need for finding other sources of "new revenues"). Given the intergenerational issues resulting from using a draw rate significantly lower than the actual real rate of return, to us these results add even more weight to our proposal to use a draw rate based on the actual real rate of return realized over some period of time, rather than one based on anticipated future real rates of return.

Because it generates the least amount of change year-to-year, we believe the 25-year average is the best approach, but likely could be convinced as well of the suitability of the 15- or 20-year averages. Looking at the results, we are concerned that the use of 5- and 10-year averages could generate an unnecessary amount of year-to-year change.

But at the end of the day we believe that the use of some sort of averaged actual rate of return is more appropriate than the use of anticipated rates.  The potential for significant intergenerational problems resulting from the use of a constitutionally or even statutory fixed rate is too great.

Monday, March 19, 2018

Just who is the Alaska Senate Majority trying to protect?

In an article in this Sunday's edition of the Anchorage Daily News ("New forecast of Alaska oil revenue takes chunk out of state’s deficit"), the Senate Majority's fiscal position is summarized this way:
The Senate majority ... favors lower [Permanent Fund] dividends ... Senate leaders have said taxes would hurt Alaska's economy and aren't needed ....
But the Senate isn't really concerned about the overall Alaska economy; if it was, its position would be the reverse.

According to a study from the University of Alaska-Anchorage's Institute of Social and Economic Research (ISER) last March, "the PFD cut ... has the largest adverse impact on the economy" of all of the so-called "new revenue" sources it analyzed, including sales, income (progressive and flat) and property taxes. If the Senate was truly concerned about the overall economy, cutting the PFD would be the last option taken, not the first, and certainly not ahead of taxes.

The Senate also isn't really concerned about Alaska families.  According to a second study from ISER in early 2017, a "cut in PFDs would be by far the costliest measure for Alaska families."  As in the earlier study, the analysis included also sales and income taxes. If the Senate was truly concerned about Alaska families, cutting the PFD would be the last option taken, not the first, and again, certainly not ahead of taxes.

The Senate also isn't really concerned about the amount of money Alaskans are required to pay to support government. As both the first and second ISER studies make clear, "[n]on-residents would pay a share of any of the potential taxes, reducing the burden on Alaska households." Because PFDs are only paid to residents, however, "the impact of the PFD cut falls almost exclusively on residents." 

Using ISER's numbers we have estimated that Alaskans will be required to pay more than $500 million more overall under PFD cuts over 10 years than would be the case under any of the tax cases. Again, if the Senate was truly concerned about limiting the amount of money Alaskans are required to support government -- and optimizing contributions from non-residents receiving income in the state -- cutting the PFD would be the last option taken, not the first, and again, certainly not ahead of taxes. 

So, if the Senate doesn't really care about the overall Alaska economy, Alaska families or limiting the amount of money Alaskans are required to pay overall to support government, what does it care about. 

Put another way, just who is the Senate trying to protect by putting PFD cuts ahead of taxes.

To analyze that we compared the effect of PFD cuts with that of a flat tax on a family of four. We have previously discussed the type of flat tax we envision. ICYMI: Designing a Flat Tax (Sept. 2017).

To identify just who the Senate is trying to protect we calculated the crossover point at which a flat tax would take more from a typical family of four than the Senate's proposed PFD cuts.

Those below that point would fare better under a flat tax. Those above fare better under a PFD cut; as a result, they are the ones the Senate's actions are protecting. Our analysis is here (the crossover point by year is in the yellow column):

The answer was higher than even we guessed off the top of our head; roughly, those with incomes above $160,000-$170,000.  

Only those receiving above that amount would pay more under a flat tax; all those receiving less than that amount lose more under the Senate's proposed PFD cut plan.

So, using a family of four as the measure, who is the Senate trying to protect?

The answer: families with incomes greater than $160,000 - $170,000, about the Top 10%.

At whose expense? Families earning less than $160,000 - $170,000 -- the Remaining 90%.

Let that sink in -- in order to save the Top 10% of Alaska families from paying a bit more under a flat tax, the Alaska Senate Majority is prepared to hurt the overall Alaska economy, the Remaining 90% of Alaska families, and make Alaskans pay more for government overall.

Just wow.  Their upper income donors must be so proud. The Remaining 90% of Alaska families? Not so much.

Wednesday, March 7, 2018

Maintaining the PFD is important to achieving real spending cuts ...

Some ask why we are so focused on preserving the PFD. 

There are a number of reasons -- the significant adverse effect of cuts on the overall Alaska economy & families, its critical role in protecting against raids on the corpus, its role in creating a private sector economy similar to those in other oil producing states.

But another, similarly important reason is the significant role maintaining the PFD plays in restraining government spending to long-term sustainable levels.

Because PFD cuts largely don't affect their donor class, some legislators from more affluent parts of the state (or more affluent themselves) have made clear that they have no problem cutting the PFD to zero. Their willingness to do so enables them to avoid focusing on the hard work of constraining spending.

As Governor Hammond well understood, "the best therapy for containing malignant government growth is a diet forcing politicians to spend no more than that for which they are willing to tax." 
Diapering the Devil at p. 31. Cutting the PFD enables the legislators to put off the date they have to do so even longer. 

It provides a cushion of an additional $750 million - $1 billion (and growing) in revenue before they have to begin confronting the need for taxes. They can continue to say "yes" to their constituents -- particularly including those corporations tied to government spending which make up a significant part of their donor class -- to a much greater extent and for a lot longer than if they were confronted instead with the need to raise new revenues through taxation now.

That delay has significant, long-term adverse consequences to Alaska, however. 
As is the case at the federal level, all that resulting increase in spending ultimately will do is bring Alaska closer to economic peril. 

Enabling spending to increase up to the level it can be funded through current revenues plus conversion of the PFD to government revenue will put the overall Alaska economy at even greater risk the next time oil revenues decline or, once we start relying on that source of revenues, investment returns drop.

A significant portion of the Alaska economy is already built on a somewhat artificial base of free government services funded by oil revenues. We have seen the last four years how unreliable that is.

Expanding spending to include the PFD simply will double up on that artificial base by including free government services dependent on projected investment returns. Those with long-term experience and a long-term perspective in financial markets know how unreliable those are as well. See, e.g., Financial Times, "Norway’s oil fund could lose over $420bn in next big market crash" ("The $1tn fund said that it could lose more than 40 per cent of its value in a single year because of a combination of a plunge in stock markets as well as a potential strengthening in the Norwegian krone.")

From our perspective it is important to draw a line in the sand on state spending now. We may need more than our current revenue base can sustain, but as Governor Hammond said, the revenues to fund any addition should only come to the extent "politicians ... are willing to tax." 

Going beyond that -- by converting the PFD to government revenue -- only walks Alaska's economy farther out on thinning ice, so that Alaska is over deeper water and farther from shore when the ice inevitably fails. It also removes the safety net that the PFD provides to the Alaska economy and Alaska families during challenging economic times, making the economy and those families entirely dependent on government when those times come.

That, inevitably, will lead to an even larger crash and burn for the overall Alaska economy and Alaska families than if we start to face up to the hard work of reigning in spending now.

The Alaska Senate started hearings yesterday on SB 196, a bill that would purportedly impose statutory limits on spending. They will tell you that approach is the solution to Alaska's spending binge. 

But as we have seen with the PFD, Alaska statutes dealing with fiscal issues are nearly as worthless as the paper on which they are written. They don't even have to be repealed; they can just be ignored.

What we need instead are hard, real world limits on spending. 

As Governor Hammond wisely understood, those are only created when government spending is put on a "diet forcing politicians to spend no more than that for which they are willing to tax." Cutting the PFD enables them to dodge that diet yet again, allowing them to continue to fatten government spending, putting the Alaska economy and families at even greater long term peril.

We have the opportunity to stop that now by preserving the PFD, and from the perspective of building a sustainable economy and budget that is exactly what we should do.

We would suggest the results of the Governor's and legislature's proposed spending levels would look much different if we do. Regardless of what the Alaska Senate tries to tell you about SB 196, we doubt it will if we don't.