Thursday, July 19, 2012

"Understanding Alaska's Budget" May Explain Much More Than It Intends ...

The Alaska "House Special Committee on Fiscal Policy" yesterday released a new website focused on "Understanding Alaska's Budget."  The website may explain much more than the authors intend about how Alaska has worked itself into its coming fiscal crisis -- and why recent legislatures have made the problem worse.

The press release announcing the website provides the first clue.  The release quotes the Chair of the House Special Committee as follows:
We’re in the cat-bird seat, financially, now, but with throughput this week under 400,000 barrels, and with a volatile oil price, we need to prepare people for the likelihood of lower revenue. That means also preparing to handle the challenges before we reach a crisis – that’s what this is meant for.”
Alaska is not in "the cat-bird seat, financially, now."  Alaska has a temporary cash surplus, the same way that you or I would if we treated as current disposable income the money that we otherwise need to put away for our children's college tuition or our retirement.  Spending it now means that our children -- and us -- will be worse off in the future as our income winds down but our spending needs continue.

As the University of Alaska Anchorage's Institute of Social and Economic Research ("ISER") has made clear in two recent studies, once adjusted for the savings levels that are required to fund tomorrow's state spending requirements once oil winds down, Alaska is not currently in the "cat-bird" or any other type of comfortable seat.  Instead, as I explain more fully in a recent piece (which relies on the ISER studies), Alaska is very much behind the curve and is spending away today at an alarming rate money that otherwise should be put away to handle future needs.

The fact that the "Special Committee on Fiscal Policy" thinks otherwise is not only disappointing -- it is downright alarming.  Thinking you are in the "cat-bird" seats leads to short term decisions that have very bad long term consequences.

The second clue that the website provides about how Alaska has worked itself into this situation is even more telling.  One of the things about the House website that holds promise is that it has a tab headed "Fiscal Gap," which attempts to explain Alaska's coming fiscal crisis and alternatives for dealing with it.

But then, precisely at the critical moment, the website -- and evidently the Committee, like the Legislature since 2006 -- goes soft and, just like the shortstop in the critical series, lets the hard liner go through its legs.  On the "Fiscal Gap" page, the Committee has a header entitled "What can be done" that lists various alternatives for dealing with -- and closing -- the Fiscal Gap.  The last two on the list are mirror images of the same step -- cutting spending (which actually is last on the list), and increasing savings.  Here is what the website says about cutting spending (which, of course, is necessary in order to increase savings):
"Budget cuts will likely be needed to address a fiscal gap, so it will be important to look for ways to cut out waste, trim non-essential services and find other ways to do more with less. However there is a limit to what can be done without gutting essential services that Alaskans rely on, and deep cuts are likely to slow the economy.
At the end of that paragraph there is a hypertext link that seeks to explain why "deeper cuts are likely to slow the economy."  That explanation is where things really spin out of control.  Here is the explanation given at the link (its long, but important; I have emphasized portions that provide the most significant insight):
Why not just cut the budget? 
Alaska’s operating budget has been increasing at about 9% per year for the last decade and is expected to continue on this path. Even with tighter budget control, the budget will need to increase as population increases and to adjust for inflation just to maintain current levels of service. Increases in future obligations due to an aging population are a part of fiscal gap calculations and one reason why Alaska is not alone in facing future budget woes. 
While deep cuts to state services could help the plug the fiscal gap, they would hurt the economy and Alaska families. State government not only provides needed services and infrastructure, it also plays a significant role in the state’s economy, directly employing around 7% of working Alaskans (24,000 people in 2011) and generating even more jobs by providing grants and contracts to the non-profit and private sectors and by being a major purchaser of goods and services from Alaska businesses. Without state funding some of those jobs will disappear. 
Often when people talk about cutting government spending they mean cutting out excess bureaucracy and paring back non-essential services. It will be important to find efficiencies and look for ways to trim waste, but there is a limit to what can be cut without cutting into basic services that many Alaskans rely on. Administration only accounts for 4% of the state operating budget. While there may be efficiencies that can be found, administration cannot be gutted since it includes core services like IT and telecommunications services, accounting and payroll that state agencies need to operate. 
In past years, the state has cut the capital budget when short-term deficits have occurred in years of low oil prices. Cutting the capital budget provides immediate savings but is a short-term fix that has its own negative impacts, such as higher future costs due to deferred maintenance on public buildings. Cuts to the capital budget also impact general contractors, engineers, and people working in the trades throughout Alaska who contract with the state to plan and build infrastructure projects. Maintaining public infrastructure, including roads, bridges, ferries and public health clinics is a core function of government that no one else is going to pay for if the state doesn’t do it. 
Budget cuts impact people differently. Cuts to education impact children and families, while cuts to the capital budget impact the Alaskans in the construction industry, and cuts to health and human services impact people with fewer resources. In one way or another, state spending improves the quality of life for all Alaskan. We are used to receiving high levels of service from our government. In a recent statewide telephone survey, Alaskans from all political parties chose maintaining state services over balancing the budget for nearly all state services.
I will write much, much more about the positions taken in this tab in future pieces, but for now let me briefly make three points.

First, the focus on the role of "government" as a source of jobs ("[w]ithout state funding some of those jobs will disappear") is something that one would ordinarily expect to hear from the far-left wing of the Democrat party, not a committee composed primarily of Alaska Republican House members.  What happened to the usual -- and economically sound -- principle that government should leave the role of job creation -- and more importantly, picking economic winners and losers -- to the private sector, and limit taxes in order to permit the private sector to create those jobs and make those choices?  This rhetoric sounds much more like that which justified the federal government's recent economic stimulus packages than anything normally associated with "fiscal conservatives."

Second, the size of the budget -- which the Committee now appears to argue cannot be cut without "hurt[ing] the economy and Alaska families" -- is a recent phenomenon.  As I explain elsewhere:
Prior to FY 2008 – the first budget of the Palin/Parnell Administrations – state spending levels were relatively moderate. During FY 2004 – 2006, for example, General Fund spending was only (.pdf) $2.3 billion, $2.3 billion and $3.0 billion. From FY 2008 forward, however, state spending has exploded. The comparable numbers for FY 2008 – 2013 are as follows (.pdf): $4.25 billion, $5.0 billion, $4.23 billion, $5.1 billion, $6.72 billion and $7.6 billion. While any one year might be excused as an anomaly, the succession of six such years in a row – and the fact that the numbers are escalating – leads to serious concerns about where the state’s fiscal policy is headed. 
In short, just six years after the fact, General Fund spending for this coming year alone (FY 2013) is budgeted to exceed the total amount spent in the three years from 2004 – 2006.
Certainly it isn't the case that the legislatures prior to 2006 were "hurting the economy and Alaska families."  Instead, what those legislatures were doing was balancing the needs of future Alaskans with those of current Alaskans.  The legislatures since 2006 appear to have abandoned that long-term view and focused increasingly only on pandering to the needs of current Alaskans.  The Legislature -- and the Committee -- should be concerned equally about both the current and future "economy and Alaska families."  Their comments provide a valuable insight into the fact that they aren't.

Third, the last sentence from the website -- "Alaskans from all political parties chose maintaining state services over balancing the budget for nearly all state services" -- is just nonsense.  Of course, current Alaskans choose to get as many government services as possible.  Government services to current Alaskans appear to be a "free good" -- Alaskans don't pay for them in the form of income, sales or even significant property taxes; someone else pays the costs.  As long as they don't have to pay for them, consumers always want "free goods," and the more of them they can get, the better.

Whether Alaskans want those free goods to continue isn't the right question to be asking.  As the ISER studies make clear, the goods in fact aren't "free," but are being paid for by future Alaskans by depleting the savings that they will need to maintain spending once oil winds down.

Thus, the right question to ask is whether Alaskans want more -- and more -- of those goods and services now at the expense of them having access to the same level of goods and services in their retirements, and their children and grandchildren during their lives.  That is the real question raised by the spending levels recent legislatures have approved.

It may be that current Alaskans planning on leaving the state in the next few years to spend their retirement elsewhere, and whose children have left the state and don't plan on returning, will continue to answer "yes."  But are those the people about whom the Legislature should be concerned?  I would suggest not.

If instead of asking current Alaskans whether they want to continue to receive free goods, the Committee asked whether current Alaskans want to do so at the expense of their -- and their children's -- future, my strong guess is that those who intend to remain in Alaska would provide a much different answer than what the Committee has assumed.

The simple fact is that future Alaskans can't afford the level of government services that current Alaskans are receiving.  The failure of the Committee to realize that -- and recognize that deep cuts are required in the level of government services being provided to current Alaskans in order to maintain a moderate level of government services to future Alaskans -- does much to explain how Alaska has worked itself into its current position.

In its press release, the Special Committee congratulates itself on the website being "visually stunning."  I don't disagree; its a bright, shinny new toy.  On the substance, however, the Special Committee has muffed the fly ball.  Instead of helping to explain to Alaskans that there is a need to become serious about retrenching the budget, the Special Committee instead tells them that Alaska is in the "cat-bird" seat currently, and doesn't have to -- indeed, shouldn't -- worry much about cutting the budget going forward.