Wednesday, March 13, 2013

Alaska Fiscal Policy| Watching different movies ...

There is a phrase that lawyers (and perhaps others) sometimes use that came to mind as I was reading a KMXT (the Kodiak NPR station) post containing some recent remarks by Rep. Alan Austerman, the Co-Chair of House Finance.

The phrase that came to mind was "watching different movies."  What that phrase sometimes means is that two people who are in the same place at the same time and are seeing the same string of events (i.e., watching the same "movie"), nevertheless perceive a different series of events and as a consequence, come to vastly different conclusions, as if they are watching a different movie.

The phrase came to mind when I read the following in the KMXT story:
Based on numbers from the Department of Revenue, Austerman said he expects the state to tap into its savings to do the budget this year. In general, he said Alaska is looking toward some tough times ahead, and shaping the state’s budget will only get more difficult.-- 
(Rep. Austerman 2 :30 “The big question is if you look at the projections from the oil industry, that it takes 7-10 years to develop new oil coming into the pipeline. That if we have a 7-10 year period that we don’t have new revenues, then the question is how far can you stretch your savings out to buffer that 7-10 year period. ..."
The hi-lited portion is what caught my attention.

Alaska is not facing a 7-10 year gap over which it needs to stretch its savings, but after which things will be back to normal.  Instead, every -- and I mean every -- piece of information that is publicly available about Alaska's fiscal future points to the fact that Alaska is in the midst of a significant fiscal paradigm shift, where future state revenue streams (at least based on oil) will continue to decline.

A recent study by the University of Alaska Anchorage's Institute of Social and Economic Research (ISER) does an excellent job summarizing the conclusion that the current data supports.  In its January report entitled "Maximum Sustainable Yield:  FY 2014 Update," ISER concludes
"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 .... 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."
The graphic representation that captures those facts is at the top of this post.  The revenue line -- which is based on the state's own forecasts through 2023 -- is represented by the light blue layer toward the bottom of the graphic.  ISER simply has trended that line into the future and, in an effort to give credit to that future, added additional layers for the revenues which could result from the successful development of some new oil fields and an LNG gas export project.

The upward sloping black line at the top estimates the level of state spending also based on current trends.  The red is the use of the state's two current reserve funds -- the Constitutional Budget Reserve and the Statutory Budget Reserve -- to fill the gap between spending and revenue.  The white space after about 2023 between the black line and the top of the revenue layers is the fiscal shortfall ISER sees coming -- the one that ISER predicts will create the "economic crash."

There is nothing in the ISER assessment, and nothing in any state forecast, that predicts a fiscal turnaround in 7 - 10 years.  Nothing.  The only thing that some people -- including me -- suggest is that the slope of the revenue decline curve may soften some if oil tax reform results in a renewal of investment in the development of the state's resources.  But no one is predicting a complete turnaround of revenue, such that at the end of a 7 - 10 year gap, the state returns to current revenue levels.

Sometimes its not important that people see a "movie" the same way; the consequences of seeing events differently are not significant.

That is not the case here, however.  If policy makers assume that there is a relatively temporary, 7 - 10 year, gap in state revenues, but that the state will return to the current norm after that event, then you think about using the current state budget reserves -- which, combined, are currently in the range of $20 billion -- to wait out the disruption (i.e., "fill the gap") until "normal" times return.  That is the "movie" that Rep. Austerman, and by implication, the House Finance Committee, evidently is watching.

But, based on the hard data, that movie is fiction and, as the above graph shows, leads the state directly into a fiscal abyss -- in ISER's words, an "economic crash" -- of unprecedented proportions.

As the ISER report later discusses, there is another way to deal with the state's fiscal future.  That approach involves reducing spending now, not the immediately "popular" thing to do.  But implementing that step allows the state to create an endowment which ultimately enables state spending to continue at a consistent, "sustainable" level (which ISER calculates to be in the range of $5.5 billion/year) indefinitely into the future.

From the perspective of current Alaskans intending to remain in the state for the long haul or concerned about their children's future in the state -- which is the same long term perspective the legislature should have as well -- that ultimately is a much more popular result than simply continuing on the current course until the inevitable economic crash occurs.

The key to achieving that future, however, is reducing spending now (not trying to sustain it through the use of current state reserves) and committing current state reserves to a current endowment now (not spending them in an ultimately futile effort to maintain current state spending).

In short, in this situation it does make a difference what "movie" the state's policy makers are watching.  Hopefully, they will understand soon the version they are currently "watching" is fiction, and shift over to a "reality" channel, before we all are watching a feature entitled "the great Alaska crash of 2023" on the History Channel.