Friday, November 22, 2013

Tennis courts and state spending (continued) ...

Wednesday I wrote a column about the current battle over the use of state money to build indoor tennis courts in Anchorage.

I have written about the issue several times before (here, herehere and here), but let me set the stage again.

The chart on the left -- which is taken from a report earlier this year on the status of the state's current fiscal condition by the University of Alaska-Anchorage's Institute of Social and Economic Research -- tells the story.  In its report, 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, 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. ...
What can the state do to avoid a major fiscal and economic crisis? The answer is to save more and restrict the rate of spending growth. ... 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. So the state needs to sharply step up its savings rate, starting now.
How much does the state need to step up its savings?  The ISER report responds:  "All revenues above the sustainable spending level of $5.5 billion ... [sh]ould be channeled into savings."

Against that, the actual proposed spending for the current fiscal year -- including that for the proposed tennis courts?  $7.1 billion, nearly 30% above sustainable levels.

What if the state doesn't save?  Two earlier studies (here and here) by Northern Economics and ISER answer the question:
... the phasing in of a state personal income tax starting in 2022, reduction in the Permanent Fund dividend by half, and diversion of remainder of the earnings of the Permanent Fund to support general fund expenditures starting in 2023 largely offset declining oil revenues for a decade but eventually they are insufficient to forestall a downward trend in general fund revenues ...
In short, as the graph at the beginning of this piece indicates, the state falls into a fiscal abyss, reducing the standard of living in the state significantly.

To me, the battle over the tennis courts has become part of this larger story.  Given that state spending for this year already is way over sustainable levels, we need to identify opportunities for lowering state spending commitments wherever they arise.  Governor Parnell recently identified Medicaid expansion as one such opportunity (see "Where the money runs out: The price of oil, Medicaid expansion and Alaska social policy …"); the Anchorage tennis courts are another.

Later in the afternoon Wednesday, after posting my latest commentary I received two comments, which are available here.  The first is from Stephanie Williams:
I’ve tried to post to your blog… “The battle over tennis…” Mr. Keithley, the 8 million is 3/10,000 of 1% of the state capital budget of 2.3 billion. Demboski’s proposal is not a good move for the city or the state. If we were to accept her proposal, it would destroy high school regional tennis and the state tennis program along with many other wonderful programs that go on during the summer when recreational players can use the outdoor courts. We lobbied successfully for the monies to fund a multi-purpose facility providing 2 1/2 basketball courts, volleyball, badminton, table tennis and 6 tennis courts. The assembly should honor the intent of the legislature.
It is hard to understand how the failure to build new facilities "would destroy" programs that already exist utilizing existing facilities.  Maybe they won't be as nice as they could be, but "destroy" them?  Unlikely.

Moreover, there are other calculations which are relevant.  The "$8 million," for example, is more than one-third of the $23 million shortfall that the Anchorage School District is projecting for next year's budget.  If the purpose of the grant is to support school activities, perhaps the money instead should be directed to the Anchorage School District to weigh whether the use of the funds for tennis outweighs other high school activities that are currently being cut.

But the better course is that suggested by Assemblywoman Any Demboski -- not spending the money at all and returning it, hopefully for investment in savings, to the state.  As the ISER report makes clear, choices made today are affecting tomorrow.  Spending above sustainable levels today are leading directly to income and other broad based taxes, the diversion of income from the Permanent Fund and other, significant, financial cuts tomorrow.  Indeed, it is not too farfetched to visualize a situation in which building the tennis courts today contributes toward the expense, very quickly, of being unable to pay for high school tennis coaches tomorrow.

Alaska has reached the era where it is required to make choices.  The state can no longer -- if it ever could -- afford to be all things to all people.  The writer suggests that since "we" (whoever "we" is) "lobbied successfully" for money at the state level, they should be permitted to proceed.  The problem is that they forgot one step in the process -- being transparent with the Assembly at the front end so that the Assembly could prioritize that request among other, competing uses for money.  Now that the Assembly finally is catching up with the process at the back end, the proponents can't reasonably complain that the Assembly members are out of bounds in offering alternatives to simply taking the money.  They may be late in the process, but that's not their fault.

The second comment was from current Alaska Tennis Association President Allen Clendaniel, and is more directed to the portion of my comments Wednesday which discuss Ed Hendrickson.  As you may recall, I didn't pick Hendrickson out of the air; instead he himself publicly had made some comments the day before which appeared to attempt to defend the tennis courts on economic grounds, but without providing any economic support.  My column challenges those assertions.

The email suggests, however, that I should
... breathe for a second. Ed Hendrickson can be a volunteer for a non-profit [and] a corporate executive. More folks should give back to the community. Building public recreational infrastructure is good for the community. If we don't believe in public recreational infrstraucture we should sell the Performing Arts Center, Sullivan Arena, Ben Boeke, Dempsey Ice Arena, the Spenard and Fairvew Rec Center, and let the trail system rot. I'm not sure why you are singling out a project that represents 0.0003% of the capital budget and going after a volunteer. No good deed goes unpunished I guess.
I disagree that, given the state's financial condition, its a "good deed."  A good deed would be giving money personally to the effort and helping raise at least a substantial (e.g., 50% or more) portion of the remainder personally from others in the private sector.  That is how such things are financed elsewhere in the country.

Take for example the Michael D. Case Tennis Center at the University of Tulsa.  One of the premier college tennis facilities in the nation, the facility was built in 2001 for $10 million.  How was it financed? "Tulsa developer and philanthropist Mike Case ... funded a major portion of the tennis center and raised the additional funding for the project."  Now that is a "good deed."

Simply being part of a lobbying group to carve out state (i.e., "other people's") money to fund a new capital project, when the state already is spending over sustainable levels, does not require much of a personal sacrifice.

More importantly, seeking full funding for such projects from the state sends very confusing signals to state policy makers.  I have lost count of the number of times legislators have told me stories of people or companies coming to them on the one hand to argue for "fiscal restraint" or "fiscal certainty" and then in the next breath, asking for state support for this or that project.  Understandably the second ask severely undermines the credibility of the first, which has led us precisely to the condition in which the state currently finds itself.

The ISER report makes clear that we have come to a time in the state's history where first things have to be put first.  The first thing that the state needs to do is to put its fiscal house in order, and then, once we have adopted sustainable budgets, to fund only those projects going forward that fit within a sustainable budget and citizens believe in enough to help fund significantly themselves.  Frankly, that is not a lot to ask in a state that otherwise imposes no state level income, sales or property taxes.

The tennis courts meet neither of those criteria.  Until they do (if they ever do), my criticism of the proposed appropriation -- and support for Amy Demboski's alternative -- remains.

Wednesday, November 20, 2013

The battle over the tennis courts becomes curiouser and curiouser ...

The morning papers reveal that, despite appearances to the contrary as recently as yesterday morning, the vote over whether to use state funds to build indoor tennis courts in Anchorage won't occur during the same month as the Anchorage School Board starts the process of making significant cuts in the city's school budget.  Instead, the vote on the tennis courts has been put off to the Assembly's next meeting, in early December.

Facing a nearly $40+ million deficit over the next two years, the School Board doesn't have the same luxury of putting off dealing with the situation it faces.

The latest reason for the delay appears to be a statement made yesterday by House Finance Co-Chair Bill Stoltze suggesting that Anchorage Mayor Dan Sullivan used "deceptive practices" in arranging for the state grant.  That may -- or may not -- sort itself out before the next vote.

But in the midst of everything else what interested me most about the controversy yesterday was a comment made by Ed Hendrickson, among other things the Vice President of the Alaska Tennis Association.

As I have outlined before on these pages, Hendrickson is a smart guy.  His day job is Chief Financial Officer of Alyeska Service Company, the operator of TAPS.  He is on loan ("seconded," as they say in the trade) in that job from ConocoPhillips Alaska, one of Alaska's major producers and a fairly profitable company as these things go.

Yesterday, in response to an opinion piece by the owner of the Alaska Club about another way for the city to spend the same public money, Hendrickson had this to say:
The Alaska Tennis Association believes that sport and recreation activities produce a healthier population, both physically and mentally, which in turn places less stress on our health care system. Sports also contribute to economic growth through business investment and community employment. 
Essentially, Hendrickson is arguing that the tennis courts should be viewed as an investment, which will produce a return in terms of lower health care costs and also in terms of increased investment and employment.

Really?  Hendrickson's Alyeska resume states that, among other things, "[h]e has extensive expertise with ... economic evaluations [and] long-range planning ...."   If he truly believes that argument he is fully capable of producing an economic evaluation showing the return that Alaskans would realize from an investment in tennis in terms of lower health care costs and increased business investment and employment.

He hasn't.  

Moreover, as one of the the three largest taxpayers in the state, if ConocoPhillips believed that building tennis courts would help to reduce public expenditures elsewhere, I have to believe they would be considering contributing to the investment themselves.  One of the reasons production tax rates in this state are -- and with the upcoming referendum on SB 21 threaten to remain -- so high is because of the current level of state spending.  You would think finding ways to reduce state spending is something that should interest COP and its fellow oil companies.

But, ConocoPhillips hasn't offered to contribute toward the cost.  Instead, Hendrickson -- one of its senior executives -- is arguing that the entire cost should be born by the state.  

While he may fail to see the irony, I don't.  Let me make it clear:  the industry shouldn't be asking for increased state spending -- especially on non-core services -- out of one side of its mouth at the same time it is arguing for reduced state revenues out of the other.  Its time to put up or shut up.  If you want to see this state again become attractive to investors, then help identify ways to lower state spending.  And good lord, whatever else you do, don't add to the problem.

According to the Alaska Dispatch (but oddly enough unreported in the Anchorage Daily News) one of the three suggestions before the Assembly on dealing with the issue is that sponsored by Assembly member Amy Demboski.  Under that proposal, "all of the tennis court money [would be sent] back to Juneau to be re-appropriated for other uses."
“I do not support using the legislative funding for any tennis court project,” said Demboski.
Especially in light of the funding shortfalls being addressed elsewhere in town, that is the fiscally responsible position to take on this issue and my view as well.  If the Alaska Tennis Association wants to take another they should produce a study showing that taxpayers -- including the state's largest investors -- will be money ahead in the future if they spend some of it now.

Until then, I will just continue shaking my head -- and wait for the other so-called "fiscal conservatives" on the Assembly (and most of them claim they are) to step up and support Demboski's proposal.

Monday, November 18, 2013

If I were Governor ...

Yesterday I published a piece on the main blog discussing Alaska's gathering fiscal storm -- "Where the money runs out: The price of oil, Medicaid expansion and Alaska social policy …."  Then late yesterday I received an email in response which basically said "ok, genius [the actual word that went here was less charitable], what would do different if you were Governor."  The basic theme of the email was that the current Governor is doing all that can be done to deal with the current situation and Alaska is simply going to have to ride it out.

As my friends know (the email wasn't from a friend) one of the things that motivate me is a challenge -- and the odds of a response increase if the challenge is put in the form of a semi-derogatory email.  Interestingly enough, I have thought about this -- so here are the first three steps I would take "if I were Governor":
  1. Capital Spending.  Immediately -- as in today, right now -- I would dramatically slow down the issuance of new state construction contracts.  A major part of the increase in state budgets over the last three years has come through the capital budget.  In the five years preceding the last three, capital spending averaged roughly $800 million/year.  In the last three years the capital budgets have been $1.6 (FY 2012), $2.6 (FY 2013) and $1.8 (FY 2014) billion, respectively.  Not surprisingly, those rank as the first, second and third highest in Alaska's history (the next highest is a half billion dollars lower).  While I can't get my hands on the precise number, I understand that these funding levels are so high that the contracts for a number of the projects have not yet been issued.  If I were Governor I would put a moratorium on those now, and then set a schedule for pacing them out over the next three to five years, to act as a means of softening the transition to the necessary reductions in future capital budget levels.

  2. FY 2015 Budget.  I would submit a budget for the coming fiscal year which limits total unrestricted general fund spending (the key number in any state budget) to $5.8 billion.  While some claim that is an "unacceptable" drop from current levels, its not.  It allows for an operating budget of $5.3 billion -- the same as for the current fiscal year -- and a capital budget of $500 million.  While some will claim that capital budget level is "too low," it will still result in a rolling five year average capital budget (i.e., the average over the last five years) of $1.42 billion, which is the second highest in Alaska's history (second only to the current five year average of $1.48 billion).  Such a budget not only is a significant step toward sustainable levels, but it would provide breathing room this coming year while the Commissioners work with the legislature to identify what its going to take to get the operating budget under control in future years.  And to emphasize the point, at the same time I announce that I am submitting a $5.8 billion budget, I would make clear also that I would use the Governor's power of line item veto to bring the final number back to the same level should the legislature attempt to increase it during the session.

  3. Fiscal Plan.  Finally, I would work with the legislature this coming session to craft and enact a state budget act which would require future Governors to submit sustainable budgets.  Current Alaska law requires that Governors submit (and legislatures enact) "balanced budgets," but as the last few years have demonstrated that concept is insufficient to protect Alaska's interests.  Under current law budgets are "unbalanced" only if they exceed current cash flow plus available financial reserves.  As the analysis earlier this year by the University of Alaska-Anchorage's Institute of Social and Economic Research (ISER) makes clear that approach permits current Governors and legislatures to spend away the "nest egg" which is needed to support future Alaska generations.  My approach would not prohibit spending above sustainable levels where both the legislature and Governor agreed -- the legislature could enact a higher than sustainable budget and the Governor could concur by not exercising a line item veto to bring it back down.  But requiring the Governor initially to submit a sustainable budget at least would provide Alaskans -- and the legislature -- with the information they need to judge whether taking money from future Alaskans -- and how much -- is appropriate.
No, I don't have a similar list for how to achieve world peace or, even, how to solve the nation's health crisis.  But Alaska fiscal and oil policy?  I got this.

Sunday, November 17, 2013

A supplement to a personal note ...

A couple of weeks ago I wrote a personal note about the recognition of a donation I had made ("A Personal Note| The "Keithley Collection of Native American Art Works'").

This week I received an update on the collection, with pictures of the collection's installation and a copy of the accompanying brochure.  Originally, and probably still, these pages were intended as a place where I could capture extended thoughts about things that were important to me, which I could share with others that might be interested and then preserve in one place so I wouldn't have to search through various folders or file boxes when I wanted to recapture them.

So it is with the things related to this collection.  For those interested -- and for me when I just want to wander back for awhile -- the pictures and brochure are captured here.  Thanks, Ginger, for sending ....

Saturday, November 9, 2013

A new book worth reading| "American Nations: A History of the Eleven Rival Regional Cultures of North America"

I have always been captivated by books that try to explain why America -- and its parts -- think and vote the way they do.  I carried around Kevin Phillips' seminal (and at the time, controversial) work -- The Emerging Republican Majority (ERM) -- for years, not because I necessarily agreed (or disagreed) with the outcomes he predicted, but because it provided a fascinating (and turns out, mostly accurate) insight into a previously under perceived (or at least under reported) shift then going on in the American psyche.

So it may be with a new book that I first learned about yesterday and then subsequently, off and on, read most of last night and this morning.  Titled "American Nations: A History of the Eleven Rival Regional Cultures of North America," the book provides a fascinating insight into the current cultural, social and political differences which characterize not only the United States -- but also Canada and parts of Mexico.

I first learned about the book while flipping through the Washington Post's "GovBeat" webpage, was intrigued and then went on to read a larger summary written by the book's author, Colin Woodard, for his college (Tufts) alumni publication, and then started into the book itself after downloading it from Amazon.

As with ERM, the book seems important to me because it rings true with my own experience.  According to the divisions made in the book, I was born, raised and have lived large segments of my life in portions of the country that are defined as "Greater Appalachia" and, indeed, continue to carry many of those characteristics with me now. In his piece for the Tufts alumni magazine, Woodard describes those characteristics as follows:
GREATER APPALACHIA. Founded in the early eighteenth century by wave upon wave of settlers from the war-ravaged borderlands of Northern Ireland, northern England, and the Scottish lowlands, Appalachia has been lampooned by writers and screenwriters as the home of hillbillies and rednecks. It transplanted a culture formed in a state of near constant danger and upheaval, characterized by a warrior ethic and a commitment to personal sovereignty and individual liberty. Intensely suspicious of lowland aristocrats and Yankee social engineers alike, Greater Appalachia has shifted alliances depending on who appeared to be the greatest threat to their freedom. It was with the Union in the Civil War. Since Reconstruction, and especially since the upheavals of the 1960s, it has joined with Deep South to counter federal overrides of local preference.
The book's general approach to Alaska also rings true.  While the book does not discuss Alaska extensively, it essentially divides Alaska among three of the eleven nations.  Juneau (and I would assume Southeast generally) is described as being part of "The Left Coast," Anchorage, Fairbanks (and I suspect the Railbelt in general) are included as part of "The Far West" (which has a lot in common with Greater Appalachia), and the remainder of Alaska, along with large portions of Northern Canada and Greenland are included as part of the "First Nation."

That correctly helps capture the uniqueness of Alaska; no other state reflects a mix of those three "nations."

But in addition to that surface explanation, the book also helps provide a deeper dive into what drives Alaska.  As all here recognize, large numbers of Alaskans are either first or second generation "immigrants" from other parts of the country (and indeed, other parts of the world), and often retain much of the culture of the nation from which they moved.  So, depending on the person and the issue, discussions on Alaska policy issues also often reflect characteristics common to "The Midlands," "The Deep South," and even "Yankeedom."

For those similarly interested in such things, I recommend the book highly.  If you aren't sure, you can follow the same track I did -- start by reading the summary on the Washington Post "GovBeat" website, then go to the longer summary written by the author for the Tufts alumni magazine, and then subsequently, if it retains your interest, go on to the book itself.

My guess is, as I did ERM, I will be carrying it around for awhile and referring to it often as a source for understanding the reason for this reaction or that policy position.

Friday, November 8, 2013

Monday's "Thrilla in Dena'ina" ...

As readers of these pages will know, recently some have criticized the idea of moving Alaska state government toward using a sustainable budget model.

Despite endorsement by Commonwealth North ("Long Term Economic Sustainability for the State of Alaska") and the Alaska Chamber ("Support Reduction of Spending to Sustainable Levels"), among others, and predictions by the University of Alaska-Anchorage's non-partisan Institute of Social and Economic Research (ISER) that, absent its adoption, Alaska faces a "fiscal crisis" and "economic crash" within the next decade, some apparently feel safe with Alaska continuing its current spending binge.

In my view -- and interestingly enough, the view not only of ISER but also Northern Economics, a co-author of two studies making the same point -- Alaska is following a path that, while benefitting current Alaskans by creating an artificial bubble economy, comes at the significant expense of future generations.  According to one of the studies co-authored by Northern Economics on Alaska's current fiscal path
… state general fund revenues are projected to exceed state expenditures until 2015, after which time annual revenues fall below annual expenditures. Starting in 2015, the state begins to draw down accumulated balances in the general fund and constitutional budget reserve. Revenues from the development of a gas pipeline starting in 2020, the phasing in of a state personal income tax starting in 2022, reduction in the Permanent Fund dividend by half, and diversion of remainder of the earnings of the Permanent Fund to support general fund expenditures starting in 2023 largely offset declining oil revenues for a decade but eventually they are insufficient to forestall a downward trend in general fund revenues ….
This Monday, ISER's Scott Goldsmith and I will be debating the Anchorage Chamber's Andrew Halcro and, interestingly enough, Northern Economics' Jonathan King on this subject at the Anchorage Chamber's weekly "Make it Monday" forum.  Scott and I will defend the proposition that developing and adhering to a sustainable budget model is the best approach for avoiding this future.  Andrew and Jonathan will argue the opposite.

The formal title given the debate is "Debating Alaska's Fiscal Future."   I prefer to think of it as the "Thrilla in Dena'ina" (for those who don't understand the analogy on which that is based, an explanation is here).

The debate is open to the public; the details are here.  If you are interested in the subject -- and I would guess you are if you have read this piece -- it may be worth your time to attend.

Monday, November 4, 2013

A Third Way (or how Mayor Dan Sullivan can restore some of his political lives) ...

While I don't usually write on municipality issues, an article in yesterday's Anchorage Daily News on an issue coming before the Anchorage Assembly this week caught my attention because of its state level implications.

The article -- Tennis courts or hockey rinks? Assembly to consider competing spending plans -- reports on the Assembly's upcoming vote Tuesday on how to handle the state money appropriated last legislative session to build new, indoor tennis courts to be owned by the municipality.  The appropriation of state money for this purpose was requested by the Alaska Tennis Association.  I have written on the issue before (see "Mayor Dan Sullivan is using up his nine political lives and may be on the last (at least with me) ..."; "Naming names ...").

The issue before the Assembly appears to be coming down to whether to spend the state appropriation on the tennis courts, or to update certain municipally owned hockey rinks.  Spending the money on hockey rinks at least comes closer to the purpose of the appropriation described to most legislators at the time they voted to approve it as part of this year's state budget.  (According to this and previous ADN stories, the appropriation was included within the bill  in a category earmarked for "deferred and critical maintenance.")

But that choice loses sight of the bigger picture.

The bigger picture is that, in light of where state finances are headed based on current spending levels (under either SB 21 or ACES), the state shouldn't be spending this money at all -- it should be saving it.

As we have written about on numerous occasions, current state spending levels are heading Alaska straight toward a huge fiscal crisis starting either later this decade or the beginning of the next.  As summarized by a report earlier this year from the University of Alaska - Anchorage's Institute of Social and Economic Research (ISER):
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.
 At that point there will be a significant issue even meeting the state's obligation to the so-called "Big 3" spending categories -- K-12 education, medicaid and retirement assistance (including PERS/TRS) -- much less room remaining for anything else (for example, such as the state's university system).

As a result, in all fairness, the issue before the Assembly this coming week is not whether the state appropriation should be spent on tennis courts or hockey rinks.  That is a false choice -- in many ways akin to "fiddling while Rome burns."

The choice instead is really about whether the money should be spent on either use now at all, or instead put back into savings to help prepare Alaska to avoid the fiscal future it is now painting for itself and as a means of enabling Alaska both to fund the "Big 3" and other legitimate functions of government going forward.

As the ISER report continues, "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 as the adjacent figure shows, that’s twice what the state has in financial assets today. So the state needs to sharply step up its savings rate, starting now."

The Mayor and fiscal conservatives and others concerned about Alaska's future on the Anchorage Assembly should be adopting a third way to deal with this issue.  Instead of appropriating the money at all, the Assembly should vote to "just say no" and return the money to the state with a request that it be put into state savings.  That would send a powerful message that the Anchorage Assembly, at least, understands and is seriously concerned about the state's fiscal future.

And if Mayor Sullivan led that charge?  Well, it would restore several of his political lives, at least with  this fiscal realist.

Read more here:

Read more here:

Sunday, November 3, 2013

Just the facts, ma'am ...

A favorite show when growing up was Dragnet, a weekly half hour series about police Detective Joe Friday  (played by Jack Webb) and his sidekick (everyone has a sidekick, right?), Bill Gannon (played by Harry Morgan, who subsequently went on to play Colonel Sherman T. Potter in MASH).

As played deadpan by Webb, Detective Friday was a stickler for precision, in lore at least often cutting off witnesses mid-story with the phrase "just the facts, ma'am."

So it is with a discussion that currently is going on about sustainable budgets.  We need to hit the pause button on the rhetoric for a few minutes while we do a fact check.

Potential revenues from SB 21 do not justify current spending levels

One emerging critic of the approach -- and apparent defender of the nearly 50% percent increase in state spending during the Parnell Administration -- recently has claimed that the calculations by the University of Alaska-Anchorage's Institute of Social and Economic Research (ISER), on which the currently proposed sustainable budget figure of $5.5 billion in state spending is based, are wrong, because they fail to take into account "growth [in revenues] as a result of the changes to our tax structure with the passage of SB21."

In essence, the critic is suggesting that current spending levels are supported by SB 21.

That is an odd claim since even the Administration's own Fiscal Note submitted in support of SB 21 shows at least a near term decrease in revenues as a result of SB 21, to the point that the state budget is now predicted to run a cash deficit in the current fiscal year for the first time since the early 2000's.  As a result, if anything, there is a need for substantial budget reductions in the immediate future, not holding the line, as the Governor indicated earlier this year he intends to do for the next five years.

Even looking at the longer term the Administration's own claims of later revenue growth likely to result from SB 21 don't support the assertion that the continuation of current budget levels are appropriate.  The only time that the Administration actually has provided hard estimates of the type of long-term revenue "growth" expected to result from SB 21 was during the later stages of the last legislative session, in a submission made by its consultants to the House Finance Committee.

We analyzed those in detail in a piece in the Alaska Business Monthly this summer, finding that although the revenue numbers anticipated to result from SB 21 are higher than under ACES, they come nowhere close to supporting the sort of spending levels the Governor previously has proposed.

Even the Administration's own short term projections show the same results.  Adding the most optimistic set of incremental revenues potentially resulting from SB 21 projected on page 5 of the bill's final Fiscal Note does not offset the deficits shown under most scenarios reflected in the Administration's corresponding "10-year plan."

Moreover, at this point even those projections are suspect.  In 2011, then-DNR Commissioner (and now, Senate candidate) Dan Sullivan said that, in order to offset current production declines, oil investment levels need to exceed $4 billion per year.  While there have been some announcements by investors of new projects since the passage of SB 21, so far they only have totaled only a little over $ 4 billion spread over a number of years.  Even using the largest estimates, the announcements don't begin to approach $4 billion on a sustained annual basis.

As I have explained elsewhere, of course, that is not the fault of SB 21.  Instead, it increasingly is the fault of the threat posed by the fiscal gap that current spending levels are creating -- and the ones that the critic appears to be defending.  Ironically, by defending those spending levels the critic is undercutting the success of the very changes in the tax code he purports to support.

I agree with the general philosophy, underpinning SB 21, that tax cuts produce increased revenues.  But all of the data supplied by the Administration or otherwise available demonstrates that the substantial increase in spending levels over the last three years has far outstripped any reasonable projection of the future revenue stream and that neither SB 21 nor ACES supports the continuation of current spending levels.  It is critical that the state come to terms with those facts.

Formula programs are not driving the recent, substantial increases in state spending levels

There is a second allegation that also requires a fact check.  The critic also appears to claim that state spending cannot be cut because "too much government expense is mandated."  ("With the rapidly growing and metastasizing cancer of entitlements we are seeing smaller and smaller percentages of the budget available for the legitimate functions of government.")

While I don't disagree that mandates contribute to growing spending, that is not what has been driving the rapid growth of the Alaska budget to unsustainable levels.

The annual budget reports produced by the Office of Management and Budget break down spending by formula ("entitlement") and non-formula driven programs.  Formula driven spending in FY 2011 -- the last year the Alaska budget was at sustainable levels -- was $1.77 billion; for FY 2014, the same categories of spending are budgeted at $2.1 billion, an increase of around $330 million.

In the meantime, non-formula driven spending has increased roughly $570 million ($3.03 billion (FY 2011) to $3.6 billion (FY 2014, adjusted to treat "Oil and Gas Tax Credits" in the same way as in FY 2011)) over the same period.

Put another way, if all other spending had been held equal, the current budget would exceed sustainable levels due to increases in formula spending by only 6% and still be around $5.8 billion.  Including the increase in non-formula driven spending, the current budget in fact is a billion dollars higher and exceeds sustainable levels by nearly 25%.  In short, so-called entitlement (formula based) programs are not causing the problem, increases in other spending are.

Moreover, even if formula-based programs were the problem, that is not an excuse to avoid finding offsetting cuts elsewhere -- or going into the programs, some of which are state created, and adjusting the formulas to reduce the resulting spending levels.

As I have explained elsewhere on these pages, Alaska can only afford to spend so much without adversely affecting future generations and setting them up for taxes, reduced dividends and, even then, significantly lower levels of spending.  It doesn't matter that the excessive spending is the result of either formula or non-formula driven programs; excessive spending now results in the same dramatic economic consequences for future generations.

As the first fact check made clear, even at the most optimistic projections offered by the Administration, SB 21 is not positioned to swoop in and save the day with new revenues which offset current spending levels.  Alaskans are going to have to do it the old fashioned way -- by cutting spending down to sustainable spending levels.

There may be a number of reasons I wouldn't be a good Governor -- chief among those is that I have no desire to be.  But the fact that I don't understand how the Alaska economy or oil industry economics work is not among them.  I have a pretty good grip on those.

Those are "just the facts, ma'am."

Friday, November 1, 2013

My turn on the Casey Reynolds Show ...

Earlier today I noted that I would be sitting down with Casey Reynolds on his talk radio show to respond to the issues raised yesterday during his interview with others.  See "The subtext of this story (income taxes, dividend cuts … or not) …."

I was there for an hour and answered every question he had (what I understand is sometimes called a "Talk 'Till You Drop" press event).  For those that missed the discussion and are interested in my view on the issues raised this week, attached are the links to the podcast.
Hour 1:  Segment begins at minute 23:50 and runs to the end.
Hour 2:  Segment begins at the start and runs to minute 22:00.
And with that, I am calling it a week and heading to this weekend's sessions of my "Best college course, lifetime ...."