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."