Sunday, August 17, 2014

A discussion about education funding ...

I have been working on a piece on education funding for the past two months, but haven't been satisfied that it captures the competing views fully.  Then a couple of days ago an online discussion that began innocently enough about Proposition 1 turned into a full fledged -- but respectful -- debate on education funding, which along the way captured the competing views completely.   I couldn't have done a better job if I continued working on the previous piece for the next year.

The discussion took place among three people whom I highly respect and me.  Here it is, edited lightly to avoid disclosing the identify of the others involved:
Friend 1: My distilled thoughts on the Alaska oil tax ballot measure. … Sad to see it has become so divisive that people like Brad Keithley is a target of online ridicule, a man I know has only the best interest of Alaska (and UAA for that matter) in his heart. ...

Friend 2: I don't know ... Brad made some pretty outrageous statements about education spending when he was on the education panel--basically that the oil companies wouldn't continue to invest here unless we cut spending on education. I was on the fence until I read what he was saying, now I am 100% in favor of Prop 1.

Me: Its reality ....  At the current rate of growth, the "Big 3" of spending (education, medicare and PERS/TRS) alone exceed 100% of revenues by the end of the decade. The only way out of this mess is both to build revenues, which is what SB 21 is designed to do, and reduce spending. Education is one of the constitutional priorities, but as a practical matter it (along with other categories) are going to need to be trimmed in order to keep spending within the state's means. (And living within the state's means is necessary to ensure investors that we aren't going to change oil and other taxes yet again just about the time new projects hit payout.) That's just reality (which often is not popular, but is). Voting Yes on 1 won't change that situation, and in fact by limiting the potential for revenue growth will just make it worse. But you already knew that.

Friend 1: This is great! Takes me back to the three of us debating [xxx]. And I look fondly on those days because of the caliber of people I got to argue with. I personally think you're both driving toward the same end, a sustainable Alaska that invests in it's own people. [Friend 2] you are correct that the oil companies should not have a say in how Alaska spends its money. But my understanding of Brad's point was more that there is less willingness to invest in a place where the realities of budget are meaningless and fiscal terms are fluid. So ... I'm going to agree with both of you.

Friend 3: There is a lively public debate happening on whether the production tax system makes a difference in investment decisions at all (which by the way it does, once it starts flipping every year). But I think we are really out on a limb if we think that the State of Alaska's educational spending sets the oil companies' investment strategy. The debate is about which system is better for the long term. A system that is unpredictable from month to month and makes it impossible to analyze economics of an investment project hardly promotes a healthy private industry.

Me: [Responding to Friend 3] ... Its not educational spending alone that's the problem; its total spending, which vastly is exceeding revenue (in the last two years alone the state has drawn down $6 billion, or over a third of current savings) and creating an onrushing situation which ISER correctly has described as a "fiscal crisis." Alaska's traditional response when faced with those situations (which actually was the underlying cause for the mid-2000 changes) is to raise oil taxes first, because god forbid, we wouldn't want to use the other potential tools -- institute income or sales taxes, or start diverting a portion of the PF income stream. Believe me, once investors see that picture, they start backing off current investment plans. Once we focus on spending, education spending necessarily becomes part of the discussion because it is both currently the largest single category of state spending [and], as I noted above, on its current trajectory ultimately becomes part of the monster that eats Alaska. In short, this is not a debate about whether education spending alone is good or bad -- of course its good. The problem is, however, that when you back up and see the total picture in context, the current level is simply not sustainable and, along with the other categories, needs to be addressed before we drive this bus over the cliff.

Friend 2: Sorry, Brad, education spending is special. We shouldn't waste money on things that don't help, but I am willing to do whatever it takes to get my kids a decent education, including going into debt. I expect the government to take a similar view.

Me: The problem, [Friend 2], is that the beneficiaries of the other categories of spending feel the same way about theirs. If all the state spent money on was education we would be fine. But it isn't. And debt doesn't help. It has to be repaid, of course, and the only revenue source the state uses to do that is from oil, which is in decline (regardless of whether we use ACES or SB21). To deal with that the state necessarily must do two things. One, find ways to stabilize and potentially increase revenues -- and SB 21 helps to do that. Two, reduce spending to levels where we live within our means, and because it is the largest category of spending education necessarily becomes part of that discussion. Until we do both investors looking at major investments dependent on long term revenue streams for payout rightfully remain concerned about another bait and switch, where they invest based on one tax regime only to find another applied once the resulting revenue stream commences. And that uncertainty sends them off to other venues. We could wish it was otherwise and that spending is delinked from investment (which would enable me also to be a cheerleader for continuing down the current course), but it isn't.

Friend 2: Brad, I don't equate education spending with bridges, new office buildings, or tax cuts. I have spoken to a lot of people about this and am confident that most people agree with me--education comes first--even if it does so at the cost of short-term economic growth. When you and others began to link education spending cuts with favorable growth in oil company investment, you made a mistake in my view.

Me: So, the House Sustainable Education Task Force was put together to find a way of continuing to satisfy the constitutional mandate of prioritizing education over both the short and long terms (that was the reason for including the word "sustainable" in the title). I realize that today's parents focus on today's spending levels, but the Task Force was charged with something more, to look at the ability to continue to sustain education over the long term as well -- in other words, to look out for tomorrow's generations as well as today's. As ISER has made clear, the real situation the state faces is that if we don't do something in the near term to reduce spending, the state is headed for a crash and burn in which future spending on all things, including education, is going to be reduced much, much more drastically than if we reduce spending some now. The point I was making in the portion of my remarks you are focusing on (which were intended to address the argument made by some that additional revenues would somehow magically appear toward the end of this decade and so we didn't need to worry at all about future generations) is that tomorrow's situation [will] be made even worse if we don't solve the problem now because the intervening investment levels necessary to support the state's future revenue stream [will] be impaired as well. To put it another way, the Task Force's purpose was not only to focus on putting education first today (which it is, because it receives the largest share of state spending now), but how to balance that with making sure that education also receives adequate funding to put it first into the future. I can see how some would have some concern about that if all they look at are today's kids (certainly, more is always better than less), but rightfully the state -- and the Task Force -- was concerned about more than that (we were concerned also about the level of funding available for [Friend 1]'s kids when he ... has some in the years ahead).

Friend 2: Brad, we are just going to have to disagree on this. I'd go broke paying for my kids' education if that was what was required. And yes, that might mean that I'd have nothing left for my grand-kids. But you know what? If I do a good job with my kids, my grandkids will be okay too. Normally, I hesitate to analogize from my household finance to governmental finances, but in this case the analogy is spot on. Providing for a quality education for our kids TODAY is the highest and best investment we can make--all others lag far behind.

Me: Yep, I understand we disagree and I can understand the personal perspective. But at least in my view -- and the view of those who established the Sustainable Task Force -- the state needs to take a longer view. Part of the oil wealth the state is receiving today essentially is being received in trust for the benefit of future generations. The state owes an obligation to both current and future Alaskans and has to balance the interests of both. Thanks for the discussion ...