Monday, September 29, 2014

This is what I know ...


For more information on "It's Our Future" click here.


I am working on a longer piece on the importance of fiscal policy in this election, and as usual when I start have prepared a list of the things to use as a reference. Here is the list:
  • Bill Walker, Alaska Libertarian Party candidate Care Clift and Alaska Constitution Party candidate J.R. Meyers all have said they support putting in place a "sustainable" budget. That term has a clearly defined meaning, backed up by a series of papers prepared by UAA's Institute of Social and Economic Research (ISER). 
  • Recently, Governor Parnell is reported to have said he supports a "balanced sustainable budget." "Balanced" and "sustainable" budgets are two different things.  Under a "balanced" budget government rides down revenues until there are none left or it creates other sources (e.g., through an income tax). Under a "sustainable budget" government deposits excess revenues received in good years (i.e., those years with revenues over the sustainable level) in what ISER refers to as a "nest egg" to produce earnings to supplement and sustain the same level of overall spending in later years (adjusted for inflation and population growth) when other revenue sources aren't sufficient. In the process government avoids the need to create additional revenue sources (i.e., an income tax) in later years as revenues from previously primary sources decline. 
  • Moreover, in recent discussions Governor Parnell apparently has claimed to some to have submitted balanced budgets to the Legislature each of the last five years. Even his own Office of Management and Budget, however, admits that last year's budget was over $1 billion in the red when submitted, so not only is what he means by the term "balanced sustainable" unclear, it's not clear what Parnell means even when he uses the term "balanced."
  • The current budget, which already is projected to finish $1.6 billion in the red, is based on an assumption of oil prices averaging $105/barrel over the current fiscal year (July 1, 2014 - June 30, 2015).  So far in the fiscal year, oil prices have been at or above that level only 30 days.  Oil prices currently are in the range of $95/barrel and both the futures market and a number of analysts are predicting continued softness in the months, if not years ahead.  
  • At current production and tax levels, each $1 change in the price of a barrel of oil changes general state revenues by roughly $90 million.  If oil prices end up averaging $95 for the fiscal year instead of $105, the state budget will end up $2.5 billion in deficit, an all time record and after the previous reductions caused by the deficits and other legislative actions of the last two years, will eat through roughly 20% of the state's remaining unrestricted savings.
  • In response to the above, Governor Parnell and his supporters generally rely on his "record" of having reduced the state's budget by $1 billion each of the last two years.  That is not entirely accurate.  Approximately $350 million of that reduction is attributable to ignoring one year's worth of payments generally made out of the operating budget to support PERS/TRS.  When those are added back in, as they should be to produce an apples to apples comparison, the reduction is only in the range of $1.6 billion.
  • Moreover, the reductions are from the record budget levels that Parnell himself approved earlier in his term, and haven't even kept pace with the rate of reduction in state revenues over the same period .  Despite the claimed spending reductions, the current budget is still the fourth highest in state history and is estimated to produce a $1.6 billion deficit (the second largest in state history) which as noted above, may balloon to $2.5 billion if lower than projected oil prices persist.  Whatever reductions have occurred, they haven't been remotely enough to put the state back on the sound fiscal footing it was before the Governor started approving record budget increases.  
  • Most important, the relevant question to the Governor (and any candidate) this election is not where the state has been, but where it is headed.
  • The state's current track is threatening to undue quickly the gains in investor confidence achieved through SB 21.  On its current track the state will run through its remaining savings somewhere between five years from now (at the $2.5 billion/year deficit level) and seven years (at the $1.6 billion/year deficit level).  Investors reasonably anticipate that, when faced with the need to increase revenues (as savings run out), the state will increase taxes on industry first before moving on to other revenue sources.  Without a clear and reliable plan for dealing with the situation, investors already are leery of making significant new investments that rely on revenue streams to achieve anticipated returns lasting longer than four to five years at the outside.
  • Beyond that, the state's current track also is leading directly toward what ISER predicts will be "institution of broad-based [income, sales or both] tax and use of a portion of the earnings from the Permanent Fund."  Essentially, on the current track future Alaskans will be left holding the obligation to pay for the bloated spending decisions made by this one.
  • In my opinion, fiscal policy is the key issue at the state level in this election cycle.  ISER has said that, on its current track, the state is heading toward a "fiscal crisis" and "economic crash."  The consequences are severe and that track has to be changed now -- by the Governor elected this coming election -- in order to avoid those consequences.  
  • The Final Point.  As of this writing, there are 35 days between now and Election Day.  Three candidates -- Walker, Clift and Myers -- need to tell Alaskans how they will achieve a sustainable budget,  within what time frame and how it will avoid the outcomes of the current track.  One candidate -- Parnell -- has to explain in the first place what his plan is for changing the current track that Alaska is on (i.e., what he means by the words he is using), then how he will achieve that plan, within what time frame and how it will avoid the outcomes of the current track.
  • The clock is ticking: