Thursday, April 23, 2015

Is Walker moonwalking a key campaign commitment: Sen. Micciche asks an important question, the answer indicates the Administration is back peddling ...

Is Governor Walker beginning to back peddle (or to borrow Michael Jackson's phrase for his equivalent dance step, "moonwalk") on his commitment to sustainable budgets?  It is beginning to sound that way after listening to Office of Management and Budget Director Pat Pitney's response to a key question from Senator Micciche during today's Senate Finance hearing.

Over the past several years Dr. Scott Goldsmith of UAA's Institute of Social and Economic Research (ISER) has published a series of papers focused on developing a sustainable budget for the state. The papers are collected here.  The most recent ("The Path to a Fiscal Solution: Use Earnings from All Our Assets"), which we will write about more later, was published earlier today.

During the campaign, Governor Walker on his campaign website and during various speeches said this about sustainable budgets:
I will make the hard choices necessary for a sounder fiscal future, including putting in place a sustainable budget. I will make sure the investment climate in Alaska supports those goals, which includes a favorable fiscal climate for citizens and companies investing in our economy.
​When asked during the campaign what he meant by a "sustainable budget," then candidate Walker repeatedly referred to the analysis and work done by Goldsmith.  In Goldsmith's most recent work on the subject, done earlier this year, he put the sustainable level of spending -- the sustainable budget "number" -- at $4.5 billion.

​Earlier this year during his State of the Budget Governor Walker said he had "asked [his] commissioners to tell [him] what their departments would look like in four years if their budgets were 25 percent smaller than they are today." The level "their budgets ... are today" he was referring to was roughly $6 billion, and so a 25% reduction from that level would bring state spending down to the $4.5 billion sustainable level outlined in Goldsmith's most recent work.  Presumably, given Walker's campaign statements that was not a coincidence.

​So, with that in mind Sen. Micciche asked Pitney during the hearing for an update on what to expect going forward.  Given the Governor's previous commitment to "make the hard choices necessary ... [to put] in place a sustainable budget," Micciche essentially described this year's cuts as the initial effort, and asked Pitney what the Legislature and Alaskans should be expecting going forward.

Pitney's response was, well from the standpoint of honoring Walker's campaign commitment, horrible.

Over the course of her answer to Sen. Micciche, and then a follow up from Sen. Dunleavy, Pitney said at various times "we're not ready" make those cuts, talked about "areas of inflexibility" and said that the Administration was beginning to look at "more holistic solutions," which Sen. Dunleavy in his follow up correctly characterized as "taxes."

Indeed, Pitney seemed even to attempt to walk back from the first round of cuts incorporated in the current budget -- which those around the table characterized as being "about 9%" from previous levels -- saying in response to Sen. Dunleavy's follow up, in some cases the current round of cuts "have gone too far."

Sen. Micciche characterized her answer as "disappointing."  From the standpoint of someone who has worked on these issues a long time and sees the impact which the state's failure to achieve sustainability will have both on future Alaskans and investors's perceptions of the state -- the two constituencies which Walker repeatedly mentioned during the campaign -- it is something much more than that.

Going forward it is useful to keep in mind that in order to collect each $200 million in new revenue through taxes, the state will need to raise the equivalent of roughly $275 per Alaska man, woman and child (or $1,100 per family of four).

Assuming the Senate and House finally resolve their differences somewhere in the middle, this year's budget likely will come in around $5.5 billion.  As Goldsmith points out in his last two papers, even assuming the state uses both of its revenue streams (oil and investment earnings), and including a healthy increment of new revenues from a successful LNG project, the state's long term revenue level will average out only at around $4.5 billion.

That means if the Administration stops cutting spending now, and relies instead on taxes (or other "revenue" options such as cutting the Permanent Fund Dividend (PFD) in order to divert more money to state government) to make up the difference, the state will need to raise the equivalent, each year, of $1,375 per Alaska man, woman and child, or $5,500 per family of four.

What those in the Administration fail to recognize is the significant impact that will have on Alaska's private economy.  At a personal level, for example, think how many fewer things you will purchase from Alaska merchants if, as a family of four, you are sending $5,500 per year you previously had to spend or save through your family budget instead to the state government.

Moreover, the prospect of diverting $5,500 per family of four out of the private economy into the government economy raises serious concerns about other impacts.

In a previous study analyzing in part the effects of reducing the PFD in order to increase the money flowing to state government, Goldsmith said that in Alaska, increased government spending generally goes to capital projects, a form of spending that generally "generates less employment and increased income inequality" than broad based spending in the private sector.  So, the Administration's approach not only would damage Alaska's private economy, it may worsen both employment and income equality at the same time.

Candidate Bill Walker was right.  Alaska's leaders need to make "the hard choices necessary for a sounder fiscal future, including putting in place a sustainable budget."  If Pitney's comments are any indication, Governor Bill Walker is going the exact opposite direction.

Senators Micciche and Dunleavy, along with the remainder of the Senate Finance Committee, are to be commended for asking important questions to which Alaskans deserve answers.  They were disappointed with the answers; Alaskans should be very concerned as well.