Be Careful What You Ask For

Are Alaskans Trying to Talk Their Way Out of Services ... and a Dividend?

 

Coarse Grind – Opinion and Analysis

 

In the first few rounds of public testimony in the Alaska State Legislature this year a common theme has emerged from voices all around the state. “Don’t tax me and don’t touch my dividend until you stop this wacky government spending spree.” That message is received by legislators in a variety of ways, but there are three main reactions, depending upon the legislator’s understanding of what the current $3.6 billion revenue shortfall means.

The “Government is too big” crowd seems to perceive the current shortfall and public outcry against revenue-based solutions as confirmation of their years-long mantra that “government growth is unsustainable,” and also as an opportunity to finally rein things in. This group includes fiscal hawks like Sen. Mike Dunleavy (R-Wasilla), Sen. Bill Stoltze (R-Eagle River) Sen. Charlie Huggins (R-Wasilla) Sen. Pete Kelly (R-Fairbanks), Rep. Tammie Wilson (R-North Pole) and Rep. Lora Reinbold (R-Eagle River).

The “Dividend is sacrosanct” crowd hears the voices from Alaska as a sort of popular uprising against a government that can’t solve its own problems. The most determined voice in this group is Sen. Bill Wielechowski (D-Anchorage), but he is joined by others including Stoltze. Democrats long ago staked out ground as protectors of the Dividend, but under the current fiscal storm they are finding it increasingly difficult to reconcile that position with their equally strong calls for education and public health funding.

The “We’ve got to do something” crowd, easily the largest group, is caught between popular opinion and the harsh reality that sometimes voters don’t always see the big picture. For this largest group the current fiscal situation presents the greatest political challenge. To steer the state toward a sustainable economic future they will have to do the very things the public has urged them not to do. Legislators will tell you, and they have some evidence to back it up, mere mention of the Permanent Fund or taxes is akin to getting fitted for a tar and feather jumpsuit.

So, what if the people get what they want? Legislators like to use the analogy of home budgeting when talking about state government. “In your household budget you wouldn’t spend money you don’t have!” they might say – because only the criminally insane have mortgages, car payments or credit cards. In the case of the current revenue shortfall I’ve heard legislators say, “If your household income was suddenly cut in half you’d make serious cutbacks in your budget!” For the record, my advice is if your household income is reduced by half ... look for a J-O-B. I can imagine the scene around the dinner table. “Kids. Daddy lost his job, so things are going to be a little different around here. We’re going down to one meal a day, but it’ll be a good meal – meat once a week! We’ve had to let the health insurance go, so try not to fall from anything higher than an ottoman. Sucking it up when your sick feels bad in the moment, but it builds character, trust me, you’ll be better for it. Instead of soccer, baseball and dance we’re going with more cost-effective activities. Mom picked up some lawn darts at a garage sale. One of ‘em is missing, but that just means the red team will have to try harder, it’s good training for the harsh real world. Instead of that vacation we had planned, we’ve decided to do something super cool this year – we’re tenting out in the backyard ... until we lose the house. After that we’ll be tenting out in grandma’s backyard, but don’t tell her until Mom and I have had a chance to chat with her. I know a lot of that sounds hard, but there’s some very good news that’ll help you weather the storm. We’re going to continue to pay your PF ... er, allowance, until the money completely runs out. Then we’ll have another family council to figure out what to do.”

The beliefs that Alaskans can continue to not pay our own way, that our government is bloated beyond all comprehension and that government’s most important role is to cut each of us an annual check for our share of the pie are, in fact, myths, and they do not align well with what was once a truth about Alaskans – that Alaskans are a hardy lot; people who are tough enough and resourceful enough to solve problems other Americans can’t even imagine, and that because we are few in a vast landscape we necessarily come together in our communities to pool our resources and efforts to ensure everyone comes out OK. In the early ‘80s things changed in Alaska, and Alaskans changed as a result. When oil revenue is sufficient to pay all the bills; when you are released from paying state taxes, and when the government starts cutting you a check, just for being here, it’s easy to forget that you have any responsibility to your community. But isolation is not the same thing as independence, and it’s fair to ask people who would rather cut than pay for government to specify where the government is doing more than it should, or where the inefficiencies are.

The chart below has made the Capitol rounds in various forms this session. This version illustrates a few things Alaskans should understand as the debate continues.

Click on image to open separately.

This version of a graph provided by the Legislative Finance Division shows how many operating dollars each agency receives. This one shows undesignated general funds only, which are primarily what the legislature looks at when altering the operating budget. Even if you add designated funds the first eye-opening revelation is that you could completely cut every department from the University of Alaska down to the Department of Environmental Conservation and not add a shovel full of dirt to the $3.6 billion economic hole. But, those who prefer cuts will say, Look at all that money in the Department of Health and Social Services, statewide operations and the Department of Education and Early Development.

That’s where the second eye opener comes in. This graph breaks the UGF operating dollars out by fund type (see the key in the upper right). The Legislature is not limited in touching non-formula and capital dollars, represented in teal and yellow. The Legislature could also made changes to the orange PFD segment and could make changes in debt service, but only by refinancing it, effectively reducing the annual payments, but stretching out the terms, ultimately costing the state more in the long run.

The most important segments on the graph are in dark blue, representing formula-based funds. Those formulas are written in statute, and cannot be changed without legislation. In the DEED column the formula is the Base Student Allocation. In the DHSS column it is mostly Medicaid formula funds. The Legislature is working on Medicaid reform measures this year, but under current law those formula dollars are essentially untouchable. Also of note is that the DEED budget consists almost completely of formula funds. The department itself has a tiny operations budget, and by personnel it is smaller than every other department, other than Administration. The function of DEED is primarily to serve as a pass-through for BSA dollars to flow from the state to local districts, where the schools are under local control. It means that when Alaskans call for cuts to DEED and DHSS they should realize they are asking for real reductions to local schools and to health care access. When they ask for further cuts to other departments they are talking about tiny amounts of money relative to the revenue shortfall.

It’s also important to note that government operations, adjusted for population and inflation, are about the same today as they were in 1986, and they are significantly reduced over the past two years. Capital spending has been reduced to effectively zero – the state only spends capital dollars that are matched with federal funds. It’s not much.

So, what about the notion that government should keep its hands off the PFD? First, it’s important to point out that the Permanent Fund and the PFD are not the same thing, and were not created at the same time. The initial concept of the Fund was born of an understanding that oil reserves don’t last forever, but investment earnings can last at least a lot longer. By building an investment fund with part of the oil revenues the state created an investment-based resource to maintain government services and operations long after the oil taps out. The idea of the dividend came a short time later, based on the idea that Alaska’s natural resources are constitutionally held in common and that Alaskans should benefit directly from those collectively-held resources.

I’m not writing here to either praise or damn the PFD, but I’ll point out that the idea that the Permanent Fund should fund government when resources no longer can, combined with the idea that the fund should spin off large amounts of revenue to cut individual checks for Alaskans has set up a natural fiscal conflict between Alaskans and our own government. Adding fuel to the conflict is the fact that, since the income tax was removed in 1980, Alaskans have been content to let oil revenues pay for essentially all of our government operations and services. Our constitution says our resource wealth should be managed for the maximum benefit of Alaskans, but it doesn’t define what that means. Is it of maximum benefit to pool our economic resources to operate schools, law enforcement, roads and infrastructure, parks, etc., or is it to our maximum benefit for a family of four to get $4,000 per year (or more) to manage as it will? It’s a legitimate debate, but when oil revenues are not enough to provide basic services I wonder if Alaskans will Pick, Click, Give enough to keep the schools open, the snow plows running and the Troopers on the road. Whether we’ve collectively realized it yet or not, that’s the dilemma we currently face.

There’s more. Alaska has about $14 billion in total savings available to fill the gap. The gap, give or take, is about $3.6 billion ... per year ... if oil averages $56 per barrel. You don’t need to do long division to see the savings run out in about four years. Oh, and oil is more like $30/bbl now. About half the savings are in the Permanent Fund Earnings Reserve. That’s where our dividends are paid from. That means no more than five years from now even if the calculation says you’re entitled to a $2,000 dividend there won’t be any money to pay it. That money will have been spent to keep our schools open, our roads plowed and our Troopers on the job. Not getting a dividend will be the good news. The other news will be that, very likely, the combination of oil revenues and Permanent Fund earnings will not be enough to maintain all the services most Alaskans consider critical. That will mean no more revenue sharing and reduced state money for local schools – property values will likely diminish, but property taxes will have to increase so local governments can provide at least some of the services the state no longer can.

Fortunately, most legislators realize doing nothing is not an option. They are concerned they will pay a hefty political price for keeping the state solvent and keeping the lights on in our local schools, but they seem reluctantly willing to do it. Those legislators who continue to tell us we don’t have to pay our own way, or that the Permanent Fund is something other than what it is, will score political points in a rhetoric-rich environment, but that rhetoric is a perilous gamble that somehow declining production and prices will once again rebound, they always have in the past, and we’ll all continue to enjoy a government free of charge – you’re very welcome, comrade. That gamble has always paid off in the past, but sooner or later the production decline will tip the equation against us, at any price and under any tax regime.

I'm not a gambling guy. We sold our house in Juneau a few months ago when we moved to Anchorage. I don't intend to buy another one until Alaska has a healthy and sustainable economy ... or until that first $300,000 PFD rolls in.

PUBLISHER'S NOTE: Special thanks to Alaskan humorist and artist Chuck Legge for providing the cartoon above. The check's in the mail, Chuck. No. Really.