Paul Jenkins: Alaska takes another run at the fiscal cliff

By PAUL JENKINSJanuary 25, 2014 

The Legislative Finance Division's unblinking look at Gov. Sean Parnell's budget is enough to give anybody the screaming heebie-jeebies, but only the brain dead have not seen it coming for years.

The division's analysis tells us what we already know: We spend too much, save too little, rely desperately on the next boom to save us and pretend everything will be just fine. It is, after all, what suffices for long-term fiscal policy in Alaska.

This time, though, the jig may be up.

"In just a few short years," the Finance Division report warns, "the bottom line fiscal question facing Alaska legislators has changed from "How much can we save this year?" to "How large is the deficit?"

While we are, indeed, facing a deficit, it could be much, much worse. We have substantial income from oil and gobs of money stashed away, and, luckily, the Legislature last year reformed Alaska's old oil tax to spur investment and production in a bid to flatten the North Slope's downward production - and revenue - spiral.

The old tax structure, if it were in place with today's falling prices, would be bringing in even less revenue. Worse, it did nothing to promote more North Slope production and it sent investment elsewhere.

The report uses the term "sobering" to describe the deficit, and that does not begin to include additions to the $12 billion budget sure to come from legislators. They are expected, if history is any teacher, to tack on another $400 million.

Our lousy old tax policy and the inability to say no to spending has pushed us into our current deficit mode. In 1988, 2.2 million barrels of North Slope crude oil gushed south through the trans-Alaska oil pipeline every day. That has slowed to about 500,000 barrels daily. Alaska state government gets about 90 cents of every dollar it spends from that oil.

High oil prices masked the long production decline. We have been getting more for less. Now, prices are slipping, too, along with revenues - unrestricted general fund revenues will drop $2.24 billion in fiscal 2014 - and Alaska finds itself looking at red ink.

The bold lie -- and they know it is a lie -- peddled by forces seeking to repeal last year's oil tax reform seeks to blame that reform for the decrease. That shamelessly ignores falling oil prices, increased transportation and production costs and sliding production - and the inconvenient fact that without the reform, the revenue loss to Alaska would be worse.

As iffy as our finances appear, we are in great shape compared to states with crushing budget shortfalls and zip for savings or income. At least we have oil and about $15 billion stashed in Constitutional and Statutory budget reserves.

Despite that loot, the Finance Division says our current spending is unsustainable without additional revenue. It says curbing spending growth will not do enough and concludes drastic measures such as large cuts in capital budgets, or state sales or income taxes or - gasp! - dumping Permanent Fund dividends may not be enough to cure future deficits.

Without our substantial reserves, it says, the state budget would have to be slashed by $2.5 billion annually for the state to live within its means - and that is if nothing changes, government stays the same size and capital budgets top out at about $800 million annually. Those kinds of cuts would hurt. A lot.

Legislative Finance says state reserves would last until fiscal year 2024 if the forecast and assumptions hold, which jibes with economist Scott Goldsmith's conclusion last year that state spending was our Achilles heel.

"Right now, the state is on a path it can't sustain," he wrote. "Our cash reserves may get us through 2023, but after that?" His estimate then was that state government could afford to spend about $5.5 billion a year in unrestricted General Fund money over the long haul.

We fortunately have time to ease into our new reality. The problem with deficits is that they quickly morph from fiscal to political problems. With reduced funding, there will be increased demands for what is left -- and fights over everything. Taxes. Education. Cuts. Who gets what. This. That. The other thing.

Perhaps we will learn to live within our means. Or pray for the next boom.

Paul Jenkins is editor of the AnchorageDailyPlanet.com, a division of Porcaro Communications, which is performing services for the "Vote No on 1" anti-repeal effort.

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