Budget debate: Alaskans may need to brace for some cuts now, big cuts later or taxes

Lisa Demer

Other states might envy Alaska's financial strength: a $149 billion nest egg, according to economist Scott Goldsmith. That includes savings accounts, the Permanent Fund and the value of petroleum still in the ground.

But if the state continues on its current path, the savings will be drained in about a decade and the state will be struggling to make huge cuts that will be felt by almost everyone, he told the Anchorage Chamber of Commerce Monday.

The comments came in a debate over Alaska's fiscal future.

On one side were Goldsmith, a University of Alaska Anchorage economist, and Brad Keithley, an oil and gas consultant. They argued the best approach is to shrink state spending to about $5.5 billion, the amount that Goldsmith says the state can afford per year over the long haul, not counting Permanent Fund dividends. That's about $1.5 billion less than the state's main general fund spending this year.

Not so fast, said those arguing against that: Andrew Halcro, the chamber's president and a former state representative, and Jonathan King, an economist with Northern Economics Inc.

While Halcro and King agreed that cuts to state spending are necessary, they said Goldsmith's strategy would damage an economy in which public spending bolsters many private jobs. Halcro suggested a measured approach would work better by combining some cuts with new revenue such a broad-based sales tax as well as some Permanent Fund interest earnings, though not the fund principal.

Steve Johnson, coach of the high-performing UAA debate team, moderated Monday's session. He asked the crowd to text before and after the debate whether they agreed that Goldsmith's "maximum sustainable yield" was the best approach. Before the talks, the crowd was evenly split. But after listening for an hour, they dramatically changed course.

The state already is dipping into savings to balance the budget. On the current trajectory, the budget deficit could swell to $5 billion to $7 billion a year, Goldsmith said.

"It wouldn't be a temporary small bump, but rather a permanent downsizing of public services and the economy, reaching into every community and every sector," he said. "Think about the pain of cutting basic government programs in this next legislative session by more than 50 percent, 50 cents on the dollar."

Local governments would feel it too, he said. Somewhere between 20,000 and 40,000 public employees around the state would lose their jobs, he said.

Political leaders have been warning of the impending fiscal crisis for many years but high oil prices have masked declining oil revenues.

"This time is different," he said. He predicts the state will face the fiscal cliff around 2023, unless it saves more and holds spending to around $5.5 billion, plus Permanent Fund dividends.

Halcro argued that squeezes the economy too hard. State spending and the private sector "have become a double helix," he said.

Consider the new $109 million UAA sports arena being built with public money and private contractors.

"Where do those jobs go when that project is done?" Halcro said.

Goldsmith's proposal would "strangle the same economy that it hopes to save," he said.

The Legislature can only slash certain areas within what's called the "unrestricted" general fund because much of the money goes for things like the public employee retirement system, Medicaid health insurance program and K-12 education, King said. About one-fourth of the truly discretionary spending would have to be cut, he said.

"Maybe we eliminate whole departments," King said. "Goodbye, Military and Veterans Affairs. Goodbye, the governor's office. Goodbye, Labor and Workforce Development."

A state budget cut of $1 billion to $2 billion would mean the immediate loss of maybe 5,000 to 10,000 jobs around the state, he said.

But Keithley said the state only has to turn the clock back three years to return to a $5.5 billion budget.

"We're taking spending back to where it was, frankly, at the beginning of the Parnell administration. We're taking spending back to where it was just three short years ago," Keithley said.

The capital budget for buildings, roads and other big projects has tripled from $600 million in the 2011 budget year to $1.8 billion this year, Keithley said. And this year's capital budget was cut by hundreds of millions from the year before.

"You're all business people," Goldsmith said. "Have you noticed the economic decline?"

At $5.5 billion, Alaska still would be spending an average of $32,000 per family of four, which ranks at the top of state spending per capita, he said.

About 90 percent of that unrestricted general fund budget comes from oil revenue. Keithley said oil, gas and mining interests won't invest in Alaska if they fear the state will turn to them when the budget crunch hits. He said the contentious oil tax cuts approved this year in Senate Bill 21 aren't enough without a solid, long-term budget plan.

"We can say we are going to tax ourselves," he said. "We can say we are going to divert the Permanent Fund dividend. We can say that we are going to do all these nice things. It won't happen. We'll go back and tax the guy that we've always taxed."

Parnell wants to restrain government spending and is willing to make cuts with legislative support, his spokeswoman, Sharon Leighow, said in an email. Oil prices are down from the spring forecast, so the state will have less to spend, which should be motivation for cuts, she said.

As to whether the governor supported Goldsmith's plan, she didn't say.

One candidate for governor said the Goldsmith approach is premature. Republican Bill Walker, an oil and gas lawyer who is running as an independent, said Alaska has vast riches in the ground that can generate revenue. The state needs to lead the way in development if private interests won't, he said.

But state Rep. Charisse Millet, R-Anchorage, sees promise in the idea. She has proposed legislation, House Bill 136, that would require the governor to state annually how much revenue was projected for each of the next 10 years.

She told Johnson, the UAA debate coach, that she would like his team to come to Juneau and argue the issue before legislators.

As to the quick survey, of the 63 people who texted votes post-debate, 64 percent said they agreed that Goldsmith's proposal was the best way.

Reach Lisa Demer at ldemer@adn.com.

Contact Lisa Demer at LDemer@adn.com or on