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Chamber debate: Would slashing budget secure Alaska's fiscal future? Or court disaster?

Alex DeMarban

The state's unprecedented spending spree in the last five years is on track to cripple the economy in a decade or less. So what's the fix? A statewide sales tax? Tapping the earnings of the Alaska Permanent Fund? Major cuts to state services? Those were the grim possibilities considered on Monday during a debate at the Anchorage Chamber of Commerce, as economists and others weighed solutions to the fiscal cliff that everyone agreed is coming if the budget isn't reined in.

There was no argument spending has jumped 55 percent in the last five years, largely under Gov. Sean Parnell. Add in the falling oil production that provides nearly all state revenues, and the state's hefty surpluses screeched to a halt in the fiscal year that ended this summer, with the deficit at roughly $500 million.

At the verbal throw-down, consultant Brad Keithley and economist Scott Goldsmith argued that acting immediately results in the least damage, and it doesn’t have to be difficult.

Their formula: Immediately cut the state budget -- weighing in at $7.1 billion this year -- to a little more than what the state spent in 2011 -- $5.5 billion.

From that baseline, allow the budget to grow slightly each year for inflation and population growth. Put any extra income -- say from increased oil and gas production -- into savings.  

Do that, and Alaska will continue growing its cash reserves and the Alaska Permanent Fund -- collectively valued at more than $60 billion today. Eventually, it will be large enough that the earnings can sustain state government.

New taxes will be avoided, Alaskans will still get dividend checks, and investors looking for long-term stability will look to Alaska for opportunity, argued Keithley and Goldmsith.

But maintain the status quo, and the state will have blown through its $18 billion cash reserves by 2023. When the deficit is bad enough, the economy will collapse, driven in part by tens of thousands of state employees getting pink slips and the rippling damage that would have on stores and restaurants.

"Alaska would slip into a permanent funk," Goldsmith said.

Arguing against that plan proposed by Goldsmith -- dubbed "maximum sustainable yield" -- were Anchorage Chamber president Andrew Halcro and Jonathan King, a senior economist with Northern Economics.

They both acknowledged a long-term fiscal plan is needed, and soon. But something better is needed than Goldsmith's plan, though it's great in theory, they said.

Cutting the 2014 budget to $5.5 billion would create an immediate fiscal cliff. That's because state spending and the private sector have become a "double-helix," with private companies greatly dependent on the state's capital budgets, Halcro said.

"If maximum sustainable yield is adopted, it will strangle the same economy it hopes to save," Halcro said.  

In the short-term, as many as 9,000 private-sector jobs would disappear, and that would have enduring negative fallout that would thwart investment, argued King.

"You can't just leap off the cliff, and it's as potentially dangerous a cliff in the short-run as it is in the long-run," he said.

A problem with the plan in the long run, he said, are the untouchable costs -- such as retirement plans, Medicaid and debt payments. Those will eat up more than half the budget in a matter of years.

To follow maximum sustainable yield, 25 percent of the remaining budget would need cutting. He provided examples that he called "silly" yet felt illustrate the magnitude of the problem:  You could cut whole departments, such as Fish and Game, Environmental Conservation or Military and Veterans Affairs. Or you could take a sequestration-approach that slashes an equal 25 percent of the budget from all departments. But that would mean such things as sparing the Alaska State Troopers under the Department of Public Safety, but cutting village public safety officers and programs targeting domestic violence and sexual assault.

"It's hard to take the addict off cold turkey," he said. "We need to engage in a fiscal plan with a step-down approach (that gets us) living within our means."

So what's the solution? Halcro, saying he was only sharing his personal opinion, said some sort of broad-based sales tax is needed, one that spreads the pain beyond the oil companies that pay for nearly all state services.

He also suggested siphoning off a percent of the earnings from the Permanent Fund.

Keithley said the idea of increasing taxes doesn't work for potential long-term investors -- for oil and gas and mining projects -- that he advises through his business, Keithley Consulting.  

State lawmakers have historically balanced the budget on the backs of the state's oil industry. Big investors know they'll likely be paying for any increased taxes.  

"The answer we just got is the very answer that scares resource companies away from this state," said Keithley.

Keithley said he and others worked hard to see Senate Bill 21 -- Parnell's tax cut for oil producers -- implemented to help attract investment and increase oil production.  

"But we are rearranging the deck chairs on the Titanic if we don’t deal with the fiscal gap, if we don't deal with fiscal responsibility," he said.

Without stability, investors will seek short-term only gains in Alaska before they "get the hell out of Dodge."

Instead, the state should take the simple steps of returning to 2011 spending levels. That means, initially, significant reductions to the capital budget, which has grown from $600 million in 2011 to $1.8 billion today.

That's an easy place to start, Keithley said.

So who won the debate? Immediately after the dust settled, some 80 people in the audience had already responded to a poll by text, with 64 percent favoring Keithley and Goldmsith and 26 percent favoring Halcro and King.

So will Alaska politicians listen? Not if history is any guide.

Halcro recounted his attempts to create a fiscal plan when he served as a state lawmaker in the late 1990s. At the time, Alaska was two years from running out of money because of dwindling oil income.

Few people cared about creating a long-term plan.

"Too many people thought, 'Hey, if the economy crashes, that's not so bad because government will be forced to spend less,'" he said.

It was finally decided that $250 million would be cut from a budget that stood over $2 billion. But in reality, only about $60 million was cut.

"What we did for three years was move money around. This is complex and history shows us it's not going to be easy," he said.

Contact Alex DeMarban at alex(at)alaskadispatch.com