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Alaska must cut spending by $800 million for sustainable budget and kids' future

  • Author: Sen. Dunleavy
  • Updated: June 25, 2016
  • Published March 14, 2016

In President Dwight Eisenhower's farewell address to the nation he said: "As we peer into society's future, we – you and I, and our government – must avoid the impulse to live only for today, plundering for our own ease and convenience the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow."

This generation of politicians will need to answer one very important question: Will we ensure our children and grandchildren have the same opportunities in Alaska that we were afforded? Change is never easy; that's equally true whether it's change we choose or that which is thrust upon us.

Over the past two years, the price of oil fell through the floor and with it went Alaska's unrestricted general fund revenue. This precipitous decline was unpredictable. Nevertheless, it is our new reality and may be with us for some time.

In a recent interview, Gov. Bill Walker likened the start of his term to a man going to work in a house that just caught on fire. With the price for Alaska North Slope crude continuing its decline, our fiscal house continues to burn. Since the passage of the current fiscal year 2016 budget, an additional $600 million hole has appeared in our revenue as a result of oil prices that continue to fall and the $3 billion-plus deficit we will face in the next cycle continues to grow.

Comparing this to the oil price crash of the mid 1980s and hoping we can just ride this out ignores several critical facts. The Trans-Alaska pipeline is moving about 77 percent less oil now than it was at its peak in 1989, so price cannot "save" us this time. Large amounts of oil in the Lower 48 can now be tapped into because of technological advances, and huge amounts of natural gas as a preferred alternative to oil are also being produced. Alaska is in a bind and hope is not a strategy.

Alaskans across the state are beginning to focus on this important challenge. That's a good thing. The time for difficult decisions is upon us, and the massive state budget that doubled in size over the past decade, fueled by record oil prices and a tax system that stifled development and rewarded spending instead of production, is the 800-pound gorilla in the room.

Plans that are being suggested start with new broad-based taxes, ideas on how to use the Permanent Fund, or risky schemes to leverage savings with debt such as pension obligation bonds. These approaches are largely coming forward from within government or from those who directly benefit from government spending. They prioritize government over people and spending over savings.

From my perspective, new broad-based taxes are not the answer. Winston Churchill once said, "A nation trying to tax itself into prosperity is like a man standing in a bucket and trying to lift him­self up by the han­dle." That rings as true today as it did when he said it more than a hundred years ago. Just look at California or Illinois. Their response to revenue issues has been to increase taxes and user fees. The result has chased business, jobs and residents out of state, reducing their tax base and failing to solve their budget issues. With this "tax more" policy failing in places like California, a state with an ample population of millions and without Alaska's additional challenges of climate, distance, costs and lack of economic diversity, it is difficult to see how adopting such tax-and-spend policies will work in Alaska.

To raise $1 billion in revenue would require a statewide income tax rate at 30 percent of federal tax burden, or a sales tax of about 8 percent. If you imposed both at those economy-crushing levels, and after accounting for the exemptions and loopholes the lobbyists would demand and the costs of the new bureaucracy needed to collect them, we would be roughly halfway to filling our fiscal gap. Keep in mind w have an almost $4 billion budget gap.

While some sort of change to our debt and revenue management is worthy of discussion, I don't favor either the proposals for pension obligation bonds or a massive restructure of the Alaska Permanent Fund. Considering the recent developments in the global economy and the huge corresponding negative impact on our domestic financial markets, using savings to issue debt and hoping earnings make a profit is looking more and more like a family losing their jobs, covering bills by running up credit card debt and hoping to hit the lottery in time to pay it all off. This is simply not a tenable way to fund essential government services. When I asked a few of my colleagues if they would run their own family finances the way some are proposing Alaska adopt, the answer has been, "No way!" Why then would we foist such policies on Alaska?

The time has come to seriously reduce current state spending to the level where excess earnings from our savings can fund a sustainable budget as envisioned by the late Gov. Jay Hammond and others: about $800 million less than we are spending now. Then, together we can re-prioritize and re-invent the delivery of essential state services. We can look for smart and strategic ways to grow and diversify our economy and to increase our revenue and brighten our children's futures. In order for Alaska to continue to prosper, we must put out the fire and get our fiscal house in order.

Sen. Mike Dunleavy, R-Wasilla, has served in the Alaska Senate since 2013.

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