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State budgets and the false 'sustainable' number that never dies

  • Author: Dermot Cole
    | Opinion
  • Updated: September 30, 2016
  • Published February 2, 2016

The dream of the $4.5 billion "sustainable budget," based on the notion that oil prices will quadruple from current levels, refuses to die, even among those who should know better.

"Our state-funded budget of approximately $5.3 billion needs to be reduced by about $800 million to bring it down to a sustainable figure of $4.5 billion as per the ISER/Goldsmith model," Sen. Mike Dunleavy said in a posting on Facebook Monday.

"If we can agree on reductions this year and next we should be in a fairly good position to have a sustainable budget of $4.5 billion going into the future that could be sustained through the revenues we currently bring in as well as a draw on the earnings reserve account," the Wasilla Republican said.

The problem is that the budget is not sustainable at $4.5 billion under the model put forward by veteran Alaska economist Scott Goldsmith, an emeritus professor at the Institute of Social and Economic Research. That estimate is now off by $900 million or far more, depending upon what the future holds.

That legislators don't look more deeply and regularly into key budget assumptions and how changes in market conditions impact all models and forecasts about Alaska's financial future is a troubling failure.

It remains a simplistic article of faith among many Republicans that all we have to do is cut the budget to $4.5 billion and live on current excess Permanent Fund revenue—meaning no new taxes, no Permanent Fund dividend cuts and no difficult decisions to anger the voters. This is a popular view because people would rather not hear about taxes, dividend cuts and reductions in state services.

To keep repeating the $4.5 billion mantra reflects a misunderstanding of our situation and of the limits of Goldsmith's model as a budget tool. He agrees that if the new sustainable target, driven down by low oil prices, is $3.6 billion with a gas line or $2.8 billion without one, "we cannot do it with cuts alone."

"But I am suggesting two things," Goldsmith said. "Use the biggest and easiest to access tool first -- PF earnings. And second be very careful about changing the way the dividend is administered."

That statement from Goldsmith should end the repeated claims that his model proves that a budget of $4.5 billion means no new taxes and no changes to the Permanent Fund dividend. He said he doesn't advocate a change this year to the dividend formula or new taxes, but wants to hold off for another year, opting to start using Permanent Fund earnings first to restructure the budget.

One of the biggest changes in his model is the ever-shifting forecast about the future value of billions of barrels of oil and trillions of cubic feet of natural gas that have yet to be developed. The estimated value has gone down repeatedly in recent years, which is no surprise, as no one who predicts the future is always right.

In 2011, the model placed a value of $81 billion on oil and gas in the ground, based on future oil price forecasts. It rose to $89 billion two years later and dropped to $69 billion a year ago. The new number will be lower still.

Using this calculation and the estimates about future earnings of the Permanent Fund to make budget decisions today is fraught with uncertainty. The oil and gas may not be developed and the Permanent Fund may not earn as much as people hope. It's easy to say that this is just part of a business cycle and that oil prices will rise again, but we don't know exactly when or by how much.

With lower oil prices, the new sustainable numbers from Goldsmith's model are much lower. A number that changes every time it is calculated is by definition not the foundation of a sustainable budget.

Of course, the lower numbers could always be too pessimistic, but we need to take a conservative approach when so much guesswork is required. The $4.5 billion claim was based on oil prices rising to $100 by fiscal year 2018 and climbing thereafter. It was also based on the idea that the gas line will be built within a decade.

Higher future oil prices and the gas line might become a reality. But we would be foolish to say they will happen. And it would be nice if getting to $4.5 billion would fix things, as that would make this situation much easier for Alaskans.

No one has shown any way that state spending can be cut to $3.6 billion or $2.8 billion without major economic consequences. It should be easy for the state to get to $4.5 billion, given the clamor to cut government, but the lack of specifics about what to cut shows that Alaskans have conflicting views.

I understand why politicians prefer vague discussions of budget cuts with no details, but that doesn't get us anywhere. It's wishful thinking, founded on prayers that world oil prices will quadruple in four years and the gas line will be built a decade from now. Trusting that the future will save us from ourselves is hardly a sustainable plan.

Dermot Cole, an Alaska Dispatch News columnist based in Fairbanks, has been covering Alaska politics for 40 years. His daughter, Aileen Cole, is a deputy press secretary for Gov. Bill Walker. The views expressed here are Cole's and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)alaskadispatch.com.

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