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Dermot Cole: Delaying revenue action risks damaging Alaska's economy

  • Author:
  • Updated: September 28, 2016
  • Published October 17, 2015

Some leading legislators remain in denial, but the state has no real choice but to enact a new plan to pay for government in 2016.

The reasons are simple enough -- failing to develop a course forward will mean a decline in the state bond rating, greater damage to the Alaska economy and a shrunken state savings account that could vanish by 2018.

Legislators who want to talk only about cutting the budget by more than $700 million -- on top of the $800 million or so cut this year -- aren't facing up to the overwhelming scope of the problem or how this could put the state on even shakier ground.

Cutting a few million here and there won't be hard, but legislators can't or won't identify departments, programs, projects and services they want to stop that will add up to hundreds of millions in savings. They just say they want a "right-size government."

Getting the proper dimensions for state government is not like finding a shoe that fits Cinderella. Everyone wants the perfect fit, but the budget talk won't be real until lawmakers put specifics on the table and try to squeeze a size 8 into a size 5.

The black hole of the budget, which continues to expand, is the main reason the state must take action to stabilize the economy and build confidence that Alaska is up to the challenge brought on by the collapse in oil prices.

With oil near $50 a barrel, we are subtracting $3 billion from reserves to pay the bills again this year. That puts the expiration date on the life of the Constitutional Budget Reserve in 2018 or 2019. The longer the delay in creating a sustainable budget, the greater the potential economic damage, with public and private job losses, lower real estate prices and business uncertainty.

Worried about the election a year from now or hoping for an oil price miracle, some legislators are praying they can avoid talking about using Permanent Fund earnings and tax increases in 2016. What they should be worried about are the much more serious consequences of failing to act.

Standard & Poor's has given the strongest signal possible that the state's triple-A bond rating will end if the state doesn't move to fix its $3 billion structural deficit. The 50 percent drop in oil prices has demolished many an assumption about the path ahead. The magnitude of the deficits are unsustainable, S&P said.

"Therefore, we would likely lower the rating on the state -- possibly by more than one notch -- if state lawmakers do not enact measures to begin correcting the state's fiscal imbalance within the next year," S&P said. "The typical lag that exists between the enactment of fiscal policy adjustments and when they yield results implies the need for lawmakers to act early. Therefore, even with its reserve balances at still-strong levels, we would likely lower the rating on the state rating even within the next year if lawmakers defer enacting corrective fiscal policy adjustments."

The agency report is a stark document that shows there is trouble on the horizon. A reduced rating would mean a higher cost to borrow money. More importantly, it would mean increased questions about the stability of the Alaska economy and our ability to adjust to a different reality.

In a panel discussion Tuesday at the Alaska State Chamber of Commerce conference in Fairbanks, Joe Beedle, president and chief executive officer of Northrim Bank, said the S&P warning is not to be taken lightly.

"They're not just threatening," he said. "It is going to happen if we don't have a longer term plan. I personally am very concerned about it, just as I would be for my personal credit FICO score."

Pat Pitney, Gov. Bill Walker's director of management and budget, said budget cuts and revenue increases cannot be made in sequence because of the size of the deficit. "I agree we have to reduce spending, but we cannot wait to implement revenue. We will be on the cliff if we wait," said Pitney.

Beedle said Greece provided services without taxing citizens and we need to learn from its mistakes. "They didn't pay for them in Greece. And they're smacked. They're a non-global player. We need to be global player. We need to have discipline. We probably need to have taxes," he said.

"We don't have three years to wait to start talking about it," he said.

The logic is sound and the matter is urgent, but the two legislators who took part in the discussion, Fairbanks Sen. Pete Kelly and Big Lake Rep. Mark Neuman, don't see it that way.

They want to focus on getting $700 million in budget cuts, not on the dwindling savings account, and aren't ready to talk about taxes and the use of Permanent Fund earnings. Kelly says Alaskans are telling him to "cut that government first."

"We're not going to get buy-in from the public on any other revenue measures until we get down to that and people feel that we're down to the right-size government," Neuman said.

"The average Alaskan that I talk to does not feel that we're at the right-size government," Neuman said.

"I think if we go down accepting any of these taxes or use the Permanent Fund dividend too soon, it takes too much pressure off reducing government. That's my highest priority," he said.

He didn't identify what he would cut to make government the right size. Neither did Kelly, who said legislators should act like a board of directors.

"A board of directors doesn't get into the ledger sheets and put on the green eyeshades along with their CFOs. They just say, 'We have X amount of money for you to spend, now go find out how to spend it,' " said Kelly.

To me, that sounds like an attempt to avoid angering those who select the board of directors.

"At the end of this legislative session, I think the best we can hope for would be to get to that $4.5 billion mark. It's a huge cut, it's $700 million in day-to-day operations. The reason it has to all come from day-to-day operations is that the capital budget is near zero right now, so we can't cut anything from zero," Kelly said.

The most telling moment during the discussion came when a member of the audience asked about the implications of the S&P warning on the state economy and the cost. Pitney and Beedle said the state has no time to lose, while Kelly and Neuman did not answer the question in their responses. This is not a subject that our leaders should skip over.

The oil price collapse will have long-term consequences for our state. The implications of the S&P statement are clear -- the state bond rating will drop if a fiscal plan isn't forthcoming. Continued delay and uncertainty is bad for business and bad for Alaska.

The views expressed here are the writer's own 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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