Opinions

It's simple. Alaska's budget dilemma means coming to grips with complexity

Sen. Pete Kelly likes to say the politics of figuring out Alaska's financial future is difficult, but the math is simple.

The state Senate president has got that half right. Nothing about the math is simple.

Every future forecast, with dollar figures rounded off to the nearest hundred million, is founded on estimates, variables and assumptions.

It should be acknowledged at the start that each of those can be wrong, which means  every simple multibillion-dollar math problem constructed atop a pile of assumptions can be all wrong.

Start with the world price of oil, the oil production rate, the oil tax rate, the performance of the Permanent Fund, decisions about the size of the Permanent Fund dividend, the level of state services, state taxes, new technology, the inflation rate, spending by the federal government and the depth of the recession in Alaska. There are more.

Estimates have to be made on these uncertainties, which are harder to predict than the weather next year or the stock market next week.

It is simple to oppose an income tax and claim to the folks on Facebook that this is a principled stand worthy of Lincoln. It is simple to pick budget-cut numbers out of the air and claim to have a coherent plan.

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It is a good deal harder to find ways to deal with the complex situation that confronts Alaska.

The Senate decided long ago it would be the only thing standing between Alaskans and a balanced fiscal plan. Many of the same people were in office a year ago when Kelly said, "I am not getting into the taxing business while I know government is still too big."

With that as a starting point, the Senate produced a "complete solution" with simple multibillion-dollar math to prove it was right all along. The Senate plan would cut the dividend to $1,000 and use about $2 billion a year in Permanent Fund earnings to cover half the cost of government.

The biggest uncertainty embedded in the plan is the future likelihood—one that few politicians discuss in the open—that withdrawals from the Permanent Fund years from now will have to be much greater than projected.

Since we don't know the course of future events, every plan about Alaska's future finances has to come with giant disclaimers. Even small changes can have a major impact, running into the hundreds of millions.

For instance, in the column under Kelly's name that appeared in many state newspapers, describing why an income tax is not needed, there was this sentence about the Senate plan to use the Permanent Fund and a reduction in dividends as the major tools: "Second, our version of Senate Bill 26 actually begins growing the Constitutional Budget Reserve after 2022, according to the nonpartisan Legislative Finance Division."

But look closer and that's not what the budget charts show. The Constitutional Budget Reserve would not grow after 2022 under the Senate plan. Something close to $300 million in new revenues or higher cuts would be needed.

An editor at Alaska Dispatch News asked some questions about the column and Kelly's office revised it to say: "Second, our version of SB 26 actually begins growing the Constitutional Budget Reserve after 2022, according to the nonpartisan Legislative Finance Division, even if we reduce spending only 2 percent for the next two years, a fraction of what I believe a streamlined government could save."

Two percent in unidentified cuts doesn't sound like much. That would add up to about $180 million in streamlining over two years, which would leave the plan about $100 million short.

All of this is based on expectations that we will run what Kelly says is a "small budget deficit of about 12 percent, easily covered by our reserves for a decade."

That would be a deficit in the vicinity of $500 million, which is not small.

To make all of this run smoothly, the state would have to keep a lid on future expenses, despite allocating nothing to speak of for a capital budget, rising pension liabilities, increasing costs for deferred maintenance and no allowance for health care costs climbing much faster than the overall inflation rate.  

It wouldn't take much for the deficit to top $1 billion.

The Senate has built its plan on a shaky foundation of select statistics and promises of future reforms aimed at proving an income tax is unnecessary. It's too bad the math is not simple.

Columnist Dermot Cole can be reached at dermot@alaskadispatch.com. 

The views expressed here are the writer'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@alaskadispatch.com. Send submissions shorter than 200 words to letters@alaskadispatch.com or click here to submit via any web browser.

Dermot Cole

Former ADN columnist Dermot Cole is a longtime reporter, editor and author.

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