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'A reality check': State budget analyst urges fiscal solutions beyond cuts

  • Author: Pat Forgey
  • Updated: September 28, 2016
  • Published March 26, 2015

JUNEAU -- David Teal knows that people often don't like to hear what he's got to say. But he had a packed house Thursday to hear him talk about the state budget.

"As a practical matter, you simply cannot cut your way to a sustainable budget," said Teal, the Alaska Legislature's top budget expert. He's director of the Legislative Finance Division and one of the most knowledgeable observers of the state's financial situation.

Teal's look at options for Alaska to get out of its $3.5 billion budget deficit has previously been made behind closed doors to legislators but House Finance Committee co-chair Steve Thompson, R-Fairbanks, invited the public to an informational presentation from Teal on Thursday.

Thompson called Teal's presentation "a reality check" for Alaskans looking for a way out of budget deficits.

Among Teal's observations: Alaska could shutter every state agency and still have a $1 billion deficit.

That's because the budget includes enough items, such as spending for local schools, debt service, oil and gas tax credits, past retirement costs and Medicaid, that are difficult to cut, he said.

So far during this year's legislative session, Gov. Bill Walker and legislative leaders have focused on cuts, but Teal said that's not enough.

Alaska's path to a sustainable budget will likely have to involve some combination of cutting spending, increasing revenues and using the Permanent Fund in some way, Teal said, and while the numbers have changed over the years, the basic elements haven't, he said.

New revenues could come from things like income taxes, sales taxes or other taxes, he said.

But what Alaska also needs are oil prices higher than they currently are, he said, and that's something that can't be counted on.

"We have no idea where oil is going," he said.

Teal has developed for legislators a spreadsheet model in which various combinations of increased revenues can be entered to see how each changes the overall budget picture.

For example, he said, an income tax set at 10 percent of federal income taxes would bring in $300 million per year, while a 1 percent sales tax would bring in about $100 million.

None of the options actually closed the budget gap but they all got closer.

The good news, Teal said, is that Alaska has billions in savings from when revenues were high to cushion the budget. But under likely scenarios, all the savings will be exhausted and the budget gap will remain, he said.

Teal also showed several options for using the Permanent Fund to close the gap. One option is spending the earnings reserve, which the Legislature can do now legally but not necessarily politically. It could also switch to an endowment-type system called percent of market value but that would take a constitutional change.

Various changes to government funding would hit Alaskans very differently, he said.

"Most of the people in this room would be far more affected by an income tax than they would be by the loss of your Permanent Fund dividend," Teal said to a room full of government employees and lobbyists.

"But if you are a family living in a rural area that relies on your dividends and those of your kids for 50 percent or more of your cash flow, that reduction in dividends is a big deal," he said.

One flaw of the model, Teal said, was that it wasn't sophisticated enough to look at secondary effects of actions such as cuts to government spending, which might cause job and population losses.

Rep. Dan Saddler, R-Anchorage, said there's an assumption among Alaskans that there's a "huge, bloated state government" and that the state's financial problems would go away with sufficient cuts.

Teal said that when inflation and population are calculated in, that's not what the data show.

"What that shows is the current level of spending, in real per capita dollars, is roughly what it was in the '80s," he said.

Thompson told the public that the Teal presentation was not intended to advocate for any specific solution but to "make the wheels start turning in your head" and get people thinking about alternatives.

"Without some drastic changes, we are going to have more major problems than we have today," he said.

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