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It's time to cut state spending: The numbers show future has arrived

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Posted: Sunday, October 7, 2012 12:00 am | Updated: 11:34 am, Mon Jan 21, 2013.

Community perspective

James Carville is known for many things, but the one that always comes first to mind is the line he used to keep Bill Clinton on message during the 1992 presidential campaign. Carville summed up the campaign this way whenever Clinton threatened to wander off topic: “It’s the economy, stupid.” Clinton got the point and won the election.

A significant number of Alaska legislative candidates are in need of a similar mantra this coming election, except the appropriate theme this time should be “It’s the spending ...”

These candidates currently are treating state spending levels as an issue that can be deferred to some vague point in the future rather than as an issue that needs to be addressed in the next legislative session. Indeed, some say that addressing spending can be put off until “when, if or as” the current savings accounts are depleted.

Unfortunately “the future is now,” as NFL Hall of Fame Coach George Allen used to say.

In recent papers, the University of Alaska’s Institute of Social and Economic Research has extensively analyzed the last two state budgets and concluded that, at current and projected levels, the state is spending money that needs to be put into savings now if future Alaskans are to maintain the same standard of living that current Alaskans enjoy.

Some think the Alaska Permanent Fund alone is sufficient to accomplish this task and that the state can spend whatever additional funds it receives — including the current balances of the Statutory and Constitutional Budget reserves — without worrying about tomorrow. As the most recent ISER study points out, however, all of the state savings accounts combined, including the permanent fund, are currently capable of generating only “between $2 billion and $3 billion in sustainable earnings in perpetuity.” That is enough to pay only “for about one-quarter to one-third of the current state general fund budget.”

Additional assets bring the total amount of sustainable general fund spending to approximately $5.6 billion annually. ISER concludes that continued spending above that level — which the state has done the last two years with general fund budgets of $6.7 billion and $7.6 billion — imposes an increasingly substantial “fiscal burden” on future generations.

Some candidates also argue that they do not need to be concerned about these issues because they anticipate oil tax reform will increase production, and as a result increase revenues.

An analysis presented by Karen Rehfeld, the director of the state Office of Management and Budget, near the close of last spring’s special session undermines that conclusion.

Rehfeld’s analysis demonstrates that, at current and anticipated spending levels, the passage of the governor’s oil tax reform bill proposed at the beginning of the special session would have resulted in immediate and continued spending deficits. If the bill had passed, the immediate deficit for this year would have been $650 million. By 2018, the projected annual deficit would have grown to more than $1 billion.

Based on that and other state reports, it is possible to calculate that production would need to increase by more than 40,000 barrels per day immediately in order to restore the budget to balance in the current year.

At currently projected spending rates, production levels likely would need to increase by more than 75,000 barrels to offset the projected 2018 deficits. That is the equivalent of adding roughly three-quarters of another Kuparuk field within five years. That is more than a “stretch” goal.

The simple fact is that at currently projected spending levels it is unrealistic to think that increased production will be sufficient to balance future state spending. The results are even worse if production does not increase.

Significant spending cuts must be part of the equation. In order to avoid leaving future Alaskans with a substantially lower standard of living, those spending cuts need to start in the next legislative session.

Bradford Keithley, of Anchorage, is a partner and co-leader of the oil and gas practice at the law firm Perkins Coie LLP. He publishes the Thoughts on Alaska Oil & Gas blog.

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