By Cliff Groh

Gov. Mike Dunleavy’s proposal for a constitutional amendment to limit spending is wrong for our state for several reasons. This seductive measure might seem like a relatively painless way to address Alaska’s continuing fiscal problems, but the apparently magic remedy is much more likely to turn out to be a poison pill.

The flaws are numerous:

The proposed constitutional spending cap is based on the fallacy that Alaska does not have a revenue problem but a spending problem instead.

The proposal rests on a faulty formula poorly designed to deal with the realities of our state’s needs.

By carving out Permanent Fund Dividends from the cap, the exceptions to the proposed limit tilts preferences for outlays from the State of Alaska.

The proposal will likely shift some spending from the State of Alaska to local governments, redistributing rather than reducing spending (and tax burdens).

Finally, Gov. Dunleavy’s proposal is so sweeping in its simultaneous creation of a new appropriations limit and a new Savings Reserve Fund—as well as a substantially changed Constitutional Budget Reserve—that there is a dispute among attorneys regarding whether the proposal can be accomplished as a single constitutional amendment.

Let’s go through these problems in order.

The Dunleavy administration’s basic argument is that the State of Alaska has a spending problem, not a revenue problem. In assessing whether the State of Alaska has a spending problem, note that the Alaska Legislative Finance Division reports that the budget has been cut by 44 percent in the last seven years. After adjusting for the effects of population and inflation, the budget this year is now lower than it was before oil first flowed through the Trans-Alaska Pipeline System.

Contrary to the Governor’s assertion, the substantial decline in Alaska oil production have combined with persistently lower oil prices to give our state government a big revenue problem. It turns out that being the only state without a broad-based tax—making Alaskans the lowest-taxed people by far in the U.S.—only works if you have substantial amounts of new oil money coming in.

The proposed constitutional amendment’s formula for the spending cap is flawed as well. Gov. Dunleavy’s initial proposal would limit any budget increase to half of the combined change in inflation and the state’s population—or two percent—whichever is less. According to the Center on Budget and Policy Priorities, a similar formula imposed in Colorado in 1992 “does not keep pace with the normal growth in the cost of maintaining services, let alone the need to make new investments or improvements.”

The formula’s problems are two-fold. The segments of the population requiring the most state services—such as children and senior citizens—often grow more rapidly than the population overall (or constitute a larger percentage of residents as the population falls). Additionally, the federal measure of inflation proposed to be used does not accurately measure the costs of state services given that the costs of services that the state government pays for—like education and health care—go up much faster than the costs of consumer goods and services measured by the federal cost of living index. (The Governor has offered a substitute version of the proposed constitutional amendment that drops population from the formula, relying only on the Consumer Price Index for Anchorage.)

The squeeze on education and health care—by far the two biggest categories of public services paid for by the State of Alaska—is likely to be even more severe given that the proposed spending limit creates an exception for appropriations for Permanent Fund Dividends. In the absence of consensus on a formula for setting the annual Dividend, adopting a constitutional amendment exempting Dividends from a spending cap would only exacerbate the Legislature’s biggest problem of recent years, which is figuring out the yearly amount.

Putting this spending cap in the Alaska Constitution will tend to put pressure on local governments to increase their spending, particularly on K-12 education. That additional local spending caused by that limit on state spending would likely lead local governments to raise their property and sales taxes. Some Alaskans might see their total state and local tax burden go up rather than down if this constitutional amendment is adopted.

Finally, the courts could rule that Gov. Dunleavy’s proposed measure is too broad to be enacted as a constitutional amendment proposed by the Legislature and instead characterize it as a “revision” that could only be adopted through a constitutional convention. The Legislature’s lawyers have opined that the Governor’s proposal—which includes major changes to the Constitutional Budget Reserve as well as the creation of a new Savings Reserve Fund in addition to the spending limit—is so sweeping that the Alaska Supreme Court would view it as a revision instead of a proper constitutional amendment. The Alaska Department of Law disagrees, but this question remains alive.

Alaskans need to search for real solutions to our state’s fiscal problems and not fall for this highly problematic proposed constitutional spending limit. Constitutional amendments are hard to pass and hard to change once passed, and this proposal is too flawed to risk.

Cliff Groh is an Anchorage lawyer and writer as well as the legislative assistant who worked the most on the bill in 1982 that created the Permanent Fund Dividend we have today. He also designed a course he taught at the University of Alaska called “Navigating Alaska’s Fiscal and Economic Challenges.” This is the eleventh installment of a continuing series on the Permanent Fund Dividend and Alaska’s fiscal system.

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