Part 1: Living within our means; living on a budget
Over the years, I have heard critics of state government decry the management of the state of Alaska, demanding that the government “should be run like a business” or demanding that government should “live within its means.”
I heard one fellow pound the hearing room table, denouncing state spending while declaring that his “family had to live within a budget, so why not the state?”
I am reminded of all these old saws as I listen to the current debate over the size of the Permanent Fund Dividend, mainly because they are being used by the “Full Dividend” side of the debate. “Cut the budget, not my dividend,” one person testified to the Legislature. “I must manage my household budget, why can’t the state manage theirs?” declared another.
As the Governor and the Legislature prepare for a special session to consider full funding for the PFD, I want to shatter a few myths too often brought to the argument.
‘The state should live within its means like my family’
Alaska households are, on average, not financially well managed. According to a survey of states by Credible, Inc., a financial services company, Alaska families have one of the highest ratios of debt to income in the nation. We rank near the top (7th) in terms of family debt, measured as a ratio of debt capacity to current debt (31.3%)
Meanwhile, the state of Alaska is doing quite well according to a banking industry analysis (GoBankingRates.com) carrying a debt ratio of 13.3% and ranking no. 1 in the nation for the lowest debt to asset ratio.
So, by at least one important measure, Alaska’s government is managing its debt well, certainly far better than the average Alaska family.
‘The legislature doesn’t try to control costs’
This comment implies that legislators have not tried to manage the costs of government. That is NOT true. Democrats, Republicans and Independents have made a lot of tough choices and have brought down expenditures.
Since FY 2015, the Legislature has cut the operating and capital budgets by nearly $6 billion, reducing the two budgets from nearly $11 billion to a little under $5 billion. Most of the capital budget currently funded by the state leverages a much larger amount of federal funds.
‘The legislature spends too much money on government programs’
Besides the constitutionally required expenditures (e.g., education, health, welfare, infrastructure, fish and game, judiciary) and bonded indebtedness, the two largest uses of state treasure are NOT constitutionally mandated. The Permanent Fund Dividend at $1.9B equals roughly 37% of total expenditures; and oil tax credits are a huge drain on the state treasury.
Oil credits are bit more complicated to explain because they represent a reduction of revenue to the state and not a direct expenditure from general funds. Some estimate the production tax credits (one of many different forms of credit) under AS 43.55.024(i)—established under SB21 — are $1.2 billion for FY20. As a ratio of total state expenditures, $1.2 billion would represent a percentage of total expenditures if they are treated as a current liability assignable to the FY20 budget — or 29%.
So roughly 56% of State spending is consumed by non-constitutionally mandated expenditures, leaving around 44% of our budget to focus on those things called for by the constitution.
‘The operating budget keeps growing out of control’
This myth is repeated often by constituents at hearings, and it is untrue.
When adjusted for inflation and population growth, the level of spending by the state is about what it was in FY 1979. On the REVENUE side, however, unlike 1979, Alaska is facing DECLINING revenues, thanks to tax credits and persistent low oil prices; Alaska’s fiscal challenge is NOT CUTTING EXPENDITURES; it is RAISING REVENUES.
And Governor Dunleavy has REFUSED to propose NEW REVENUES to pay for the budget despite a constitutional requirement that he do so at Article IX, Section 12.
The state government IS living within its means; we are just being presented with false choices in doing so. When over half the budget is being used for non-constitutionally mandated expenses and we are being pressured by industry and a misleading populist campaign to make those choices, it creates what Governor Hickel called a “Crisis in the Commons.”
In reflecting on the foolishness of legislators and the governor during the oil market crash of 1986-1987, Governor Hickel used the words of Peter J. Smith, a Canadian political scientist who came to Alaska to advise the Permanent Fund Trustees:
“…in 1986 and early 1987…the state of Alaska…was forced to cut millions from its capital and operating budgets. The state was also considering laying off or reducing the salaries of its employees. This at a time when citizens were sent dividend checks totaling $295 million and the legislature had authorized a transfer of $1.26 billion of the Earnings Reserve Account to fund principal…” (Hickel, Crisis in the Commons, ICS Press, 2002, P. 181)
Governor Hickel goes on to write:
“This was the tragedy of the Commons in modern form. In order for each Alaskan to attain a small individual gain, we sacrificed the larger good. And, like the shepherd on the overgrazed village commons, we suffered more from the economic collapse that followed than we received in the small incremental gain of the slightly larger dividends. …Capital sums that could have upgraded our community and diversified our economy were disbursed as bonuses for each resident. We failed to benefit from our Owner-State because our leaders forgot why we had obtained ownership in the first place.” (Emphasis added) (ibid)
Part 2. Running the state like a business
So to recap Part 1: State officials have been diligent and cut expenditures but have redirected funds for constitutionally-mandated services to non-mandated ones — the PFD and oil company subsidies.
Now let us address the oft-heard complaint that the state should be “run like a business.” I agree with that complaint. I am on the side of those who want a more business-like approach to running the state.
State oil subsidies are not a business-like practice
No well-managed public corporation subject to securities and business rules and regulations, would transfer shareholder assets to external partners the way the state legislature has done. Certain legislators, for example, who act as board members on behalf of the people of Alaska would be subject to conflict of interest rules under federal securities law. The same would apply to legislators who are spouses of employees or contractors subject to remuneration by the outside corporation in partnership with “Alaska, Inc.” They too would be thoroughly vetted and examined for a conflict of interest by regulators.
Second, no well-managed business would invest in the exploration, development or production of an outside corporation without an abundance of security, a guarantee of a return-on-investment and an exit strategy that returns all invested funds to the state’s balance sheet. Here I am talking about “capital recovery,” not just some vague assurance of “future taxes,” but full recovery, with interest and compensation for the opportunity costs (rent) of that investment.
Yet Alaska has spent billions in tax credits of all sorts to incentivize the oil industry and we do not have any notes, debentures, certificates or class of stock in these corporations in exchange for these investments. While some might argue that the legal liability derived from such paper would be substantial, I would rebut by saying that the ABSENCE of recourse and compensation is unacceptable. There are caveats and provisions that can be written into surety that protects the state. It is unacceptable to treat the oil industry any differently than we would treat any other partner or debtor doing business in and with the state. The state has a long history of lending and partnering in all kinds of industries, including jack-up rigs in Cook Inlet. It is absurd for the state not to demand surety from the likes of ConocoPhillips and Exxon in exchange for tax credits.
Third, no well-run and managed business would liquidate long term assets that are providing a predictable benefit stream and earning a market rate of return. Yet that is precisely what is being proposed by the Dunleavy administration, NOT for the purposes of sustaining state operations but to finance subsidies for outside corporations.
A dividend makes no business sense!
Finally, no well-managed corporation would declare a dividend to its shareholders when it is facing revenue declines, a cash-flow crisis and an inability to fund operations.
In fact, a REAL company, when facing financial crisis, would not only NOT pay a dividend to shareholders, it might well make a “Call on Capital.” Shareholders would be asked to INCREASE their contribution to the company in order to bridge the financial crisis.
An income tax DOES make business sense!
Maybe that is what we can call the income tax in the future—not a tax, but a “call on capital.”
So, anytime I hear someone whining about the size of their “dividend” or fulminating against the idea of paying some taxes, or robustly defending unsecured investments of State treasure in outside companies and THEN demand that the state be “run like a business,” I just shake my head walk away.
The state of Alaska is far better managed than most Alaskans believe. There are some real problems that should be addressed in the upcoming special session on the Permanent Fund Dividend, however.
FIRST USE OF CASH. Financial analysts always look at business expenditures to see how they direct their spending priorities. The founders of the state intended for the first use of resource revenue be the provision of constitutionally mandated programs and services. All non-constitutionally mandated spending should fall in line AFTER mandated spending is fully funded.
SECOND USE OF CASH. The first priority for the remaining cash balance would be those non-mandated expenditures that meets the Article VIII Section 1 priority for “maximum benefit” to Alaskans. Alaskans will have to decide which of the major non-mandated uses of cash are their highest funding priority:
Oil Tax Credits
Permanent Fund Dividends
The choice is yours, Alaska.
Elstun W. Lauesen is a retired development finance specialist, a certified Economic Development Finance Professional, with a 40-year career in Alaska and the Pacific Northwest. Mr. Lauesen lives in Spenard with his wife, Harriet Drummond and, among other activities, Elstun serves as the Communication Chair of the Progressive Caucus of the Alaska Democratic Party.