Alaska’s Deadliest Hemorrhage
The crash in world oil prices has sent Alaska state financial officials reeling. After years of high oil revenue, nearly unrestrained government growth, and unrepentant “bring home the bacon” pork spending, Alaska now finds itself with a whopping fiscal year deficit expected to exceed $3.5 Billion. If you divide this amongst Alaska’s tiny 738,000 population, this financial bloodletting amounts to a staggering $4,742 per individual Alaskan, $18,970 for a household of four, or $28,455 for a household of six.
For years Alaska has grown our state bureaucracies on autopilot by mathematical formula (around 6-9% per year) into cash draining behemoths. We now employ over 24,000 state employees- many of which to help protect Alaskans from themselves.
Our legislature also writes huge annual checks to literally hundreds of state funded non-profits for myriads of diverse social causes or even to entertain us, such as the Alaska State Fair. If you want to get a good laugh at some of the more humorous titled non-profits getting state funding just from just one state agency- Alaska’s Department of Health and Human Services, download their FY2014 report. I caution you not to try to print it out because it is 302 pages long and you may run out of ink, or paper, or patience trying.
Perhaps the worst example of legislative largess is found in the Capital Budget (I call it Alaska’s pork budget which may be a little harsh considering some of it is good). This is the part of the budget where new roads and bridges are funded. Who can argue with that right? This has however devolved into a catch-all category where legislators fund micro “pork” projects at every level in their voting districts- from sewer pipes, to extra fire engines and police cars, to senior center vans. These can be argued as good things to fund from a social viewpoint, but shouldn’t local governments fund local projects with local tax dollars and not rely on the state legislature to bridge the gap between their bronze-plated haves and gold-plated wants?
Last but not least is the profligacy of local entities continually voting to sell bonds for capital improvement projects such as roads and schools where the state is on the hook for paying back 70% of the bond debt back while the local entity only pays back the remaining 30%. Alaskan bond debt is now a crushing $40,714 per Alaskan– the highest in the nation.
At this hemorrhage rate, the legislature has only about three years’ worth of savings left in the financial blood bank before it turns anemic and must adopt new revenue sources such as a state income tax, a state sales tax, new oil taxes, or a raid on the PFD. All are being actively discussed for implementation as early as 2017. We need not go limping down this gray government-bricked road.
The University of Alaska Institute for Social and Economic Research (ISER) has calculated a maximum annual sustainable budget amount of $4.5 Billion (unrestricted general fund that is currently around $6.1B or $6.3B if you add the $262 Million annual PERS/TERS retirement contribution to make yearly comparisons). This is the amount we can spend annually nearly into perpetuity without having to implement ANY new taxes or raid the PFD.
With oil trading at $60 per barrel, Alaska will only generate about $2B in oil revenue. In this scenario Alaska will generate more income from our savings invested in financial instruments than from oil. However, if the Alaska legislature continues to plow through our savings like a Valdez snowplow in January on Thompson Pass, we will have no investment income left and therefore the sustainable budget number will also plummet to around $2B. It is absolutely essential therefore to reduce the state budget from $6.3B to $4.5B. If I were governor, I would rip the Band-Aid off in one year by vetoing any budget that came in a penny over $4.5B (this number does not include federal grant money which is additional). However since I am not governor, the current plan is to reduce our state budget to $4.5B over a three year period to help reduce price shocks in the economy. The goal then is to reduce state spending to $5.5B this year, then $5.0 the second year, and $4.5B the third year and thereafter. Many grassroots politicos are putting the entire political weight of their organizations behind this plan. Big-spending scoffers will likely find us funding their opponent during the next political primary.
Many legislators from both political parties would rather increase revenue rather than cut spending owing to the intense lobby pain being inflicted on them by special interest groups (who are also the largest campaign donors). The big-government ideological phrase now echoing through the legislative halls in Juneau is, “You cannot cut your way to prosperity.” Really? Imagine yourself as a CEO at the helm of a large corporation that was losing fistfuls of cash because of having too many redundant employees on their books that used that phrase to their investors. The board would fire the CEO immediately. Historically, states like Texas that have had the most prosperous economies in the nation have also governed themselves in the most businesslike manner by attempting to keep their bureaucracies small, budget balanced, and taxes low. Those that have tried to overtax and spend their economies into a Utopian existence like California always seem to be in financial trouble and have high unemployment. You cannot spend your way to prosperity either.
Having too many state bureaucrats living off the private sector reduces Alaska’s prosperity in three fundamental ways. First, public pay and benefit costs must be born on the shoulders of the private sector. Secondly, the state loses out on the potential economic growth from state employees that could be otherwise similarly employed in the private sector. Thirdly and not insignificantly, too many red-tape producing bureaucrats can slow new economic activity to a crawl as potential new natural resource developers are dragged through a veritable glacial mud steam of regulations, fees and permits.
Alaska’s economic future now rests in the strong hands of State Representative Mark Neuman (R-Big Lake). He is Co-Chair of the powerful House Finance Committee and in charge of Alaska’s massive Operating Budget (the Capital Budget is assumed to be nearly zero during this financial crises). Rep. Neuman told me he has a goal to reduce the Operating Budget by $600-700M which would put Alaska on the recovery trajectory. However, he is facing enormous opposition from special interest groups to keep spending levels near their historic highs.
Quite frankly, the special interest voices being heard in Juneau for continued levels of spending can be much louder than their district grassroots voices for spending restraint. The Roman Senate had a famous saying of vox populi, vox Dei or “the voice of the people is the voice of God.” Though somewhat blasphemous for a person of faith like myself, I am convinced that many legislators informally poll their districts daily by the volume of daily phone calls, emails, and faxes they receive as their district vox populi. If you the grassroots are silent on this issue, than the budget will likely follow the voices of the special interests and your family will soon be facing a state income tax, a state sales tax, an industry stifling rise of oil taxes, or the raiding of your PFD- or possibly all at once.
Keep Alaska financially solvent and a good place to do business and raise a family. Contact Rep. Neuman today to encourage him and his staff along with your local legislators. Crimson red now paints the Alaskan skyline. Whether it is on the east or western horizon is up to you. Contact Rep. Mark Neuman at 907-465-2679 or [email protected] to give him encouragement along with your local representatives. Remember, our elected legislators work for us, not the other way around.
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