Alaska is Alice Rogoff, and if you watched the rise, the fall and the implosion of what was the Alaska Dispatch News, you know how that story ended.
Where it began was with Rogoff growing up in a comfortable, upper-class family, marrying David Rubenstein who eventually earned more money than many banks, and as a result, never needing to learn how to work for a living.
The parallel with Alaska – a state of which Rogoff so badly wanted to be part – isn’t perfect, but it’s close.
Alaska struggled and clawed for survival before oil was struck on the North Slope in 1968, but ever since the crude started flowing in 1977, Alaskans have been living easy on the money of oil industry’s labor.
Forty-two years is a long time to live outside reality. People become conditioned to the idea life will always be easy and the money will always be there.
Certainly Rogoff did.
Money was not something she earned. It was something given to her to spend because of who she was, and she spent it with good intentions. Lots and lots of good intentions.
Rogoff might have some flaws on a personal level. She still hasn’t paid AlaskaDispatch.com editor Tony Hopfinger, the man who helped make real her dream of becoming an Alaska somebody, the money an Alaska jury decided she owes him.
But on a societal level, she wanted to help people, especially Alaska’s Native people
Alaskans have always been similarly well-intentioned. About 60 cents of every dollar the states spends today goes to finance education, pay for healthcare for low-income residents, to support welfare, or to provide for pensions.
Because Alaskans – left, center or right – want all the state’s children to be educated, want everyone to survive illness, want to keep the poor from starving, and want to thank those who worked to build the state.
These are good intentions spawned by 20th Century America prosperity. They are, likewise, the good intentions of having the wealth to have good intentions.
For thousands of years before the 20th Century, Alaskans educated their own children, fought off illness as best they could without medical providers, left the weak behind to die, and had no clue as to the meaning of the word “pension.”
And for almost two decades after the Territory of Alaska was replaced by the State of Alaska, good intentions were constrained by fiscal realities.
Before oil started gushing in the north, Alaska state government survived mainly on an income tax and spent about $500 million per year. Were the spending of 1975 adjusted for inflation and population growth and projected forward to today, the state would be spending about $2 billion.
The state is spending more than twice that now.
Why? Because it can. Because we can.
The state of Alaska, like Rogoff, is rich. As of the end of February, we were sitting on $63.9 billion in the Permanent Fund.
Despite this, Republican Gov. Mike Dunleavy entered office proposing $1.6 billion in budget cuts. He has been taking the predictable public beating ever since.
All politicians agree there is fat in the state budget right up until the time it comes time to go on a diet, and then a lot of the fat becomes muscle. Anyone who has ever gone on a diet can understand the problem.
Dieting is difficult. You have to control your desires. And Alaskans have spent decades eating what they want.
Not only that, there is little real reason to diet. Yes, it might make the budget look better, but it’s not like we’re going to die tomorrow if we don’t get things under control.
If the state goes on doing what it is doing and maintains itself by emptying the Constitutional Budget Reserve Fund (CBRF) and drawing down the state’s Earning Reserve, it can continue to pay full Permanent Fund Dividends and survive through fiscal year 2028 and still be sitting on $63 billion in the Permanent Fund, according to the State of Alaska Fiscal Plan For FY20 – FY29 released by the Dunleavy administration this week.
“With no accessible savings, this scenario leaves few options and fewer assets for future Alaskans,” the plan adds. “Taxes or budget cuts would still be required, but the conversation would just be delayed for a decade.
“The short-term benefits are highest in this scenario, as no money is removed from the current economy, and PFDs are greater than in fiscal year 2019(FY19). As a result, total household income in FY20 increases by about $1.3 billion, and no subtractive impacts are felt by the current economy.”
(The Dunleavy fiscal plan could be found here: https://www.omb.alaska.gov/ombfiles/20_budget/PDFs/FY2020-10yr-Plan-Final.pdffbclid=IwAR1YbTKA5y5yFbkOKX1g9Rq4HsLfOIrZAi0vA7OfL_tPTHNO3hKWGPJS264)
The Dunleavy plan refers to this as the “kick the can down the road” approach. It is similar to Rogoff’s “hope for a miracle” plan that envisioned people lining up to buy newspapers in the Age of the Internet.
The kick-the-can-down-the-road approach eventually needs a miracle, too – a big jump in oil prices.
This probably has a better chance than Rogoff’s miracle. BP – one of the oil majors – was once projecting $100 per barrel oil would become the norm. The price today is moving around $65 per barrel, and most forecasts predict it will stay below $70 per barrel for a long time.
Given this, Dunleavy has, for better or worse, rejected the miracle gamble.
“The governor does not believe it is just to saddle future generations with the questionable fiscal decisions of today,” the fiscal plan says. “Therefore, he does not support this scenario.”
Instead his proposal is to cut. Democrat legislators have talked about new taxes.
Neither option is all that good. The Dunleavy plan does offer a fourth option but promptly rejects that call for the use of Permanent Fund earnings to offset the deficit in order to maintain state spending.
“This scenario inevitably leads to the demise of the PFD program, as increased government spending eventually consumes the entire” Permanent Fund draw, the plan says. “Ultimately, this scenario still requires a future solution to the same problems currently facing the state.”
The fiscal plan is 20 pages long and simplifies the state’s budget issue about as much as it can be simplified. It is doubtful many Alaskans will read the document.
The plan also highlights the one thing on which all economists and most politicians do agree.
“…There is no simple solution to addressing the state’s budget deficit. Every
option comes at a cost. The question is, ‘What trade-offs are we willing to accept?’
“While reductions in state services are difficult decisions, it is important to recognize the cost of not addressing the structural gap between revenues and expenditures.”
Dunleavy’s big argument for majors cuts is a long-game plan. The economy takes a hit in the short-term, but the restoration of the Permanent Fund Dividends help offset the damage and once the economy stabilizes in a state with a trimmed down bureaucracy, a cap on spending (another Dunleavy proposal) and requirements for Alaskan approval of any new taxes, the state will start to grow again.
“…The Governor’s plan signals to those wishing to invest in Alaska that it has its fiscal house is in order, and is open for business. The plan results in higher levels of household income to support a higher
standard of living, avoids taxes that would hinder economic growth, and ensures that Alaskans continue to receive their individual share of Alaska’s resource wealth,” the plan argues. “Removing uncertainty regarding future taxes will promote further investment and allow Alaska’s economy to grow and diversify.”
That conclusion is speculative. Economically, it’s true that lower taxes and fiscal certainties encourage business investment, but Alaska has a lot of natural disincentives to business: it’s far from markets; the cost-of-living is high; the pool of skilled workers is small; and more.
Signalling that Alaska is open for business might encourage investment in new Alaska business, but there’s no guarantee. And it’s hard to see a promise of a better times in the future causing any government employees to willingly give up their jobs today.
There are reasons budget cutting is hard.
Rogoff couldn’t do it even though she had complete control over her business. She ended up losing it all in bankruptcy.
Dunleavy has only limited control over the state budget and is facing a tsunami of opposition to his proposed budget cuts. The only thing legislators hate more than cutting budgets is imposing taxes, the other option for getting the state’s fiscal house in order.
Whether Alaska government can do either or simply kicks the can again remains to be seen.
The fiscal plan warns that a crisis near, arguing that “now, the CBRF balance is at what many consider to be the minimum level needed for cash management and emergencies, and it appears unlikely that high oil prices are going to save the day.”
Be that as it may, there are political reasons for years of political inaction even if the results were not good.
“…The data clearly show that spending $16 billion out of savings over the last four years to support higher government spending did not get Alaska out of a recession and did not significantly reduce unemployment,” the plan says.
Fiscally, that’s a valid argument for changing course. Economically, some are already arguing the Dunleavy plan could make things worse, lengthening the recession and increasing unemployment. Politically, lawmakers are mainly thinking about what plan will get them re-elected.