Budget woes

As the Alaska state House and Senate prepare to sit down to reconcile budgets that take a blood-sucking mosquito bite out of state spending but nonetheless continue the dangerous and eventually doomed policy of living on savings, it’s hard to avoid wondering what Roger would think.

Roger would be the late Roger Cremo, an Anchorage pioneer and attorney who urged a permanent fix to the state’s budget crisis after oil prices plummeted in the 1980s and an earlier Legislature ended up in the same predicament as the Legislature of today.

With the state suffering through the “Great Recession” in the late ’80s and struggling into the ’90s as the economy slowly recovered, the “Cremo Plan” was among the most talked about of various Alaska “fiscal plans” intended to avoid the state once again ending up in the predicament it is in today.

The plan never got off the ground.  Both former state Rep. Brian Rogers, D-Fairbanks, and former Anchorage Daily News reporter Stan Jones remember the problem as a simple lack of “political will,” but the plan was eventually killed by a force even more powerful.

One could say the end came when Alaska got lucky.

Crude oil prices bottomed out under $18 per barrel in November ’98 and then started climbing and climbing and climbing. Prices peaked at almost $50 per barrel two years later, dropped briefly in 2001, but then started climbing again.

By June of 2008, prices had gone over $162 per barrel and for the next six years rarely dropped below $80. The state’s “fiscal gap” – the difference between what Alaskans could afford and what they wanted from government – disappeared beneath a pile of petrodollars.

Discussions of budget cuts, new taxes, use of Permanent Fund dollars or any other measure to close the fiscal gap faded away as soon as the gap closed, and once it was buried under a pile of money, it was largely forgotten even as the state went on a spending spree.

“These highly unpopular options were avoided when oil prices soared after 2005, bringing the state record revenues and large surpluses – despite rapid growth in spending” is how now semi-retired economist Gunnar Knapp, then at the University of Alaska Institute of Social and Economic Research (ISER), put it in 2015.

 By 2008 the state was so flush that then Alaska Gov. Sarah Palin, the little-known liberal politician from Wasilla destined to become a nationally famous conservation politician, convinced the Legislature to give Alaskans a $1,200 energy rebate on top of a $2,069 Permanent Fund Dividend (PDF) to help offset the high costs of gas and heating fuel. 

The good times didn’t last.

“…Falling oil prices after 2012, and then a more-than 50 percent drop in prices during the first half of fiscal year 2015, brought ever-increasing deficits – projected at $3.5 billion at the time of writing – a sense of fiscal crisis, and a renewed recognition that the state’s fiscal situation was unsustainable, and that deficits would likely erase reserves within seven years and possibly much sooner if oil prices stayed low,” Knapp wrote seven years later.

And now, the state faces a $1.6 billion deficit newly elected Gov. Mike Dunleavy announced a plan to cut only to have Alaskans react in panic:

Welcome to life as an Alaska, oil-revenue junkie. The highs are great, but life can be hell if you’re having trouble getting that next fix.

Smoothing the curve

The Cremo Plan was designed to cure this by taking the highs and lows out of the budget process.

Cremo proposed ending the Permanent Fund and replacing it with a “Perpetual Fund” into which all oil dollars would flow. A fixed percentage of the fund would then be marked for withdrawal every year.

The withdrawal would cover the cost of running state government and of paying Permanent Fund Dividends (PFD) to Alaskans. The plan would have blocked legislators from spending extravagantly just because they could in the good times of oil riches, and it would have backstopped the cost of government in the lean times of low oil revenues.

Simply put, the plan would have made Alaska more like Norway with its Government Pension Fund Global or simply “the fund,” as the Norwegians call it.

“The fund is an integrated part of the government’s annual budget,” according to fund manager Norges Bank. “Its capital inflow consists of all government petroleum revenue, net financial transactions related to petroleum activities, net of what is spent to balance the state’s non-oil budget deficit.

“The fund was set up to give the government room for maneuver in fiscal policy should oil prices drop or the mainland economy contract. It also served as a tool to manage the financial challenges of an aging population and an expected drop in petroleum revenue.”

Begun in 1990, the fund hit the $1 trillion mark almost two years ago. That growth was aided by the big flow of oil money into the fund from 2001 of 2014 when oil prices were high.

Alaska in those years was growing state government, super-heating capital spending and, under the leadership of Palin, warring with state oil companies.

Norway had a somewhat different approach.

‘The overall objective of Norway’s petroleum policy has always been to provide a framework for the profitable production of oil and gas in the long term,” the Scandinavian country says on its website for The Petroleum Tax System. “It has also been considered important to ensure that as large as possible a share of the value creation accrues to the state, so that it can benefit society as a whole. This is partly obtained by the tax system.”

The Alaska Permanent Fund dates to 1976 – 14 years before the Norway fund – and is now valued at $64.5 billion – about a 15th of the value of the Norway fund.

Norway is, of course, a sovereign nation and can thus function in ways Alaska cannot. As a U.S. state, Alaska labors under some federal restraints on spending as it vividly discovered after the original, 1980 plan to pay  PFD dividends to at the rate of $50 per year of Alaska residency retroactive to Statehood was struck down by the Supreme Court of the United States (SCOTUS).

The Alaska Supreme Court upheld the plan, but SCOTUS ruled it violated the Equal Protection Clause of the Fourteenth Amendment to the U.S. Constitution by creating fixed, permanent distinctions between an ever-increasing number of classes of Alaskans.

The size of the checks handed cheechakoes would never match those of sourdoughs until the latter were in their graves. The SCOTUS ruling was not popular in Alaska, and the couple who brought suit – Ron and Penny Zobel – were for a time outcasts, but time heals all wounds. 

The Zobel suit does, however, serve to underline how Alaska is not Norway, and thus emphasize that speculating on how things might have worked out if Alaska was more like Norway is tricky.

Still, attorney Brad Keithley – the managing director of Alaskans for Sustainable Budgets, and a man who has spent a lot of time watching and pondering Alaska’s revenues and spending – observed that under the Cremo Plan “we likely would have a smaller state budget, be a smaller (population) state and likely have some sort of personal tax system. It also likely would have reduced the swings back and forth in the oil tax structure.”

Yes, an income tax was part of the Cremo Plan, but the money Alaskans actually earned would have remained protected from that tax.  Earned income would simply have served as the yardstick to determine how much of the PFD wealthier Alaskans gave back to the state.

More for the poor

“PFDs would be higher than under the present plan,” authors of Alaska Politics and Public Policy – The Dynamics of Beliefs, Institutions, Personalities and Power, wrote in 2016, “though a large portion of them would be progressively back to the state,but no one would be taxed more than their PFD amount.”

In other words, the PFD would have been restructured to help struggling Alaskans while those who’d found financial success in the north would do with less or none of the state handout.

“This proposal meets the fairness concerns about using Permanent Fund earnings so that lower-income Alaskans would not be penalized by a reduced PFD or an income tax,” concluded book editor Clive Thomas, a former political science professor at the University of Alaska Southeast, and his colleagues. “Although it failed in the Legislature, Cremo’s idea was championed by Gov. Jay Hammond….”

Hammond, an iconic figure, died three years before Cremo.

Neither had any luck selling various legislatures on the original Cremo Plan or any of the variants that emerged. By the time the state’s Long-Range Financial Planning Commission (LRFPC) adopted a final version of a plan for legislative consideration in 1995, Alaskans had been pocketing PFDs for years.

As Jones wrote then for the Daily News, “even politicians who aren’t talking against the plan are walking softly around the touchy issues of cutting Alaskans’ Permanent Fund dividends and, for the first time in more than a decade, taxing their incomes.”

At the time, he also reported that “under the commission’s plan, the fiscal gap would drop to zero by 2000. And by 2003, the state would be running a budget surplus of about $200 million a year.”

In retrospect, he says now, he isn’t sure anyone in Juneau was willing to believe that.

“Anybody can crank up Excel, type in a bunch of assumptions, and come up with a fiscal plan that works perfectly in Excel,” Jones said. “But if your assumptions are political nonsense, your plan won’t work at all in the real world. Spreadsheet salvation is just mental masturbation.

“My guess? If we ever get a fiscal plan, it’ll be after so much blood, sweat, tears and mucus have been shed by politicians and public alike that there seems no way out except for the plan before them.”

Rogers, the former legislator from Fairbanks, thinks the Cremo Plan might simply have been doomed by bad timing.

“If adopted in 1979 it would have given us something similar to Norway,” he said. “Unfortunately it wasn’t, and by the time the LRFPC came around it would have required a very big drop in spending (similar to what the Governor has proposed this year), which no one had the stomach for.”

Maybe human nature will dictate the same-old, same-old goes on for a long time still. Alaska had cash reserves to fall back on in 1995 that made it easy to avoid big budget cuts. Alaska today has cash reserves to fall back on that make it easy to lack the stomach for budget cuts.

A 2015 effort by Scott Goldsmith, an ISER economist, to revive Cremo’s idea went nowhere. Goldsmith described his “Path to a Fiscal Solution” as economically easy. That might even have been true. It just wasn’t politically saleable.

It’s probably an even harder sell today.

Alaska oil production, which since 1995 has been expected to just keep going down, down, down, stabilized in 2014, and given new oil discoveries last year is expected to soon begin increasing.  The flow through the TransAlaska Pipeline System is projected to start increasing by up to 100,000 barrels per day. 

Meanwhile, oil prices, which have been oscillating, are again creeping upward and most analysts are forecasting they will continue to do so. 

The state budget for fiscal year 2020 forecast a $1.6 billion deficit with oil at an average price of $64 per barrel. Alaska needs to see an average price of about $71 per barrel for the budget deficit to zero out.

Prices have been bouncing around that number since the start of April, but where the fiscal year average will end up remains anyone’s guess.

It is possible Alaska could get lucky again if kicking the can of fiscal responsibility down the road once again – as Dunleavy has described the state’s fiscal policy – can be considered lucky.

But is it truly reasonable to expect state lawmakers to treat state finances differently from how most Americans treat their personal finances? Anywhere from 55 percent to 78 percent of Americans are now reported to be living paycheck to paycheck, and none of them are sitting on the kind of savings safety-net still backstopping the state of Alaska.

Were Cremo still alive, his observation on all of this might come in one word – “snafu” – in so many ways.

16 replies »

  1. I like Glenn Reynolds paraphrasing of Herb Stein’s Law in terms of government spending, whether on debt, pensions, education, entitlements, or anything else…

    “Something that can’t go on forever, won’t. Debts that can’t be repaid, won’t be. Promises that can’t be kept, won’t be. Plan accordingly.”

    Right now we have multiple groups, dependent on “government” money, whose “plan” is apparently that they’ll get theirs and the other guy’s expectations aren’t their problem. Which is why government in particular shouldn’t ever have gotten into the “making long-term promises to particular individuals” business and should be prioritizing extricating itself before the whole edifice crumbles.

  2. You can probably get real close to balance by simply rolling back Walker’s Medicaid expansion (around $390 million in 2017- increasing every year), and substantial cuts to education at all levels (total ed spending in 2018 was $2.4 b). i can see at least a 50% education cut in our not so distant future. Technology / distance ed / online training will do to the current structure what Thomas Edison did to the Community Bands and Community Theater troupes of 120 years ago. And vouchers will complete the deal. Complete COLA freeze statewide on all state salaries / PERS / TERS for 5 – 10 years would also help (yes, I am a PERS guy).

    On the income side, from the 2018 numbers, for each 100,000 additional bbls of oil off the Slope, the State gets $557 million. Grow the flow and grow the income. Sadly, nobody is talking about this either.

    Problem is that the PFD is easy to grab. Now that Walker set the precedent, it is no longer painful to do so. No stomach in Juneau for any of the suggested cuts above. This is going to get uglier before it gets better. Cheers –

    • Well said Agimarc! Increase the flow ! Not just oil but fish farms and other buisness. Legislators must look into ways to adjust laws and regulations to encourage a more diverse economy and make our state attractive for buisness. More support/ marketing for renewables like eco tourism even sport fishing and hunting. The state has screwed Cook Inlet sport fishers and commercial fishing in multiple drainages . Especially the Yukon and upper Cook Inlet . Agimarc I don’t agree with reducing Medicare as people need health care to stay productive and not a burden. Otherwise you are definitely pushing right direction! Increase the flow cut unnecessary costs .

    • With regards to increasing flow/state income,it depends on lease structure.
      In short,prudhoe bay legacy is high $.
      Newer fields not near as much.
      Google up King Economics(i think)

      • Anwar . Pump it dry while oil is in demand= profit . Renewables are on the horizon. = price drop . Invest every dime possible into permanent fund to difersify . = eventually able to follow Norway’s fund for government support and investment in future infrastructure. Privatize all school . No more state financed failing public schools. Worthless money pit . Stop financing failure . Make grants available to charter schools and voucher systems for parents to choose schools they prefer that are performing correctly. Dump public ed . If this is done schools will start exceeding expectations. Kids will be better educated and America will “rock” public schools are a failing system of indoctrination that deadens the mind of many .

  3. The way we are going, electing people who cannot do simple math, we will not have a dividend in a few years. Those we elect will soon be telling us that since they spent all of the PF Earnings Reserve they will need to tax the few of us who work so they can give it to the many of us who do not. After that the big pie called the Permanent Fund will be on the table.

    We need elected representatives who can do simple math. We cannot keep spending our savings and hoping that TAPS throughput will go up and the price of oil will rise.

  4. Very important subject. Great article. Thanks for your in depth analysis Craig!

  5. Alaskans have been fed a limited amount of information on the items in the state budget (both by politicians and reporters).
    This administration keys on “oil” and the “pfd” as well as funding for “education”.
    This three legged stool allows the discussion to be framed around the select few talking points so “dems” and “reds” can safely keep their high salaries and avoid other key issues like the “pension crisis” currently sweeping across America.
    How much of the AK state budget goes to pensions for retired state, muni and borough workers?
    Are the past rates which were established during the “boom” period still sustainable as we move forward with low prices for oil and no new revenues projected?
    “Moody’s Investors Service recently estimated that public pensions are underfunded by $4.4 trillion.
    That amount, which is equivalent to the economy of Germany, accounts for one-fifth of the national debt”…
    “Every year that goes by leads to more red ink and more concern because the state and local plans across the country have clearly not done what they should have done to contribute the right amounts….”–Olivia Mitchell
    Where does Alaska stand with promises made to retired workers and pension obligations for the future?
    How much of this year’s budget is going towards pensions and retirement benefits?
    These are questions that should be asked by journalists throughout the state.

      • Governor Parnell moved 3 billion from the CBR into those funds to help address the exploding and reoccurring annual cost. Governor Walker used that one time 3 billion expenditure as justification to claim he was cutting the budget when he wasn’t.

      • Thanks Craig for that link…
        It seems strange that every other state is writing about their pension crisis and no reporters (in Alaska) are writing about Alaska’s “underfunded” pension system?
        “Alaska, Connecticut, and California have the worst-funded pension systems in the country, stated the report, with liabilities per capita of $46,774, $32,805, and $29,137, respectively.” 

        Your link to Cliff Groh’s paper states…
        “There is uncertainty about the size of these unfunded liabilities, and there are also different ways of calculating them. For example, the State of Alaska’s snapshot balance-sheet approach, subtracting the accrued liabilities from the assets, based on their actuarial value, produces an estimate of $6.609 billion for the combined unfunded liabilities of PERS and TRS.5 That figure is an estimate of the unfunded liabilities discounted to the present day.”
        So, we can see why teachers and state employees both favor using money that could go to the PFD for their pensions.
        $6 Billion in “Unfunded” pension plans is a large chunk of change for the state to come up with if this administration is hell bent on no new taxes and no breaks in hand outs to the oil companies….
        $6 BILLION DEBT for pensions is obviously why Walker garnished the PFD’s for the budget during his term.

      • Most elegant description: expensive education turning out poorly educated children.

    • Steve, seemed like every company had a pension to reward their employees at one time. I guess that was before we had to implement overburdensome federal and state regulations and to absorb the costs (education, healthcare, housing, food) of 30 million illegal aliens. With thousands more coming by the day. Well, new Democrat voters is the politically correct term.
      Classic socialism Steve-O, where the haves pay the have-nots. Until we are all poor or “eqaul” as they say. Well, except for the leftist elite.

      • Steve,

        When you said “$6 BILLION DEBT for pensions is obviously why Walker garnished the PFD’s for the budget during his term” what exactly makes it obvious to you? I do not recall hearing Walker suggest such a thing, nor do I recall any other lawmaker suggesting such a thing. What exactly makes it obvious to you that Walker took large portions of the PFD from every Alaskan man, woman, and child to put into the pension fund of state workers and teachers? Did he propose a bill to do such, if so I don’t recall that either.

        The main reason there is such a large unfunded liability in the PERS and TERS pension accounts is because the workers themselves failed to fund them. They easily could have bargained for the raises they’ve received over the years to go towards their own retirement, instead they chose cash.

      • as Thatcher put it: the problem with socialism is you eventually run out of other people’s money.

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