Why Exhausting Alaska’s Budget Reserves Is a Terrible Idea


Breaking the bank

Breaking the bank

Long-time readers of this blog may be tired of hearing this, but it’s important enough that it needs repeating. And repetition seems to be necessary to pound the ideas into our thick-headed legislators’ skulls. Exhausting more of the state’s budget reserves before imposing taxes is a terrible, stupid, awful idea.

Unfortunately, it is the default option, the consequence of inaction and equivocation. Which the Republican majority caucus is very good at.

Why does WC say it it a wretched idea?

Crude oil is a non-renewable resource.1 When you have extracted what is economically recoverable, it’s gone. For a while, you can recover a little more at increasing cost in capital and environmental damage. Earlier state legislators, considerably brighter than their modern peers,2 recognized that. They created several funds to transform the non-renewable resource into a renewable resource. The Alaska Permanent Fund and the Constitutional Budget Reserve are big pools of money, and you can collect interest and dividends from prudent investment of those monies forever. Those funds represent a kind of renewable resource, something that, with care and prudence, can be available forever, unlike the crude oil from which they derive.

Unless you spend the principal. If you spend the principal of those funds, you are denying future generations the benefits of those once-in-a-lifetime non-renewable resources. You are cutting off all that future income. You are transforming those funds into a non-renewable resource.

In the current fiscal year, we’ve burned through about $3 billion in reserve funds. Assuming a ten percent return on investment, that means we’ve denied ourselves and future generations about $300 million in revenue each and every year in the future. Stupid, stupid, stupid. It’s the golden goose mistake. Or, to put it in terms even Republican legislators might understand, it’s like harvesting every single salmon every single year. Instead of getting salmon forever, you get salmon for a few years and then they are gone forever. Dermot Cole calculates that at the current rate, we’ll have exhausted the Constitutional Budget Reserve – and all of the potential future revenue that implies – in 2018 or 2019. We’ll have extirpated the fiscal salmon.

This is not a hard decision. The choice is to adopt a modest state income tax now or, with income from the Constitutional Budget Reserve lost because the Fund has been senselessly spent, and deficits higher, a much higher income tax a couple of years from now.

WC understands an informal poll of the legislators isn’t encouraging. Senator Pete Kelly (R, Stupid) claims Alaskans are telling him to “cut that government first.” But even Senator Kelly knows we cannot solve the fiscal problem by cutting. The discretionary budget is much less than the shortfall. A leader would do what is required, not what his poorly-informed constituents want, which is more cake. When there is no more cake.

The idea that we have to cut more from state government before we can adopt revenue – whether earnings from the Permanent Fund, a state income tax or, most likely, both – is a lame, short-sighted and ultimately self-defeating excuse for avoiding an unpleasant task. We cannot budget cut our way to prosperity, and attempting to do so is likely to seriously hurt Alaska’s economy. The State’s bond rating is already in jeopardy. The Alaska Legislature is flirting with creating a recession as bad or worse than the mid-1980s crash. In that one, we lost half our banks, most of our credit unions and all of our savings and loan institutions.

So, yeah, stupid. We shouldn’t need a new lesson already. Come on, legislators; planaria have a longer memory than this. Suck it up and do your job.3

 


  1. Strictly speaking, more crude oil is being made, even as you read this. Organic sediments are already trapped at just the right depth, and being exposed to just the right temperatures, to make more crude. Unfortunately, the process takes millions of years. In geological time, crude oil is a renewable resource; in human time, it’s absolutely not. 
  2. There are boxes of rocks smarter than out current legislators. WC isn’t praising earlier legislators; just comparing them to the current crop of wretched excuses for statepersons. 
  3. Astute readers know WC doesn’t live in Alaska any more. The “we” in this post is imprecise. But WC did live in Alaska for more than six decades and still feels a stake in his old home. 
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