Our state government has been spending close to $5,000 nominally per person more than it brings in through revenues for two fiscal years now. Anyone who has balanced home budgets knows that the state can reduce government spending and/or increase government revenue to solve the imbalance.
College students often take out loans and spend in excess of their income with the plan to one day repay the loans once increased income is a reality. Middle aged people often spend below their income and save with the expectation of retiring and in those retired years they plan on spending in excess of their income.
Although people may not know it, they are in effect leveling their spending habits over the course of their lives by overspending early and late in life, and spending less and saving more in the middle. We need to take this approach to state government budgeting.
Dr. Scott Goldsmith, the economist and Professor Emeritus at the University of Alaska’s ISER, has designed a robust economic model for doing just that. His model calculates something called “Maximum Sustainable Yield.” This economic concept is also often used in fishery management.
When it comes to fish, it is the maximum amount of fish that can be harvested year after year after year while maintaining a healthy population. For the state government this is the maximum government spending level that we can sustain year after year. The number assumes we can sustain this level even when future government “spending grows with inflation and population, no new taxes, PFD constant, and use of earnings of all financial accounts.” In other words, no new taxes and you get to keep your PFD.
The approach immediately brings in new revenue by using the income above and beyond what is needed to pay and inflation and population proof the PFD for the general fund. The number his most recently updated model produces is about $4.5 billion for the unrestricted general fund, otherwise known as “the budget.”
This begs the question, when was the last time our government spending would be sustainable under the most recent calculations?
From Fiscal Years 1997 to 2006, our government spent below the current sustainable level. Furthermore, from 1999-2005, it spent at or below $4 billion. A year later, in 2006, was the last year we were below the sustainable level; our government even spent almost $900 million below the sustainable budget in 2004. We ought to set in motion a plan this legislative session to make our government look, operate, feel, and most importantly spend, when adjusted for inflation and population, like it did in this time period. When we do this, it is not only possible, but probable that we can get away without taking PFDs from our children, parents, working class, and senior citizens and without taxing ourselves.
Since 2006, agency operations modestly contributed to the increased spending, but this isn’t the real culprit. This part of the budget is where important spending like K-12 education, the university system and transportation spending occurs, so those that are fearful of deep cuts in these areas should have reason to breath a sigh of relief.
As can clearly be seen, the statewide operation budget has increased significantly. Almost half of this increase has been driven by the generous tax credit program. When we changed to the new tax structure under SB21 and cut oil taxes at high and medium prices on crude, we kept the tax credit program going. Those tax credits have been in the $500 million per year range for several years now. They have been a real driver in increased government spending and, given our fiscal situation, it is time to rethink the scale and even the existence of the tax credit program.
The other significant component of Alaska’s operations budget over the last several years has been appropriations to pay down the unfunded liabilities of the state public workers defined benefit pension plans. The good news is the unfunded liabilities are much better shape today than they would have been without these appropriations.
The capital budget grew out of control in the years after FY2006. While our government and politicians made many fiscal mistakes, this is the largest mistake that they have already corrected. Over the last several years, the once bloated capital budget has been paired down to acceptable levels.
It seems to me that the easiest way to make our government spend like it did in the 10 years before FY2007 is to undo much of what changed since then. This means rethinking oil tax credits first. Once significant reductions have been made to this area our government will be within a few hundred million dollars of the sustainable level which we can certainly reach.
If we spent so frugally while maintaining our univerity system, roads, public schools, troopers, court system, jails and so forth for 10 years in a row before, it is only reasonable that we can do it again.
This approach of rolling back spending to this time period allows us to use the Goldsmith plan in a way that saves the PFD and avoids new taxes.
• Aaron Lojewskiis a realtor in Fairbanks. He holds a master’s degree in economics from the University of Alaska.