For many years, business leaders in Alaska and the organizations they belong to, such as RDC, have been imploring our state government to develop a fiscal plan.
However, the response to these pleas has been very disappointing. It is true that we occasionally hear political leaders talk about pieces of a plan. The current plethora of approaches to saving surplus funds from the new oil taxes is an example of the piecemeal approach we have seen in the past.
Alaska is at an interesting crossroads with regard to fiscal planning. Our government has chosen to increase taxes at a time when we already have a surplus, which puts us in the enviable position (unless, of course, you are one of the state’s three major taxpayers) of being able to discuss how these surplus funds might affect our fiscal future. Thus, it would seem to be the perfect time for our leaders to construct a fiscal plan.
So, how might a plan be constructed? The first step in any fiscal plan is to look at the expense side of the equation. This step would require using a base year to start from and then estimating future expenses based on some formula driven by assumptions including inflation and population growth. I would propose that such a plan cover at least a tenyear period and be updated no less frequently than every other year.
Using 2006 as the base year for the operating budget, and limiting future budgets to three percent growth per year might be a place to start. It is true that such a formula would mean that the 2008 proposed operating budget is $600 million over the target, but the same formula was adopted by the legislature in the recent special session raising production taxes.
The point here has less to do with what the formula is than that the state needs to have some longterm spending goals so we can stop the piecemeal approach to budgeting, which has become a major detriment to fiscal discipline.
The legislature could also consider adopting a twoyear budget cycle. I believe there will be several positive effects from such a policy. These include reducing the temptation to increase the operating budget each year, helping the legislature meet the voter mandated 90day session, and reducing the time that executive branch agencies have to spend on the budgeting process, thus freeing them to carry out their other responsibilities.
Similar longterm goals need to be set for the capital budget. However, the annual increases to the operating budget pose the biggest threat to longterm fiscal stability.
Any fiscal plan must have a policy for saving surpluses, and there are several options for doing so. One would be to pay back the debt owed to the Constitutional Budget Reserve Fund that has resulted from previous withdrawals from that fund. A solid fiscal plan would also set a target for how large we want this fund to grow.
Another place to save the surplus is in the Permanent Fund. However, before making future deposits to this fund, I believe the legislature should adopt the Percent of Market Value approach for distributions from this fund, either by statute or by amending the constitution. Such an approach would keep the dividend program, but also set aside some of the distribution to be returned to the Earnings Reserve portion of the Permanent Fund in times of surplus, but be available for meeting budget deficits in less robust times.
The split between these two streams of revenue will probably be the subject of a good deal of public debate, but a 50/50 split seems reasonable to me. There are also some that would put a cap on the dividend, and that is certainly a subject that could be discussed as part of any longterm fiscal plan.
Once these savings decisions have been made, the state should be able to estimate probably revenue streams for the ten-year period. Such a plan would give us the basis for some comfort as to how the state will address those years in the future when deficits will surely be the order of the day, even if it would lead us to having discuss the possibility of a statewide tax.
Certain items will drive any discussion of a fiscal plan. These include the funding of education, local government revenue sharing, and the debt to the state’s retirement funds, among others. In addition, the steady decline in oil production will play a dominant role in any 10year fiscal projection.
A fiscal plan should drive fiscal discipline, particularly if the legislature were to adopt the base budget assumptions I presented above. However, as much as political leaders talk about holding the line on and/or reducing the cost of government, they have not done so. If government is ever to get serious about cutting expenses, then it must realize the only way to achieve this illusive goal is to repeal laws. New laws drive new expenses. Getting rid of old laws and refining the timeconsuming and wasteful processes that government sometimes employs is a way to make a well designed fiscal plan work.
I have tried to lay out some options to get to a fiscal plan for our state. Admittedly, it is not the only road map to that destination. However, no matter what the route, if we do not start this journey in a time of fiscal abundance, we will be forced into crisis planning when this abundance no longer exists.
By not acting now, the government is wasting an opportunity and will also inevitably waste at least some of our fiscal resources. In the words of a country western song, what we need is, “ a little less talk and a lot more action.”
