A picture is worth a thousand words, or so they say. The picture at the right is worth much more than that – about $3 billion more! That’s how much more money the state of Alaska will need to balance its budget in fiscal year 2010 (July 1, 2009 - June 30, 2010). To get to this number, I do make a few assumptions, but this large deficit is not outside the realm of possibility: I assume oil prices will average $40for the year (approximately the current price at publication) and I also assume the Legislature will pass the Palin Administration’s proposed FY10 budget as is, with no additions and limited capital projects.
Clearly, Governor Palin is a lot more optimistic than I am. She predicts higher oil prices ($57.78/barrel) in her forecast and subsequently, a much smaller deficit. Let’s hope she’s right! But what if she’s not? Given this hypothetical, yet very realistic scenario of $40 oil, we may end up eating through all of our savings in the Constitutional Budget Reserve (CBR) in approximately three years.
What can we do?
Well, we could encourage our state legislators to take action now. Why now? We’re not yet in dire straits. Speaking of Dire Straits, didn’t they have a song that referred to getting your money for nothing? Anyway, I digress.
We need to hold our legislators accountable to lead, not just get re-elected. I applaud their past efforts of saving nearly $7 billion since FY 05. But, even with this savings, we’ve still seen the general fund budget grow every year, nearly doubling in the past ten years.
Legislators should lead by questioning every penny the state spends. When legislators propose new programs, the fiscal notes for these bills must be scrutinized. As for current state programs, RDC’s past president, John Shively, once recommended sun-setting every program after five or ten years, forcing legislators to delve into the justification for the program and make its users defend their budgets. I think it’s an idea worth looking into. Even with all of that said, if we were to cut the state budget by a mere 12 percent, we would save $500 million. To make up the entire $3 billion in cuts, we’d have to slash the budget by over 75 percent. Though it sounds good, it’s not realistic and at this point, given the state of the economy, unwise.
Now, it’s hard to hold your legislators accountable for what they spend when individual Alaskans pay nothing. In years past, RDC has encouraged the implementation of a broad-based tax, be it either a sales tax or an income tax. Amazingly, Alaska is the only state in the union that doesn’t have either a state income or state sales tax. But as the chart shows, even if we were to implement both a five percent state income tax AND a four percent statewide sales tax, we’d only generate about $1 billion.
In addition, RDC has also recommended implementing a Percent of Market Value Approach to the Permanent Fund. Similar to other endowments, five percent of the value of the Permanent Fund could be withdrawn each year. At a value of $30 billion, we would have $1.5 billion for use by the state (I will leave it to the Legislature whether this amount would be used for dividends, funding public services, or otherwise). Again, even if we did this, we’d still end up short.
Put them all together – $500 million in cuts, $1 billion in broad-based taxes, and $1.5 billion from POMV – and we will have a balanced budget in the next fiscal year. Meanwhile, oil production continues to fall by four percent per year, so for FY11, assuming a flat budget, we’ll need to average more than $40/barrel to keep our deficit at only $3 billion.
The gas pipeline will save us, won’t it? Well frankly, we’re at least ten years away from a pipeline being able to take Alaska’s gas to market, and given what I just outlined, we will have to do something before then. And even so, current natural gas prices are below the estimated cost to ship the gas to the Lower 48, and as more supply comes online from the different shale plays and other non-conventional sources in the Lower 48, gas prices may stay low for some time. What the state ultimately realizes from natural gas may be surprisingly little.
In the meantime, I’m going to ask you all to pray, and I mean the type of prayer you would say before taking that college final you needed an A on in order to pass the class. Get down on your knees and pray for significantly higher oil prices to bail us out once again. But like all prayers, God just won’t grant you your request if you’re not prepared. Miracles can happen, but frankly, if you haven’t studied for the test, you deserve to fail.
And if we don’t prepare now, we too will fail.
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