Senate plan to balance budget without taxes founded on rosy assumptions

In the 1920s, a Minnesota man named Prophet Jim McNulty managed to get his name in the newspapers because he knew what would happen in the future.

He knew we would have a woman as president by 1945, that prohibition would never end, the U.S. would own Canada by 2000 and the New York Yankees would win the 1925 World Series.

He also knew enough to write to hundreds of newspapers and government leaders, which is how some of his correspondence landed in the territorial files of the Alaska governor's office in a repository labeled on occasion as the "nut file."

The "nut file" is of another era, but it's good to remember Prophet Jim when it comes to predicting the future in this uncertain world.

Forecasting is easy. The hard part is getting it right.

To that end, there are plenty of predictions about Alaska's financial future in the air just now, but I've noticed that some of them are prophetically flawed because they pretend inflation doesn't exist.

They include charts and graphs that purport to show we can freeze spending near $4 billion and keep it on a straight line forever.

But this is a bit like losing weight by promising to go on a diet in 2018.

Straight lines are graphically pleasing to those who want to put a lid on state spending, but they conceal the big future reductions in state services that will have to be made to keep the budget flat.

To represent a stable budget, the line has to climb, but that is not what people want to see. They would interpret a climbing line to mean the budget is rising, even if it is not.

Inflation can be ignored for a little while, but as banker Elmer Rasmuson famously said in another context, it is like a thief in the night.

If inflation runs 2.25 percent a year, and we go a decade without adding money to compensate, that's the same as stripping about $1 billion a year from the budget in 2027.

Those who put flat-line budget proposals forward need to be clear they are counting on future cuts in state services they have not revealed. It's just possible Alaskans will support paying taxes if it means saving services.

In addition to ignoring inflation, the flat-line budget charts assume we can live without a big increase in the state construction budget that pays for the major repair and rehabilitation of facilities ranging from elementary schools to Pioneer Homes.

Adjusted for inflation, the construction budget is about as low as it has ever been. The cost of neglecting state facilities, which can only be done for so long, has to be part of any reckoning on the state budget.

So does the cost of paying hundred of millions in promised state cash subsidies to oil companies. Rightly or wrongly, the state made a deal and has to pay up.

These are three of the main reasons why claims the budget can be forever frozen are suspect.

I'm excluding for the moment the pledges by some legislators to cut $750 million or $1 billion over the next three years. Legislators have declined to identify cuts or say what they want the state to look like in three years, delaying any opportunity to weigh the impact of those predictions.

The latest plan to use Permanent Fund earnings, Senate Bill 70 , would allow for the transfer of about $2 billion a year from the earnings to pay for government services, and provide for a Permanent Fund dividend of $1,000.

I think it is a reasonable plan that deserves support.

Unlike the plan put forward by Sen. Mike Dunleavy, R-Wasilla, who has bottled up the other bills, this approach would help preserve the value of the Permanent Fund over time.

But Senate leaders should be more circumspect in talking about the advantages of SB 70. They are promising far more than they can deliver, claiming we will never need a broad-based tax.

"If you look 10 or 12 years down the road, with the growth of the fund, eventually the fund will provide a sustainable level of revenue, even in times of shortfalls with oil prices, that will keep us from having to ever need a broad-based tax in this state," Sen. Peter Micciche of Soldotna told reporters Monday.

He did say that if oil drops for a prolonged period to $25 per barrel or $35 per barrel, a broad- based tax would have to be evaluated. An extreme scenario on the low or high end of oil prices would disrupt every notion about stabilizing the Alaska economy. Micciche said the current oil price forecast, spending cuts and a Permanent Fund draw would get us to stability with no need for a tax.

I understand the impulse to say that we can avoid taxes forever. Some people want to hear that, just as some want to see flat lines on budget models.

It's far too soon to declare the Senate plan is a reasonable way to do that, however, because it doesn't.

This is not just a math exercise, but a political problem, with any number of ways to judge what is important.

Legislators who are promising $750 million in unidentified budget cuts over the next three years need to get the full details on the table, along with plans for a capital budget, a confession that inflation exists, and a schedule for paying off the cash subsidies to oil companies.

Only then will a clearer picture of our budget future emerge and we may know the full impact of the latest Permanent Fund restructuring plan.

Otherwise, we might just as well be getting predictions from a crackpot like the Prophet Jim.

Columnist Dermot Cole can be reached at dermot@alaskadispatch.com. 

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