Proposed constitutional amendments would reduce public services, policy flexibility

The range of possible state oil revenues in the future is very large. The Department of Revenue has estimated that in, say, 2030, oil prices could be anywhere between $20 and $120 per barrel. Daily oil production could vary between 300,000 and 800,000 barrels per day. Accordingly, revenues could be between $800 million and $10 billion per year. There will be good years and bad years.

The state needs the flexibility to deal with this volatility in its budget. But against this backdrop comes the governor’s three proposed constitutional amendments that will be the subject of special sessions this summer.

One of these amendments — HJR 6 / SJR 5 — would set a budget cap each year as the average of the previous three year’s budgets, adjusted for population or inflation. Insofar as this would start in 2024, the 2021–2023 budgets would be memorialized. This is regardless of how those particular three years may have been influenced by short-term events.

The current 2021 real per-capita budget is one of the lowest since oil began flowing from the North Slope. If this amendment had been enacted 10 years ago, the average of the prior three years, and the future budget standard, would have been much different.

If the 2022 and 2023 budgets are similar to 2021, we may be locking in at a low part of the revenue range, in which case higher sustainable levels of public spending might have been possible. This is arbitrariness of the first order. The short-term would drive the long term.

The spending amendment says that if revenues are short of the cap, you can take the difference from the budget reserve account. But that account is essentially empty, without prospects of being replenished. And should the budget be depressed below the cap, that year enters the budget calculus for subsequent years.

Alaskans would be unable to use additional money in high revenue years. And this silences the debate over broad-based taxes to enhance the revenue base, because we would not be able to use them.

The second proposed amendment — HJR 8 / SJR 7 — would require voter approval of tax increases passed by the Legislature. This additional requirement could be a tough nut to crack when additional money is needed at times of low revenues.

The third proposed amendment — HJR 7 / SJR 6 — which would establish a fixed percent-of-market-value amount to allocate money from the Permanent Fund for spending, which is fine, would also set a fixed portion of the POMV for Permanent Fund dividends.

So when there are revenue shortfalls, when funds for public services are lacking, the same dividend would be paid as when money is flush. This is like saying you are going to go on vacation to Paris each year regardless of how much money you have.

Money spent on the dividend, especially to wealthier Alaskans, could be put to better public use. As the value of the fund increases, dividends would increase, but spending on public services would not.

These measures would reduce public services. What is equally disturbing is how they would automate lawmaking. Legislators would be unable to do much when revenues are high or low. This is not what we want.

The politics of budgeting is not easy, nor was it designed to be so. There is no one place to land that is correct. The legitimate policy differences are real. An essential design in the constitution was to compel different interests to negotiate and compromise.

Democracy requires the collective process; it cannot be imposed by formula. It must be able to react to changing circumstances.

Roger Marks is an economist in private practice in Anchorage. From 1983-2008 he was an economist with the State of Alaska Department of Revenue, Tax Division.

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