Alaska’s deadliest hemorrhage

The crash in world oil prices has sent Alaska state financial officials reeling. After years of high oil revenue, nearly unrestrained government growth, and unrepentant “bring home the bacon” pork spending, Alaska now finds itself with a whopping fiscal year deficit expected to exceed $3.5 billion. If you divide this amongst Alaska’s tiny 738,000 population, this financial bloodletting amounts to a staggering $4,742 per individual Alaskan, $18,970 for a household of four, or $28,455 for a household of six.

For years Alaska has grown our state bureaucracies on autopilot by mathematical formula (around 6-9 percent per year) into cash draining behemoths. We now employ more than 24,000 state employees — many of which help protect Alaskans from themselves.

Our Legislature also writes huge annual checks to literally hundreds of state funded non-profits for myriads of social causes or even to entertain us, such as the Alaska State Fair. If you want to get a good laugh at some of the more humorous titled ones getting state funding from just the Alaska Department of Health and Human Services, download their FY2014 grant report. I caution you not to try to print it out because it is 302 pages long and you may run out of ink, paper, or patience.

Perhaps the worst example of legislative largesse is found in the Capital Budget. This is the part of the budget where new roads and bridges are funded. Who can argue with that, right? This has, however, devolved into a catch-all category where legislators fund micro “pork” projects at every level in their voting districts — from sewer pipes, to extra fire engines and police cars, to senior center vans. These can be argued as good things to fund from a social standpoint, but shouldn’t local governments fund local projects with local tax dollars and not rely on the state Legislature to bridge the gap between their bronze-plated haves and gold-plated wants?

Last but not least, is the profligacy of local entities continually voting to sell bonds for general purpose projects such as roads and schools where the state is on the hook for paying back 70 percent of the bond debt while the local entity only pays back 30. Alaska bond debt is now a crushing $40,714 per Alaskan– the highest in the nation.

At this hemorrhage rate, the legislature has only about three years’ worth of savings left in the financial blood bank before it turns anemic and must adopt new revenue sources such as a state income tax, a state sales tax, new industry-crushing oil taxes, or a raid on the PFD. All are being actively discussed for implementation as early as 2017. We need not go limping down this gray government-bricked road.

The University of Alaska Institute for Social and Economic Research has calculated a maximum annual sustainable budget amount of $4.5 billion (unrestricted general fund that is currently around $6.1 billion or $6.3 billion if you add the $262 million annual PERS/TERS retirement contribution in order to make yearly comparisons). This is the amount we can spend annually nearly into perpetuity without having to implement any new taxes or raid the PFD.

With oil trading at $60 per barrel, Alaska will only generate about $2 billion in oil revenue. In this scenario Alaska will generate more income from our savings invested in financial instruments than from oil. However, if the Alaska legislature continues to plow through our savings we will have no investment income left and therefore the sustainable budget number will also plummet to around $2 billion. It is absolutely essential therefore to reduce the state budget from $6.3 billion to $4.5 billion. If I were governor, I would rip the Band-Aid off in one year by vetoing any budget that came in a penny over $4.5 billion (this number does not include federal grant money which is additional). However since I am not governor, the current plan is to reduce our state budget to $4.5 billion during a three-year period to help reduce price shocks in the economy. The goal then is to reduce state spending to $5.5 billion (unrestricted general funds- operating and capital spending combined) this year, then $5 billion the second year, and $4.5 billion the third year and thereafter. Many grassroots politicos are putting the entire political weight of their organizations behind this plan. Big-spending scoffers will likely find us funding their opponent during the next political primary.

Having too many state bureaucrats living off the private sector reduces Alaska’s prosperity in three fundamental ways. First, public pay and benefit costs must be born on the shoulders of the private sector. Secondly, the state loses out on the potential economic growth from state employees that could be otherwise similarly employed in the private sector. Thirdly and not insignificantly, too many red-tape producing bureaucrats can slow new economic activity to a crawl as potential new natural resource developers are dragged through a veritable glacial mud steam of regulations, fees and permits.

This week it is absolutely critical that the House Finance Committee holds the line as it finalizes its numbers to send over to the Senate. Please contact Finance Committee Co-Chair Representative Mark Neuman (R-Big Lake) and fellow committee members to encourage them to hold this line against the intense wailing and gnashing of teeth by special interests. Crimson red now paints the Alaskan skyline. Whether it is on the eastern or western horizon is up to you.

Daniel Hamm lives in Palmer and is an international Boeing 747 freight pilot.