This is from reader Garand Fellow in response to my question about how long the Walker administration honeymoon will last. He/she goes much further. I don’t necessarily agree with him/her about everything—particularly about the gasline—but it’s a well thought-out column and worth taking the time to read in full:
I hope the honeymoon will be long but the odds are against it. First, there is something in the water on the 3rd Floor that causes arrogance toward the legislature. Also, the new COS and the legislative leaders have a rocky past. Finally, with lots of new, inexperienced people there are chances of screw-ups and misstatements that will destroy the honeymoon before needed fiscal decisions are made. The press will give the new governor lots of rope but if he lets them continue to think they are important (now that the election is over and the press is unimportant) they will use the rope to hang him when he finally has to test his leadership skills.
Governor Walker has to lead Alaskans as we begin to decide how much government we can afford, and it will be much less government than what we have now which is how much government we want. The question isn’t who we can tax so that we can keep this huge government going, the question is how much bureaucracy can this economy really afford. And there is absolutely no sane person who can look at the world energy and financial environments and expect a pipeline to bring North Slope natural gas to Southcentral tidewater. The only question is whether the economic dislocations will be efficient and reliable, or whether remaining state cash reserves will be spent tilting at windmills and propping up state and municipal government until there is no alternative to jumping off the cliff.
I would propose to Governor-elect Walker that if we are going to be unintelligent about this, and if we want the economic dislocations to be as severe and deep as possible, we can continue to prop up this bloated state and municipal government structure (it’s really one structure). But if we are to continue to maintain government at unsustainable levels until all the cash is gone then it makes sense to first take the controversial cash off the table; let’s use the PCE and the earnings reserve of the Permanent Fund before we use the general budget reserves. That gives us a better chance of having some cash left later when hopefully we do become intelligent and good financial managers. No one should expect decisions like this to be made of course.
If we want the economic dislocations to be as easy on Alaskans as possible the state should right now invoice municipalities for their share of the PERS and TRS unfunded liabilities. Reimbursement of municipal school debt service should end. Capital projects now funded and under construction should be examined for possible abandonment. The senior welfare program that replaced and now exceeds in cost the earlier longevity bonus should be ended. Medicaid and the BSA need to be reduced in nominal dollars. Other subsidies like PCE should be ratcheted down. Unless or until the courts say no all subsidies like PCE need to be placed on a path to curtailment.
I predict that many people will now look for more ways to involve the courts at this early stage (instead of at the end when it cannot and will not be resolved without the courts). That is, what Fairbanks and Ketchikan did to involve the courts in the school funding discussion will lead the way to seeking court rulings that resolve some of the many other government funding anomalies hidden or allowed up to now by petroleum revenues. We have all been near-do-wells spending other people’s money (we thought) so we could be spendthrifts, and in fact we were spendthrifts of course.
If Governor-elect Walker is no more of a leader than his predecessors, and if he postpones this fiscal comeuppance while first spending all the reserves then we may all one day wish we had left Alaska right about now and watched this from afar. One litmus test is if the legislative leadership and the governor are calling each other names by the 4th week of the session then intelligent Alaskans will be selling and shorting. If the state of the state speech doesn’t list state general fund programs that will be eliminated this year then we are in big trouble. If instead that speech tells us a gas line will save us all then there won’t be a UHaul truck available to rent by Labor Day.
There will be a honeymoon of some duration. Governor Walker should use this period to make big decisions that will reconcile expenditures with expected revenues from known, proven sources. That means eliminating programs rather than hiding behind the fiction of so-called across-the-board cuts. That means hoarding cash by not even waiting until July 1 to spend less. That means he will have to be a leader, and the easiest time for him to do that is very soon. Unity will need to mean making both Republicans and Democrats squeal if Governor Walker is going to solve this problem.
Possibly there would be wide agreement that what we now fear from our elected leaders is that they can only reach agreement to fool us and themselves. Instead of cutting the budget they will try to use the cabalistic and cryptic government accounting rules to hide over-spending. For example, as many will recall $3 billion was appropriated from savings to pay down a portion of the $12 billion retirement liabilities. A private company would not be allowed to call that an expenditure (by the SEC, the IRS or the equity markets); it’s simply a transfer from cash (an asset) to pay down a liability, and the IRS would come down hard on a company that tried to cost it against annual revenues. But government accounting will allow calling that $3 billion a part of FY2015 appropriations (expenditures). So a less than honest elected official (or a bunch of them) could appropriate up to $3 billion more in the combined FY 2016 operating and capital budgets without showing a budget increase over FY2015.
There are other ways to hoodwink everyone without violating any of the abstruse government accounting rules. Moving budget items from the budget bill to supplementals (immediately past year supplementals, coming year supplementals, or both) and not budgeting for costs that will have to be met by devices like disaster declarations are two common practices. Selling bonds can give cash to spend today but government accounting rules only require costing each year’s worth of debt service as it comes; so debt is another device used by state and municipal governments around the country to hoodwink voters and taxpayers.
All of these practices require cash however, so look for cash to disappear even as the Dispatch has stories of Draconian budget cuts to vital programs. Devices such as selling bonds actually make the problem worse in the future of course. The trouble for Alaskans is that we are in a period when cash needs to be hoarded and future obligations, especially debt and entitlements should be avoided.
No one knows where oil prices are headed. Whatever future prices are there will be people claiming they knew it all along, and a few -but not government – will have made money on it. But state and municipal Alaska government has been growing for 40 years through depleting a nonrenewable resource, so prices are entirely unlikely to rise enough to support this huge government over the mid to long term. The environment that was required to permit, finance and construct the TransAlaska Pipeline does not exist today for North Slope LNG, and getting there appears grossly unlikely. Real budget cuts are required today, and dishonest devices to allow spending remaining financial reserves are likely to be proposed by some.
I hope Governor Walker reads this column. Good, solid perspective.
Jon … There are a number — indeed probably a consensus — that believe the current oil price slide has overshot the mark and that oil prices will indeed rebound, but to the $80’s, not the $100’s. As the International Energy Agency put it in their November Oil Market Report, “it is increasingly clear that we have begun a new chapter in the history of the oil markets. ” Unfortunately for this purpose over the past several years those who make it have allowed the oil price underpinning the Alaska budget to creep up from roughly $78/bbl at the beginning of the last Governor’s run, to $120/bbl at the end. Even his last budget — which he now has passed off to his successor — requires an oil price of roughly $115/bbl to break even, so even a rebound to the $100/bbl range will leave Alaska billions of dollars in the hole.
You — and Boone Pickens (who made similar statements about the future price of natural gas in the 1980’s right before he lost his company by being on the wrong side of the bet) — may indeed be right and oil prices may quickly rebound to the $100 range. But are you willing to bet your and Alaska’s future on that against-the-experts gamble, because if we continue to spend at that level and you are wrong, the state will have spent the remainder of the “nest egg” that ISER makes clear will be required to support state spending as you grow into your 40’s, 50’s and 60’s and subsequent generations of Alaskans look for their equal share of the state’s one-time wealth which happened to be harvested during this generation. Personally, I am not.
The gas has been used to maintain reservoir pressure to extract more oil. If the gas was taken from Prudhoe we would have lost billions of barrels of oil. Now that Prudhoe is getting depleted we won’t lose nearly as much oil – indeed Exxon has long maintained that gas would be taken from Prudhoe in the early 2020s. Google AOGCC Prudhoe gas off take to learn more.
Jon, that gas and it’s potential market have both been available since the late 1960’s. Yet, somehow despite all the “time money and resources” spent, not one lousy drop has ever left the slope…. It’s now a half century later and it remains a very good bet that a man will have walked on both the Moon and Mars before any of that gas ever gets to a viable market.
There is certainly reason for the doom and gloom, and there is not much any governor can do to save the state if oil prices remain low for an extended period. What I don’t understand is why people are convinced that oil prices will not rebound. If oil prices do return to $100, and if the billions in additional investment continue to flow to the North Slope, and if more independents continue to show up, then we should be fine.
It’s also worth noting that oil prices are falling in part because of a weak global economy. Whenever the global economy picks up, oil prices will rise again.
I also don’t understand why some are convinced that AK LNG is doomed. Walker may kill the project or the market could, but those that are convinced it can’t work need to explain why Exxon, BP, and Conoco are spending so much time, money, and resources on it.
Finally, while Gas Commercialization may not save the state, it will generate billions in additional revenue from the gas AND it will spur more development of oil, which means even more revenue to the state.
Well folks, I suspect Gerand’s thoughts are fairly close to the mark. A gas line will not save us no matter how or when it’s built or where the gas goes. I was fairly disappointed but not surprised to see that our new Governor opened his term with an announcement that even though he see’s the State’s financial future as troubled, one of the first actions his administration will take will result in a relatively massive expansion of our exposure to an already significant fiscal drain.
Hours into his term our governor has already shown the cut of his jib…. He has no qualms about spending even when he admits that he does not know how he can pay the bill.
Over the coming weeks and months we will start to hear many ‘reasons’ why the state should start spending from the Permanent Fund’s several accounts. Much whining, finger pointing and blame casting will be heard from both the left and the right, from both the Administration and the Legislature and yet you will hear nothing of any significant cuts in the size of our government. I fact, I suspect you will not be able to get a politician of any stripe to even mention in passing that there may need to be some cuts.