Today is Day 44.
Gettin’ real with David Teal
The Alaska Legislature’s Finance Division Director David Teal always makes for an interesting day in the Legislature, and he was in front of both the Senate and House finance committees on Tuesday to give his breakdown of the governor’s budget.
His talk and the following question-and-answer sessions with the committees made all the headlines on Tuesday—with rhetorical questions about whether the budget was designed “to create chaos”—but we wanted to focus on his introduction to the Senate Finance Committee where he broke down Dunleavy’s stated budget principles that built this budget:
- expenditures cannot exceed existing revenue;
- the budget is built on core functions that impact a majority of Alaskans;
- maintaining and protecting our reserves;
- the budget does not take additional funds from Alaskans through taxes or the PFD;
- it must be sustainable, predictable and affordable.
Teal delivered a point-by-point takedown of these principles, either raising flaws in the thinking (like how can a budget so heavily based on volatile oil prices ever be stable) or exposing how the governor’s budget plays fast and loose with his own rules (like how scooping up municipal oil and gas property taxes will almost certainly raise taxes on Alaskans).
“The first is that expenditures cannot exceed revenue is certainly true in the long-run. I think we all know that, we’ve been using reserves and you can’t continue to do that,” he said.
Then he showed this graph of historical state spending matched against its income (green being oil revenue and the black cap on the right being the draw from the Permanent Fund):
“I noted that expenditures equals revenue is simply a mathematical relationship with policy implications,” he said, later adding, “The real point is there’s no question here that revenues were insufficient to fund the budget for a number of years since FY 13, so the question isn’t do expenditures exceed revenue, it’s do expenditures exceed revenue because expenditures are too high or revenue is too low, historically low? I’ll let you be the judge of that.”
As you can see from the graph, those revenues are historically low.
“The OMB director (Donna Arduin) said that the answer is obvious, the expenditures must be too high because they exceed revenue. Well you can turn that around and say revenues are too low because they’re less than expenditures, ” he said. “I don’t think you can answer the question until you review the entire budget and determine how much you want to spend and where you want to spend it and then you can compare expenditures to revenue and how you want to address the deficit if there is one.”
He then moved onto the second point about the budget being “built on core functions that impact a majority of Alaskans.” Again, here, he says the administration comes up short.
“The OMB Director said it’s built on core functions, it was built from the ground up. Some interpreted that statement as use of zero-based budgeting. It is not zero-based budgeting. If it were zero-based budgeting, your questions about the analysis of fiscal impact would be answered. You would have had the background papers necessary to justify the reductions to the budget or whatever remained in the budget,” he said. “The director clarified later that it was not zero-based budgeting, it was core-based budgeting. … It doesn’t really matter what you call it, it seems apparent that many of you share my disappointment in the lack of evaluation and analysis to support the governor’s proposals.”
Just as legislators have been fuming about the lack of answers to pretty much anything in Dunleavy’s budget, so has Teal. Teal goes onto to poke holes in the administration’s defense of the budget as simply focusing on the numbers and leaving the policy implications to the Legislature or local governments to figure out.
“I think budgets shouldn’t simply be a math problem that budgeting and policy are inseparable, and that you cannot make good policy decisions or good budget decisions without full information,” he said. “All cuts are not equal, yet the common answer to why are you cutting this particular item have been, ‘We have a deficit’ or ‘it’s just a proposal.’”
The third point about reserves was debunked quickly.
“Number three maintaining and protecting our reserves is probably a goal we all share, but the budget pulls $436 million from the statutory budget reserve fund and AIDEA reserves,” Teal said. “The FY 19 budget (the one passed last year under former Gov. Bill Walker) is expected to pull less than $300 million from reserves.”
The fourth point has been one that has raised alarms across the political spectrum: The impact of cutting school funding, school bond debt reimbursement and scooping up those municipal oil and gas taxes will have on local governments, specifically the property tax rates they levy.
“The fourth principle is that the budget will not take additional funds from Alaskans through taxes or the PFD, and it does not rely on existing state revenue to balance the budget. It pushes cost onto municipalities, it shifts revenue from municipalities and some, if not all of those costs and revenues are going to be passed onto citizens. It’s not direct, but it’s a likely consequence.”
The fifth point he raised was particularly interesting in the grand scheme of the budget and its implications for future years: That oil prices are volatile. A core principle of Dunleavy’s budget is that a stable state budget will encourage the private sector to blossom in the state and more than make up for economic impacts of the deep cuts to state spending. Teal questions that.
“The fifth principle is that it must be sustainable, predictable and affordable, but if expenditures equal revenues and you’re going to set that as the guiding principle and revenue is volatile—as we know it is— how will the budget be any more predictable than oil prices themselves? Are we going to cut expenditures every time revenue falls. Are we going to increase the budget every time revenue goes up? How are you going to respond to a $50 oil situation, come back in special session? I don’t see how simply setting expenditures to revenue makes things more predictable,” he said.
“Perhaps I’m too literal on this—I understand that each of us can interpret words in different ways—but it seems that the governor took two of the three normal budget balancing tools off the table. He said the $1.6 billion deficit would be filled without new revenue and without pulling money from reserves,” he said. “I suspect that many people think the budget is balanced because the governor cut $1.6 billion from spending, especially after seeing what happened to the Marine Highway System, the university, Medicaid, senior benefits, the university. But here’s a short fiscal summary:”
Yeah, the deficit isn’t closed by cuts alone but by new revenue in the form of those municipal oil and gas property taxes and others. While they’re aren’t directly new taxes on Alaskans as Teal said earlier in the presentation they certainly will be made up, at least in part, with higher taxes on Alaskans.
It ended up being pretty bad timing, then, for Gov. Michael J. Dunleavy to give a bunch of one-on-one interviews with mainstream outlets later in the day. Many of the issues brought up in Teal’s presentation were brought to Dunleavy, who largely retreated to his tired talking points on.
ADN: I want to ask you about something that just David Teal just pointed out upstairs (in the morning Senate Finance Committee meeting). He had said the governor has proposed that one of the principles is not spending from savings in the budget. There’s a provision that calls for spending the remains of the statutory budget reserve. Can you reconcile that for me?
Dunleavy: Well, we’re really, I mean we’re really focused on the CBR and the earnings reserve.
Dunleavy: And that’s what we’re looking at.
ADN: OK. So when you say it’s spending from savings —.
Dunleavy: It’s CBR and earnings reserve.
Barnes: I don’t know if you heard anything about the Senate Finance meeting this morning, but earlier today David Teal speculated that maybe your budget was a way to create chaos and force the legislature to make the hard decisions and have this conversation about what is really worth it. Was that your intention?
Dunleavy: The first part, chaos — that wasn’t the intent that was to sow chaos, but certainly the budget is a conversation to have with the people of Alaska and the legislature as to what we value, what we want to fund, what we can fund and how we fund it. This was a budget that was a balanced budget. We proposed a balanced budget. And part of that balancing act is the reductions of $1.6 billion. There are those that will propose we use the PFD, there will be those that propose we use taxes. I just think that causes more problems moving forward. Alaska with 730,000 people, high unemployment rate, lack of investment in the state of Alaska, I think if we start going down the road of taxing or taking money out of the pockets of Alaskans, we’ll see more of an exodus out of the state. New York, New Jersey, Illinois, California, Connecticut — there was a report this morning that says that’s exactly what’s happening in those states. There’s an exodus of individuals that are part of the tax base that make money, and they are leaving those states, net out-migration. We can’t afford that in Alaska, we’re already a high cost state. If we start taking more money out of the pockets of Alaskans, it’s going to force more people to decide if they want to stay or go, and I believe that more and more people will leave. We just went through a period of four years of spending an excess of $2 billion a year out of the CBR roughly, actually it was more than that. And yet, we’re still in a recession, and we still have individuals leaving the state of Alaska. We’ve got to get our fiscal house in order. We’ve got to get the structural deficit taken care of, and we have to do it sooner than later.