If Legislators are getting their budget basics from Arduin, then Alaska’s in trouble

OMB Director Donna Arduin gives a budget presentation to the Senate Finance Committee on Jan. 23, 2019.

By An Anonymous In-the-Know Person. (Note from the editor: No one loves anonymous authors, but we’re a blog. This post originally came in as a tip from a trusted source and was close enough to a post that we worked to hammer it into shape.)

Alaskans know Donna Arduin well. After a disastrous budget roll out for Governor Dunleavy’s inaugural year in office, the former OMB Director left the state in no small amount of ignominy after having failed to achieve her prized goal: a massive reduction in government spending in Alaska.

The reality is that the size of government in Alaska today, despite what snake oil Arduin and others will try and sell you, is less than government’s size in 1980, when accounting for inflation. As has been the case since the beginning, the two largest expenditures in state government remain education and health and social services. This makes sense considering the constitutional mandates to provide for equitable statewide education and for the health and welfare of Alaskans. It should surprise no one then that children learning in schools and lower-income citizens are not able to “pay” into the system they benefit from as robustly as others. 

Arduin is philosophically opposed to all government spending despite being a direct recipient of it for what appears to be her entire career. Hopping from state to state, building a reputation for a smug and pugnacious attitude towards detractors, Arduin’s advice tends to drive politicians’ careers into the ground as hard as it does their budgets (see: Jeb Bush’s controversial first-year budget, Illinois Rauner’s failed first-year budget leading to Illinois Speaker Madigan’s warning to Alaska, Gov. Dunleavy’s recall, etc.)

And after a blissfully not-at-all-peaceful year for us, Arduin has once again appeared back in Alaska. This time, “training” candidates and spending an hour on the Michael Dukes radio show explaining everything from her mistaken views on the Alaska Statehood Act to how she’s advising those candidates to dress up the word “cuts” as “policy reform.” Arduin’s consistent misunderstandings of our state’s history, constitutional precedence and process are on full display.

Instead of approaching this as a narrative retelling of Arduin’s interview, let’s dive right into each of her claims.

“Legislative finance staff has a tendency to tell them (legislators) they have two options.” 

The Legislative Finance Division is a non-partisan agency that delivers financial information to the legislative branch in consultation with the Office of Management and Budget. Over the course of the six to seven years that Alaska has been running a yearly deficit, legislative finance has consistently presented three, not two, options to balance the budget: 1. Reduce Expenditures, 2. Pull money from reserves, 3. Add Revenue.

Arduin attacks the credibility of a non-partisan agency because she knows it cannot defend itself in a political tit-for-tat. She further misunderstands the options presented by legislative finance which, incidentally, are the exact same budget prescriptions available to every state in every fiscal conversation, ever. Arduin’s “other options” are dealt with below.

“Changing the way you’re spending money doesn’t have to happen overnight. I know the CBR is drained and it’s unfortunate. There are other resources to get you through on a glide path.

Arduin seems to argue against her own advice which has been used to ill-effect across a variety of states. Many in Alaska argued for a “glide path” in response to the destruction proposed by Arduin in Dunleavy’s first budget. Her advice was to cut hundreds of millions of dollars and cost shift hundreds of millions more, which, if successful, would’ve dramatically altered state and local government for years into the future (see: possible University closure, reducing Power Cost Equalization for a single year use while ignoring the general fund needed to supplement its benefit into the future; the $440 million reduction in local property taxes across the state which would wipe out revenue from Valdez, Utqiagvik, etc.).

A window into Arduin’s misunderstanding of the math: the time for a glide path may have been two years ago, not now. The state’s two main cash accounts are the Constitutional Budget Reserve (CBR) and the Earnings Reserve Account. The CBR acts as a savings account, providing the state the cash it needed to fill budget deficits for the last six years. One would hope Arduin would understand the fundamental fiscal principle that as a situation worsens, the options for addressing it become more limited.

The ERA, while it has available cash, is an investment account that spins off earnings that pay for the Permanent Fund Dividend and state services. There is no reality that the state can pay for a functional level of state government, a statutory PFD and not overdraw the Earnings Reserve Account.

“The ERA has enough money to pay dividends and it’s been earning money. There are multiple options to spend money more wisely and less of it and achieve better outcomes”

It’s a fairly shocking statement to hear from an “economist” that the primary argument for spending money is because the account has money in it. Yes, the Permanent Fund earns money. But as anyone with a retirement or investment account understands: every dollar spent today from the account, robs the account of the compound interest that would build up above that value if it were not spent and instead saved. Her plan is tantamount to robbing your retirement account to buy a boat, something no financial advisor would agree with.

Arduin seems to understand the concept of building up “reserves” when discussing Wyoming later on, but lacks the vision to see that paying out billions in a single year for “back pay dividends” is the single largest threat to the Alaska Permanent Fund and Alaska’s last remaining “reserve.”

Arduin provides no evidence to bolster her claim that “there are multiple options to spend money more wisely.” More wisely than what?

“Without moving money around and playing with charts, spending isn’t going down.”

A factually untrue statement that requires little more than a google search to disprove. From FY13, the state unrestricted general fund budget has dropped around $4 billion.

It is an incontrovertible fact that the size of government has been trending downwards for more than eight years as evidenced by the 48% drop in the size of government between FY13 and FY21 and, as stated previously, is the size of government in 1980 when accounting for inflation. Oil first flowed down the pipeline in 1977

“I had to tease every time Ed and I sat in committee, they never let him get past page 2.”

Lacking actual data or analysis to support her claims, Arduin often resorts to outright misrepresentations (see legislative finance division) or snide, half-true remarks.

Ed King was the OMB economist for around six months, and it is true he was interrupted a few times in Senate Finance as all presenters are. King joined presentations at approximately 19 legislative hearings during his employment in 2019, most in the first few months of session.

Of those, he was the primary presenter on around five. On February 5th, he presented to a House Finance Committee explaining the finer details of a 27-page presentation alongside the Commissioner of Revenue. On March 6th, King presented a 23-page presentation to a House Finance Committee in its entirety with extra time to spare. On March 7th, King spoke extemporaneously without a presentation for an hour and ten minutes with few interruptions. Examples abound.

“I made the economic case for paying the PFD.”

Arduin casually refers to her work in making the economic case for paying the PFD, yet actual research on the topic itself is scant and mostly recent. Relying entirely on the simplistic and inane concept/talking point that “the private sector spends money more wisely than the public sector” Arduin has yet to produce a scintilla of evidence that serves as the foundation for her “economic case for paying the PFD.”

In fact, the economic impact of the PFD has been rigorously researched only a few times over the years. In the 1980’s ISER economist Scott Goldsmith published a paper with surveys of Alaskans of what people were spending their PFD’s on and attempted to graph those habits onto an economic analysis. Since then, only recent intrusions into the topic have been made by ISER.

That research is definitive: the economic boost that comes from a PFD is largely centered around a small time period, and the positive effects are marginal on things like birth weights. More impactful to a substantive economic analysis are points regarding crime, which increases around the time of PFD payments, income inequality, which actually grows as a result of the Permanent Fund in the short and long run, and consumption habits which show “Alaskans spend significantly more on non-durables (such as cosmetics, cleaning products, food, fuel, and other consumables) and services in the month when they receive the dividend payment, and this excess consumption persists over the first quarter after the dividend payment.”

COVID-19 aside, the “economic case” for paying the PFD may exist, but Arduin and King have yet to find it themselves. Yet, they will likely continue to hammer away at the tortured, overly simplistic logic that “money belongs in the private sector.” Alaskans would be better served by looking to respected research outfits like ISER and others for this information.

“Instead of saying we’re going to cut education we’re going to say, our kids are going to learn how to read. There was a terrific reading bill that died in the leg. Folks this weekend aren’t going to let that happen.”

Arduin can’t help but let the politics peek through the strategy. While it may be true that there is such a thing as a new reading program that does not involve any state spending, Arduin here makes the case that targeted investment in a government program will benefit Alaskans. Does Arduin realize programs cost money to implement?

Further, it’d be remiss to not note Arduin, vanguard of the “private sector does it best” movement, promises here that legislators she’s training will pass a new government program that will no doubt require state funds and thus, grow the size of state government.

The strategy of window dressing “cuts” as simple programmatic efficiency while still achieving the same outcomes is not borne out by any other explanation other than politics. To be clear, she is still advising cuts to education.

Referring to “those other funds” Arduin: “They are unconstitutional. They are hidden from legislators. They have the right to approp those funds as they see fit. I showed everyone a list of those ‘dedicated’ funds like the PCE which totaled, my staff went through it, over $2B

A few things to unpack here.

First, Arduin claims that certain funds are unconstitutional. The funds she is likely referring to are the Power Cost Equalization Fund and the Higher Education Fund.

The PCE Fund provides economic assistance to communities and residents of rural electric utilities where the cost of electricity can be three to five times higher than for customers in more urban areas of the state.” The Higher Education Fund funds scholarships for Alaskan students who achieve academic excellence. 

The funds are not unconstitutional nor have either been the target of a lawsuit or disagreement over their constitutionality until Arduin showed up.

What Arduin is likely ham-handedly trying to tie together with her explanation of these funds is the dedicated funds clause of the constitution. The Alaska Constitution, Article IX Section 15 states that

“The proceeds of any state tax or license shall not be dedicated to any special purpose, except as provided in section 15 of this article or when required by the federal government for state participation in federal programs. This provision shall not prohibit the continuance of any dedication for special purposes existing upon the date of ratification of this section by the people of Alaska.”

This functions as a ban on dedicated funds and is meant to provide legislators every year with the full power to appropriate any and all funds.

Both the PCE Fund and the Higher Education Fund are fully available for appropriation with a simple majority vote. The PCE Fund balance is just over a billion dollars and the Higher Education Fund balance is around $346 million. Arduin desperately wants to use that money to backfill the deficit created by paying enormous dividends. She attempts to muddy the legal waters to support raiding the funds for her own purposes.

Arduin claims the fund balances are “hidden from legislators.” Yet, the fund balances are available from a variety of online, easily accessible, public sources and are sent directly to legislators and staff in the form of Fiscal Summaries by the Legislative Finance Division and are regularly updated. The public is welcome to peruse these “hidden” documents at any time by clicking on this link and scrolling to the last page of this link: https://www.legfin.akleg.gov/FisSum/FY21-Budget.pdf

The idea that these funds are “hidden” or “unconstitutional” is of course laughable and easily disproved in mere moments.

Arduin also appears to not know about the Public School Trust fund, a constitutionally sound dedicated fund, created in 1913. Per the constitution, funds dedicated before statehood are exempt from the Article IX, Section 15 clause. 

Perhaps Arduin should check with her former OMB “staff” since they appeared to have miscalculated the amount available for appropriation in the various funds we have which is actually closer to $1.5 billion, not the $2 billion she advertises.

A final note regarding raiding PCE fund, action suggested by Arduin. A simple financial model would show that overdrawing the fund (drawing more from it than it is earning) to fund an oversized Dividend would deplete the fund itself in just a few years. 

Does she not understand that though the PCE fund could sustain a statutory dividend for a short period, the consequence would be a double whammy for the state budget of then dealing with rural Alaska’s power costs spiking with nowhere to turn to for relief except the state general fund?

Single-year budget tricks do not stand up in terms of value to the power of compound interest that has built the fund over years no matter how strongly stated. But those tricks, if successful, can be used to demolish more than 30 years of work in a single fiscal year, logic which applies to both the Permanent Fund and the PCE fund. A pattern of fiscal mismanagement emerges. 

“The ERA. Most states don’t have this. Even with a statutory PFD, which everyone agreed is legally, fiscally, and economically the right thing to do there’s still ways you can change the policies of how the money goes into the permanent fund and goes out that will benefit glide path.”

Mercifully, and finally, a correct statement: most states do not have an ERA. Most states also do not have a $66 billion investment account built up over generations to provide benefit for all residents into perpetuity. Small details.

Further, a quick analysis of the “legal, fiscal, and economic right thing to do” in regard to a statutory PFD.

Legal: The Wielechowski v State of Alaska case was definitive that the payment of a Permanent Fund Dividend is an appropriation, not an automatic transfer. This is no longer a debate, but settled Supreme Court precedence and the law of the land. To pretend there is a “legal” reason for paying out a statutorily calculated PFD and ignore the appropriation process flies directly in the face of the dedicated funds clause, a ruling from the Supreme Court, and the very foundation of what legislative bodies do: appropriate. A “legal” debate over this question is, at this point, a delusion.

Fiscal: Alaska has stared down multi-billion-dollar deficits for more than six years now. This is, in fact, not the fault of the size of state government or the size of the Dividend, but is, in fact, the result of falling oil prices and cratering oil revenue. The State of Alaska has its economy and state budget tied to a volatile commodity whose pricing it has no control over. Crashing prices drove the unsteady revenue stream for the state into the ground, from a high over of about $112/barrel in 2014 and stabilizing a few years later around $62. The current price of oil is around $40/barrel. Any organization in the world would reasonably cut its dividend when faced with such dire and presumably lasting, fiscal circumstances. Arduin’s vaunted private industry would advise strongly, on fiscal grounds, paying out billions in dividends while the core business burns.

Economic: As stated previously, there is little respected, peer reviewed research into the economic benefits of the PFD. What little actual research there is shows the opposite. Arduin believes if she continues to say “there’s economic benefit to the PFD” that it will somehow become true. Serious people who have spent time with the issue believe otherwise.

“There’s a lot of ways that things can be done. Ed gave us good math, what if we just did this differently, and what if we didn’t inflation proof, and did all these little nerdy things that people take for granted. Well don’t take it for granted. That fund is growing. That fund will be growing paying a full statutory PFD. What can we do, besides cutting people’s dividend and growing this pot to a larger size than it is now.”

Actual financial experts understand the power of inflation. Alaska was once blessed to have the Permanent Fund under the guidance of Elmer Rasmussen, one of whose famous statements stuck with many Alaskans until recently who called inflation “the thief in the night.”

If the amount that is pulled from the Permanent Fund is between 5 and 5.25% per year for Dividend and government services, and inflation is around 2%, that equals 7% to 7.25%. It is not difficult to look up the Permanent Fund’s publicly public return targets. They are around 7%. To claim inflation proofing isn’t needed, that Dividends of any size can be paid including back-pay, and that the fund will still grow is not a serious claim. If it were, the Dunleavy/Arduin budget wouldn’t have billion-dollar holes in it year after year that needed to be filled from the Permanent Fund Earnings Reserve.

The Permanent Fund will not be “growing paying a full PFD.” In paying a statutorily calculated PFD and maintaining government at its current size, the ERA sits empty in two years. Math indeed.

“You’ve got over $300 million going to the North Slope Borough. Great for them. But it should be shared with rest of the state. There’s fewer than 10,000 people there. Coming from the Outside, wait I thought all petro resources went to the state. We all wish they could go to the people but, that’s not how the Statehood Act was formed. They belong to the people, but they come to the state. Why aren’t they being sent to state government rather than just going to a few?”

All at once, it would appear that Arduin has skipped any close reading of the Alaska Statehood Act, advocated for nationalization of one of the most successful industries in US history, and slighted the people of an entire region of Alaska.

Firstly, the Statehood Act is silent on the myriad revenue streams that flow from oil. If all petro resources went to the state, why would the state even lease land for private companies to produce and make a profit on, instead of just setting up an oil company, producing it itself, and taking all the money? Friedman is no doubt rolling in his grave over how far his acolyte has strayed from the path.

The Statehood Act was written at a critical time for the development of oil and gas policy. For years, private companies poked holes in the ground across the  country, California, Texas, Kansas, etc. with no regard for resource conservation of production efficiency. Congress, watching this, crafted the Alaska Statehood Act to accommodate the belief that in order to keep this from spiraling out of control in a newly formed state, the Act would ensure the state could not “sever” itself from the mineral estate. By way of example, good management of pool rules by the Alaska Oil and Gas Conservation Commission keeps oil from being wasted as it was in years past.

No, not “all petro resources go to the state,” because we live in a capitalist country that allows private companies to earn profit. If Arduin read just a bit further she’d understand the nuance that Alaska owns the oil, not the mechanisms for and profits generated from producing it. We are a unique state after all. 

Mystified by elementary civics, Arduin forgets we live in a representative democracy whereby the “people” are represented by “representatives” who they “elect” to send to Juneau to deal with the disposition of the state’s resources (which, again, to be clear is the tax and royalties paid to government as a percentage of the market value of the oil in the ground, not the profits earned from producing that oil which go to private companies). One wonders whether Arduin thinks we should just have an unregulated, unpermitted direct democracy style regime where people are sent checks, but don’t bother themselves with the dirt of actually running a government.

“Those boroughs also get federal NPRA funds. They’re already getting something and projections for those to increase.”

First, Arduin seems to misunderstand that multiple and geographically separate boroughs receive revenue through taxing oil property, conflating the pipeline corridor with the actual oil properties outside of the corridor.

Boroughs like Valdez and the Kenai Peninsula, in addition to the North Slope Borough, receive substantial revenue from taxing oil property. The Kenai Peninsula and Valdez Boroughs are not, in fact, eligible for NPRA Impact Mitigation Funds.

NPRA Impact Mitigation Funds are only allocated to the villages and communities located in the NPRA or affected by oil development in the NPRA. The NPRA is on the North Slope of Alaska, nowhere near Kenai or Valdez.

It is true that the NPRA Impact Mitigation grant fund program is forecast to increase substantially over the next ten years as Conoco’s Willow project comes online. The soonest first oil could come from that field though is 2025, likely later in light of COVID and work slowdown.

Arduin advised Dunleavy to take 100% of the Boroughs’ oil property tax revenue in 2019. What was her proposal for not just Kenai and Valdez, but for the North Slope Borough whose “replacement” revenue wasn’t projected to come for 6 more years? The answer, of course, is there was no plan. Take the money for the state and run.

“I talked to Sen. Shower when he started research and I haven’t worked in every state in the country and I’ve never seen anything like it. He said 48 or 49 other states function without this thing called a ‘binding caucus.’ Legislators should be free to represent their constituents.”

Fascinating to see Arduin share her non “economic” opinions. A quick review of American history shows the beginning of the binding caucus stretches as far back as 1861 (if not further) and has been used across states and among caucuses across the entire country since.

“Most governors didn’t have time or opportunity to solve those problems. Now it’s compounding during the current year. Medicaid costs are up as well. Revenue is down, Medicaid costs are up. Some have built up reserves. Some states have unfortunately, we know who you are, have been draining theirs. Most put out budgets in January. We’re gonna be sitting on this a long time until that.”

While a popular talking point that “Medicaid costs are up” Arduin’s claim is once again lacking context at best, lying at worst. Shocking to some may be the fact that the state of Alaska has spent nearly the same dollar amount for the state UGF Medicaid kick in since about 2016 ($640m). Credit is due to SB74 passed a few years ago by conservative Fairbanks Senator Pete Kelly. Federal costs for Medicaid are increasing, but that is a different subject.

Has the State of Alaska spent nearly $15 billion in savings over the last six years as the political issue of the PFD is settled? Yes. Is Donna Arduin, less than a year resident of the state, proposing possibly the largest raid of the Permanent Fund since its inception in paying out billions today thereby damaging the fund for every single Alaskan man, woman, and child tomorrow? Yes.

You cannot complain about “draining funds” when your entire economic “plan” hinges on doing just that. 

“Government spending, the larger the government spending, the smaller the private sector economy. We talk about multiplier effect, what that means if I’m investing money I’m creating something, jobs, economic output, the government doesn’t do that at all. In fact, the multiplier for government spending is nothing, it takes money away from those could invest.”

One wonders what Arduin thinks the billions in tax credits paid to oil companies since the early 2000’s leading to more production and more jobs over the years “did.” What is the multiplier effect of offering tax credits and 0 taxes to the Cook Inlet so that Anchorage would have gas to turn its lights on? What of the billions paid to Americans and Alaskans alike, funded by government, that kept millions, including the precious “private sector economy” from economic catastrophe during a global pandemic? 

No matter, even if she could address that, she will just hammer away silly talking points about “government crowding out the private sector” or some such.

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3 Comments on "If Legislators are getting their budget basics from Arduin, then Alaska’s in trouble"

  1. Who’s paying her? This charlatan does nothing for free.

  2. This all comes down to two concepts. 1) I really don’t give a damn about Alaskans because I’m not really an Alaskan. 2) All I care about is draconian Republifacist politics. Attempting to actually solve our budget issues isn’t part of that equation.

    • Spot on. But there are indications that it’s more about her own financial bottom line than any commitment to political or policy ideals.

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