Alaska: Bloated State Budget, Fiscal Disaster Waiting to Happen

On September 5, journalists Mike and Tim Bradner published a report on the Palin Candidacy in their trade journal, the Alaska Legislative Digest. Mike is a former Speaker of the House in the Alaska State Legislature, and Tim once worked for British Petroleum. They know the state well.

Here are some excerpts from their report:

"While Gov. Palin talked the talk, her effort in fiscal policy was markedly lacking."

"Remember we are a state with just under 700,000 population and this year had a budget of over $11 billion."

"One of these "nowheres" [bridges] was from Anchorage to her home town of Wasilla. . . . The Knik Crossing bridge is still alive with a combination of federal, state, and private (bonds) financing."

"both capital budgets she has presided over are chalk full of earmarks, many not for things one would think government ought spend money for. Alaska has an 'earmarks' budget such as no other state has ever even dreamed of."

"we in Alaska all know Alaska has a fiscal disaster waiting to happen . . If the oil production decline rate steepens and oil prices drop, the state's rosy financial situation could turn bleak, which could be a problem with a bloated state budget."

Alaska Legislative Digest No. 17/08

Many of Palin's successes due to link with liberal Democrats
In Alaska, Palin has demonstrated strengths and weaknesses as Governor. She scored legislative achievements in 2007 and 2008 by linking with liberal Democrats on oil tax issues, but failed to follow up on promises to cut spending and change the way the Legislature writes the state capital budget, a spending program stuffed with earmarked projects with the state flush with oil money. Palin will have to own up to her own and state earmarks Palin will have to own up to scores of state earmarks in the state capital budget in both 2007 and 2008, a more than significant portion ending up in her home region of the Mat-Su Valley and City of Wasilla. In terms of the state operating budget she talked the talk, but did virtually nothing. Likewise, she will have to own up to seeking and receiving federal earmarks while she was Mayor of Wasilla and hiring a big time lobbyist to help. In addition, both capital budgets she has presided over are chalk full of earmarks, many not for things one would think government ought spend money for. Alaska has an "earmarks" budget such as no other state has ever even dreamed of.

Careful Sarah, in your 2006 gubernatorial campaign you strongly supported the "bridges to no where"
Gov. Palin may also get caught on her statements about Alaska "bridges to nowhere." One of these "nowheres" was from Anchorage to her home town of Wasilla. Twice on the national stage she has said, or inferred, she has opposed these bridges, the Knik Arm Crossing and Gravina Island bridge at Ketchikan. The reality is that in her gubernatorial election she supported both projects, only backpeddling on Gravina when federal agencies expressed doubt about continuing federal support. The Knik Crossing bridge is still alive with a combination of federal, state, and private (bonds) financing. Whether this bridge project will survive is questionable. There is a grain of truth only in Palin's national statements in that she did agree to drop the Gravina project, but only after a year as Governor and after the federal DOT backed away.

Palin and liberal Democrats gave her a record
All this aside, there's little doubt that Palin is willing to shake things up and play politics differently. Palin relishes her reputation as a reformer, and as governor she championed ethics reform. A strong ethics bill passed the Legislature during her first year, but again due to her running with liberal Democrats. In fact, it was legislators who did the heavy lifting on the complex bill, but Palin supported it. This is her pattern, talking an issue, but waiting for others to do it, and then jumping on board and commanding the stage.

There may be question of Palin's consulting business?
The intense national focus may also bring into question a business license Palin secured in 2006, When already running for governor, to do governmental consulting. It was consulting that was the questionable practice that came under focus during the legislative scandals. Palin says she never did any business under the license, but that cannot be ascertained unless tax returns are turned up and put on the public table. The business name? The French word for Red Neck.

The state budget surplus - it fell into the state coffers, a legacy of soaring oil prices and the state significantly increasing its own take.
In her speech Palin claimed the budget surplus. However, luck has played a big part in Palin's claim of a balanced budget, not fiscal responsibility and work. Oil revenues pay for more than 80 percent of Alaska's budget. Palin came into office inheriting a budget surplus, and as oil prices soared in 2007 and 2008, state revenues spiked, creating huge surpluses. Her predecessor, former Gov. Frank Murowski, had the bad luck of coming into office facing low oil prices and a $1 billion deficit. Murkowski's budget cuts put him on a trail of unpopularity that made him a pushover for the charismatic Palin to defeat. Palin played to her popularity this summer, when the Legislature agreed to a $1,200 energy rebate, a cash giveaway to citizens.

Palin proposed new petroleum taxes - legislature pushed them up and up!
Palin also went after the petroleum industry for new taxes, but this was mainly in tweaking tax changes made by her predecessor, former Gov. Frank Murkowski. Murkowski had increased state taxes on oil producers, but Palin came in with a proposal to increase the tax. Her own tax proposal was relatively modest but state legislators added changes that boosted its effects substantially. Now Alaska boasts some of the highest taxes on oil production in the world.

Oil and taxes up and up, and oil production falling and falling
While it was the Legislature that ramped up her oil tax, Palin didn't oppose it. The tax is now so high that some industry development projects on the North Slope are being delayed and cancelled. With oil production from the Slope declining at rates of more than 6 percent a year, there is a point where the efficiency of the Alyeska pipeline is challenged and where state revenue falls far below budget.

A budget surplus, but no credit to fiscal policy or restraint
Yes, Alaska is currently wealthy with a budget surplus. But we in Alaska all know Alaska has a fiscal disaster waiting to happen - down time. Our finances are not something to brag about, and we all know it, in fact quite the contrary, and doing so invites uncomfortable questions. If the oil production decline rate steepens and oil prices drop, the state's rosy financial situation could turn bleak, which could be a problem with a bloated state budget. Alaska's fiscal policy or lack thereof is a problem and should be attended to while we have a surplus. Alaska's oil revenue stream is subject to events the state cannot control, i.e. market price and production. The features we can control are savings and budget growth. Even with reasonably high oil prices there is a point where Alaska's production beings revenue down to where there is no surplus, but worse, a growing budget deficit, increasing with further production decline.

Gov. Palin talked the talk, but talk didn't lead to action
While Gov. Palin talked the talk, her effort in fiscal policy was markedly lacking. The Legislature tucked some money in the Constitutional Budget Reserve (CBR), but they ignored deposit in the Permanent Fund, despite what should have been a tempting down market. They then cached money here and there subject to a majority vote. Gov. Palin has had the tools to insist on savings and policy, and she had the political capital and clout to do so - an 80 percent popularity. She also had the constitutional power of line item veto, which applied to the huge capital budget could have been used to leverage a few steps in fiscal policy. She didn't, and this is the complaint about Gov. Palin. She doesn't interact with economic interests, which right now we are all calling special interests. She doesn't interact socially and make such interests welcome in her office. But this is also true as applied to the general business community, to local officials, legislators, community.

Palin is weak on day-to-day governing and dealing with complex policy
If Palin has weaknesses it is in the day-to-day business of governing and dealing with complex decisions. What is surprising for a politician so gifted in public communication is that Palin seems to lack the instincts for talking and dialogue with others in government, basic skills that are essential for consensus-building. Legislators and community leaders were often blind sided by her decisions, for example on her capital budget vetoes in 2007.

Budget vetoes but no participation or policy
Palin initially showed good instincts, but failed on the follow-through, when she made large cuts in 2007 to a huge capital budget passed by legislators. Lawmakers howled, but Palin used the opportunity to mount "reformist rhetoric," about back room deal-cutting. However, her cuts showed little logic for policy and also a lot of "show-biz" politics, and lawmakers complained that neither Palin nor her staff bothered to participate in the 2007 capital budget construction. In 2008, when legislators asked her for guidelines for the capital budget to avoid vetoes, Palin did not provide any. The capital budget was even bigger in 2008 than 2007, but she made few vetoes. Remember we are a state with just under 700,000 population and this year had a budget of over $11 billion.