Dunleavy promises budget cuts that could devastate Alaska

Gov. Mike Dunleavy told reporters Tuesday that he wants a balanced budget right away, echoing the remarks of his imported budget director from Outside.

If he is serious about cutting $1.5 billion from state spending next summer—the projected shortfall—Alaska Republicans will no longer have the freedom to hide behind the “right-size government” mantra.

If he is serious about that number he will make life difficult for himself, every member of the Legislature, every local government, every school district and everyone who lives in Alaska.

And if he is serious, the fantasy enjoyed by Republicans that cutting waste, fraud and abuse from government is all that we must do to continue the status quo will end.

The claim from Tuckerman Babcock, the governor’s chief of staff, that Dunleavy promised cuts of this magnitude during his campaign is nonsense.

“He wants to do exactly what he said he would do in the campaign,” Babcock told Unitarians Sunday in Anchorage, according to ADN columnist Charles Wohlforth. “There are a lot of people in Alaska who aren’t going to like what he promised to do.”

Babcock is pretending that Dunleavy said during his campaign that he would cut the budget to $3.2 billion. Dunleavy said he would cut it to $4.1 billion or $4.3 billion or $4 billion. Those are the numbers he used many times, all of them unrealistic without a serious cut to state services.

For his $1.5 billion plan, the state could shut down the University of Alaska, close the Department of Transportation, lay off thousands of workers, force the closure of dozens of schools, suspend payments that help local governments cover retirement costs and still not come close to the target.

Another option would be to fire every state employee. That would still leave a few hundred million dollars to cut. Or the state could require across-the-board cuts that would sound good on the surface, while crippling every state service, preserving empty shells and giving cover to elected officials.

Dunleavy’s remarks before a cabinet meeting, reported by Andrew Kitchenman of KTOO, echoed those of Donna Arduin, the budget director imported from national GOP circles to instruct Alaskans.

Arduin told Elwood Brehmer of the Alaska Journal of Commerce in December that the budget has to be balanced right away, meaning a cut on the order of $1.5 billion.

“I don’t believe in budgeting towards hoping revenues go up,” Arduin said in a Dec. 28 interview. “The budget should be steady and predictable, so we shouldn’t budget hoping that we’re going to get more revenues next year.”

Arduin also made the ridiculous claim that the Alaska budget was not all that different than other states, aside from the dependence on oil revenue and the existence of the Permanent Fund Dividend program.

She will not be in Alaska that long. But she said she really likes cutting budgets.

“I enjoy the challenge and working with fiscally conservative governors to make sure that — in most state it’s taxpayers; here it’s dividend recipients and hopefully not future taxpayers — are first and foremost at every policy table and every policy discussion,” Arduin said.

First and foremost, it starts with specifics.

As a member of the Legislature and as a candidate for governor, Dunleavy stayed away from specifics. More than two years ago he said the annual state budget needed to be cut by $1 billion over a four-year period, but he never provided details.

During his campaign he said the rise in oil prices in 2018 had made those ideas irrelevant. But oil prices collapsed again in October, proving once again how foolish it is for Alaska politicians to make financial plans based on daily oil prices.

What Dunleavy offered during his campaign as proposed budget cuts were laughable—such as the nonexistent $4.5 million commuter rail study that he mentioned time and again that he wanted to get rid of, along with his false claim that the state had funded 2,000 jobs that were intentionally kept vacant.

Lt. Gov. Kevin Meyer, who like Dunleavy had spent many years working on the state budget, complained during his campaign that legislators had no real budget power and that it was all the governor’s fault.

Now that he is governor, Dunleavy could cut $1 billion and more by eliminating thousands of jobs and numerous state programs and agencies and support for local governments and school districts.

I don’t know if he is serious. We won’t know until February when he provides the details.

In a radio interview in late 2016, Dunleavy said the way to approach the budget is to figure out first how much there is to spend first. That way the politician wouldn’t always get, “What do you want to cut?” as the first question. It’s a hard question and I understand why Dunleavy wanted to avoid it at all costs. And he has managed to do that for years.

He said he would rather have everyone agree in advance on how much money could be spent on the state budget and then begin to deal with specifics.

"It's a lockbox. And then you kind of duke it out, if you need to. . . inside that lockbox," said Dunleavy, channeling former lockbox leader Al Gore in that radio interview in 2016.

It didn’t work that way then. It doesn’t work that way now. There is no lockbox to protect a politician from an unpopular decision.

Dunleavy is the one who has been peddling a budget mirage for years, one that says the Permanent Fund Dividend can increase, state and local services won’t take a major hit and no taxes are needed.

What do you want to cut? That is the first question.

I asked two respected economists about the Arduin-Dunleavy budget-balancing plan.

Gunnar Knapp, who is retired from the Institute of Social and Economic Research, replied this way:

You asked about the economic impacts of cutting state spending by $1.5 billion or more. ISER's 2016 study on "Short-Run Economic Impacts of Alaska Fiscal Options" estimated potential economic impacts of selected options for reducing the deficit by $100 million, including cutting state spending. Potential job losses from cutting state spending depend significantly on what you cut: laying off a snow-plow driver has a bigger impact than not buying a new snow plow.

The ISER study estimated (see page ES-3, in the Executive Summary) that job losses from cutting state spending by $100 million could range from as low as 775 to as high as 1677 depending on what is cut and various other assumptions. So 1000 jobs per $100 million of cuts, or 1 job per $100,000 of cuts, would be a reasonable assumption. Extrapolating, a rough estimate is that cutting state spending by $1.5 billion might reduce employment by 15,000 jobs.

Note, however, that a critical issue is what the money "saved" by the cuts is used for. If it's used to reduce the deficit, or the amount by which we draw down our savings, then the total spending taken out of the economy is $1.5 billion, with net losses or about 15,000 jobs. However, if the cut in state spending is used to pay bigger dividends, then the money isn't taken out of the economy: it just goes into the economy in a different way, with a much smaller net effect on total employment (although dividend spending in general creates fewer jobs than spending on the state workforce).

While the short-run effect of massive state spending cuts on jobs is clearly important, it is not the only effect that a cut of this magnitude that we should be thinking about. Such a cut would have an enormous impact on state and local services, which would affect Alaskans in all kinds of ways which they may not be thinking about. An average Alaskan might feel that state spending is bloated and all of us can probably come up with examples of particular kinds of spending that we think are wasteful or unnecessary. Maybe we can identify a few millions or tens of millions that we think should be cut. But cutting $1.5 billion would require hitting services that every Alaskan values. The snow is not going to be plowed as fast from the Glenn Highway and the Parks Highway, and if you wreck your car because the highway wasn't plowed, a trooper isn't going to show up as soon.

From an economic perspective, if you start talking about cuts of $1.5 billion, the longer-term impacts on Alaska's economy might be far bigger than the short-run impacts of lost employment due to reduced state spending. Reducing state spending by that much would hugely affect the ability of the state to invest in the infrastructure and management needed for long-term resource development, or to fund the kinds of public services needed he private sector needs to want to invest here, or to be able to attract and retain a skilled workforce here.

Finally, it's an illusion if people think they can avoid being taxed by cutting state spending. Many of the services that would be cut would inevitably result in local governments having to replace services that citizens demand. So if you like your state taxes low, expect your local taxes to be higher.

Mouchine Guettabi, now a professor at ISER, said he agreed with Knapp’s summary about the potential $1.5 billion reduction and his emphasis on the potential long-term impact.

Guettabi said:

I think that the interest in the immediate effects has dominated the conversation (we are partially to blame). Having said that, my forecast for 2019 to 2025 shows mild growth which can be wiped out if cuts of that magnitude are enacted. Severe budget cuts have the potential of extending this recession by more than a year which could obviously have structural effects.

Dermot Cole5 Comments