The most anticipated hearing of the session became the most anticlimactic, as Office of Management and Budget (OMB) Chief Economist Ed King failed to provide the economic defense of Gov. Mike Dunleavy’s FY 2020 budget many expected.
The budget reduces unrestricted general fund (UGF) spending on agency operations by $650 million. It also transfers $450 million from local governments to the State by repealing petroleum property taxes and fisheries taxes.
When the budget was released on February 13, it immediately sparked concern that thousands of jobs would be lost, based on a 2016 analysis by the University of Alaska Anchorage (UAA) Institute of Social and Economic Research (ISER).
Senate Finance Committee members asked OMB Director Donna Arduin if the Dunleavy administration analyzed the potential for job loss and outmigration.
“Our chief economist has been analyzing all of those potential impacts and clearly, clearly believes that, and data shows that, the result of solving our fiscal problems [is] that private sector investment would outweigh the loss of jobs in the government sector,” Arduin responded in a February 14 hearing.
The data King presented Wednesday doesn’t “clearly, clearly” support Arduin’s claims.
Quite the opposite, King’s presentation repeats that job losses in education, the University of Alaska, and State employment are “unclear,” but could total up to 5,500.
King declines to estimate additional job losses in health care. However, he told House Finance Wednesday afternoon that health care job growth will merely slow, despite the Department of Health & Social Services being slated for $337 million in UGF cuts and over $700 million in reductions to federal funding.
“You probably won’t get as clear answers as you would like to. I’m sorry. That’s the nature of my job,” King told Senate Finance during Wednesday’s hearing.
“I actually thought that this was going to be an economic analysis of impact in some of the reductions that the administration has proposed,” said a disappointed Senate Finance Co-chair Natasha von Imhof (R-Anchorage). “The University: we’ve got community campus ideas, four-year college, research. How does that translate into an economic impact across the state? Department of Education: a $1,000 decrease in the BSA [Base Student Allocation]. How’s that going to ripple effect? Medicaid: what are the economic impacts on rural hospitals, trauma hospitals, elder care with the Pioneer Homes? The ferry, Southeast Alaska. How much can a full PFD offset the loss of ferry service in Southeast?”
“Is that a later date?” she asked.
“This presentation is setting the stage for future presentations as we dive into those silos,” Department of Revenue Commissioner Bruce Tangeman told her.
von Imhof said sarcastically that she was relieved to hear it and looks forward to the analysis. Meanwhile, the budget has to be passed by June 30.
The administration called a press conference to do damage control following the morning Senate Finance hearing, but King’s presentation received an even more hostile reaction in House Finance Wednesday afternoon.
“Mr. King, I’m a little confused because I thought this presentation was the economic impact analysis for the governor’s proposed fiscal plan,” House Finance Co-chair Tammie Wilson said after King had talked for an hour. “Is there some place in the presentation that you’re actually going to give us the economic impact of the budget that’s before us?”
“Nobody knows the answer to that question,” King replied. “ISER doesn’t know. I don’t know. Nobody knows exactly how the future is going to unfold. I wish that I could give you an answer to that question. All of those proposals are all being evaluated by their own departments.”
So the legislature has no more information than it had three weeks ago when the budget was released.
“We don’t know exactly how local governments are going to react to the proposals that are in place if they were to pass. We might expect that some local governments raise taxes. We might expect that some local governments make budget cuts. We might expect that some local governments dissolve,” King dispassionately told House Finance.
“The takeaway from this presentation we have is that the administration didn’t do any kind of economic analysis of this budget and what it was going to do to the economy of the state of Alaska,” Wilson concluded.
King countered that the Dunleavy administration chose budget cuts as the least harmful way forward, a claim that ISER’s data directly refutes.
Budget cuts have the second most harmful impact on the economy behind direct reductions to the State workforce. A broad-based tax would cost roughly 500 fewer jobs per $100 million in deficit reduction than the cuts Dunleavy has proposed.
Economists’ Statements Support Claims That Budget Will Trigger Recession
In arguing against short-term government stimulus, King confirmed that eliminating longstanding government programs, as Dunleavy’s budget does, will return the state to a recession.
“As soon as you increase spending through government spending, you’re trapped. You have to continue that spending. Otherwise, it’s going to trigger a recession,” King told Senate Finance. “It doesn’t mean that that spending isn’t worthwhile, that it isn’t creating value; but it does mean that you will see the negative impacts as soon as you stop that spending.”
While economists often disagree about the length of recessions and whether one currently exists in Alaska, there is agreement that the state has recently been in a recession.
“We’ve been losing jobs for 39 months and counting,” testified Dan Robinson, research chief for the Department of Labor and Workforce Development (DOL).
In addition, there has been an unprecedented six consecutive years of negative migration, totaling 35,000 people.
“The normal state of an economy is growth. Population growth drives employment growth,” Robinson said.
Births have offset outmigration, according to Robinson’s presentation.
The most recent data also shows Gross Domestic Product (GDP), wages, and income exceeded inflation in 2018.
“All of those things directionally suggest our economy is recovering. Job growth, whether it has happened or is about to happen, is likely coming soon,” said Robinson. “We don’t know yet whether we’re growing or not,” but we think we are.
“Did we do something? Did we take care of something?” Sen. Peter Micciche (R-Soldotna) asked of the positive numbers.
Micciche mentioned last year’s SB 26, which established a percent-of-market-value (POMV) draw from the Permanent Fund Earnings Reserve Account (ERA) to pay for government and Permanent Fund dividends (PFDs). This year, the payout is about $3 billion.
“We did do something,” Robinson told Micciche. “We did something very important with the POMV change. We created a new revenue stream that isn’t directly tied to oil.”
Instead, the POMV ties most State revenue to domestic and international investment returns. The result is a more stable revenue stream that doesn’t spike or plummet to the same degree with oil prices.
“That gets us partway there,” Robinson said.
DOL forecasts slight job growth in non-farm employment and slight contraction in government employment for 2019, but Robinson advised the forecast was published prior to the release of Dunleavy’s budget.
“That was not part of our thinking when we did this forecast,” Robinson said of the proposed reductions.
“Wouldn’t you say that a 41-percent reduction in the University’s budget would have substantial impact on the economy of the state of Alaska, considering that they are one of the largest employers?” asked Sen. Lyman Hoffman (D-Bethel).
“If we knew that cut was happening, our State government employment forecast would have been much larger in the negative, for certain,” replied Robinson.
In addition to government, Robinson hinted that Dunleavy’s budget would likely lower job projections for health care and potentially raise retail job expectations because of a larger PFD.
With the state forecast to add only 1,400 jobs in 2019, any lingering hit seems to spell a return to recession.
Micciche worried about the message the cuts would send to the oil industry.
“Do you see a significant destabilization that could put us right back in that across-the-board uncertainty?” he asked Robinson.
“People tend to exaggerate the fragility of an economy. So when people say, for example, that a tax would be poisonous to an economy, that depends on the size of the tax. When people say that the dividend would be magic for an economy, well, let’s look at that and see the specifics of what a dividend does,” Robinson responded. “They very quickly become non-economic questions; they became policy preference questions.”
“People shouldn’t worry as much as I think they do about the fragility of economies. Uncertainty is a real factor, but things don’t spiral down fast, as you see from our historical numbers, or spiral up fast,” Robinson continued.
“Most of us want to reduce our spend,” Micciche said before adding a caveat. “Do you not see a 30 percent reduction of State spend sending a signal to industry that perhaps they may be the next one with a target on their back?”
“It’s disruptive,” Robinson acknowledged. “There are costs to that.”
“There’s no doubt that a budget cut, and even a conversation about a budget cut of this magnitude, creates new short-term uncertainty, and that has economic costs,” he added.
“It’s not an economic stimulus; it’s an economic retardant,” Senate Finance Co-chair Bert Stedman (R-Sitka) concluded about the budget.
“I think that’s accurate,” Robinson agreed.
During Arduin’s February 14 thesis that Dunleavy’s reduced spending proposal would stimulate the economy, she cited negative GDP numbers and said Alaska currently ranks last in state GDP.
“We don’t do a lot with Gross Domestic Product because in Alaska, [oil] prices… more so than production in recent years, really bully the numbers,” Robinson explained Wednesday. “If oil is included, oil is what’s going to drive those numbers.”
“It is definitely the tail wagging the dog on this one,” Stedman agreed, noting wild swings in the gross value of oil.
Disagreement Over Size of PFD and Deficit
Though recent indicators suggest the Alaska economy is growing, Robinson said six prior years of contraction pointed to the need for structural change in State government.
“We feel fairly confident that that’s why we haven’t started to grow yet,” he said. “We’ll have this headwind until we get this structural change behind us.”
The hearing Wednesday indicates senators believe that structural change was achieved by establishing the POMV.
But Dunleavy’s proposal to pay a statutory PFD of $3,000 is growing a deficit that would otherwise be smaller. $1.9 billion of the $3 billion POMV would go to PFDs.
King’s presentation highlights the disagreement over the size of, and approach to, the deficit. He shows deficits in excess of $2 billion in perpetuity, even including the current fiscal year.
“I expect this conversation to maybe get a little lively,” Stedman announced.
Stedman pointed out that, after the POMV, the FY 2019 deficit is only expected to be $300 million.
“So the current year we’re talking about, the FY ’20, we’re talking about a $1.6 billion deficit if we pay out a $3,000 dividend,” Stedman said. “It seems like the $1.6 [billion] is definitely hinged on the size of the dividend.”
King argued that the deficit is still being filled from the Permanent Fund earnings reserve, rather than being reduced through budget cuts.
“Whether we call it a percentage-of-market-value draw, or whether we call it some other thing, it’s still a draw from a savings account,” King said.
“Would you agree or disagree that we solved 80 percent of the problem last year when we passed SB 26?” Sen. Click Bishop (R-Fairbanks) asked King.
King replied that the POMV solved $1 billion of the problem, again assuming the statutory calculation of $1.9 billion in PFD spending.
“The problem exists, and it will continue to exist, until something changes,” he told Senate Finance.
King acknowledged that the problem would only get worse if the State continues to pay out a full PFD.
“As the fund generates earnings, the PFD gets larger. That PFD grows faster than the POMV does… which means that your percentage of the percentage-of-market-value that’s going towards dividends is getting larger over time,” King explained.
That means less for State government.
Arduin and Dunleavy have consistently said taxes that could fill a portion of the deficit are not up for discussion.
“If you pay a $3,000 dividend, something has to give somewhere if there’s no new revenue sources,” Stedman said. “Take the budget reductions, you’re basically at -$1.6 billion. If you pay out no dividend, you get a whole different picture. And we can meet our obligations with a very small dividend.”
Before Stedman is sent a bunch of hate mail, he has said on the record the PFD will not be zero in 2019.
Senators Chastise OMB Director for “Non-Answers” and “Gibberish”
“When you talk about the governor’s proposal fixing the problem, he ties the legislature’s hands if we can’t consider several things, like additional income,” Hoffman said. “We are not being given those options when we are requesting them of the administration.”
“What the governor presented was his solution,” Tangeman responded. “Obviously, the elephant in the room is the Permanent Fund dividend itself.”
“And the expenditures side of the equation,” Tangeman hastily added.
“The only proposal available for him to analyze is the governor’s proposal,” Arduin said of King. “Once you have a proposal, then we can discuss it,” she told Hoffman.
“If we come up with an option that has a dividend that is less than the $3,000 and can balance the budget, potentially using the Constitutional Budget Reserve [CBR] for a soft landing, that will be acceptable? Or is that not acceptable, and our hands are tied behind our backs?” asked Hoffman.
“That is not the governor’s proposal. The governor’s proposal is to pay the full statutory dividend,” Arduin said.
“I am fully aware of that,” said an irritated Hoffman. He repeated his question.
Again, Arduin declined to negotiate.
“Once you have a full budget proposal, Mr. King can analyze it in the same way that he’s analyzed the governor’s proposal,” she responded.
“Thank you very much for that non-answer,” Hoffman told Arduin.
“I didn’t get anything out of that last comment, either,” agreed Sen. Donny Olson (D-Golovin). “I want answers. I don’t want gibberish.”
Stedman said King and Arduin would be back before Senate Finance on Thursday.
“Maybe they’ll have a different answer in the morning after they talk to their boss,” Stedman said, referring to Dunleavy.
Stedman noted that, like the PFD, the fisheries taxes Dunleavy proposes to repeal are set in statute.
“Does the administration intend to make all required expenditures that are statutorily required, or treat the dividend different from other statutory requirements?” he asked.
“Once we have a final budget, the governor will live within the statutes, the appropriations, that are in the final budget,” Arduin answered.
King’s PFD Job Calculation Fundamentally Flawed
So obvious was the pending comparison between King’s analysis and ISER’s that King made the cover page of ISER’s study his first PowerPoint slide.
“This report has become very popular in the last few weeks,” King told Senate Finance members. “It’s a great piece of academic literature.”
But King said that models like ISER’s are simplifications of economic reality.
“They’re not predictive of what will happen; they’re instructive on the magnitudes of changes, but not necessarily predictive of how those changes will occur,” he said.
“In reality, when somebody loses their job, they’re not just plucked out of the economy and their income is gone from the economy. They go out and they find another job, or they find ways to spend money out of savings, or they adjust in some other way, whether it’s through retirement or opening a business. They react to that loss of income by replacing that income,” King said.
That’s excellent news for the 6.3 percent of Alaskans who are currently out of work and those who could shortly be out of work, based on the economists’ testimony Wednesday.
King also said that ISER’s numbers have been misunderstood and misused.
The comment is telling, since King cites ISER to conclude Dunleavy’s PFD will create 14,272 jobs.
King’s math is a mess.
First, he starts with 892 jobs created per $100 million in PFD spending, which is the high estimate from ISER. Then, King multiplies those 892 jobs by $1.6 billion.
But $1.6 billion is the amount of the deficit, not the difference between FY 2019 PFD spending and proposed FY 2020 spending. That figure is actually $921 million.
Splitting the difference between ISER low-end (558) and high-end estimates of job creation per $100 million of PFD, Dunleavy’s $3,000 PFD would create 6,500 more jobs than FY 2019.
Both King and Robinson caution that short-term infusions of money do not create sustained job growth, so the State would have to commit to budgets like Dunleavy’s into the future. That is the same budget King acknowledges will cost thousands of jobs.
ISER economist Mouhcine Guettabi, one of three authors of the 2016 analysis, could be before Senate Finance as early as Thursday, if the committee finishes with King.
King has yet to testify on his job growth or loss estimates in Senate Finance.
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