Report: Low taxes lulled as budget swelled

  • By Tim Bradner
  • Monday, April 6, 2015 10:23pm
  • News

Alaska’s current budget crisis can easily be blamed on the plunge in oil prices, which are less than half what they were nine months ago, but some responsibility should be laid at the door of the state’s citizens, who are largely disconnected from state spending decisions — except to spend more.

The disconnect is because Alaskans are largely insulated from having to pay taxes. In fact, the state sends every citizen a big Permanent Fund Dividend check every year.

Inattention to what happens in Juneau is a big reason why the state budget has doubled in the last 10 years, according to a recent report on the budget by Commonwealth North, the Anchorage-based public policy group.

Former state Revenue Commissioner Eric Wohlforth and former state budget director Cheryl Frasca co-chaired a task force of Commonwealth North members that met weekly over four months to produce the report.

Wohlforth, a well-regarded bond attorney, was Revenue commissioner in the 1970s when Alaska had a smaller population, a smaller budget, and a state income tax that caused citizens to watch the budget. Frasca was later budget director for former Gov. Frank Murkowski.

It was on her watch that state revenues plummeted, in 2000, during a previous oil price plunge and Murkowski had to slash popular programs to right-size the budget. Wohlforth and Frasca briefed the Resource Development Council on the report in Anchorage March 19.

In the last decade, they told the RDC, the state budget has doubled but inflation can account for only 30 percent of that and the state’s population has grown only 11 percent. That means a good part of the budget growth happened because special-interest groups urged legislators to expand spending while there was no counter pressure that could have restrained growth.

To be fair, fuel prices shot up during the period, hiking costs all through state agencies, but those costs are down now. Health care costs, however, climbed steadily.

Health care costs are a huge driver in budget growth even aside from Medicaid. Costs for active state employees have increased 218 percent since 2001, according to the Commonwealth North study.

In fiscal year 2014, the budget year ending last June 30, the state paid out about $1.6 billion for health care, the Commonwealth North report said. About $703 million of that was for Medicaid and the rest for active state employees, retirees, inmates in prisons and for workers’ compensation.

Wohlforth told the RDC that a critical need is to somehow restart citizen engagement with state government. Oil revenues gushed into the treasury in 1980 and the state’s income tax was repealed shortly after, but even in those years there were efforts to enlist independent citizen reviews of state programs, Wohforth said.

“Even in the (Govs. Jay) Hammond and (Walter) Hickel eras (of the 1970s and 1980s) there were budget management reviews of state operations by independent citizen groups which included mainly business people and CPAs,” Wolhforth said.

“They spent a lot of time with agencies and made recommendations to the governor and Legislature, many which were followed. We’ve seen nothing like this in recent years. We’ve seen budget growth, but no review, and we need to re-establish these.”

Budget-writing is a legislative responsibility and citizen reviews are not delegations of that responsibility because review groups only produce recommendations, he said.

Govs. Hickel and Murkowski also sponsored several conferences of Alaskans including high-profile task forces of citizens and legislators to make recommendations on fiscal policy.

Wolforth said the budget must be considered before new revenues are discussed.

“The budget has to be looked at alone and aside from revenue sources. We need to restore public confidence in our ability to manage the budget, but the central dilemma is Alaskans’ disengagement in the process,” he said.

Most of the recommendations in the Commonwealth North study are proposals for changes in the Legislature’s procedures for writing the budget. Those are aimed at making the process simpler and more transparent to the public.

One recommendation, which seems to swim against the current of budget-cutting, is that the Legislature return to 120-day sessions in lieu of its current 90-day session, Wolhforth said. Ninety days isn’t enough time to get the work done on complicated issues like the budget, he said.

One hundred and twenty days is the constitutional limit for sessions while 90 days is a limit set by statute. Legislators can change that or can even just ignore it as happened last year when they stayed in session extra days to finish work on a contentious school funding bill.

Absent more time in Juneau there should at least be more time on budget work, Frasca said, perhaps by legislative committees working in the interim between sessions.

One of Commwealth North’s central recommendations is that all expenditures in the general fund are looked at and that distinctions in revenues such as “designated funds” and “other state funds” are removed, she said.

These terms were originally applied for purely administrative reasons but their use tends to confuse the public, making it appear that certain income streams are “fenced off.”

This has allowed budget debates to focus only on “undesignated general funds,” as compared with “designated” general funds that are tied to programs, as well as “other state funds” which are typically revenue from fees and rentals.

These designations lead to shell games being played. For example, legislators typically brag about cutting undesignated expenditures while conveniently ignoring growth in “other state spending.”

In the past, legislators have also slid major programs under “other state spending” and tying them to designated fund sources, such as fees or rentals, which can lower the undesignated spend. It can be an illusion, however, because the budget may not really have been cut.

The same thing has happened with state program reviews. Spending like state school foundation programs and Medicaid, which are linked by statute to population growth or other factors, are called “formula programs” and typically aren’t given the kind of scrutiny by legislators because they considered sacrosanct.

Frasca said all programs need to be on the table, formula and non-formula and including the big formula programs like state support for elementary and high school education (the school foundation program) at $1.2 billion per year, Medicaid at $800 million per year in state funds, and state personnel pay policies.

“All spending needs to be looked at and all revenues have to be available,” Frasca said.

The creep in agency programs, including incremental expansion, is another problem.

“We should take a hard look at new programs that have been added in the last five to 10 years,” the period in which the operating budget has shown the most growth, Frasca said. “The Legislature tends to look at the incremental, year-to-year change, and not the base,” or why the program was put in place to begin with.

Commonweath North didn’t get into specific recommendations for cuts in its report, but Frasca said the optional services provided under Alaska’s Medicaid program is an area that should be looked at. These are services in addition to those required by the federal government. This is an example of incremental growth where lawmakers have added services over several years.

“Medicaid reforms should be implemented immediately,” Frasca said.

About a third of Alaska’s $1.6 billion Medicaid budget (state and federal funds combined) is for optional services that have been added, according to the Commonwealth North study.

It’s difficult for political leaders to say no to things like this, Frasca said, “especially when they are facing a room full of disadvantaged children.”

In the end it may not be possible for the Legislature to effectively deal with the problem any more than Congress has been able, by itself, to cut military spending by closing redundant military bases.

Congress addressed that through its Base Closure and Realignment Commission, or BRAC, process where an independent commission makes recommendations that take effect unless Congress rejects them, which Congress has not done.

Frasca and Wolhforth said something similar may be needed for Alaska.

“There could be recommendations submitted to the Legislature which take effect if the Legislature does nothing,” she said.

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