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Big risks present in CBR makeover

Posted: Sunday, March 16, 2008

A constitutional amendment that would radically transform the state's finances has been quietly moving through the state House of Representatives. The measure is the bipartisan brainchild of Republican Ralph Samuels and Democrat Mike Doogan, both from Anchorage. It could come to a vote in the House as soon as Monday. If approved, it would abolish the constitutional budget reserve in all but name, and replace it with an endowment. The sole purpose of new endowment would be to provide long-term support for state spending.

In 1990 voters established the CBR to be a fiscal safety net for the state, seeding it with money from tax and royalty settlements. It was a farsighted move. Oil prices rise and fall unpredictably, and in 1993, when prices fell to $15 per barrel, the state was able to draw $1.4 billion from the account to temporarily support government services and the state economy. Prices later rose, but in 1998 they dropped again, this time to an unbelievable $12 per barrel. The CBR was again the state's lifeline. In 18 years the state has drawn a total of $4.8 billion.

Today there is still $3.1 billion left in the CBR, and the state Senate has voted to add money from the current surplus. That, together with earnings on fund investments, will bring the total in the reserve to a comfortable $5.6 billion. Should oil prices fall to $50 per barrel, it's enough to sustain state services and the economy for almost two years until oil prices again cycle upward. The CBR wasn't designed to protect the state from long-term revenue declines, but the fiscal cushion nevertheless gives policy makers the time needed to adopt adjustment measures that could make the difference between a soft landing and a crash.

The Samuels-Doogan constitutional amendment has a host of problems, but the most obvious is that under their plan the CBR would cease to provide this protection. Money now in the reserve would be used to capitalize the new endowment. Income from the new fund would be dedicated to supporting future state spending. Money in the principal of the new fund would be constitutionally protected - off limits to appropriation no matter how dire the state's fiscal need.

Assuming no further deposits, revenue being spun off from the endowment would remain very modest for a very long time; it would not rise above $200 million per year until 2012, and remain less than $500 million through 2023.

That's not the scenario promoters of the amendment are imagining. Their vision of the future has oil prices staying high, and the Legislature stuffing all the resulting surpluses in the endowment.

"One more good year, and you are close to $10 billion in the endowment," Samuels enthused in an interview on Wednesday.

Even under that optimistic scenario revenue from the fund doesn't reach $500 million until 2015.

Doogan, interviewed separately on Wednesday, said he doesn't think oil prices are likely to come down anytime soon. If they do crash, however, he says the state could always amend the constitution again to allow emergency appropriations from the endowment principal.

But others think it is more likely the Legislature would dip into the earnings reserve of the Alaska Permanent Fund, the pot of money from which the permanent fund dividend is paid.

"With the CBR money off the table, the permanent fund earnings reserve moves to the front of the line anytime you have shortfall," said a Palin administration economist.

I asked Samuels what happens if the price of oil drops to $50 a barrel months and stays there for a couple of years.

"You would end up having to go to the earnings of the permanent [fund]" Samuels agreed. But he said that would happen in any event, even if the current CBR were retained. "You'd burn through it, and you're going to end up at the same place."

Another top Palin administration official, noting that the amendment removes billions from the reach of bondholders, suggested that it could have an adverse impact on the state's bond rating.

Despite the constitutional amendment's many problems, Samuels, who serves as the House majority leader, seems convinced he has lined up the two-thirds majority needed to pass the measure in the House. On Wednesday he said he was planning to bring it to a House vote on Monday. If he does that, and it passes, let's give a silent prayer of thanks for our bi-cameral legislature. And let's hope that senators give the scheme a more thorough analysis than it has thus far received in House.

• Economist Gregg Erickson is the owner of a Juneau consulting firm (www.EricksonEconomics.com). He can be reached at gerickso@alaska.com.



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