The Friday Alaska Landmine column: "Surplus"

This week we explain the Orwellian use of the term "surplus" by some to cover up what's really a huge and growing state budget deficit

In a previous column, we wrote about the “Orwellianization” of the language used by some when discussing Alaska fiscal issues. The term was a reference to George Orwell’s dystopian novel 1984, in which the government gave common terms the opposite of their standard definition to confuse and manipulate the populace into accepting things they otherwise would not.

As we summarized in that column, in 1984, the result was a government-generated “newspeak” in which:

… “war” becomes “peace,” a forced labor camp becomes “joycamp,” past facts appearing in the press that are no longer consistent with current political views become “malquoted,” lies, propaganda, and distorted historical records become “truth,” distorting a historical record becomes “rectify,” starvation and rationing become “plenty,” and torture and brainwashing become “love.” “Free” and “equal” are stripped of the political meaning we give them today, becoming largely empty shells, and, as Orwell had his main protagonist say, “in the end, the Party would announce that two and two made five, and you would have to believe it.”

We were reminded of that column and Orwell’s novel late last week when reading the Legislative Finance Division’s (LegFin) most recent July 2024 newsletter. There, LegFin purported transparently to summarize the final Fiscal Year (FY) 2025 state budget as enacted by the Legislature and signed by Governor Mike Dunleavy (R – Alaska). In doing so, LegFin made this claim:

Based on the Spring 2024 forecast, both the FY24 and FY25 budgets are projected to have surpluses ($128.8 million and $146.5 million, respectively). The FY24 surplus will lapse to the CBR, while any FY25 surplus will be available for appropriation next session.

It was the word “surpluses” that immediately brought Orwell’s 1984 to mind.

As with every other Alaska state budget since the Legislature first tapped the Statutory Budget Reserve (SBR) in FY13, the FY25 budget is in a current-law deficit. As with all the others that have come after FY13, expenses far exceed current law revenues.

LegFin’s FY25 Fiscal Summary seeks to hide that fact by never showing the calculations underlying AS 37.13.140 and AS 37.13.145, the statutes governing the determination and disposition of income from Permanent Fund earnings.

As we have explained in a previous column, this is how those statutes work using the numbers applicable to FY25. Under the existing statutes as they continue to remain in effect (current law), the annual percent of market value (POMV) draw from the Permanent Fund earnings account ($3.657 billion) is divided between the portion statutorily designated for Permanent Fund Dividends (PFD) and the portion available for government services in this way:

Under the statute, the portion of the POMV draw statutorily designated for the PFD is $2.325 billion; the portion available for government services is $1.333 billion.

Using the latter number, the left side of the following chart shows the actual amount of unrestricted general fund (UGF) revenue available for government services in FY25 under current law. The total amount is the sum of traditional revenues ($2.79 billion) plus the portion of the POMV draw available for government services under current law taken from the previous calculation ($1.33 billion). The total is $4.12 billion.

The right shows the amount of spending included in the FY25 UGF budget per the LegFin summary. The total is $5.38 billion.

The resulting math is simple. Under current law, UGF revenues minus expenses result in a $1.26 billion deficit. That’s a deficit equal to approximately 25% of spending, only slightly less than the 27% deficit level the Congressional Budget Office currently projects for the federal budget for FY24.

Then what’s the basis for LegFin’s claim that the budget is in surplus? Without explaining what they are doing to create a “surplus,” LegFin silently rolls in the effects of the non-statutory PFD cut (or, as University of Alaska-Anchorage Institute of Social and Economic Research Professor Matthew Berman calls it, the “tax” on the PFD) also reflected in the FY25 budget into revenue.

Here’s the full calculation:

Transparently including that calculation reveals two things. The first is that the Legislature clearly is relying only on PFD cuts (taxes) – which disproportionately impact middle and lower-income Alaska families – to offset the deficit. There are no additional broad-based revenues – which would also reach upper-income Alaska families and non-residents – or additional revenues from oil that are helping cover the shortfall. The Legislature is relying entirely on PFD cuts (taxes) to plug the $1.26 billion budget deficit.

The second is that the Legislature is not only cutting (taxing) the PFD to the level required to eliminate the deficit but is also going beyond that level to create a “surplus.”

The excess being cut (taxed) to create that “surplus” is not insignificant. At current recipient levels, the $150 million additional cut (tax) is equal to about $240 per PFD, or $1000 for a family of four. In total, the cut (tax) is $1.41 billion, or, again, at current recipient levels, about $2,200 per PFD ($8,800 for a family of four). The excess cut (tax) alone is more than 10% of the total.

Why take more from the PFD than is needed to offset the deficit and call it a “surplus”?

One reason is suggested in a recent Anchorage Daily News editorial board op-ed. That op-ed challenged Governor Dunleavy’s line-item veto of funds intended by the Legislature for the Alaska Blood Bank. In his veto message, the Governor explained the action as appropriate to “preserve general funds for savings and fiscal stability.”

In the course of questioning the veto, the op-ed referenced Senate Majority Leader Cathy Giessel (R – Anchorage) – a proponent of the spending – in claiming that the veto made no sense on that ground because “the operating and capital budgets included a surplus before the governor got out his red pen.”

That is the same argument that Representative Alyse Galvin (I – Anchorage) used last year in her own op-ed in the Anchorage Daily News, urging an override of the Governor’s previous veto of a portion of the increased funding the Legislature had passed for K-12. Like Senator Giessel, Galvin claimed, “And there is a budget surplus. So, what’s the hang-up?”

In short, by creating an Orwellian “surplus,” the Legislature has sought to position itself to claim that it already has created fiscal stability. Any additional gubernatorial vetoes are unnecessary. It’s a way of attempting to further insulate legislative spending from fiscal scrutiny, even by the Governor.

There is also likely another reason. It provides legislators campaigning for reelection a titular basis on which to claim – as many already are – not only that they “balanced” the budget but also that they were so fiscally conservative that they left a “surplus.”

But they haven’t. The so-called “surplus” isn’t the result of taking the traditional steps of cutting – or even restraining – spending to create a surplus. Counting the supplementals assigned to the FY24 budget this session, before vetoes, operating and capital spending authorized this session was up by more than 7.5% over the FY24 baseline ($5.51 billion v. $5.12 billion).

The so-called “surplus” also isn’t the result of some unanticipated surge in oil and other traditional revenues. Indeed, projected traditional revenues for FY25 are down by 7.5% from FY24 levels ($2.79 billion v. $3.01 billion).

Instead, legislators have only cut the PFD – again, which disproportionately taxes middle and lower-income Alaska families – more than is needed to cover the budget deficit. They have artificially created the so-called “surplus” entirely through excess taxes.

Because legislators have largely insulated themselves and their significant donors from the adverse effects of PFD cuts, that may seem a “surplus” to them, but it’s certainly not to the middle and lower-income families from whom the funds have been diverted. As we’ve explained in previous columns, to them the funds represent an increasingly material share of income. We seriously doubt any of those families would consider the funds “surplus.”

Some also defend the excess cuts (taxes) as a backhanded means of making token payments into the badly depleted Constitutional Budget Reserve (CBR). They explain that to the extent the so-called “surplus” is not spent in the subsequent year’s supplemental, it will lapse into the CBR.

To be clear, there are few greater proponents of CBR repayment than us. We have written about it multiple times in the columns, most recently just a few months ago here: Alaska is leaving future generations with even less than a bare cupboard; that needs to change.

But as we’ve also explained, the repayment should come from the same groups that benefited from the additional spending that the drawdown of the CBR funded – all Alaskan families, non-residents, and oil companies (a significant share of the CBR drawdown went to pay so-called “reimbursable” oil and gas tax credits).

Using only PFD cuts (taxes) – pushing almost the entire burden down to middle and lower-income Alaska families – to repay the CBR is the same as if you have to pay for all of the damages after the neighbor kids steal your classic car from your garage to take it for a joyride and then end the ride by smashing it into someone else’s home. Maybe you are responsible for a little bit of the costs because you left the keys in the car and the garage door open, but the kids (and their families) who took the car from the garage without permission and then proceeded to drive it recklessly should bear the bulk of the costs.

We understand that top 20% legislators desperately want to hide from the public what is really going on with the budget. Can you imagine the outrage if Alaskans realize they are paying excess taxes largely to create legislative campaign talking points for the incumbents?

But as the Congressional Budget Office (CBO) does at the federal level, the self-proclaimed “non-partisan” LegFin, which says that its mission is to provide “accurate, relevant and objective information and analysis,” should play it straight with Alaskans.

Rather than resorting to Orwellian newspeak to help cover up what is actually going on, LegFin should transparently include the calculations that reveal what actually is occurring – the Legislature is making excess (Britannica: “more than necessary”) PFD cuts (taxes) – and, like the CBO does in similar circumstances, let the resulting chips fall where they may. Anything less is making LegFin complicit in the problem, not part of the solution.