After we published an article about HB 331 last week, the “Alaskans for a Sustainable Budget” posted a retort questioning our conclusions.

First, I have to say that they do bring forward one compelling argument. The advantage of HB 331 hinges on the fiscal responsibility of the legislature, and their history isn’t great. But we have to be careful that we are comparing apples to apples.

Ceteris Paribus

One of the key components to a good analysis is sterilizing the work environment. Just like to don’t want contaminants in your chemistry lab, you don’t want outside variables clouding your economics conclusions. So, we employ a tactic we call ceteris paribus, or “all else equal”. For example, if you want to know how a marketing strategy is working, you have to compare the sales under the same circumstances.

If you run your marketing campaign while your competitor’s shop is closed, you need to ask if your sales increased due to the marketing or due to the lack of competition. If your marketing campaign was to close the competitor’s shop, that’s one thing. But chances are the two events happened coincidentally, not causally.

Apples to Pineapples

That’s the problem I have with Mr. Keithley’s analysis. It uses spending $4.3 billion on non-credit related budget items, while paying $200 million in credits as its baseline. Then it compares that to passing HB 331 and increasing the budget by $150 million a year. While these two things sound similar, they taste very different.

Faulty Conclusion

Of course the State’s financial picture is worse under this scenario. But is that the fault of passing HB 331?  No.

In fact, if you compare that increased spending rate under both scenarios, passing HB 331 remains a good deal.

It isn’t the bonding that injures the State’s balance sheet, it’s the spending. 

 

But a Good Catch

However, there is a way those conclusions could be correct. What if, rather than budgeting based on what the state needs, the legislature budgets to a target amount of spending?

That would lead to a real problem. Now, rather than reducing the budget and keeping the extra money in the bank to earn interest, the legislature instead views the reduced budget as an excuse to spend that money in another way.

If that’s the way this whole thing plays out, throw my previous analysis out the window.

 

POMV as the Path to Higher Spending

Some argue that this is basically what happens with the POMV draw created by SB 26. The legislature will view that calculation as the amount they should spend, rather than the amount they can spend.

If that’s the case, Mr. Keithley may be right. If we are going to take on debt under the pretense that the debt service will be paid with the interest on the savings, we need to protect those savings. Otherwise we may end up with an empty savings account and a debt service payment on top of it.

Even if the discount on the face of the certificates warrants the bill on its own, the financial implications are a net negative to the State if those savings are wasted. Which means that, at least in my mind, the passage of this bill relies upon the fact that it reduces the budget and those savings are saved.

Options

There are a few ways that can solve this issue. One way, which Mr. Keithley suggests, is to reduce the POMV calculation by the anticipated savings. Of course, future legislatures could just ignore that statutory provision, but at least it gives them clear guidance. I could support this approach.

Another approach would be to move the money out of the ERA into an account designed to earn interest (technically, you also need to reinvest the earnings that exceed the debt service payments, but the initial appropriation goes a long way). This way, if the legislature does increase spending, they run out of savings faster. And that prevents them from digging into the money that was saved by bonding.

To do this, just amend HB 331 to require that whatever amount of bonds are issued, the same amount of money be moved from the earnings reserve account into another account (or just make it easy and appropriate a billion dollars now).

One option is the Alaska Capital Income Fund (which is designed to earn interest for debt service payments). Another is the principle account of the Permanent Fund (where the money is protected by the constitution).

This way, that money will generate interest from which the bonds can be repaid. Meanwhile, the ability to spend that money is removed from the legislature.

And of course, I always recommend fiscal responsibility.

 

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