Creative Accounting, Juneau Style

Scott Goldsmith Professor of Economics and Director Institute of Social and Economic Research University of Alaska Anchorage July 16, 2002 786-7720

Never let it be said that Alaska is behind the times. Cutting edge creative accounting has been practiced in Juneau for years, although now it’s more bizarre than ever. Here are some examples.

Create Assets Out of Thin Air (like Enron). The state has been operating in the red for a decade. This year the General Fund, which pays for most day to day government operations, will have a $1 billion “fiscal gap.”

Since the state can’t print money, we’ve been borrowing from a savings account called the Constitutional Budget Reserve. That account was set up to provide temporary loans to the General Fund when low oil prices created budget deficits. The idea was that we would repay the CBR, as it is called, when high oil prices created surpluses. To date these loans have totaled $4.5 billion. We have yet to make any repayments to the CBR. In the style of Enron, the CBR shows this loan as an “asset,” though no one seriously believes the CBR will ever collect.

Sell at a Loss, Make it Up on Volume (like any number of defunct dotcoms). The CBR is hemorrhaging at the rate of $3 million a day to cover the General Fund shortfall, so it won’t last much longer. The only permanent solution is to cut spending and find new revenues.

So far, budget cuts have been the solution of choice. Adjusted for inflation, spending per Alaskan from the General Fund has fallen 40 percent in the last decade. But we cannot cut the budget indefinitely without actually eliminating some of the public services we have become accustomed to, like parks and roads.

For new revenues the popular choice is “economic development,” based on the incredible theory that development could bring in enough new revenue to balance the budget, even though we have no personal income or sales tax. The truth is, with the exception of petroleum, no new development can pay its own way in the absence of broad-based taxes. Sometimes called the “Alaska Disconnect,” this situation is reminiscent of those failed dotcom companies that lost money on every sale, but thought they could make it up on volume.

Ignore New Obligations (like Worldcom). Two new commitments to spend money emerged from the final hours of the recent legislative session. But you won’t see them anywhere in the budget. Look for them to show up as new obligations next year and beyond.

Voters will decide this fall whether the state should sell $463 million in bonds. Most of that debt would have to be repaid with future General Fund revenues. The state also agreed to pay more interest on the debt of local governments in support of ports and energy projects. Some of these projects make sense—but if we want them, let’s not be like Worldcom and try to hide their costs under the rug.

If you look past these examples of creative accounting, it’s clear we didn’t make any real progress toward reducing the fiscal gap this year, and we have less financial cushion to deal with it in the coming years.

As if that were not enough, we also have an arithmetic problem that we can characterize as “one plus one equals one billion.” After an incredible struggle, a liquor tax increase was passed this session that is expected to add about $20 million per year to General Fund revenues. Unfortunately this drop in the bucket is only big enough to “inflation proof” or offset the effect of inflation on the size of the fiscal gap. No one seems to have noticed that a growing population and falling oil revenues are also expanding the gap each year.