FY2010 Budget: Three card Monte and the fantasy surplus

(12/16/08) On Monday, Governor Sarah Palin rolled out her proposed budget for the coming fiscal year, although it was difficult to see it through all of the smoke and mirrors. 

The practice of bait and switch budgeting has become a classic hallmark of the Palin administration. However this years budget game is even more disturbing given the significant decline in oil tax revenues due to the collapse of oil prices and the administrations refusal to recognize the changing reality of state revenues.

In December of 2006, Palin rolled out her first budget and promised over $100 million in "unallocated cuts." That line item was yet to be identified cuts to the operating budget, which sounded good and made her initial budget proposal seem prudent. But there was never any clue what so ever about where they'd find the $100 million in cuts and at the end of the day it simply disappeared as a budget line item to be replaced by more spending.

In December of 2007, Palin rolled out her second budget and this time told Alaskans that her budget held government operating growth to 4%. But when the legislature's budget gurus reviewed the governor's proposal, they stated that the increase in the operating budget was actually closer to 14% with all of the side funds that the administration had created for without counting them as spending.

Yesterday, another year, another proposed budget that was nothing more than three card Monte.

Claiming that her budget will decrease general fund spending by 7% and that the state would enjoy a $338 million surplus, Palin's budget is relying on an unrealistic projection of the price of oil to make her budget float. In addition, as her administration has done in previous years, they're spending money - this time $238 million from the Alaska Housing fund - but not accounting for it in their budget calculations.

The administration is basing its 2010 budget on the hope that the price of oil will average $74.41 beginning next July and through the fiscal year. Taxes on oil represent ninety cents out of every dollar the state collects.

The problem is that their forecast is incredibly off balance with what other groups and agencies are predicting. The Federal governments Energy Information Agency is predicting $51 per barrel and many oil & gas consulting firms are predicting nothing higher than $54 per barrel over the next year.

And while the Department of Revenue has said that forecasting is just a guess that has to be made, it's clear that the guess is designed to pad the revenue picture to avoid the governor from having to explain deficit spending. 

Yesterday the price per barrel dropped $1.77 per barrel to close at $38.76, even though OPEC had already announced their intentions of cutting supplies to shore up falling prices. The price drop, even in the face of promised production cuts shows what kind of economic times we are living in. And again, while the Department of Revenue says forecasts are always cloudy, their forecast seems irresponsible during a time when most economists are calling this the worst U.S. recession in seventy years.

In addition, both oil prices and production are down and many North Slope firms are cutting back on new investments on the slope. Last year, the operating budget called for $400 million in oil & gas tax credits (which is a sign of activity) but in the 2010 budget they are planning for only $300 million.

Last week Conoco announced cuts and several smaller independents have announced plans to hold off on new exploration efforts due to the falling price of oil and the high cost of operating.

What about the pipeline?

The biggest challenge facing the Palin budget is the lack of commitment to improving Alaska's infrastructure ahead of the gas pipeline that Palin has already told America she was building.

Former State Senator Drue Pearce, who heads the Office of the Federal Coordinator for Alaska Natural Gas Transportation Projects, told the recent Resource Development Council Conference that one thing that could kill the project is under the state's control -- needed infrastructure upgrades. 

For years many of us have pointed to the much needed upgrade of the state's infrastructure to prepare for the construction of the pipeline. Roads, bridges, ports and perhaps the railroad will need to be improved early so that construction materials can be staged along the pipeline route.

On March 26, 2006 I addressed this in a blog which pointed out what we've all known since the gas pipeline discussion began in earnest:

"The Department of Interior has identified anywhere between $800 million to $1.5 billion worth of needed upgrades to existing infrastructure. From widening and resurfacing roads to reinforcing bridges, the construction of the pipeline cannot happen without these necessary transportation corridor upgrades.