For Alaska to Survive and Thrive, Our Fiscal Policy Needs an Overhaul - P.O.W. Report

Wednesday, October 12, 2016

For Alaska to Survive and Thrive, Our Fiscal Policy Needs an Overhaul

As seen in Alaska Business Monthly.

By Joe Beedle & Joe Schierhorn

Brexit is an abbreviation for “British exit,” referring to the June 23, 2016, referendum whereby British citizens voted to exit the European Union. We would argue that Alaska’s exit or avoidance to deal with fiscal discipline amounts to Alaska’s exit from economic and fiscal reality, a dysfunctional end to prosperity, an “AK-IT” scenario. We need legislative action to reform our fiscal discipline so that we stabilize our fiscal and economic future and attract investment capital and viable business to the state.

At Northrim Bank, we are very proud of our Alaska roots and work tirelessly to engage with our customers and the community to build the best Alaska we can. As the Chairman of the Board and the President/CEO of the Bank, the two of us have more than seventy years of experience in the financial industry and have lived in Alaska for more than one hundred years, collectively. We have a deep, caring, passion for Alaska and our company and so do our employees. We work every day to maintain discipline and grow Alaska business, and we engage to keep Alaska strong.

The past couple of years have been very disturbing to witness as the state of Alaska has accepted repeated annual budget shortfalls of $4 billion, rapidly diminished our savings accounts, and not made any meaningful progress on systemic or sustainable programmatic fiscal policy improvements. The state has become more divisive and dysfunctional and lost considerable confidence of many stakeholders, including credit markets, private sector investors, and developers of our base industries. Many groups and individuals urged the Legislature to adopt a plan that would provide sustainable relief for the budget shortfall and create a long-term solution to the state’s fiscal problems. Unfortunately, this has not happened and as a result, the state’s liquid financial reserves will drop below healthy levels next year. We do not have time to delay action further!

The lack of a sustainable plan has lowered the state’s credit rating and caused turmoil throughout state agencies and the public and private sectors. We are extremely disappointed that even with all the discussion and public engagement that there is still no workable plan being considered by the Legislature. We know the Legislators are concerned about the upcoming election; but also, we want them to know that we, here at Northrim, stand for election everyday with our customers and investors. It is through our discipline and accountability that we win the votes of our customers. Investment dollars are fungible and mobile, and Alaska is losing opportunities while we wait for legislative action. Again, we urge the Legislature to take action and remember that their job is to maintain stability and create a constructive plan, which sometimes means making difficult, unpopular decisions. It is time for all Alaskans to realize that we need to do what is best for Alaska as a whole, and not just for ourselves as individuals.

There is opportunity in times of struggle. Northrim Bank was born out of the ashes of the recession of the mid-1980s and the two of us do not want to revisit those times again. Through discipline and hard work, we created not only a thriving financial institution but also one that is a resource for our customers and the community. The state’s budget woes do not make up the entire story of the Alaska economy and it is important for businesses to remember that there is opportunity in difficult times; efficiencies can be enhanced, bargain purchases made, and new markets explored. While the oil and gas industry is facing challenges in the current environment, other sectors might enjoy relative strength. We are fortunate to have healthy fishing, mining, transportation, tourism, hospitality, retail, healthcare, and military complex industries. However, the headlines only read that our state can’t balance its budget.

Previously, the governor said the state just has a cash flow problem and had time to correct the “glide path.” To a banker the most important “C” of credit is “cash flow,” and thus we believe a systemic income statement overhaul of state government finances needs to occur to keep from crashing.

Visioning the problem as if Alaska’s state budget was an airplane:

Many things are required to keep the budget on track or the plane in the air; the state has a large plane but it is only one-tenth of the planes in the air; businesses and industries have their own planes and must work together to ensure safe travel for all. As with any flight, planning and coordination is needed to ensure a safe trip; pilots must remain calm and disciplined in the face of an emergency; the Administration and the Legislature are like the pilots of the state’s budget—collectively they must bring discipline back to the planning and execution of the budget. The state’s reserves are on empty and they are not checking the boxes on the checklist to keep the plane in the air.

The Administration has created a plan that has merit and would be successful in maintaining a safe flight. Community partners, such as the Institute of Social and Economic Research, Commonwealth North, Plan4Alaska, and Alaska’s Future have worked throughout the past year to brief the public and Legislature on the importance of a plan that creates a sustainable budget, or safe flight plan. The state’s plane is in a tailspin and we need to work quickly to recover. We no longer have the fuel reserves to keep the state’s plane in the air.

Like many throughout Alaska, we are concerned about the lack of action taken by the Legislature to course correct for the loss of revenue fuel or uncontrollable cost drag on the plane of the state. This past year was the time to plot a strategic flight plan that would keep Alaska flying in the future. As we are all aware, there is no single solution to solve the budget crisis. The comprehensive budget plan must include all of the following items:

Cuts to the state budget
New revenue to include, but not limited to, broad-based taxes
Use of Permanent Fund earnings
As an aside, Northrim as a corporation pays an Alaska state income tax at the marginal rate of 9.4 percent, one of the highest in the country. We both, as individuals, are willing to pay a personal income tax and/or a state sales tax, and we are willing to give up part or all of our Permanent Fund Dividend to help balance our state’s budget.

It is time to reset the expectations of the Legislature. They must lead by doing what is best for Alaska. Discipline over desire is needed to correct the course of the state budget. As noted earlier, we, the Bank, stand for election every day with our customers and our customers remain loyal to the Bank because we have the discipline to maintain a steady flight plan. Customers (or constituents) appreciate discipline over desire and understand that difficult decisions must be made to keep a plane in the air.

Northrim Bank built its own plane out of the wreckage of a bad economy and we are resolute not to allow our reserves or capital to be depleted or let our systems deteriorate. The realization of getting the Northrim plane off the ground took resolve and alignment just as staying credit diligent and capital strong is required today. We not only have the tools and discipline to keep our own plane in the air safe and sound but also the tools to help other businesses maintain a steady flight path themselves and avoid potential disasters.

In the past year, we have created a program called SurThrival. A program that helps Alaska businesses not only survive, but also thrive during times of economic hardship. It started as a response to the fiscal crisis with the state’s budget and grew in response to a slowing economy and is applicable through many types of adversity. Businesses receive tips that will help them SurThrive in a down economy and Bank officers are available to create a plan for the business to help navigate the turbulence of economic difficulties.

We continue to be cautiously optimistic that the state will solve its budget deficit. This will occur through further decreases in government spending, use of Permanent Fund earnings, and generating new revenue through broad-based taxes. At Northrim, we will continue to advocate for a balanced approach to the state budget issues. There are many tools available to deal with the issue. We also believe that there will be opportunities to SurThrive in the current economic environment.

We ask the Alaska Legislature to vote for a disciplined and sustainable fiscal solution that provides opportunities for all Alaskans to SurThrive. [Full Source]

This article first appeared in the October 2016 print edition of Alaska Business Monthly.

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