A Way Forward on the Alaska Budget

Alaska Republican AssemblyDecember 22, 2015

Brad Keithley (bgkeithley.com)Alaskans for Sustainable Budgets

Overview

• Where are we headed under business as usual

• What are the alternatives

• A way forward

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Business as usual

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Traditional revenues (Fall RSB + PFC forecast)

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FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2026

UGF 5.4$ 2.3$ 1.6$ 1.8$ 2.0$ 2.1$ 2.1$ 2.2$ 3.5$

PF Income (realized)3.5$ 2.9$ 2.7$ 2.8$ 2.9$ 3.1$ 3.2$ 3.3$ 4.1$

Total 8.9$ 5.2$ 4.3$ 4.6$ 5.0$ 5.2$ 5.3$ 5.5$ 7.7$

Spending (Gov’s 10-year (UGF) + PFC forecast)

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FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2026

UGF 7.3$ 6.0$ 5.2$ 4.8$ 4.7$ 4.7$ 4.3$ 5.0$ 6.0$

PF/D 1.2$ 1.4$ 1.4$ 1.6$ 1.6$ 1.5$ 1.5$ 1.6$ 2.0$

PF/IP 0.5$ 0.6$ 0.9$ 0.9$ 1.0$ 1.0$ 1.0$ 1.1$ 1.3$

Total 10.8$ 8.9$ 7.9$ 7.5$ 7.6$ 7.8$ 7.5$ 8.3$ 10.1$

Spending v. Revenues

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Fiscal reserves

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FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2026

CBR 12.2$ 10.1$ 7.1$ 5.8$ 4.6$ 3.6$ 2.8$ 1.8$

ER (realized, after PFD/IP)5.2$ 6.1$ 6.5$ 5.2$ 4.1$ 3.0$ 2.3$ 1.2$

Total 17.5$ 16.2$ 13.6$ 11.0$ 8.7$ 6.7$ 5.1$ 3.0$

One more thing

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What are the alternatives

• “Cuts only” to current revenue levels

• Administration “Sovereign Wealth Fund”

• SB 114/GCI

• Goldsmith “Sustainable Budget” model

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“Cuts Only”

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FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2026

Projected Spending (UGF)7.3$ 6.0$ 5.2$ 4.8$ 4.7$ 4.7$ 4.3$ 5.0$ 6.0$

Revised Spending (UGF Revenue)5.4$ 2.3$ 1.6$ 1.8$ 2.0$ 2.1$ 2.1$ 2.2$ 3.5$

% Cut 26% 63% 69% 62% 57% 55% 51% 56% 41%

FY 2006 (pre-”bubble”) v. current levels

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FY2006FY 2006 Adj to FY 2016FY 2016 FY 2016 UGFFY 2006 Adj to FY 2017FY 2017 FY 2017 UGF

Operating 2.68$ 3.64$ 5.06$ 3.76$ 4.56$

Capital 0.34$ 0.46$ 0.12$ 0.47$ 0.20$

Total 3.02$ 4.10$ 5.18$ 1.60$ 4.23$ 4.75$ 1.80$

“Sovereign Wealth Fund”

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FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2026

UGF 5.4$ 2.3$ 1.6$ 1.8$ 2.0$ 2.1$ 2.1$ 2.2$ 3.5$

CBR 1.9$ 3.8$ 3.6$ -$ -$ -$ -$ -$ -$

PFER 2.6$ 1.3$ 1.3$ 0.8$ 1.3$ 0.4$

PFD Cuts -$ -$ -$ -$ 1.0$ 0.9$ 0.9$ 1.0$ 1.5$

New Taxes -$ -$ -$ 0.4$ 0.5$ 0.5$ 0.5$ 0.5$ 0.6$

Total 7.3$ 6.0$ 5.2$ 4.8$ 4.7$ 4.7$ 4.3$ 5.0$ 6.0$

PFD Cuts & Taxes

SB 114/GCI

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FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2026

UGF 5.4$ 2.3$ 1.6$ 1.8$ 2.0$ 2.1$ 2.1$ 2.2$

CBR 1.9$ 3.8$ 3.6$ 1.0$ 0.6$ 0.3$ 0.0$ (0.2)$

PF POMV 1.6$ 1.7$ 1.9$ 2.1$ 2.2$

PFD Cuts 0.8$ 0.9$ 0.9$ 1.0$ 1.1$

New Taxes

Total 7.3$ 6.0$ 5.2$ 5.2$ 5.2$ 5.2$ 5.2$ 5.2$

PFD Cuts

?

Concern with PFD cuts & taxes

• Moves revenue from private to gov’t hands with limited understanding of overall economic and regional impacts from change

• For example, approach may create potential for increased financial leakage outside state

“[M]ost of the cash from dividends will ultimately find its way into the Alaska economy to increase employment, population, and income. … [If the dividend instead had been diverted to state government,] the most likely alternative use of the PFD would probably have been to increase capital spending by state government. … Capital spending would have generated less employment and increased income inequality.” -- Dr. Scott Goldsmith (2010)

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Add’l issues with PFD changes

• Most regressive approach …• Takes the highest percentage from low income Alaskans

• Eliminates the direct tie between Alaskans and the size of the Permanent Fund … • Reduces citizen incentive to protect the Permanent Fund

principal

• Reduces effectiveness of PFD as a means of putting mineral wealth into private hands• Reduces effort to replicate effect of L48 royalties on

private economy

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Goldsmith model

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inflation 2.30%

population grow 0.50%4.20$

UGF SUSTAINABLE SPENDING

FY 2017

Based on Current Revenue and use of financial asset income.

Spending (including dividend) grows with inflation and

population.

A Way Forward

• Approach

• Revenues

• Spending

• An additional, needed focus: S&P & Mechanism

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Approach

In my opinion, best approach remains Goldsmith model

Keys

• Reduce spending to long-term sustainable levels based on best reasonable forecast

• Use Permanent Fund earnings remaining after PFD and inflation proofing

• Remain alert to changes in key forecast variables and adjust approach if there are significant changes

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Revenues

• Traditional revenues, plususe of PF earnings

• Start use of PF earnings now (avoid CBR vote & maintain accessible fiscal reserves)

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• Key variables: AKLNG, moderate oil production decline plus new oil, PF earnings level

Spending

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Total UGF K-12 Medicaid Other HSSO&G Tax CreditsCapital PERS/TRSOther Operating

FY 2006 Adj 4.1$ 1.2$ 0.5$ 0.3$ -$ 0.5$ -$ 1.6$

FY 2016 5.2$ 1.2$ 0.6$ 0.5$ 0.1$ 0.3$ 2.4$

?

Spending

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S&P

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Mechanism

In thinking about how to respond to S&P (and others), one aspect of Gov’s approach has value …

… providing some mechanism for regulating funds available for spending to sustainable levels

… need to discuss with S&P

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Conclusions

• Alaska is not “falling of the cliff,” but 10-year outlook demonstrates we can’t continue “Business as Usual”

• “Cuts only” based on traditional revenue sources fall well below FY 2006 adjusted (pre-bubble) spending levels

• Based on current, long-term fiscal outlook, “Sovereign Wealth Fund” and SB 114 both go unnecessarily far by cutting PFD and taxes

• Based on current, long-term fiscal outlook, Goldsmith model remains best current approach (properly monitored and adjusted)

• Need to respond to S&P

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