alaska’s fiscal situation: past, present & future
TRANSCRIPT
Alaska’s Fiscal Situation: Past, Present & Future
Alaska Republican AssemblyAugust 1, 2016
Brad Keithley (bgkeithley.com)President, Keithley Consulting, LLCFounder, Alaskans for Sustainable Budgets
Agenda• Past: What happened in the last session(s)• Present: Previewing FY 2018 based on the status quo
• Future: What are the alternatives
Follow along at:http://bgkeithley.com
http://www.slideshare.net/bgkeithley
Aug 1, 2016 Keithley Consulting, LLC 2
Past: What happened last session(s) –The FY 2017 story
Aug 1, 2016 Keithley Consulting, LLC 3
Past: FY 2017 Budget As Passed
Aug 1, 2016 Keithley Consulting, LLC 4
($B) Operating Capital Total
“Conference Committee” (1) $4.26
Capital (2) $0.09 $4.35
“2016 New Legis” (add’l OilCredits) (1) .43
Supplemental “FY 2016” Operating (1) .09
Adjustments (3) .09
Remaining FY 2017 OilCredits (4) .31 .92
Total $5.18 $0.09 $5.27
(1) From Multi‐year Agency Summary ‐ Operating Budget ‐ FY 2017 Conf Committee Structure (“Conference Committee” includes only $30 million in OilCredits)
(2) From 2016 Legislature ‐ Capital Budget Agency Summary ‐ House Structure(3) $90 million from Higher Education DGF used to fund PERS/TRS(4) Additional FY 2017 supplemental required next year to fund remainder of $770 million in FY 2017 OilCredits
A beginning compliment, but then …
Past: Effect of FY 2017 Vetoes
Governor vetoed: (1) $430 mil in oil tax credits, (2) net $54 mil in other operating costs. Administration presentations now assume remaining $310 mil in FY 2017 oil tax credits also are deferred to FY 2018.
Aug 1, 2016 Keithley Consulting, LLC 5
($B) As passed Gov vetoesDeferral of
Remaining Oil Credits
Final FY 2017
Operating $5.18 $.48 $.31 $4.39
Capital .09 .09
Total $5.27 $.48 $.31 $4.48
Past: Fiscal Reserves
Aug 1, 2016 Keithley Consulting, LLC 6
From a cash perspective things are sort of ok …
Past: But that masks some thingsIf adjusted for …
Aug 1, 2016 Keithley Consulting, LLC 7
($B) Adjustments EOY FY 2017
$12.77
Effect of PFD veto $0.65
Deferred OilCredits .74
Adjusted $11.48
If Governor Walker had not cut the PFD and deferred oil credits, the EOY balance would be $11.48 B, down $2.42 B (17.5%) below EOY FY 2017. Still not bad from a current cash perspective, but not a sustainable draw.
Present: Previewing FY 2018 based on
status quo
Aug 1, 2016 Keithley Consulting, LLC 8
Present: Previewing the FY 2018 BudgetThe elephant in the room …
Aug 1, 2016 Keithley Consulting, LLC 9
Present: The Impact of Oil Credits
($B) Base Spending Oil Credits Total
FY 2018 $4.30 $1.18 $5.48
FY 2019 4.41 .29 4.70
FY 2020 4.52 .19 4.71
FY 2021 4.63 .15 4.78
FY 2022 4.75 .15 4.90
Aug 1, 2016 Keithley Consulting, LLC 10
Base spending set at $4.3 B (FY 2018), adjusted annually thereafter for inflation + population growth (2.5%) (Goldsmith sustainable budget approach)
Present: Cash Flow (status quo)
($B)Revenues (Spring Forecast)
Spending ($4.3 + Oil Credits)
Surplus /DeficitFiscal
Reserves (Status Quo)*
$12.77
FY 2018 $1.35 $5.48 $4.13 8.64
FY 2019 1.45 4.70 3.25 5.39
FY 2020 1.52 4.71 3.19 2.20
FY 2021 1.61 4.78 3.17 .97
FY 2022 1.65 4.90 3.25 4.22
Aug 1, 2016 Keithley Consulting, LLC 11
If we continue the status quo (funding all oil credits, inflation proofing, PFD’s …), even if we hold other spending to $4.3 B, adjusted for inflation & population growth …
* Math corrected 8.11.2016.
Future: What are the alternatives
Aug 1, 2016 Keithley Consulting, LLC 12
Future: What can be changed• Permanent Fund Revenues (Jay Hammond, “Diapering the Devil”):"I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity. ... [Once the money wells were pumping,] [e]ach year one‐half of the account’s earnings would be dispersed among Alaska residents …. The other half of the earnings could be used for essential government services.”
• Implementation• Set a steady rate of earnings withdrawal in order to avoid disruptions to Permanent Fund Corporation investment strategy
• Set the withdrawal rate at the expected real rate of return (PFC uses 5%) and discontinue separate inflation proofing
• Review and adjust the dividend formula, if necessary, to assure dividends and government take equal 50% share over time
Aug 1, 2016 Keithley Consulting, LLC 13
Future: What can be changed• Oil credits (AS 43.55.028):
• (b) and (c): Sets a minimum required contribution to the fund each year (FY 2017 minimum is $30 mil), provides that the legislature may, but is not required, to contribute more
• (g): Provides for an explicit allocation methodology “when the total amount of the applications for purchase and claims for refund exceed the amount of available money in the fund.”
• If sufficient moneys are not available in the fund, explorers can sell credits to majors (problematic – back door to subsidy) or use them as deductions once production commenced
• Implementation• Set future contributions at statutory base, eliminate discretionary contributions and convert outstanding refundable credits to deductions once production commenced
Aug 1, 2016 Keithley Consulting, LLC 14
Future: Cash Flow (adjusted)
($B)Revenues (Spring Forecast)
50:50 based on 5% draw
Total Revenue
Spending ($4.3 adj)
Surplus/Deficit
Fiscal Reserves (Status Quo)
$12.77
FY 2018 $1.35 $1.25 $2.60 $4.30 $1.70 11.07
FY 2019 1.45 1.31 2.76 4.41 1.65 9.42
FY 2020 1.52 1.37 2.89 4.52 1.63 7.79
FY 2021 1.61 1.43 3.04 4.63 1.59 6.20
FY 2022 1.65 1.50 3.15 4.75 1.60 4.60
Aug 1, 2016 Keithley Consulting, LLC 15
If we fund oil credits at the statutory base, use Hammond’s 50:50, use a set withdrawal at a real rate of return and discontinue separate inflation proofing …
Future: Two important questions
• Is the revenuenumber right?• Probably not, likely higher
• Is $4.3 B the right sustainable spending level?• Maybe not, possibly lower
Aug 1, 2016 Keithley Consulting, LLC 16
Future: Two important questions• Why the revenue number is likely low:
• Assumes $62.85 (FY 2022) oil price (most analysts continue to forecast $80 by 2020)
• Assumes roughly 5% annual production decline to FY 2022 (FY 2016 experience indicates lower decline, higher production levels)
• Why the $4.3 B sustainable spending number may be high:• Assumes #AKLNG startup by mid‐2020’s (risk discount likely appropriate)
• But offset to some degree if we adopt Hammond’s 50:50, set withdrawal at real rate of return
• Both need to be worked in the run‐up to the 2017 session
Aug 1, 2016 Keithley Consulting, LLC 17
Future: Why good answers are important
Aug 1, 2016
If budget makers ‐‐• Over project: Too
optimistic and current spending overshoots the mark, drains reserves
• Under project: Pessimism is an equal problem – too pessimistic and policy makers pull levers (tax/PFD/spending cut) that unnecessarily penalize the current economy
18Keithley Consulting, LLC
Sustainable budget approach createsa tool to help focus fiscal policy onthe long‐term outlook to lookthrough high and low cycles, which iscritical in a commodity basedeconomy
Future: Summing up• Revenues:
• Implement Hammond’s “50:50” approach to setting draw from Permanent Fund earnings
• Spending:• Reduce spending to sustainable levels by reducing oil credits to statutory base funding levels and eliminating discretionary contributions
• Continue setting overall spending levels using ISER sustainable budget approach (sets a steady course through ups and downs in oil prices)
• Numbers:• Challenge and work revenue and sustainable spending level calculations
Aug 1, 2016 Keithley Consulting, LLC 19
And what if spending remains elevated
• Again, Jay Hammond, “Diapering the Devil”:"Before slicing dividends to cure that skin lesion, let’s first treat that belly tumor with surgical budget cuts and, if necessary, the 'radiation' of user fees and less regressive taxes. Let’s leave dividends in the people’s pockets so they can both better afford and, to a degree, elect whether or not to pay coming user fees and taxes. ... After all, the best therapy for containing malignant government growth is a diet forcing politicians to spend no more than that for which they are willing to tax.“
• In other words, leave the PFD alone• Supported by March ISER study finding that cutting the PFD has the most adverse effect on the overall Alaska economy of all fiscal options
Aug 1, 2016 Keithley Consulting, LLC 20
For More Information …
Thought on Alaska Oil & Gasbgkeithley.com
Michael Dukes ShowTuesdays at 7:15am
kbyr.com
Aug 1, 2016 21Keithley Consulting, LLC
Backup
Aug 1, 2016 Keithley Consulting, LLC 22
What is the right sustainable level
Aug 1, 2016
If assumptions are …• $80/bbl by FY 2020 (v.
FY 2022)• 3% production decline
(v. 5%)• New oil, #AKLNG & use
of PFER• Population growth of
0.5% (v. 1%), then… long term sustainable revenue is $4.3B (w/o PFD cut or taxes)
23Keithley Consulting, LLC
“But what if” …AKLNG (% chance of success):
75%: $4.1 billion50%: $3.9 billion25%: $3.7 billion0%: $3.5 billion
Oil price (by 2020):$70: $4.1 billion$60: $3.9 billion
Oil decline at:4%: $4.2 billion5%: $4.1 billion
Aug 1, 2016
Or a combination …AKLNG (75%), Oil ($70), Decline (4%): $3.8 billionAKLNG (50%), Oil ($60), Decline (5%): $3.3 billionAKLNG (0%), Oil ($50), Decline (6%): $2.8 billion
Or … AKLNG (100%), Oil ($80), Decline (1%): $4.6 billion
24Keithley Consulting, LLC
What crude price …
Aug 1, 2016 Keithley Consulting, LLC 25