jan 9 2014 hfin committee
TRANSCRIPT
Why sustainable budgets are important
BRAD KEITHLEYPRESIDENT, KEITHLEY CONSULTING, LLC
ANCHORAGE, ALASKA
BEFORE THE FISCAL POLICY SUBCOMMITTEEHOUSE FINANCE COMMITTEEJANUARY 9, 2014
How investors view Alaska (and citizens should)
“Right now, the state is on a path it can’t sustain. Growing spending and falling revenues are creating a widening fiscal gap. … Reasonable assumptions about potential new revenue sources suggest we do not have enough cash in reserves to avoid a severe fiscal crunch soon after 2023, and with that fiscal crisis will come an economic crash.”
ISER Web Note 14 (2013)$0
$2
$4
$6
$8
$10
$12
$14
$16
2011 2015 2019 2023 2027 2031 2035 2039
Bill
ion
$
Fiscal Year
FY 2015 $6 BILLION AND GROWING:UNRESTRICTED GENERAL FUND
PF EARNINGS/CORPUS
CASH RESERVE
NATURAL GAS REV
NEW OIL REV
DOR OIL REV
NON OIL REV
UGF REVENUES
UGF SPENDING
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What Alaskans (and investors) face ahead“Two options available to the state, in addition to reducing expenditures, are institution of a broad-based tax, and use of a portion of the earnings of the Permanent Fund. … It is anticipated that both options will be required in the non-OCS case. The value shown above assumes a personal income tax, similar to the tax that was eliminated in 1980, will be phased in between 2022 and 2026.”
Northern Economics and ISER, Potential National-Level Benefits of
Alaska OCS Development (Feb. 2011)
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Sustainable budgets offer an alternative
“What can the state do to avoid a major fiscal and economic crisis? The answer is to save more and restrict the rate of spending growth. All revenues above the sustainable spending level … including Permanent Fund income, except the share that funds the dividend – would be channeled into savings.”
ISER Web Note 14 (2013)
Over time, earnings from the amounts saved are used to supplement other sources to maintain a sustainable level of overall revenues.
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Turns a non-renewable resource (oil) into a renewable resource
(financial assets)
Why Alaskans should care
No one disputes that the current spending levels are unsustainable –reductions are inevitable ISER has demonstrated
repeatedly that taxes cannot make up the difference
The question is how best to manage the situation for all Alaskans, regardless of generation The best approach for all generations is to reduce current spending to
sustainable levels, save the difference and use the earnings from the savings to maintain revenue levels as other sources of revenue decline
Otherwise, future generations bear the brunt of both reduced spending and taxes, and still do not achieve equivalent services
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How do Alaskans respond when faced with the choice
November 11, 2013 debate before the Anchorage Chamber of Commerce on adopting a sustainable budget model (MSY):
Arguing against a sustainable budget model, “Halcro … said some sort of broad-based sales tax is needed …. He also suggested siphoning off a percent of the earnings from the Permanent Fund.” Alaska Dispatch (Nov. 11, 2013)
Vote taken Favor MSY Opposed
Before 35% 35%
After 64% 26%
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Policy is consistent with Constitutional mandate
Alaska Constitution, Art 8, Sec 4:“Fish, forests, wildlife, grasslands and all other replenishable resources belonging to the State shall be utilized, developed, and maintained on the sustained yield principle, subject to preferences among beneficial uses.”
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The state’s financial resources similarly can sustain the state over the long term if not “fished out” by
the current generation.
What it requires currently … overall spending reductions
Calculation Year
General Fund Fiscal Burden
Source
MSY ActualSpend
FY2012 $6.2 $7.0 $.8Feb 2011, WebNote 7 & May 2011, WebNote 8March 2012, WebNote 10
FY2013 $6.4 $7.6 $1.2 August 2012, WebNote 13
FY2014 $5.5 $7.1 $1.6 Jan. 2013, WebNote 14
FY2015 $5.0 $5.6+ $.6+Total $23.1 $27.3+ $4.2+
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Sustainability requires a “top down” look
What is important is the overall spending level Are we saving enough to build a sufficient nest egg to
maintain consistent spending in future years
Allocation within the overall spending level can be handled several ways Sequester (all spending reduced pro rata to fit within the
overall level) Priorities established between and within categories
But formulas and other spending trends need to fit within overall spending levels No programs are sustainable if one breaks the overall
budget
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Everything needs a look
Education (K-12) spending as an example Overall state GF spending has
risen from $922 million to $1.92 billion (108%) in 10 years
Not sustainable at that level (already nearly 40% of current revenues)
Goal is to find and maintain a sustainable level to provide consistency and avoid a crash
David Teal, Leg Fin Director: Currently, “55 percent of ... available revenue is spent on these three items [education, Medicaid and retirement assistance]. By the time you get to 2022 its 105 percent of available revenue [based on FY2014 projections] being spent on these three items. Well ... you can't spend 105 percent of revenue ...”
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Lessons from the front lines
Critical to remain aware of the overall goal Each program needs to fit in the overall sustainable
spending “box” Bottom up view of each program in isolation leads to
layering and budget growth
Need to prioritize for the long term Spending on football fields now, instead of saving to build
the nest egg, works to deprive future generations of coaches and teachers (wants v. needs)
Reducing spending doesn’t necessarily mean reducing funding to the core mission Education reductions can come from reduced capital
spending, increased focus on efficiencies; does not necessarily require reductions in overall operating budget
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Recommendations for this coming legislative session
Cap UGF (operating and capital) spending this year at overall sustainable levels Should be on the downside of the $5.75 billion four year average
Enact HB 136 to provide information to the legislature and public each year on the overall sustainable budget level Enable legislature and public to understand the long term
implications of budgets
Closely examine and modify, if necessary, programs to ensure they are consistent with an overall sustainable budget Requires prioritization overall and within each program Also requires all revenue sources be tapped (e.g., UA system) And, provides a start on the additional $500 million reduction in
UGF spending required next year to offset PERS/TRS
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