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Alaska’s Budget: Background, Status and Where are we headed next 2015 ALASKA REPUBLICAN ASSEMBLY ANNUAL CONVENTION MAY 2, 2015 BRAD KEITHLEY KEITHLEY CONSULTING, LLC

Alaska’s budget (5.2.2015)

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Alaska’s Budget:Background, Status and

Where are we headed next2015 ALASKA REPUBLICAN ASSEMBLY

ANNUAL CONVENTIONMAY 2, 2015

BRAD KEITHLEYKEITHLEY CONSULTING, LLC

Background

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Problem has been building

2013 …“Right now, the state is on a path it can’t sustain. … 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)

2014… “The implications of the figures are severe … Failure to reduce the projected deficits will result in a very hard landing -- Legislative Finance Division (2014)

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And then this happened …

2014 ANS PriceJan $105Mar $111May $105

FY 2015 Budget Breakeven: $117

Jul 1 $111Aug 1 $103Sep 1 $ 97Oct 1 $ 91Nov 1 $ 82Dec 1 $ 70Jan 1 $ 55Jan 21 (low) $ 45

…May 1 $ 62

The future (2023) is now …

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Where does that lead …

“… reducing expenditures… institution of a broad-based tax, and use of a portion of the earnings of the Permanent Fund ….”

Northern Economics and ISER, Potential National-Level Benefits of Alaska OCS

Development (2011)

Failing to address the problem shifts all of the consequences to future generations and creates an uncertain and unstable climate for future investors

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Status

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Budget spending levels

Fiscal Year 2014 2015 2016Gov

2016House

2016Sen

2016Conf

2016Gov.2

Spending ($B) $7.2 $6.3* $5.6 $5.4 $5.3 $5.35 $5.4***Traditional revsources (oil+)

$5.4 $2.2 $2.2 $2.2 $2.2 $2.2 $2.2

“Deficit” $1.8 $6.8** $3.4 $3.2 $3.1 $3.15 $3.2

* Adjusted to include PERS/TRS for comparability purposes.** Includes $3 billion one-time drawdown from CBR to reduce PERS/TRS deficit.*** Includes Medicaid expansion, reverses salary freeze and K-12 BSA reduction, increases Marine Highway and UA spending. But House Minority wants more and Gov’s proposal brings no votes for funding.

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Where we are now … SB 26 (capital) and HB 72 (operating) budgets passed

both House and Senate. Capital budget sent to Governor funded

However, Operating Budget sent to Governor only partially funded (full funding was dependent on approval of a ~ $3 billion draw from the Constitutional Budget Reserve (CBR), which failed to obtain required ¾ vote in the House)

Effect of partial funding: Authority to spend will run out in … current best guess is

September If not resolved, increased likelihood also of adversely

affecting state’s credit rating (affecting bond costs and potentially affecting AKLNG costs and credibility)

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Four funding options …

1. Preferred option: Use CBR (about $10 billion remaining) But requires ¾ vote, some members of House Minority

required to vote in favor and have refused to do so without significant ($100+ million) increase in spending

2. Second option: Drain other “designated funds” Preliminary advice from Legislative Finance Division is about

$1.6 billion remaining in other designated funds, primarily PCE (Bush Caucus opposition) and Higher Ed Invest Fund

3. Advocated by some: reduce spending to traditional revenue level Would require reducing spending 65% (by $3.4 billion) in

single year, likely triggering a huge economic impact

… and/or

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Four funding options …

4. Use Earnings Reserve (ER) (currently, $6.4 billion) Contains interest, dividends and other earnings produced

from the Permanent Fund principal.

AS 37.13.145 protects amounts used for inflation-proofing and PFD

Remainder not protected. Instead, under the Alaska Constitution, Art. 9, Sec. 15: “All income from the permanent fund shall be deposited in the general fund ….”

Accessible by simple majority vote.

Governor Walker told Wall Street analysts earlier this year amounts would be used when needed to fund government.

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Where Are We Headed Next

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Continuing down the same road …

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Revenue alternatives …

Sales & Income Taxes/PFD Diversion $200 million in revenue = $275/year from each Alaska

man, woman & child ($1,100 per family of four) So, $1 billion in revenue = $1,375/year from each

Alaska man, woman & child ($5,500 per family of four)

Increased oil taxes Blood out of a turnip, killing what remains of the

golden goose

But these assume tapping “traditional” revenue sources or individual Alaskans

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“But we don’t have to go down that path” …

“If managed properly, income from Alaska’s assets -- oil revenues and earnings from all our financial accounts … -- can sustain both a $2,000 dividend and a stable and predictable state budget of about $4.5 billion, growing with inflation and population, long into the future.”

Recognizes that Alaska is a two –income family: oil and financial earnings and uses both to develop a sustainable budget

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Sustainable budget …

A calculated revenue and spending level which, if adopted now, can be maintained consistently long into the future, adjusted for inflation and population growth

Includes both of Alaska’s revenue streams: oil andfinancial earnings

Based on both current and projected revenue streams

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Achieving a long-term sustainable budget …

Reduce spending to long term sustainable levels: $4.5+ B Utilize the portion of the state’s financial earnings remaining

after inflation proofing the Permanent Fund and paying the PFD to provide necessary revenues

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The coming debate …

Taxes (sales, income, oil)

PFD diversion

Cut spending to sustainable levels

Use financial earnings to supplement oil

V.

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Thank you for your time

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