Alaska’s Fiscal Situation: Past, Present & Future

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


Past: FY 2017 Budget As Passed


($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.


($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


From a cash perspective things are sort of ok …

Past: But that masks some thingsIf adjusted for …


($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


Present: Previewing the FY 2018 BudgetThe elephant in the room …


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


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


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


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


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


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


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


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


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


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


For More Information …

Thought on Alaska Oil & Gasbgkeithley.com

Michael Dukes ShowTuesdays at 7:15am

kbyr.com

Aug 1, 2016 21Keithley Consulting, LLC

Backup


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)


“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


What crude price …


News & Politics

Alaska’s Fiscal Situation: Past, Present & Future