Perspectives on Alaska's Budget: Three Key Points
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Presentation at April 6, 2016, session of the Alaska Council for Economics Education 2016 Economics Spring Forum
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Perspectives on Alaska's Budget: Three Key Points
- 2. Agenda … • 5:00 – 6:30: “Three key points” (and a little bit about oil economics) • 6:30 – 6:50: Break • 6:50 – 8:00: Questions & some current issues Presentation at http://www.slideshare.net/bgkeithley/ April 6, 2016 Alaskans for Sustainable Budgets 2
- 3. Three Key Points • Alaska is facing a budget challenge, but how big is it • There is a solid and realistic fiscal alternative that doesn’t rely on PFD cuts or taxes • In my view, the Permanent Fund “replumbing” proposals • Are unnecessary, • Are imbalanced (between the private and government sectors), • Do more harm than good to the overall Alaska economy, and • Undermine the “permanence” of the Permanent Fund April 6, 2016 3Alaskans for Sustainable Budgets
- 6. … but how big is it? April 6, 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) 6Alaskans for Sustainable Budgets
- 7. A quick note on why I use the Goldsmith model … • Determines a long‐term “sustainable” revenue/budget number based on a multi‐year forward look – not a year‐to‐year approach. • Enables adjustments to key inputs (oil price & production, LNG, population growth, POMV rate). Why needed? "The reason the Department of Revenue will invariably always project declining oil production is because of the relatively conservative nature by which production forecast occurs … [I]t is 'highly likely' that the State will see increased production of 50,000 barrels per day [and] a further 50,000 barrels is considered 'likely' by DOR and the Department of Natural Resources.“ ‐ AG Craig Richards (Feb 2016) April 6, 2016 Alaskans for Sustainable Budgets 7
- 10. Best information at this point … Oil ($80 by 2020): “The process of adjustment in the oil market is rarely a smooth one, but, in our central scenario, the market rebalances at $80/bbl in 2020, with further increases in price thereafter.” (World Energy Outlook, International Energy Agency, Nov. 2015) Production (3% decline): “Repsol and Armstrong have said the project could yield up to 120,000 barrels daily. That estimated rate is not “unreasonable" based on details that have been published about the project, said Mark Myers, Natural Resources commissioner and a former head of the U.S. Geological Survey.” (Alaska Dispatch News, Feb. 15, 2016) LNG (~2025): At a time of historic capital constraint, at least two of the largest LNG companies – and most sophisticated investors – in the world are planning to continue to invest. April 6, 2016 10Alaskans for Sustainable Budgets
- 14. The concern … • We are formulating fiscal policy projecting out from the bottom of a commodity cycle … … and as a result may be assuming we need to raise more “new” revenue than necessary when looked at from a long term perspective … in short, the reverse of the overspending problem we experienced from 2011‐14 (when the Gov & Legis assumed oil would rise forever) • Alaska is a commodity based economy and as a result needs to take a long term budget view, not a one year snapshot April 6, 2016 14Alaskans for Sustainable Budgets
- 16. Core Principles … • Use an approach that looks at the full commodity cycle and develops a balanced, sustainable approach that smooths through the revenue highs and lows • Don’t cut the PFD or impose other taxes if avoidable because of impact on Alaska’s private economy – and if not avoidable, only to the extent it does not harm the overall Alaska economy (in short, don’t overreact) April 6, 2016 16Alaskans for Sustainable Budgets
- 17. Approach Best approach remains Goldsmith model Keys • Set spending at long‐term sustainable levels based on best reasonable long‐term forecast • Use the Permanent Fund earnings reserve – the part remaining after PFD and inflation proofing – to act as the balancing mechanism • Remain alert to changes in key, long‐term forecast variables and adjust levels if there are significant, long‐term changes April 6, 2016 17Alaskans for Sustainable Budgets
- 18. Revenues April 6, 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) 18Alaskans for Sustainable Budgets
- 20. We have done it before … April 6, 2016 20 FY 95 – 06 real spending was significantly lower … FY 1995 ‐ 2006 Alaskans for Sustainable Budgets
- 22. Critical: A spending cap … • Starting point: HB 311 “An Act requiring the governor's fiscal plan to include certain information” • Reworked, could be used either as a statutory spending cap or as a substitute for Const. Art 9, Sec. 16 (“Appropriation Limit”) April 6, 2016 22Alaskans for Sustainable Budgets
- 23. Third Point The PFD “replumbing” proposals (SB 128, SB 114 and HB 224): • Are unnecessary, • Are imbalanced (between the private and government sectors), • Do more harm than good to the overall Alaska economy, and • Perhaps most importantly, undermine the “permanence” of the Permanent Fund April 6, 2016 23Alaskans for Sustainable Budgets
- 24. Unnecessary • If the long‐term sustainable revenue level is ~$4.3 billion – and we can cut spending to that level – do we need to be adding revenue? • Until we have a better feel for where long‐term oil and gas markets are headed, there is no compelling case for long‐ term PFD cuts and taxes (i.e., overreacting) April 6, 2016 24Alaskans for Sustainable Budgets
- 26. HB 224 (Hawker) April 6, 2016 26 Why cut the PFD? Hawker: “Direct, indiscriminate redistribution of [the PFD], from the resource to people … that is pure socialism,” he said. “It’s confiscating wealth and redistributing it without any public purpose, and that’s just simply wrong.” Alaskans for Sustainable Budgets
- 27. Need to consider overall economy “[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, looking back on prior experience) April 6, 2016 PFD cuts could do more harm than good … 27Alaskans for Sustainable Budgets
- 30. Undermines the Permanent Fund • From the start, the PFD was designed to protect the permanence of the Fund itself: “I wanted to encourage contributions into the investment account and to protect against its invasion by politicians by creating a militant ring of dividend recipients who would resist any such usage if it affected their dividends.” – Jay Hammond, Diapering the Devil • The “replumbing” bills delink the PFD from the Fund, creating affirmative financial incentives for Alaskans to draw from the Fund (e.g., avoid taxes) • Effectively makes the Fund the “new” CBR April 6, 2016 Alaskans for Sustainable Budgets 30
- 31. My point … • The proposals are imbalanced: They take much more from the private sector – through PFD and taxes – than they cut spending • While they help the government economy, it comes at the expense of Alaska’s overall economy, which at $40 oil is rapidly developing its own problems • Perhaps most importantly from a long term perspective, they undermine the “permanence” of the Permanent Fund April 6, 2016 31Alaskans for Sustainable Budgets
- 32. Three Key Points • Alaska is facing a budget challenge, but it may not be as big as some suggest • There is a solid and realistic fiscal alternative that doesn’t rely on PFD cuts or taxes • SB 128 (Governor), SB 114 (McGuire) and HB 224 (Hawker) are unnecessary, are imbalanced (between the private and government sectors), do more harm than good to the overall Alaska economy, and undermine the “permanence” of the Permanent Fund If all else fails, a repeal referendum this fall on any PFD bill #ProtectThePFD April 6, 2016 32Alaskans for Sustainable Budgets
- 33. Q&A and some current issues … • Oil & gas tax credits • The Senate’s $100 MM hole: • Shifting some costs down (PERS, TRS, Alaska Performance Scholarships & Revenue Sharing) • Medicaid Reform • Criminal Justice Reform • Other revenue options • Rep. Olson’s 35% PFD “tax” (4‐year “stopgap measure”) • The minor taxes • Sen. Micciche’s “sunset” provisions • Others? April 6, 2016 Alaskans for Sustainable Budgets 33