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Alaska's Fiscal Crisis: The Challenge, the Solution and How to Achieve It (1.7.2015)

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An outline of a solution to Alaska's current budget crisis.

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Alaska's Fiscal Crisis: The Challenge, the Solution and How to Achieve It (1.7.2015)

  1. 1. Alaska’s Fiscal Crisis: The Challenge, the Solution and How to Achieve it A PRESENTATION TO THE ALASKA REPUBLICAN ASSEMBLY JANUARY 7, 2015 BRAD KEITHLEY KEITHLEY CONSULTING, LLC
  2. 2. The Challenge 2
  3. 3. 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) 3
  4. 4. And then this happened … 2014 ANS Price Jan $105 Mar $111 May $105 FY 2015 Budget Breakeven: $117 Jul 1 $111 Aug 1 $103 Sep 1 $ 97 Oct 1 $ 91 Nov 1 $ 82 Dec 1 $ 70 Jan 1 $ 55 Jan 6 $ 50 ???? The future (2023) is now … 4
  5. 5. What does it mean … $105 $70 oil • The revenue equivalent of a 54% production decline to ~230,000 b/d At current spending rates: • Draining ~$10+ million per day from savings • ~$3.8 billion (60+%) deficit (~$5,250 per Alaska man, woman and child; $21,000 per family of 4) • Less than 3 years of unrestricted savings (SBR & CBR) remaining as of June 30, 2015 Statutory and Constitutional Budget Reserves $- $1 $2 $3 $4 $5 $6 $7 $8 $9 $10 2016 2017 2018 2019 2020 2021 2022 2023 2024 Billion$ Start of Fiscal Year CASH RESERVE LIFE AT DIFFERENT OIL PRICES $100 $90 $80 $70 5
  6. 6. Mid case scenario … Assumptions … $90 oil 3% production decline Viscous oil: 2020 NPRA: 2020 New Conv Oil: 2020 Gas (moderate price scenario) 2024 No near future OCS or ANWR $0 $5 $10 $15 2016 2020 2024 2028 2032 2036 2040 UNRESTRICTED GENERAL FUND (BILLION $) ? PF CORPUS DRAW ? PF INFLATION PROOFING ? PF EARNINGS ? DIVERT PFD TO GF ? INCOME/SALES TAXES ? NATURAL GAS ? NEW OIL CASH RESERVE CURRENT OIL REVENUES NON OIL REVENUES $0 $2 $4 $6 $8 $10 $12 2016 2020 2024 2028 2032 2036 2040 SBR & CBR CASH RESERVE (Billion $) Start of Fiscal Year 6
  7. 7. 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) Draining the CBR/SBR to maintain current spending shifts all of the consequences to future generations and creates an uncertain and unstable climate for future investors 7
  8. 8. The Solution 8
  9. 9. What is a “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  Based on both current and projected revenue streams and asset levels 9
  10. 10. What is the current sustainable level … Nest egg Nest egg draw $ 5.4 B PFD payment (1.4) Net oil revenues $ 4.0 B UGF non-petroleum revenues $ 0.5 B UGF Sustainable Revenues $ 4.5 B Sustainable Revenue Financial Assets $66.2 B NPV of Future Oil/Gas 68.9* TOTAL NEST EGG $135.1B Real rate of return (5%)minus population growth (1%) 4% Nest egg draw ($135.1 x 4%) $ 5.4 B * Based on oil prices projected in DOR Fall Revenue Sources Book, plus production assumptions beyond RSB forecast reflected in “middle case” (p. 9). 10
  11. 11. Sustainable budget … Results …  Treats all generations equitably  Encourages investment and growth by providing a stable, long term fiscal structure  Smooths the revenue curve even during turbulent times  Encourages and facilitates state support for resource development Requires …  Fiscal discipline to limit current spending to sustainable level (or enact supplement revenues)  Treating all current savings and reserves as long term investments (“nest egg”) 11
  12. 12. The costs of delay … Spending above sustainable levels offsets the short term economic impact of current spending reductions but reduces the nest egg and as a result, future sustainable revenue levels Costs of delay MSY FY 2012: $6.2 B FY 2013: $6.4 B FY 2014: $5.5 B FY 2015: $5.0 B FY 2016: $4.5 B $7.0 $7.8 $7.2 $6.2 $5.9 $6.2 $6.4 $5.5 $5.0 $4.5 2012 2013 2014 2015 2016 $Billion Fiscal year Actual v. Sustainable Spending Levels (FY 2012 - 2016 (est.)) Actual Spending Sustainable Spending Level 12
  13. 13. Going forward options & costs … Future Sustainable Budget Levels @ Overspend Above $4.5 B Transition Period $500 M $1 B $1.5 B 1 year $4.47 B $4.45 B $4.43 B 2 years $4.45 B $4.41 B $4.36 B 3 years $4.43 B $4.36 B $4.29 B 4 years $4.40 B $4.31 B $4.22 B A four year transition reduces the sustainable spending level between 5 and 10% (e.g., overspending $4.5 B by $1.5 B/yr for four years reduces the sustainable level to $4.22 B) 13
  14. 14. The FY2016 Budget… Operating Budget: Formula: $2.1 B Non-Formula: $2.3 Statewide: $ .8 Add’l O&G Credits $ .2 PERS/TRS $ .3 Total (rounding) $5.8 B Capital budget: $ .1 Total $5.9 B FY 2016 Work in Progress (WIP) Unrestricted General Fund (UGF) Budget FY 2016 WIP ($5.9 B) – Sustainable Budget ($4.5 B) = $1.4 B overspend 14
  15. 15. The needed reductions … WIP Budget Final Spend Diff % Re- duction Capital Budg Op Budget Formula Non-Form $5.9 B $.1 B $2.1 B $3.70 B $5.9 $5.50 B $0.40 B 7% $.1 $2.1 $3.30 (11%) $5.9 $5.25 $0.65 11% $.1 $2.1 $3.05 (18%) $5.9 $5.00 $0.90 17% $.1 $2.1 $2.80 (24%) $5.9 $4.75 $1.15 19% $.1 $2.1 $2.55 (31%) $5.9 $4.50 $1.40 24% $.1 $2.1 $2.30 (38%) Some transition period may be appropriate, but should involve significant annual reductions and be relatively quick to avoid additional material reductions to the long-term sustainable number. 15
  16. 16. How to Achieve It 16
  17. 17. Focus on the 1+60 who count …  The Governor (the 1) proposes the budget and has the power of line item veto at the end  The legislature (the 60) enacts the budget by majority vote in each body  The Governor has no authority to increase the amount enacted 17
  18. 18. Expectations, results and response …  Establish and communicate expectations  Establish the expectation that the 1+60 will achieve sustainable revenue levels in three years, reducing the budget by one third (~$500 million) of the difference between the starting point (the WIP) and the goal (the final sustainable number, after transition) each year  Measure results  Identify the amount by which the operating budget (and each component) needs to be reduced and monitor progress in HFIN subcommittee process  Identify the amount to which the capital budget needs to be held and monitor progress in SFIN 18
  19. 19. Expectations, results and response …  Prepare to respond  Support those of the 1+60 who meet expectations  But any who do not see the current situation as a fiscal crisis requiring a response never will – they will always look for ways to kick the can down the road  Be prepared to respond by encouraging and supporting a year long primary challenge to any of the 1+60 who fail to support even a first step by  Voting yes in subcommittee/committee for agency budgets above the transition level  Voting yes for a final budget above the transition level 19
  20. 20. Morning in Alaska …  In 1984, Ronald Reagan ran a commercial that captured his vision in three words. The title? “Morning in America”  Achieving a sustainable budget can produce a Morning in Alaska but it will take a Reaganesque level of vision and commitment 20

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