Presentation on the current status, proposed alternatives and my thoughts on the current Alaska fiscal situation.

1. A Way Forward on the
Alaska Budget
Alaska Republican Assembly
December 22, 2015
Brad Keithley (bgkeithley.com)
Alaskans for Sustainable Budgets

2. Overview
• Where are we headed under business as usual
• What are the alternatives
• A way forward
Dec 22, 2015 2

3. Business as usual
Dec 22, 2015 3

4. Traditional revenues (Fall
RSB + PFC forecast)
Dec 22, 2015 4
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2026
UGF 5.4$ 2.3$ 1.6$ 1.8$ 2.0$ 2.1$ 2.1$ 2.2$ 3.5$
PF Income (realized)3.5$ 2.9$ 2.7$ 2.8$ 2.9$ 3.1$ 3.2$ 3.3$ 4.1$
Total 8.9$ 5.2$ 4.3$ 4.6$ 5.0$ 5.2$ 5.3$ 5.5$ 7.7$

5. Spending (Gov’s 10-year
(UGF) + PFC forecast)
Dec 22, 2015 5
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2026
UGF 7.3$ 6.0$ 5.2$ 4.8$ 4.7$ 4.7$ 4.3$ 5.0$ 6.0$
PF/D 1.2$ 1.4$ 1.4$ 1.6$ 1.6$ 1.5$ 1.5$ 1.6$ 2.0$
PF/IP 0.5$ 0.6$ 0.9$ 0.9$ 1.0$ 1.0$ 1.0$ 1.1$ 1.3$
Total 10.8$ 8.9$ 7.9$ 7.5$ 7.6$ 7.8$ 7.5$ 8.3$ 10.1$

6. Spending v. Revenues
Dec 22, 2015 6

7. Fiscal reserves
Dec 22, 2015 7
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2026
CBR 12.2$ 10.1$ 7.1$ 5.8$ 4.6$ 3.6$ 2.8$ 1.8$
ER (realized, after PFD/IP)5.2$ 6.1$ 6.5$ 5.2$ 4.1$ 3.0$ 2.3$ 1.2$
Total 17.5$ 16.2$ 13.6$ 11.0$ 8.7$ 6.7$ 5.1$ 3.0$

8. One more thing
Dec 22, 2015 8

9. What are the alternatives
• “Cuts only” to current revenue levels
• Administration “Sovereign Wealth Fund”
• SB 114/GCI
• Goldsmith “Sustainable Budget” model
Dec 22, 2015 9

10. “Cuts Only”
Dec 22, 2015 10
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2026
Projected Spending (UGF)7.3$ 6.0$ 5.2$ 4.8$ 4.7$ 4.7$ 4.3$ 5.0$ 6.0$
Revised Spending (UGF Revenue)5.4$ 2.3$ 1.6$ 1.8$ 2.0$ 2.1$ 2.1$ 2.2$ 3.5$
% Cut 26% 63% 69% 62% 57% 55% 51% 56% 41%

11. FY 2006 (pre-”bubble”) v.
current levels
Dec 22, 2015 11
FY2006FY 2006 Adj to FY 2016FY 2016 FY 2016 UGFFY 2006 Adj to FY 2017FY 2017 FY 2017 UGF
Operating 2.68$ 3.64$ 5.06$ 3.76$ 4.56$
Capital 0.34$ 0.46$ 0.12$ 0.47$ 0.20$
Total 3.02$ 4.10$ 5.18$ 1.60$ 4.23$ 4.75$ 1.80$

12. “Sovereign Wealth Fund”
Dec 22, 2015 12
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2026
UGF 5.4$ 2.3$ 1.6$ 1.8$ 2.0$ 2.1$ 2.1$ 2.2$ 3.5$
CBR 1.9$ 3.8$ 3.6$ -$ -$ -$ -$ -$ -$
PFER 2.6$ 1.3$ 1.3$ 0.8$ 1.3$ 0.4$
PFD Cuts -$ -$ -$ -$ 1.0$ 0.9$ 0.9$ 1.0$ 1.5$
New Taxes -$ -$ -$ 0.4$ 0.5$ 0.5$ 0.5$ 0.5$ 0.6$
Total 7.3$ 6.0$ 5.2$ 4.8$ 4.7$ 4.7$ 4.3$ 5.0$ 6.0$
PFD Cuts & Taxes

13. SB 114/GCI
Dec 22, 2015 13
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2026
UGF 5.4$ 2.3$ 1.6$ 1.8$ 2.0$ 2.1$ 2.1$ 2.2$
CBR 1.9$ 3.8$ 3.6$ 1.0$ 0.6$ 0.3$ 0.0$ (0.2)$
PF POMV 1.6$ 1.7$ 1.9$ 2.1$ 2.2$
PFD Cuts 0.8$ 0.9$ 0.9$ 1.0$ 1.1$
New Taxes
Total 7.3$ 6.0$ 5.2$ 5.2$ 5.2$ 5.2$ 5.2$ 5.2$
PFD Cuts
?

14. Concern with PFD cuts &
taxes
• Moves revenue from private to gov’t hands with
limited understanding of overall economic and
regional impacts from change
• For example, approach may create potential for
increased financial leakage outside state
“[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)
Dec 22, 2015 14

15. Add’l issues with PFD
changes
• Most regressive approach …
• Takes the highest percentage from low income Alaskans
• Eliminates the direct tie between Alaskans and the
size of the Permanent Fund …
• Reduces citizen incentive to protect the Permanent Fund
principal
• Reduces effectiveness of PFD as a means of putting
mineral wealth into private hands
• Reduces effort to replicate effect of L48 royalties on
private economy
Dec 22, 2015 15

16. Goldsmith model
Dec 22, 2015 16
inflation 2.30%
populationgrow 0.50%
4.20$
UGFSUSTAINABLESPENDING
FY2017
BasedonCurrentRevenueanduseoffinancialassetincome.
Spending(includingdividend)growswithinflationand
population.

17. A Way Forward
• Approach
• Revenues
• Spending
• An additional, needed focus: S&P & Mechanism
Dec 22, 2015 17

18. Approach
In my opinion, best approach remains Goldsmith model
Keys
• Reduce spending to long-term sustainable levels based
on best reasonable forecast
• Use Permanent Fund earnings remaining after PFD
and inflation proofing
• Remain alert to changes in key forecast variables and
adjust approach if there are significant changes
Dec 22, 2015 18

19. Revenues
• Traditional revenues, plus
use of PF earnings
• Start use of PF earnings now
(avoid CBR vote & maintain
accessible fiscal reserves)
Dec 22, 2015 19
• Key variables: AKLNG,
moderate oil production
decline plus new oil, PF
earnings level

20. Spending
Dec 22, 2015 20
Total UGF K-12 Medicaid Other HSSO&G Tax CreditsCapital PERS/TRSOther Operating
FY 2006 Adj 4.1$ 1.2$ 0.5$ 0.3$ -$ 0.5$ -$ 1.6$
FY 2016 5.2$ 1.2$ 0.6$ 0.5$ 0.1$ 0.3$ 2.4$
?

21. Spending
Dec 22, 2015 21

22. S&P
Dec 22, 2015 22

23. Mechanism
In thinking about how
to respond to S&P (and
others), one aspect of
Gov’s approach has
value …
… providing some
mechanism for
regulating funds
available for spending
to sustainable levels
… need to discuss with
S&P
Dec 22, 2015 23

24. Conclusions
• Alaska is not “falling of the cliff,” but 10-year outlook
demonstrates we can’t continue “Business as Usual”
• “Cuts only” based on traditional revenue sources fall
well below FY 2006 adjusted (pre-bubble) spending
levels
• Based on current, long-term fiscal outlook, “Sovereign
Wealth Fund” and SB 114 both go unnecessarily far by
cutting PFD and taxes
• Based on current, long-term fiscal outlook, Goldsmith
model remains best current approach (properly
monitored and adjusted)
• Need to respond to S&P
Dec 22, 2015 24