Slidedeck for the presentation on the Alaska budget to the opening session of the Walker Mallott Transition Team meetings.

1. 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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2. 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
Nov18 $ 75
????
The future (2023) is now …
2

3. What does it mean …
$105 $85 oil
• The revenue equivalent of a
40% production decline to
~300,000 b/d
At current spending rates:
• Draining ~$10 million per day
from savings
• $3+ billion (50+%) deficit
(~$4,500 per Alaska man,
woman and child; $18,000
per family of 4)
• Only 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 $10201620172018201920202021202220232024 Billion$ Start of Fiscal YearCASH RESERVE LIFEAT DIFFERENT OIL PRICES$100$90$80$70
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4. What lies beyond that …
Future revenue levels depend on …

Key variables we can’t influence

Oil prices

LNG prices

Key variables we can influence, but not control (or better put, the DNR/Congressional “to do” list)

Changes in the production curve

New oil on state lands (conventional & viscous)

LNG

NPRA

OCS (with state royalty sharing)

ANWR
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5. Ifwe hit the trifecta …
Assumptions …
$105 oil
2% net production decline
Viscous oil: 2020
NPRA: 2020
New Conv Oil: 2020
Gas (@$3.50) 2024
ANWR: 2026
OCS (w/ rs): 2026
Sustainable Spending
$6.52 B
$0$5$10$152016202020242028203220362040UNRESTRICTED GENERAL FUND(BILLION $) ? PF CORPUS DRAW ? PF INFLATION PROOFING ? PF EARNINGS ? DIVERT PFD TO GF ? INCOME/SALES TAXES ? NATURAL GAS ? NEW OILCASH RESERVECURRENT OIL REVENUESNON OIL REVENUES$0$5$10$15$20$25$302016202020242028203220362040SBR & CBRCASH RESERVE (Billion $) Start of Fiscal Year
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6. Amiddle case … Assumptions …
$90 oil
3% net production decline
Viscous oil: 2020
NPRA: 2020
New Conv Oil: 2020
Gas (@$1.50) 2024
No near future OCS or
ANWR
Sustainable Spending
$4.49 B
$0$5$10$152016202020242028203220362040UNRESTRICTED GENERAL FUND(BILLION $) ? PF CORPUS DRAW ? PF INFLATION PROOFING ? PF EARNINGS ? DIVERT PFD TO GF ? INCOME/SALES TAXES ? NATURAL GAS ? NEW OILCASH RESERVECURRENT OIL REVENUESNON OIL REVENUES$0$2$4$6$8$10$122016202020242028203220362040SBR & CBRCASH RESERVE (Billion $) Start of Fiscal Year
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7. Alow case … Assumptions …
$80 oil
5% net production decline
Viscous oil: 2020
NPRA: 2020
New Conv Oil: 2020
No near future gas, OCS or
ANWR
Sustainable Spending
$2.78 B
$0$5$10$152016202020242028203220362040UNRESTRICTED GENERAL FUND(BILLION $) ? PF CORPUS DRAW ? PF INFLATION PROOFING ? PF EARNINGS ? DIVERT PFD TO GF ? INCOME/SALES TAXES ? NATURAL GAS ? NEW OILCASH RESERVECURRENT OIL REVENUESNON OIL REVENUES$0$2$4$6$8$10$122016202020242028203220362040SBR & CBRCASH RESERVE (Billion $) Start of Fiscal Year
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8. How long will low prices last
Uncertain early in the cycle, but now increasing consensus:

EIA NovemberShort Term Economic Outlook

“ … Brent crude oil prices will average $83/bblin 2015, $18/bbllower than forecast in last month's STEO.”

IEA November Oil Market Report

“Our supply and demand forecasts indicate that barring any new supply disruption, downward price pressures could build further in the first half of 2015 .... it is increasingly clear that we have begun a new chapter in the history of the oil markets.

Capital Economics (London)

Forecasting $75 per barrel by the end of 2015, $70 by the end of 2016 and “given the current negative sentiment in the market, it is clearly possible that $70 could be hit much sooner ... we believe that lower oil prices are here to stay." 8

9. What is the goal…
“I will make the hard choices necessary for a sounder fiscal future, including putting in place a sustainable budget. I will work to make sure the investment climate in Alaska supports those goals, which includes creating a favorable fiscal climate for citizens and companies investing in our economy.”
–Bill Walker on fiscal responsibility 9

10. The challenge ahead …
Operating Budget:
Formula:$2.2Non-Formula:$2.4
Statewide:$ .7
PERS/TRS$ .3*
Total$5.6
Capital budget:$ .6
Total$6.2
http://www.legfin.state.ak.us/FisSum/FY15-Budget.pdf
FY 2015 Unrestricted General Fund (UGF) Budget
At $85, revenues are only in the range of $3 billion:
What to do about FY 2015, what to do going forward
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11. The choices ahead …
Spending Cuts

Capital Budget shrinks first (and fast)

Attention will need to turn to the big drivers in the Operating Budget (FY2015):

DEED/ K-12 ($1.4 B)

DHSS/Medicaid ($1.1 B)

O&G tax credits ($.45 B)

University ($.37 B)

Personnel count and cost
Revenue Options

Pulling from savings (depleting the cupboard)

CBR/SBR ($10 B)

Designated reserves ($2.8 B)

PF earnings reserve ($6.7 B)

Annual revenue

Sales/income tax ($1.3 B)

Diversion of PFD ($1.4 B)

Permanent Fund corpus

$47 B, but requires a vote
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