This document summarizes Alaska's budget challenges and options going forward. It notes that Alaska's budget problem has been building since 2013 due to declining oil revenues. The state budget was based on oil prices of $117/barrel but prices have fallen significantly below that. The document reviews the status of budget bills passed by the legislature and signed by the governor. It outlines four options to address the budget shortfall, including using funds from the Constitutional Budget Reserve or other designated funds. Finally, it argues that Alaska can achieve a long-term sustainable budget of around $4.5 billion by reducing spending and utilizing financial earnings from the Permanent Fund and other assets to supplement declining oil revenues. The coming debate on Alaska's fiscal future will

1. Alaska’s Budget:
Background, Status and
Where are we headed next
2015 ALASKA REPUBLICAN ASSEMBLY
ANNUAL CONVENTION
MAY 2, 2015
BRAD KEITHLEY
KEITHLEY CONSULTING, LLC

2. Background
2

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. 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 21 (low) $ 45
…
May 1 $ 62
The future (2023) is now …
4

5. 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)
Failing to address the problem shifts all of the
consequences to future generations and creates
an uncertain and unstable climate for future
investors
5

6. Status
6

7. Budget spending levels
Fiscal Year 2014 2015 2016
Gov
2016
House
2016
Sen
2016
Conf
2016
Gov.2
Spending ($B) $7.2 $6.3* $5.6 $5.4 $5.3 $5.35 $5.4***
Traditional rev
sources (oil+)
$5.4 $2.2 $2.2 $2.2 $2.2 $2.2 $2.2
“Deficit” $1.8 $6.8** $3.4 $3.2 $3.1 $3.15 $3.2
* Adjusted to include PERS/TRS for comparability purposes.
** Includes $3 billion one-time drawdown from CBR to reduce PERS/TRS
deficit.
*** Includes Medicaid expansion, reverses salary freeze and K-12 BSA
reduction, increases Marine Highway and UA spending. But House
Minority wants more and Gov’s proposal brings no votes for funding.
7

8. Where we are now …
 SB 26 (capital) and HB 72 (operating) budgets passed
both House and Senate.
 Capital budget sent to Governor funded
 However, Operating Budget sent to Governor only partially
funded (full funding was dependent on approval of a ~ $3
billion draw from the Constitutional Budget Reserve (CBR),
which failed to obtain required ¾ vote in the House)
 Effect of partial funding:
 Authority to spend will run out in … current best guess is
September
 If not resolved, increased likelihood also of adversely
affecting state’s credit rating (affecting bond costs and
potentially affecting AKLNG costs and credibility)
8

9. Four funding options …
1. Preferred option: Use CBR (about $10 billion remaining)
 But requires ¾ vote, some members of House Minority
required to vote in favor and have refused to do so without
significant ($100+ million) increase in spending
2. Second option: Drain other “designated funds”
 Preliminary advice from Legislative Finance Division is about
$1.6 billion remaining in other designated funds, primarily
PCE (Bush Caucus opposition) and Higher Ed Invest Fund
3. Advocated by some: reduce spending to traditional
revenue level
 Would require reducing spending 65% (by $3.4 billion) in
single year, likely triggering a huge economic impact
… and/or
9

10. Four funding options …
4. Use Earnings Reserve (ER) (currently, $6.4 billion)
 Contains interest, dividends and other earnings produced
from the Permanent Fund principal.
 AS 37.13.145 protects amounts used for inflation-proofing
and PFD
 Remainder not protected. Instead, under the Alaska
Constitution, Art. 9, Sec. 15: “All income from the
permanent fund shall be deposited in the general fund ….”
 Accessible by simple majority vote.
 Governor Walker told Wall Street analysts earlier this year
amounts would be used when needed to fund
government.
10

11. Where Are We
Headed Next
11

12. Continuing down the
same road …
12

13. Revenue alternatives …
 Sales & Income Taxes/PFD Diversion
 $200 million in revenue = $275/year from each Alaska
man, woman & child ($1,100 per family of four)
 So, $1 billion in revenue = $1,375/year from each
Alaska man, woman & child ($5,500 per family of
four)
 Increased oil taxes
 Blood out of a turnip, killing what remains of the
golden goose
 But these assume tapping “traditional” revenue
sources or individual Alaskans
13

14. “But we don’t have to go
down that path” …
“If managed properly, income from
Alaska’s assets -- oil revenues and
earnings from all our financial
accounts … -- can sustain both a
$2,000 dividend and a stable and
predictable state budget of about
$4.5 billion, growing with inflation and
population, long into the future.”
Recognizes that Alaska is a two –
income family: oil and financial
earnings and uses both to develop a
sustainable budget
14

15. 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
 Includes both of Alaska’s
revenue streams: oil and
financial earnings
 Based on both current and
projected revenue streams
15

16. Achieving a long-term
sustainable budget …
 Reduce spending to long term sustainable levels: $4.5+ B
 Utilize the portion of the state’s financial earnings remaining
after inflation proofing the Permanent Fund and paying the
PFD to provide necessary revenues
16

17. The coming debate …
 Taxes (sales, income,
oil)
 PFD diversion
 Cut spending to
sustainable levels
 Use financial earnings
to supplement oil
V.
17

18. Thank you for your time
18