This document discusses Alaska's fiscal challenges and provides recommendations. It notes that growing spending and falling revenues are creating a widening fiscal gap that could lead to a severe crisis after 2023. Simply constraining spending growth is insufficient, and failure to reduce deficits will result in a hard landing. The document recommends capping spending at sustainable levels, enacting legislation to provide annual sustainable budget information, and closely examining programs to ensure consistency with a sustainable overall budget through prioritization and utilizing all revenue sources.

1. Alaska’s Fiscal Cliff
THE STATEWIDE TELECONFERENCE
JANUARY 27, 2014
BRAD KEITHLEY
PRESIDENT, KEITHLEY CONSULTING, LLC
ANCHORAGE, ALASKA

2. Alaska’s current situation …
“Right now, the state is on a
path it can’t sustain. Growing
spending and falling revenues
are creating a widening fiscal
gap. … Reasonable
assumptions about potential
new revenue sources suggest
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)
2

3. Leg Finance’s summary …
“The implications of the figures are
severe:
1.
Simply constraining expenditure
growth is insufficient …
2.
Failure to reduce the projected
deficits will result in a very hard
landing …
3.
Revival of the standard fiscal
policy options [broad based
taxes, etc] may not eliminate
deficits …”
-- The Fiscal Year 2015 Budget:
Legislative Fiscal Analysts Overview of
the Governor’s Budget, Legislative
Finance Division
3

4. But things can change …
4

5. What lies ahead …
“Two options available to the state, in
addition to reducing expenditures,
are institution of a broad-based tax,
and use of a portion of the earnings
of the Permanent Fund. … It is
anticipated that both options will be
required in the non-OCS case. The
value shown above assumes a
personal income tax, similar to the
tax that was eliminated in 1980, will
be phased in between 2022 and
2026.”
Northern Economics and ISER,
Potential National-Level Benefits of
Alaska OCS Development (Feb. 2011)
5

6. What are the big drivers …
Legislative Finance
estimates that, at current
growth rates, by 2024
ninety-nine percent
(99%) of total available
revenues will be spent in
three areas:

K-12 education

Medicaid

Retirement Assistance
6

7. There is an alternative …
“What can the state do to
avoid a major fiscal and
economic crisis? The answer
is to save more and restrict the
rate of spending growth. All
revenues above the
sustainable spending level …
including Permanent Fund
income, except the share that
funds the dividend – would be
channeled into savings.”
ISER Web Note 14 (2013)
7
Turns a non-renewable resource
(oil) into a renewable resource
(financial assets)
Over time, earnings from the amounts
saved are used to supplement other
sources to maintain a sustainable
level of overall revenues.

8. Approach is consistent with
Constitutional policy …
Alaska Constitution, Art 8, Sec 4:
“Fish, forests, wildlife, grasslands
and all other replenishable
resources belonging to the State
shall be utilized, developed, and
maintained on the sustained yield
principle, subject to preferences
among beneficial uses.”
The state’s financial resources
similarly can sustain the state over
the long term if not “fished out” by
the current generation.
8

9. What type of spending
reductions …
Calculation
Year
General Fund
MSY
Actual
Spend
Fiscal
Burden
9
Source
FY2012
$6.2
$7.0
$.8
Feb 2011, WebNote 7 &
May 2011, WebNote 8
March 2012, WebNote 10
FY2013
$6.4
$7.6
$1.2
August 2012, WebNote 13
FY2014
$5.5
$7.1
$1.6
Jan. 2013, WebNote 14
FY2015
$5.0
$5.6+
$.6+
Total
$23.1
$27.3+
$4.2+

10. How to implement …

What is important is the overall spending level (requires
“top down” look)


10
Are we saving enough to build a sufficient nest egg to
maintain consistent spending in future years
Allocation within the overall spending level can be
handled several ways



Sequester (all spending reduced pro rata to fit within the
overall level)
Priorities established between and within categories
But formulas and other spending trends need to fit
within overall spending levels

No programs are sustainable if one breaks the overall
budget

11. Everything needs a look …

Education (K-12)
spending as an
example



Overall state GF
spending has risen
from $922 million to
$1.92 billion (108%)
in 10 years
Not sustainable at
that level (already
nearly 40% of
current revenues)
Goal is to find and
maintain a
sustainable level to
provide consistency
11

12. Recommendations for this
coming legislative session

Cap UGF (operating and capital) spending this year at
overall sustainable levels


Should be on the downside of the $5.75 billion four year average
Enact HB 136 to provide information to the legislature and
public each year on the overall sustainable budget level


12
Enable legislature and public to understand the long term
implications of budgets
Closely examine and modify, if necessary, programs to
ensure they are consistent with an overall sustainable budget

Requires prioritization overall and within each program

Also requires all revenue sources be tapped (e.g., UA system)

And, provides a start on the additional $500 million reduction in
UGF spending required next year to offset PERS/TRS