Alaska is facing a severe fiscal crisis due to unsustainable spending and declining oil revenues, with projections indicating significant deficits after 2023. The state's budget relies heavily on oil prices and reserves, and without substantial changes, it may lead to drastic budget cuts or the need for new taxes. Key areas of focus for reducing expenditures include education, healthcare, and oil tax credits, while additional revenue options such as sales or income taxes have also been discussed.

1. Alaska Fiscal Policy: Where are we headed
ENERGY MARKETS & REGULATION IN ALASKA
ANCHORAGE, AK
DECEMBER 8, 2014
Brad Keithley
President, Keithley Consulting
bgkeithley.com

2. 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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3. 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
????
The future (2023) is now …
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4. 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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5. What’s ahead …
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 royalty sharing)

ANWR
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6. Ifwe hit the trifecta …
Assumptions …
$105 oil
2% production decline
Viscous oil: 2020
NPRA: 2020
New Conv Oil: 2020
Gas (@$3.50) 2024
OCS: 2026
ANWR: 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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7. Amiddle case …
Assumptions …
$90 oil
3% 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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8. Alow case …
Assumptions …
$80 oil
5% 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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9. What are the alternatives …
If we don’t hit the trifecta … all middle and low cases will require one or more of the following:
“… 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)
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10. What is the starting point …
Parnell “work in progress” FY 2016 budget:

$5.5 billion in spending, but no contribution to PERS/TRS ($5.85 billion with PERS/TRS included)

Limited reductions to operating budget

Balances at $120 oil
Results

At $67 oil, $2.3 billion in revenues, $3.2 billion deficit

At $85 oil, $2.9 billion in revenues, $2.6 billion deficit
Unrestricted savings: ~$10 billion at the start of FY 2016

Roughly 3 years at current spending rates, counting PERS/TRS adjustment
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11. 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 11

12. Reducing expenditures …
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
Remember, at $85, revenues are only in the range of $3 billion
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13. Where will the focus need to be …

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 ($1.1 B)

O&G tax credits ($.62 B)

University ($.37 B)

Personnel count and cost
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14. Additional facts …

Additional cash reserves

Designated reserves: $2.8 billion (accessible through legislative action, but will reduce endowments)

PF earnings reserve:$6.7 billion (est. July 1, 2015, accessible through legislative action, but will reduce PFD)

Potential revenue generating options

Sales/income tax: $1.3 billion (~$1800 per capita)

Diversion of PFD: $1.4 billion (~$1900 per capita)

Permanent Fund corpus

$47 billion (est. July 1, 2015, but accessible only upon vote of the people)
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15. A word about other options

“Increase taxes on other industries” (mining, fish, tourism)

ISER studies repeatedly demonstrate limited revenue impact to state and potential harm to investment

“Invest in economic diversification”

To be helpful in meeting budget shortfalls, investment has to produce revenue to the state (i.e., through taxes)

Other than the LNG line (possibly), no realistic options currently on the table

Limited cash to invest, long history of failures

Change Permanent Fund investment mix to increase potential return

Potentialcomes at increased risk
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16. Where are we headed …
Spending since 2000

Knowles: $2.37 billion

Murkowski: $3.28 billion

Palin: $5.35 billion

Parnell: $6.73 billion

Walker: ???
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