A Way Forward on the Alaska Budget (12.22.2015)
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Transcript of A Way Forward on the Alaska Budget (12.22.2015)
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A Way Forward on the Alaska Budget
Alaska Republican AssemblyDecember 22, 2015
Brad Keithley (bgkeithley.com)Alaskans for Sustainable Budgets
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Overview
• Where are we headed under business as usual
• What are the alternatives
• A way forward
Dec 22, 2015 2
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Business as usual
Dec 22, 2015 3
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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$
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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$
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Spending v. Revenues
Dec 22, 2015 6
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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$
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One more thing
Dec 22, 2015 8
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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
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“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%
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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$
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“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
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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
?
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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
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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
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Goldsmith model
Dec 22, 2015 16
inflation 2.30%
population grow 0.50%4.20$
UGF SUSTAINABLE SPENDING
FY 2017
Based on Current Revenue and use of financial asset income.
Spending (including dividend) grows with inflation and
population.
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A Way Forward
• Approach
• Revenues
• Spending
• An additional, needed focus: S&P & Mechanism
Dec 22, 2015 17
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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
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Revenues
• Traditional revenues, plususe 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
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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$
?
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Spending
Dec 22, 2015 21
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S&P
Dec 22, 2015 22
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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
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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