Fiscal presentation (12.8.2014final)

Alaska Fiscal Policy:Where are we headed

ENERGY MARKETS & REGULATION IN ALASKAANCHORAGE, AKDECEMBER 8, 2014

Brad KeithleyPresident, Keithley Consulting

bgkeithley.com

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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And then this happened …

2014 ANS Price

Jan $105Mar $111May $105

FY 2015Budget Breakeven

$117Jul 1 $111Aug 1 $103Sep 1 $ 97Oct 1 $ 91Nov 1 $ 82Dec 1 $ 70

????

The future (2023) is now …

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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

$10

2016 2017 2018 2019 2020 2021 2022 2023 2024

Billi

on$

Start of Fiscal Year

CASH RESERVE LIFEAT DIFFERENT OIL PRICES

$100

$90

$80

$70

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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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If we hit the trifecta …

Assumptions …$105 oil2% production decline

Viscous oil: 2020NPRA: 2020New Conv Oil: 2020

Gas (@$3.50) 2024OCS: 2026ANWR: 2026

Sustainable Spending $6.52 B

$0

$5

$10

$15

2016 2020 2024 2028 2032 2036 2040

UNRESTRICTED GENERAL FUND(BILLION $)

? PF CORPUS DRAW

? PF INFLATION PROOFING

? PF EARNINGS

? DIVERT PFD TO GF

? INCOME/SALES TAXES

? NATURAL GAS

? NEW OIL

CASH RESERVE

CURRENT OIL REVENUES

NON OIL REVENUES

$0$5

$10$15$20$25$30

2016 2020 2024 2028 2032 2036 2040SBR & CBR

CASH RESERVE (Billion $)Start of Fiscal Year

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A middle case …



Gas (@$1.50) 2024No near future OCS or ANWR


$0

$5

$10

$15

2016 2020 2024 2028 2032 2036 2040


? PF CORPUS DRAW


? PF EARNINGS

? DIVERT PFD TO GF


? NATURAL GAS

? NEW OIL

CASH RESERVE


NON OIL REVENUES

$0$2$4$6$8

$10$12

2016 2020 2024 2028 2032 2036 2040SBR & CBR


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A low case …



No near future gas, OCS or ANWR


$0

$5

$10

$15

2016 2020 2024 2028 2032 2036 2040


? PF CORPUS DRAW


? PF EARNINGS

? DIVERT PFD TO GF


? NATURAL GAS

? NEW OIL

CASH RESERVE


NON OIL REVENUES

$0$2$4$6$8

$10$12

2016 2020 2024 2028 2032 2036 2040SBR & CBR


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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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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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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

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Reducing expenditures …

Operating Budget:Formula: $2.2Non-Formula: $2.4Statewide: $ .7PERS/TRS $ .3*

Total $5.6

Capital budget: $ .6

Total $6.2http://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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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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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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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 Potential comes at increased risk

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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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