Presentation to Governor Walker (3.14.2017 final)

Implementing Governor Hammond’s “50/50” Plan …

Presentation to Governor WalkerJuneau, Alaska

Brad KeithleyMarch 14, 2017

Agenda

• How bad really is the state’s fiscal situation•What is Governor Hammond’s “50/50” Plan and how would it work•Why is it important to maintain the PFD and what are the consequences of reducing it

Presentation by Brad KeithleyMar 14, 2017 2

Essentially, a follow on to my December 2014 Walker/Mallott Transition Team presentation

How bad really is the state’s fiscal situation


What is the issue

We don’t disagree that the state is facing a serious fiscal challenge (as we have been saying since 2012), but ...

… there are some legitimate questions about how deep it is


How big is the fiscal problem (the Administration’s view) …


But is it really that big …

Presentation by Brad Keithley

Administration forecast v. EIA (oil price) & projected 3% decline rate (production) …

Mar 14, 2017 6

2018 2019 2020 2021 2022 2023 2024 2025 2026

Oil Price

EIA (Jan 2017) $67 $75 $81 $86 $90 $94 $98 $103 $108

DOR $54 $60 $63 $67 $71 $75 $78 $84 $88

DOR as a % 80% 80% 78% 78% 79% 80% 80% 81% 81%

Product’n(MMB/d)

3% Decline 507 492 478 463 449 435 423 410 398

DOR 469 457 443 426 410 391 373 354 340

DOR as % 93% 93% 93% 92% 91% 90% 88% 87% 85%

… and now, Repsol/Armstrong

And what are the savings levels …


... of assuming that the fiscal conditions of the day will remain the same into the future (my point in 2014: Parnell’s failing)


We have a history in this state …

Running too far to the other side of the (state’s fiscal) ship also has bad consequences Should use the best

information available to determine way forward

Mar 14, 2017 8

What is Governor Hammond’s “50/50” Plan and how would it

work


Governor Jay Hammond“I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity. …

[Once the “money wells” were pumping,] each year one‐half of the account’s earnings would be dispersed among Alaska residents …. The other half of the earnings could be used for essential government services.”

‐‐ Diapering the Devil, at 15, 19


How does the PF currently work•Permanent Fund principal (corpus)• 25% of mineral revenues• Unrealized gains (retained in fund)

• Earnings • Statutory net income (SNI) (i.e., realized cash)


Where do the earnings (SNI) goOnce the “money wells” are pumping, each year:

“… one‐half of the account’s earnings would be dispersed among Alaska residents”

• Done: PFD“…. The other half of

the earnings …”• NOT “for essential government services”

• Instead “inflation proofing” and “earnings reserve”


The key to unlocking the “Other half”: So‐called “Inflation proofing”

The size of the “other half” depends on “Inflation Proofing”

(Jan 2017 PFC Projections)Without IP With IP

FY 2018 $1.5 B $0.6 B

FY 2019 $1.5 B $0.6 B

FY 2020 $1.6 B $0.6 B

FY 2021 $1.8 B $0.8 B

FY 2022 $1.9 B $0.9 B


… [Once the “money wells” were pumping,] …. The other half of the earnings could be used for essential government services.”

Mar 14, 2017 13

Is separate "Inflation Proofing” necessary

Permanent Fund Corporation Executive Dir. Angela Rodell, minutes of Feb. 16, 2016 testimony before Senate State Affairs (https://goo.gl/AOLwbr):

“MS. RODELL explained that … [t]he current Permanent Fund asset allocation consists of 80 percent self‐inflation proofing funds. Their market value already incorporates the concept of inflation. Inflation proofing as designed forty years ago is not as necessary today.MS. RODELL noted that … [i]nflation proofing … is no longer necessary for preserving the purchasing power [i.e., to protect against inflation].”


How would 50/50 work


The goal of “Implementing 50/50”

Achieving the “other half” of Governor Hammond’s original vision:

… [Once the “money wells” were pumping,] each year one‐half of the account’s earnings would be dispersed among Alaska residents …. The other half of the earnings could be used for essential government services.”


Changes the revenue line …


... and the deficit


($B)(OMB 10‐year, PFC) FY 2018 FY 2019 FY 2020 FY 2021 FY 2022

Projected deficit $(2.722) $(2.537) $(2.497) $(2.605) $(2.686)

“Other half” $ 1.539 $ 1.530 $ 1.603 $ 1.769 $ 1.896

Revised Deficit $(1.183) $(1.007) $(0.894) $(0.836) $(0.790)

The overall effect

($B) Traditional “Other half”

Draw on Reserves

Reserves BalanceYear Spending Oil Other

FY 2017 $4.30 $12.77

FY 2018 $4.41 $1.10 $0.52 $1.54 $1.25 ~$11.52

FY 2019 $4.52 $1.34 $0.53 $1.53 $1.12 ~$10.40

FY 2020 $4.63 $1.36 $0.55 $1.60 $1.12 ~$ 9.37

FY 2021 $4.75 $1.38 $0.56 $1.77 $1.04 ~$ 8.33

FY 2022 $4.86 $1.43 $0.58 $1.90 $0.95 ~$ 7.38

Total $5.48


Next five years using Administration’s oil/other numbers + PFC estimate, if spending held to $4.3B (FY 2017) adjusted for inflation & pop growth:

Mar 14, 2017 19

Protecting “self‐inflation proofing”

• “Self‐inflation proofing” contemplates that the average realized earnings (statutory net income) roughly mirror the so‐called “real” (after inflation) rate of return

• The level of earnings realized over time appears largely to be consistent with that objective, but could be subject to manipulation going forward

• For that reason and others, there are various proposals to set a firm draw rate (Governor: 5.25%, SFIN: 5%, HFIN: 4.75, Sen. Stedman: 4.5%)


The overall effect

Traditional “Other half” (SB 26/S, est.)

Draw on Reserves

Reserves BalanceYear Spending Oil Other

FY 2017 $4.30 $12.77

FY 2018 $4.41 $1.10 $0.52 $1.26 $1.53 ~$11.24

FY 2019 $4.52 $1.34 $0.53 $1.34 $1.31 ~$9.93

FY 2020 $4.63 $1.36 $0.55 $1.39 $1.33 ~$8.60

FY 2021 $4.75 $1.38 $0.56 $1.37 $1.44 ~$7.16

FY 2022 $4.86 $1.43 $0.58 $1.41 $1.44 ~$5.72

Total $6.70


Next five years using Administration’s oil/other numbers + SB 26 (SFIN), if spending held to $4.3B (FY 2017) adjusted for inflation & pop growth:

Mar 14, 2017 21

Why is it important to keep the PFD at 50%

(… and what are the consequences of reducing it)


The genius of Governor HammondThe PFD creates a private Alaska economy more like

Texas than Angola• Under Statehood Act, Alaska can’t privatize mineral interest

• Thus, absent PFD, Alaska’s private economy receives no oil & gas royalties – all goes to the government

• Genius of PFD is to help create a growing, private economy

• Cutting the PFD moves away from Texas, back toward Angola


Cutting the PFD hurts overall economic growth

As a result, cutting the PFD has the largest adverse impact on the overall economy:

• By income of all the state’s fiscal options, and

• By any measure of all the state’s revenue options

Short‐Run Economic Impacts of Alaska Fiscal Options, at III‐9, A‐15 (March 2016)


Not all fiscal options have the same impact on the overall economy – the PFD has the most positive impact of all fiscal tools on overall state income

Mar 14, 2017 24

… and at the lower end increases poverty and income disparity

‘For every $100 million raised with PFD cuts, the ten percent of Alaskan households with the lowest income lose 3.3 percent of per‐capita disposable income, compared with only 0.1 percent among households with the highest incomes.’


“Reducing the PFD by $1,000 will likely increase the number of Alaskans below the poverty line by 12‐15,000 (2% of Alaskans).”

Poverty Income Disparity

Mar 14, 2017 25

Doing the numbers …


Both HB 115/SB 26 (SFIN) save some jobs, but reduce overall state income, increase poverty levels and increase income disparity …

Mar 14, 2017 26

Why we focus more on “income”• Better measure of the amount of money circulating in the economy• Critically important during a recession• “Recessions generally occur when there is a widespread drop in spending.”

• The fact that jobs remain positive while income goes down reflects the fact that some with jobs are either not spending marginal dollars (saving) or spending Outside – not helping produce state income

• Maintaining spending in the economy is important to dealing with the recession and maintaining a strong economy

Mar 14, 2017 Presentation by Brad Keithley 27

And why we focus on low income

• Not a “populist” concern• But economic

• Increased poverty (or near poverty) levels add to state costs (operating budget)

• As importantly, ISER data shows that low income Alaskans spend all or almost all of their marginal dollars (as opposed to saving/deferring) and more of it stays in‐state (as opposed to going Outside), generating additional economic activity

• Income disparity also creates significant education, job skills issues

Mar 14, 2017 Presentation by Brad Keithley 28

Is this really the “kind of Alaska we want to live in”


“Extracting a piece of the Permanent Fund dividend from household income has accelerated the recession in the worst possible way. As a University of Alaska Anchorage Institute of Social and Economic Research analysis explained last year, extracting the money in any

alternative would have produced less drag on the economy, and less human misery.“

‐‐ Gregg Erickson

Mar 14, 2017 29

Governor Hammond thought about this day also …

"Before slicing dividends to cure that skin lesion [spending above revenues], let’s first treat that belly tumor with surgical budget cuts and, if necessary, the 'radiation' of user fees and less regressive taxes. Let’s leave dividends in the people’s pockets so they can both better afford and, to a degree, elect whether or not to pay coming user fees and taxes. ... After all, the best therapy for containing malignant government growth is a diet forcing politicians to spend no more than that for which they are willing to tax.“ ‐‐ Governor Hammond, Diapering the Devil


Conclusion• We don’t believe that enough attention has been paid to gauging the state’s fiscal situation accurately and, thus, we are in danger of “running too far to the other side of the ship”

• Fully implementing Governor Hammond’s “50/50” vision helps balance the budget and avoids the significant adverse economic effects of cutting the PFD (or other tax measures)

• As Hammond envisioned, it helps to build and maintain a sustainable budget and economy


Presentation to Governor Walker (3.14.2017 final)

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