Court Denies Rust Request for an Injunction to stay on the ballot
Alaska's Fiscal Crisis: The Challenge, the Solution and How to Achieve It (1.7.2015)
1. Alaska’s Fiscal Crisis:
The Challenge, the Solution
and How to Achieve it
A PRESENTATION TO
THE ALASKA REPUBLICAN ASSEMBLY
JANUARY 7, 2015
BRAD KEITHLEY
KEITHLEY CONSULTING, LLC
3. 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)
3
4. 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
Jan 1 $ 55
Jan 6 $ 50
????
The future (2023) is now …
4
5. What does it mean …
$105 $70 oil
• The revenue equivalent of a
54% production decline to
~230,000 b/d
At current spending rates:
• Draining ~$10+ million per day
from savings
• ~$3.8 billion (60+%) deficit
(~$5,250 per Alaska man,
woman and child; $21,000 per
family of 4)
• Less than 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
$10
2016 2017 2018 2019 2020 2021 2022 2023 2024
Billion$
Start of Fiscal Year
CASH RESERVE LIFE
AT DIFFERENT OIL PRICES
$100
$90
$80
$70
5
6. Mid case scenario …
Assumptions …
$90 oil
3% production decline
Viscous oil: 2020
NPRA: 2020
New Conv Oil: 2020
Gas (moderate
price scenario) 2024
No near future OCS or
ANWR
$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
$2
$4
$6
$8
$10
$12
2016 2020 2024 2028 2032 2036 2040
SBR & CBR
CASH RESERVE (Billion $)
Start of Fiscal Year
6
7. Where does that lead …
“… 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)
Draining the CBR/SBR to maintain current spending
shifts all of the consequences to future generations
and creates an uncertain and unstable climate for
future investors
7
9. What is a “sustainable”
budget …
A calculated revenue and
spending level which, if
adopted now, can be
maintained consistently
long into the future,
adjusted for inflation and
population growth
Based on both current and
projected revenue streams
and asset levels
9
10. What is the current
sustainable level …
Nest egg
Nest egg draw $ 5.4 B
PFD payment (1.4)
Net oil revenues $ 4.0 B
UGF non-petroleum
revenues $ 0.5 B
UGF Sustainable
Revenues $ 4.5 B
Sustainable Revenue
Financial Assets $66.2 B
NPV of Future Oil/Gas 68.9*
TOTAL NEST EGG $135.1B
Real rate of return
(5%)minus population
growth (1%) 4%
Nest egg draw
($135.1 x 4%) $ 5.4 B
* Based on oil prices projected in DOR Fall Revenue Sources Book, plus
production assumptions beyond RSB forecast reflected in “middle case” (p. 9).
10
11. Sustainable budget …
Results …
Treats all generations
equitably
Encourages investment
and growth by providing a
stable, long term fiscal
structure
Smooths the revenue curve
even during turbulent times
Encourages and facilitates
state support for resource
development
Requires …
Fiscal discipline to limit
current spending to
sustainable level (or enact
supplement revenues)
Treating all current savings
and reserves as long term
investments (“nest egg”)
11
12. The costs of delay …
Spending above sustainable levels offsets the short
term economic impact of current spending
reductions but reduces the nest egg and as a
result, future sustainable revenue levels
Costs of delay
MSY
FY 2012: $6.2 B
FY 2013: $6.4 B
FY 2014: $5.5 B
FY 2015: $5.0 B
FY 2016: $4.5 B
$7.0
$7.8
$7.2
$6.2
$5.9
$6.2
$6.4
$5.5
$5.0
$4.5
2012 2013 2014 2015 2016
$Billion
Fiscal year
Actual v. Sustainable Spending Levels
(FY 2012 - 2016 (est.))
Actual Spending Sustainable Spending Level
12
13. Going forward options &
costs …
Future Sustainable Budget Levels @ Overspend Above $4.5 B
Transition Period $500 M $1 B $1.5 B
1 year $4.47 B $4.45 B $4.43 B
2 years $4.45 B $4.41 B $4.36 B
3 years $4.43 B $4.36 B $4.29 B
4 years $4.40 B $4.31 B $4.22 B
A four year transition reduces the
sustainable spending level
between 5 and 10% (e.g.,
overspending $4.5 B by $1.5 B/yr
for four years reduces the
sustainable level to $4.22 B)
13
14. The FY2016 Budget…
Operating Budget:
Formula: $2.1 B
Non-Formula: $2.3
Statewide: $ .8
Add’l O&G Credits $ .2
PERS/TRS $ .3
Total (rounding) $5.8 B
Capital budget: $ .1
Total $5.9 B
FY 2016 Work in Progress (WIP)
Unrestricted General Fund (UGF) Budget
FY 2016 WIP ($5.9 B) – Sustainable Budget ($4.5 B) =
$1.4 B overspend
14
15. The needed reductions …
WIP
Budget
Final
Spend
Diff % Re-
duction
Capital
Budg
Op Budget
Formula Non-Form
$5.9 B $.1 B $2.1 B $3.70 B
$5.9 $5.50 B $0.40 B 7% $.1 $2.1 $3.30 (11%)
$5.9 $5.25 $0.65 11% $.1 $2.1 $3.05 (18%)
$5.9 $5.00 $0.90 17% $.1 $2.1 $2.80 (24%)
$5.9 $4.75 $1.15 19% $.1 $2.1 $2.55 (31%)
$5.9 $4.50 $1.40 24% $.1 $2.1 $2.30 (38%)
Some transition period may be appropriate, but
should involve significant annual reductions and be
relatively quick to avoid additional material
reductions to the long-term sustainable number.
15
17. Focus on the 1+60 who
count …
The Governor (the 1) proposes the
budget and has the power of line item
veto at the end
The legislature (the 60) enacts the
budget by majority vote in each body
The Governor has no authority to increase
the amount enacted
17
18. Expectations, results and
response …
Establish and communicate expectations
Establish the expectation that the 1+60 will achieve
sustainable revenue levels in three years, reducing the
budget by one third (~$500 million) of the difference
between the starting point (the WIP) and the goal (the
final sustainable number, after transition) each year
Measure results
Identify the amount by which the operating budget
(and each component) needs to be reduced and
monitor progress in HFIN subcommittee process
Identify the amount to which the capital budget needs
to be held and monitor progress in SFIN
18
19. Expectations, results and
response …
Prepare to respond
Support those of the 1+60 who meet expectations
But any who do not see the current situation as a
fiscal crisis requiring a response never will – they will
always look for ways to kick the can down the road
Be prepared to respond by encouraging and
supporting a year long primary challenge to any of
the 1+60 who fail to support even a first step by
Voting yes in subcommittee/committee for agency
budgets above the transition level
Voting yes for a final budget above the transition
level
19
20. Morning in Alaska …
In 1984, Ronald Reagan ran a commercial
that captured his vision in three words.
The title? “Morning in America”
Achieving a sustainable budget can
produce a Morning in Alaska but it will
take a Reaganesque level of vision and
commitment
20