A presentation at Law Seminars International Dec. 8-9 Conference on Energy Markets & Regulation in Alaska

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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