160107-Gunnar Knapp-An Introduction to Alaska Fiscal Facts and Choices-J

7/25/2019 160107-Gunnar Knapp-An Introduction to Alaska Fiscal Facts and Choices-J...

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An Introduction toAlaska Fiscal Facts and Choices

Gunnar KnappDirector and Professor of Economics

Institute of Social and Economic ResearchUniersit! of Alaska Anchora"eGunnar#Knapp$uaa#alaska#edu

%anuar! &' ()1*

ISER pu+lications and presentations are solel! the ,ork of individual authors and should beattributed to them, not to ISER, the University of Alaska Anchorage, or the research sponsors.
mailto:[email protected]:[email protected]


2/43

Alaska faces an e-tremel! serious fiscal challen"e#

.! "oal in this presentation is tohelp Alaskans understand the +asic facts ofthis state finances and the choices ,e face#

I am not adocatin" for an! particular choices#

(


3/43

Alaska/s faces an e-tremel! serious fiscal challen"e#0e are spendin" more than t,ice as much as our reenues#0e are pa!in" for the deficit +! dra,in" do,n our sain"s#


4/43

0e can/t continue to run hu"e deficits like this !ear/s#0e don/t hae enou"h sain"s#

2


5/43

In the ne-t fe, !ears',e ,ill hae to close the fundin" "ap

+et,een our spendin" and our reenues#

0e ,ill hae to make +i" chan"esin ,hat ,e spend or ho, ,e pa! for it3or +oth#

4


6/43

5utline

Alaska fiscal facts

State reenues

State spendin"

6he Permanent Fund

Alaska fiscal choices

7o, to close the fundin" "ap8

0hen to close the fundin" "ap8

*


7/43

Alaska fiscal facts9

State reenuesState spendin"

6he Permanent Fund

&


8/43

0hat most states/ reenues and spendin" flo,s look like

GeneralFund

UnrestrictedGeneral Fund

spendin"

Sain"sFund

:on;5ilReenues

Federalrevenues

Spendingfor federallymandated

uses

esignated!eneral Fund

revenues

Spending fordesignated

uses ofrevenue

sources


9/43

.aed earnin"s

Constitutional?ud"etResere

Fund

PermanentFund

principal

PermanentFund

earnin"sresere

:on;5ilReenues

5ilta-es

Diidendspendin"

Arro" si#es areproportional

to F$%&

revenue 'spending flo"s


10/43

From ())4 to()12' oil

reenuesaera"ed @) ofAlaska/s

Bunrestricted"eneral fund

reenues,hich pa! for

state"oernment#

Alaska has +een e-tremel! dependent onoil reenues to fund state "oernment#

1)


11/43

11

5ur state reenues are e-tremel! sensitie to oil prices3particularl! at prices a+oe )H+arrel#


12/43

5il prices hae fallen drasticall! oer the past !ear and a half3and are continuin" to fall#

1(

6he price ,as*H+arrel onDecem+er 11


13/43(ro)ected*istorical

+.- billiondrop in oilrevenuesfrom /%

to /%&0--1 drop2

.ostl! +ecause of the fall in oil prices' our oil reenues hae fallen drasticall!#Fallin" oil production and hi"her costs and credits hae also pla!ed a role#

1

From //3to /% oilprices andrevenues

rosedramatically


14/43

In


15/43

0on/t oil prices "o +ack up and sae us8

It happened +efore3in the earl! ()))s3,hen ,e faced a similar fiscalchallen"e#

It could happen a"ain# ?ut it pro+a+l! ,on/t#

6here is a "lut of oil on ,orld markets

.ost oil market anal!sts think prices ,on/t re+ound a+oe &);@)H+arrel' +ecause

So much oil production is profita+le at those prices

Gro,th in ,orld oil demand is slo,in"

Een if oil prices rise' our reenues ,ill fall as oil production falls#

14

7opin" that oil prices rise is not a realisticor responsi+le solution to our fiscal challen"e#


16/43

At &);@)H+arrel' ho, much total reenue ,ould ,e "et8

+4.4 billion 5 +6/7barrel

+. billion 5 +/7barrel

8e are spending+3. billion this year.


17/43

Een if oil prices rise' our oil reenues ,ill decline as production falls#

1&

F ())4 t ()1( th h di i i


18/43

From ())4 to ()1(' een thou"h spendin" ,as risin"',e ran +i" General Fund surpluses# Since ()1 ,e

hae +een runnin" +i" General Fund deficits#

(ro)ected*istorical1


19/43

0e used the surpluses prior to ()1( to +uild up our sain"s resere#Since ()1 ,e hae +een rapidl! dra,in" do,n our reseres#

Continued deficits of this !ear/s leel could drain our reseres in ( !ears#

1@

(ro)ected*istorical


20/43

6his !ear/s F=1* pro


21/43

7o, ,e are spendin" 4#( +illion in F=1*

%,; 06&12 isedicaid formula


22/43

6rends in General Fund spendin"' F=)&;F=1*

((

6h t l li t d d l t d t d t f t t fi


23/43

6he most unusual' complicated and least understood part of state financesis the Permanent Fund and the Diidend Pro"ram#

GeneralFund

5ilro!alties

Goernment

spendin"

Permanent Fundreali>ed earnin"s


Fund

PermanentFund

principal

PermanentFund

earnin"sresere

:on;5ilReenues

5ilta-es

Diidend

spendin"


24/43

Constitutionally mandated

contributions fromoil royalties to

Permanent Fund principal

about 4/.31 of oil royaltiesabout +/.6 ? in F$%&

Inflationproofing

about +/.6 ?in F$%&

PermanentFund

Principal$47.3 B

>ay notbe spent

Permanent Fund realized earningsabout +. ? in F$%&

PermanentFund

earningsResere$7.! B

>ay bespent

"iidend spendingabout +%.; ? in F$%&

Formula@ about half of reali#ed

earnings over the past 3 years

6h P t F d i th th 4) +illi 0 l


25/43

6he Permanent Fund is ,orth more than 4) +illion# 0e can onl!spend the Breali>ed earnin"s in the earnin"s resere' ,hich are

currentl! a+out & +illion#

(4


26/43

6he Permanent Fund has +een earnin" +illions of dollars in most recent !ears#0e hae +een puttin" that mone! in the earnin"s resere3and then dra,in"

mone! +ack out to pa! for diidends and inflation proofin"#

(*


27/43

0e hae +een usin" Permanent Fund earnin"s to pa! fordiidendsand inflation proofin"#

(&


28/43

In most recent !ears the Permanent Fund has earned more than ,e hae usedfor diidends and inflation proofin"3so ,e hae +een retainin" some earnin"s

and the earnin"s resere has +een "ro,in"#

(

ike oil reenues Permanent Fund earnin"s are hi"hl! aria+le3+ut the!


29/43

ike oil reenues' Permanent Fund earnin"s are hi"hl! aria+le3+ut the!hae +een "ro,in" as the Fund "ro,s# For the past t,o !ears the! hae

+een more than our oil reenues#

(ro)ected*istorical


30/43

Alaska/s fiscal choices

7o, ,ill ,e fill the fundin" "ap80hen ,ill ,e fill the fundin" "ap8

)


31/43

750 0I 0E FI 67E FU:DI:G GAP8

5ur onl! si"nificant and practical options are some com+ination of9

Spendin" cuts

:e, reenues

Usin" Permanent Fund earnin"s

+! some com+ination of9

= Reducing (ermanent Fund dividends= Reducing inflation proofing

= Adding less to the Earnings Reserve

= ra"ing do"n the Earnings Reserve

6here are no eas! choices#

6he fundin" "ap is so lar"e that

,e ma! need to use allof these options# 1


32/43

6he challen"e ,ith spendin" cuts is fi"urin" out ,hat to cut that isn/tmandated' essential or Bpenn!;,ise +ut pound;foolish#

Jer! littlecapital

spendin" is

left to cut

It ,ould +eer! difficult to

cut de+t

retirementspendin"

Cuttin" oil ta-credits couldaffect future

productionand reenues

.ost cuts ,ould hae to come from statea"encies3includin" education health

6here are man! potential options for ne, state reenues


33/43

6here are man! potential options for ne, state reenues3+ut none ,ould +e enou"h to close the fundin" "ap#


34/43

Alaskans pa! much lo,er +road;+ased state ta-esthan residents of an! other state#

Alaska 2

Usin" Permanent Fund earnin"s ,ould reLuire some com+ination of9


35/43

Usin" Permanent Fund earnin"s ,ould reLuire some com+ination of9= Reducing (ermanent Fund dividends

= Reducing inflation proofing- Adding less to the Earnings Reserve- ra"ing do"n the Earnings Reserve

6he Permanent Fund can earn us +illions of dollars each !ear#


36/43

6he Permanent Fund can earn us +illions of dollars each !ear#?ut the earnin"s ,ill ar! ,idel! dependin" on the rate of return ,e earn

and ho, lar"e ,e "ro, the fund#

Rates of return1@@* M ()14

0omits =&.-1 return in //62

Estimatedstart;of;F=1&

alue

APFC pro


37/43

6hree potential approaches to usin" Permanent Fund earnin"sto fund state "oernment

#pproac %istory&bac'ground

e"islature appropriates funds from theearnin"s resere' ,ith or ,ithout chan"es indiidends and inflation proofin"

6he le"islature can do this +! asimple ma


38/43

S? 112 approach9 BS,ap fundin" for diidends and "oernment

GeneralFund

5ilro!alties

Goernment

spendin"



Fund

PermanentFund

principal

PermanentFund

earnin"sresere

:on;5ilReenues

5ilta-es

Diidend

spendin"

ividends "ould be paid

from 31 of oil royalties

A payout "ould go from

(ermanent Fund earnings tothe !eneral Fund based on31 of average market value

over the past 3 years.

Soerei"n ,ealth fund approach9 Almost all oil reenues ,ould "o to the


39/43

Soerei"n ,ealth fund approach9 Almost all oil reenues ,ould "o to thePermanent Fund' ,hich ,ould make a fi-ed pa!out to the General Fund#

GeneralFund

5ilro!alties

Goernment

spendin"



Fund

PermanentFund

:on;5ilReenues

5ilta-es

Diidend

spendin"

ividends "ould be paid

from 3/1 of oil royalties

A fiBed annual payout "ouldgo from the (ermanent Fund

earnings reserve to the!eneral Fund

0estimated 5 +4. ?2

7o, ,ould different options for closin" the fiscal "ap affect


40/43

7o, ,ould different options for closin" the fiscal "ap affectAlaska/s econom! and Alaskans8

(ption )ffect on te economy *o +ould be most affected

Cuttin" spendin" Fe,er "oernment


41/43

07E: 0I 0E FI 67E FU:DI:G GAP8

Che more gradually "e ad)ust,the smaller the immediate direct effects on the economy.

?ut the longer "e delay@

6he +i""er the future direct effects on the econom!#6he "reater the risk of forced drastic ad


42/43

2(

5ur fiscal options aren/t so +ad compared ,ith most other states


43/43

5ur fiscal options aren/t so +ad compared ,ith most other states#

.ost other states9

Don/t hae an! oil reenues

Don/t hae an! Permanent Fund earnin"s

6hat/s ,h! most other states9

Spend much less for "oernment

7ae income ta-es andHor sales ta-es

Don/t pa! diidends

5ur +asic fiscal options are to +ecome more like other states9

Spend less for "oernment 6a- ourseles more

Pa! smaller diidends

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160107-Gunnar Knapp-An Introduction to Alaska Fiscal Facts and Choices-J