Alaska’s Fiscal Cliff

BRAD KEITHLEYPRESIDENT, KEITHLEY CONSULTING, LLC

ANCHORAGE, ALASKA

THE STATEWIDE TELECONFERENCEJANUARY 27, 2014

Alaska’s current situation …“Right now, the state is on a path it can’t sustain. Growing spending and falling revenues are creating a widening fiscal gap. … Reasonable assumptions about potential new revenue sources suggest 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)

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Leg Finance’s summary …

“The implications of the figures are severe:1. Simply constraining expenditure

growth is insufficient …2. Failure to reduce the projected

deficits will result in a very hard landing …

3. Revival of the standard fiscal policy options [broad based taxes, etc] may not eliminate deficits …”

-- The Fiscal Year 2015 Budget: Legislative Fiscal Analysts Overview of

the Governor’s Budget, Legislative Finance Division

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But things can change … 4

What lies ahead …“Two options available to the state, in addition to reducing expenditures, are institution of a broad-based tax, and use of a portion of the earnings of the Permanent Fund. … It is anticipated that both options will be required in the non-OCS case. The value shown above assumes a personal income tax, similar to the tax that was eliminated in 1980, will be phased in between 2022 and 2026.”

Northern Economics and ISER, Potential National-Level Benefits of

Alaska OCS Development (Feb. 2011)

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What are the big drivers …

Legislative Finance estimates that, at current growth rates, by 2024 ninety-nine percent (99%) of total available revenues will be spent in three areas:

K-12 education

Medicaid

Retirement Assistance

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There is an alternative …

“What can the state do to avoid a major fiscal and economic crisis? The answer is to save more and restrict the rate of spending growth. All revenues above the sustainable spending level … including Permanent Fund income, except the share that funds the dividend – would be channeled into savings.”

ISER Web Note 14 (2013) Over time, earnings from the amounts saved are used to supplement other sources to maintain a sustainable level of overall revenues.

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Turns a non-renewable resource (oil) into a renewable resource

(financial assets)

Approach is consistent with Constitutional policy …

Alaska Constitution, Art 8, Sec 4:“Fish, forests, wildlife, grasslands and all other replenishable resources belonging to the State shall be utilized, developed, and maintained on the sustained yield principle, subject to preferences among beneficial uses.”

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The state’s financial resources similarly can sustain the state over the long term if not “fished out” by

the current generation.

What type of spending reductions …

Calculation Year

General Fund Fiscal Burden

Source

MSY ActualSpend

FY2012 $6.2 $7.0 $.8Feb 2011, WebNote 7 & May 2011, WebNote 8March 2012, WebNote 10

FY2013 $6.4 $7.6 $1.2 August 2012, WebNote 13

FY2014 $5.5 $7.1 $1.6 Jan. 2013, WebNote 14

FY2015 $5.0 $5.6+ $.6+Total $23.1 $27.3+ $4.2+

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How to implement … What is important is the overall spending level (requires

“top down” look) Are we saving enough to build a sufficient nest egg to

maintain consistent spending in future years

Allocation within the overall spending level can be handled several ways Sequester (all spending reduced pro rata to fit within the

overall level)

Priorities established between and within categories

But formulas and other spending trends need to fit within overall spending levels No programs are sustainable if one breaks the overall

budget

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Everything needs a look … Education (K-12)

spending as an example Overall state GF

spending has risen from $922 million to $1.92 billion (108%) in 10 years

Not sustainable at that level (already nearly 40% of current revenues)

Goal is to find and maintain a sustainable level to provide consistency

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Recommendations for this coming legislative session

Cap UGF (operating and capital) spending this year at overall sustainable levels Should be on the downside of the $5.75 billion four year average

Enact HB 136 to provide information to the legislature and public each year on the overall sustainable budget level Enable legislature and public to understand the long term

implications of budgets

Closely examine and modify, if necessary, programs to ensure they are consistent with an overall sustainable budget Requires prioritization overall and within each program Also requires all revenue sources be tapped (e.g., UA system) And, provides a start on the additional $500 million reduction in

UGF spending required next year to offset PERS/TRS

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