Presentation to the Alaska Republican Assembly (4.26.2016)

How to Finish This Session with a Sustainable Budget (and economy)

Alaska Republican AssemblyApril 26, 2016

Brad Keithley (bgkeithley.com)President, Keithley Consulting, LLCFounder, Alaskans for Sustainable Budgets

Agenda

• Where are things now• What are the issues• How to resolve the issues & identify a going forward plan

April 26, 2016 Keithley Consulting, LLC 2

Where are things now: recent Juneau revenue projections


Where are things now: spending


What are the issues

• Oil & gas tax credits• Operating & capital budget• PFD cuts & taxes


Oil & gas tax credits


Operating & capital budgets


It’s all about the bottom line …

PFD cuts & taxes


Both HFIN & SFIN have proposals, but at a significant cost to overall economy …

Resolution and going forward

• Understanding and resolving the issues starts with getting revenue right

• Then,• Oil & gas tax credits• Operating & capital budget• PFD cuts & taxes


Start with the right revenue number

April 26, 2016 10Keithley Consulting, LLC

or …

What is the right revenue number

April 26, 2016

If assumptions are …• $80/bbl by FY 2020 (v.

FY 2022)• 3% production decline

(v. 5%)• New oil, #AKLNG & use

of PFER• Population growth of

0.5% (v. 1%), then… long term sustainable revenue is $4.3B (w/o PFD cut or taxes)

11Keithley Consulting, LLC

Creates focus on long‐term outlook

April 26, 2016

If you assume future is always like the present:• At high prices, too

optimistic and current spending overshoots the mark

• But pessimism is an equal problem – at low prices, too pessimistic and policy makers pull tax/PFD levers that unnecessarily penalize the current economy


Sustainable budget approach createsa tool to help focus fiscal policy onthe long‐term outlook to lookthrough high and low cycles, which iscritical in a commodity basedeconomy

“But what if” …AKLNG (% chance of success):

75%: $4.1 billion50%: $3.9 billion25%: $3.7 billion0%: $3.5 billion

Oil price (by 2020):$70: $4.1 billion$60: $3.9 billion

Oil decline at:4%: $4.2 billion5%: $4.1 billion

April 26, 2016

Or a combination …AKLNG (75%), Oil ($70), Decline (4%): $3.8 billionAKLNG (50%), Oil ($60), Decline (5%): $3.3 billionAKLNG (0%), Oil ($50), Decline (6%): $2.8 billion

Or … AKLNG (100%), Oil ($80), Decline (1%): $4.6 billion


What crude price …


Best information at this point …The point is … use the best available information at the timeOil ($80 by 2020): “The process of adjustment in the oil market is rarely a smooth one, but, in our central scenario, the market rebalances at $80/bbl in 2020, with further increases in price thereafter.” (World Energy Outlook, International Energy Agency, Nov. 2015)

Production (3% decline): “Repsol and Armstrong have said the project could yield up to 120,000 barrels daily. That estimated rate is not “unreasonable" based on details that have been published about the project, said Mark Myers, Natural Resources commissioner and a former head of the U.S. Geological Survey.” (Alaska Dispatch News, Feb. 15, 2016)

LNG (~2025): At a time of historic capital constraint, at least two of the largest LNG companies – and most sophisticated investors –in the world are planning to continue to invest.


Resolving the issues …

• Oil & gas tax credits• Operating & capital budget• PFD cuts & taxes


Oil & gas tax creditsThere is a significant problem …

From the Administration’s description of HB 247:“Most provisions of the bill will take effect on July 1, 2016. The intent of the fund transfer described in this fiscal note is to provide adequate funds to repurchase all tax credit certificates that are earned in advance of the effective date. …

• FY16‐ DOR estimates a total demand for the current fiscal year of $700 million.

• FY17‐ DOR estimates total demand for FY17 of $425 million. • FY18‐ DOR estimates total demand for FY18 of $375 million. … [The] portion of that demand, representing activity through the July 1, 2016, [is estimated at] $200 million.

The sum total of the credit demand for these three fiscal years is $825 million ($825,000.0).”


Oil & gas tax creditsAllowing the credits to continue will only make the problem worse …


Oil & gas tax credits

Even today’s HRULES proposal doesn’t get at the problem – only ends the program in 2020 (credits keep accruing until then and payable after)The Administration has this one right, there needs to be a 2016 end to the program

• Set a near term termination date• Set up a transition fund• Set up an AIDEA loan fund for credit worthy projects

But not sure that is where #AKLeg is going to land


Operating & capital budgetThe bottom line needs to come in at $4.5 billion to stay within sustainable levels – if it doesn’t, this generation needs to bear any excess (if there is any) through supp revenues


PFD cuts & taxesThis is as much an overall Alaska economy issue as a budget issue


Cutting the PFD and/or imposing taxes improves the government economy, but at the expense of the overall economy

PFD cuts & taxesSupplemental revenues will be needed to avoid shifting the burden to future generations if spending isn’t reduced to long term sustainable levels ($4.5 B) …But should only last:

• As long as spending exceeds the long term sustainable level from traditional revenue sources,

• To the extent spending exceeds the long term sustainable level, and

• With the least damage to the overall economy (Tax policy 101, likely means taxes before PFD cuts)

• SMH: we haven’t approached having this level of discussion but HFIN & SFIN are proposing a “permanent” fix

Maybe Rep. Kurt Olson’s temporary “PFD tax”


Going forward planSet overall spending at the sustainable budget level using a reasonable revenue forecast


Going forward planUse savings to supplement revenues during low points in the commodity cycle and replenish during high …


Codify the approach to set long term plan

S&P (January 2016):Therefore, we will likely again lower the state's rating ‐‐possibly by more than one notch ‐‐ if state lawmakers do not enact measures to begin correcting the state's fiscal imbalance during its 2016 legislative session. … In the event policymakers continued to take no action, the current initial rating change most likely represents the first step in a downward migration that would likely accelerate as the state's reserve balances approached depletion. If lawmakers succeed in putting the state on what we view as a glide path to a sustainable fiscal structure, with its strong reserve balances still intact, we could revise the outlook to stable.


Conclusion• Alaska is at a significant crossroads, with consequences to both the government and overall economy

• We may not get to $4.5 B this year (because of oil tax credits) … But we should come as close and resolve as many issues as we can(E.g., set a near term end to oil tax credits, use the least harmful supplemental revenue source if can’t achieve sustainable budget number)

• And make PFD cuts/taxes, if necessary, a one‐year fix until Alaskans have thought through the consequences to the overall economy (don’t throw the overall economy overboard to achieve “certainty”)


For More Information …

Thought on Alaska Oil & Gasbgkeithley.com

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Presentation to the Alaska Republican Assembly (4.26.2016)