Thursday, March 2, 2017

My conversation with Mark Colavecchio ...

Yesterday I joined Mark Colavecchio on his morning talk radio show on KFQD to discuss Tuesday's hugely disappointing HFIN vote to move more than $4B (more than half the current total realized amount) out of the Permanent Fund Earnings Reserve Account into the general fund, as well as the adverse effect of two leading fiscal restructuring bills (HB 115 and SB 70) on both Alaskans and the overall Alaska economy.

My written comments on Tuesday's HFIN action are here:  Alaska's fiscal and economic doomsday clock moved significantly closer to midnight,https://goo.gl/pT51xr.  My comments on HB 115 and SB 70 are here ("We don't always agree with Gregg Erickson, but we certainly do on this piece," https://goo.gl/pdvEyb) and here ("Comparing the impact of SB 70 v. HB 115 on the overall Alaska economy," https://goo.gl/WpmOCl).

Mark and I expanded on both during the conversation.

The conversation is available here, or at the link below:

Wednesday, December 21, 2016

This morning's discussion with Paul Jenkins ...

This morning I joined Paul Jenkins on air for a bit to discuss the Alaska budget.  Paul is the editor of the on-line newspaper Anchorage Daily Planet and is sitting in this week as the guest host of the Rick Rydell Show.  Paul is someone I have joined on air a number of times over the years when asked.

Paul and I started with my take of the Governor's proposed budget and went from there.  My point, as it has been consistently, is that the Governor and his proposed budget are focusing only on the government economy and, in the process, hurting the private and more importantly, overall Alaska economy.

The discussion provides a good overview of the problems I see with the Governor's approach, and what I view as the better way forward.  Those interested can listen in by clicking on "start" icon below, or by going to the link here:  http://650keni.iheart.com/media/play/27568778/?timeCodeStart=3130.

The conversation starts at 52:10 into the segment.

Friday, December 16, 2016

Our first takeaways on the FY 2018 #AKbudget ...


Earlier last month we published and discussed on these pages a worksheet we had prepared to evaluate the Fall 2016 Revenue Sources Book, and FY 2018 Budget and related 10-year forecast.  What we will be looking for in the Revenue Sources Book and Budget ...https://goo.gl/1kutBL.

Yesterday, the Administration simultaneously published both the Fall 2016 RSB, https://goo.gl/mCPfgH, and proposed FY 2018 budget/10-year forecast, https://goo.gl/R8GxSI.  This morning we filled in the worksheet, adding three more points of analysis -- "PFD as a Percent of Earnings," "Total 50/50 Draw on PF" and "Percent of PF Earnings Taken by Gov't."

While we will write on the budget much, much more in the days ahead, there are a few things that leap out almost immediately from the spreadsheet.

First, as we anticipated might happen projected oil revenues are being driven down by what we believe to be arbitrarily low oil price and production numbers.  While the FY 2018 oil price number is effectively the same as that forecast by EIA, the state's projections quickly depart from EIA's, falling effectively to 80'ish% of EIA's in two years. The production numbers are surprisingly lower from the outset and will deserve more attention in the days ahead.   The effect of these differences are significant, as low oil price and production numbers produce low oil revenues, which in turn produce high deficits, which then in turn drive the perceived need for so-called "new revenues" from PFD cuts and other measures.

Second, while the Administration and others attempt to continue to sell the restructured PFD as still "half" of that produced under the current statute, the spreadsheet reveals that it both starts lower than half, and quickly falls even lower, to about a third of that provided under the current statute by FY 2027.  Put another way, the level of the PFD cut proposed by the Administration will reach nearly two-thirds by FY 2027, just ten years from now.

Third,
the split of Permanent Fund earnings between the PFD and government also quickly deteriorates.  Far from Governor Hammond's original vision that individual Alaskans receive 50% annually of the earnings produced by the Permanent Fund, under the proposed budget individual Alaskans start with only 23% in FY 2018, which then deteriorates further to 18% by FY 2027.

Finally, although the Administration says that they are abandoning so-called (but no longer necessary) "inflation proofing," they aren't taking maximum advantage of the Permanent Fund earnings stream.  Calculated using the rolling five year average of earnings currently used to calculate the PFD, the Administration is only utilizing 81% of the available revenue stream in FY 2018, falling to 68% by FY 2027.  Calculated using instead the annual revenue stream without averaging, the Administration is only utilizing 76% of the available revenue stream currently, falling to 66% by FY 2027.

Not utilizing the full revenue stream while at the same time cutting the PFD has largely the same effect as so-called "inflation proofing."  It continues to build up the size of the Permanent Fund at the same time as cutting the benefits from it to the current generation of Alaskans.  It also leaves untapped additional sources of available governmental revenue, while at the same time taking money out of the private economy, worsening the recessionary effect on the economy more than necessary.

At first glance we have not found any explanation for the approach, particularly in the current recessionary economy, and are unclear what it could be.

In sum, at first glance we believe both the revenue projections and the budget raise significant issues that reflect on both its reliability and fairness to Alaskans.  We will be talking about that much more in the weeks ahead.

Wednesday, December 7, 2016

Catching up on the blogs ...

Hmmmm, from the blog, Must Read Alaska (Dec. 5, 2016):

"Where is the business community and who might emerge as a person with the courage to lead during the toughest fiscal situation since the late 1980s? Who has the business credibility, grasp of the issues, potential for broad electoral appeal, and the political savvy to put together a strong campaign?

Some mention the name Brad Keithley, but he’s not likely to pass the opposition research test. As a career attorney, his profession can hurt him.

Others say Joe Beedle (Northrim Bank president), but Joe has landed the job of a lifetime. He has not shown political ambitions, preferring to move the needle in lower key ways.

John Sturgeon has almost folk hero status in Alaska after battling the Park Service all the way to the U.S. Supreme Court. He’d have to re-register as a Republican, but he does have broad appeal because of his David-and-Goliath taking on of the federal government."


For the complete article, go to https://goo.gl/99BvgJ.

Saturday, November 26, 2016

What we will be looking for in the Revenue Sources Book and Budget ...


Likely sometime in the next two weeks the Department of Revenue will issue its Fall 2016 Revenue Sources Book (RSB).  The revenue and other forecasts contained in the Fall RSB are the basis on which the Governor prepares his proposed budget for the coming fiscal year.  Under AS 37.03.020(a), the Governor is required to submit the budget to the legislature by December 15.

Historically, the Legislature has routinely accepted and used most of the forecasts contained in the Fall RSB also as the basis for their evaluation of the budget.  This has enabled the Executive Branch largely to define two of the key parameters involved in the budget debate -- the projected revenue level and thus, the resulting projected deficit at given spending levels.

While we have not taken much issue with that approach in the past, last Spring we noted a significant difference between the oil price forecasts used in the Spring update to the Fall RSB, and the then-current price forecasts, for example, published by the International Energy Agency (IEA) and some other, highly reputable private consulting firms.  (Has the Walker Administration cooked the Spring RSB to show a worse than likely outlook?, https://goo.gl/NmAAiw)

Both the nearer and longer-term oil prices used in the Spring update were significantly below what other, non-partisan experts were projecting at the time.  The lower prices used in the Spring update resulted in lower projected revenues, and thus, higher projected deficits than would have resulted had the higher price decks being projected by other, non-partisan experts been used instead.  The higher deficits projected in the Spring update were then used strategically by the Administration and others to justify the permanent, long term cuts in the PFD contained in SB 128 and the additional so-called "new" (but really diverted private economy) revenue provisions contained in other tax bills.

That experience has led to a significant credibility gap in our mind about the revenue forecasts being published by this Administration.  

As a result as we anticipate the publication of the upcoming Fall RSB we have prepared a table (published at the top of this piece) to use as a template for evaluating the credibility of the projected numbers.  At first blush we will concentrate on four key numbers:

Oil Price:  We will compare the oil price forecast included in the Fall RSB against the projected price levels included in the federal, non-partisan Energy Information Administration's (EIA) 2016 Annual Energy Outlookhttps://goo.gl/KmyL0K  The EIA projections are largely in line with those being published by other governmental agencies and private consulting groups.  

Oil production: We will compare the projected production levels included in the Fall RSB -- a second key driver in determining overall state oil revenues -- against a projected decline curve of 3% per year from current production levels.  An overall 3% decline curve is what many have anticipated to result from the passage of SB 21.  In fact, year-on-year last year's (FY 2016) production levels increased from the prior year.  

PFD levels:  We will compare the projected PFD levels included in the detail provided by the Office of Management and Budget with those projected under the current statute by the Permanent Fund Corporation.  The numbers included in the table include the total amount of Permanent Fund earnings (in $billion) projected by each source to be paid out during the relevant fiscal year.

Unrestricted General Fund (UGF) Investment Revenue from Permanent Fund Earnings:  As readers will know, in the collection of his final writings, Diapering the Devil, https://goo.gl/FFTi9M,  Governor Jay Hammond had this to say about his vision for the Permanent Fund:
I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity. … [Once the money wells were ‘pumping money,’ in other words, producing earnings] each year one-half of the account’s earnings would be dispersed among Alaska residents …. The other half of the earnings could be used for essential government services.
We will evaluate the extent to which the Administration's proposed budget implements Hammond's "50/50" plan -- as a means of addressing the deficit -- by comparing the Administration's proposed draw of the available "other half" of Permanent Fund earnings with the levels which would be available if Governor Hammond's proposed plan was fully implemented.

In past budget discussions sometimes those who have proposed further spending reductions have been asked specifically where they would make additional cuts.  Frankly, we think its time that those sorts of detailed discussions extend to the revenue side as well.

In prior years, the Administration's revenue forecast has simply been assumed to be correct.  Going forward, its time to put that to the test.

Friday, November 18, 2016

Why some self-proclaimed "Alaska fiscal conservatives" aren't ...

Over the last few days we have seen several posts linking to the following article from an upcoming issue of Forbes. Alaska And Oil: A Lesson In Biting The Hand That Feeds You,  https://goo.gl/yTFe28.

Based on the article, many of the posts claim that the Governor "reneged" on promises made by the state, or in some instances, that the Governor "violated the law" by vetoing last summer several hundred million dollars in payments authorized in the budget passed by the legislature to be made to certain oil companies.

The posts are uniformly wrong.  

The Governor's veto decision did anything but "renege" on "promises" made by the state or violate the law.  Instead, his veto decision actually enforced a statutory limit the legislature itself was seeking to overlook and, as such, was a prudent response to Alaska's tightened fiscal situation.

Those who argue to the contrary are, at the very least, unwittingly arguing that Alaska should draw down its savings beyond the levels required by statute in order to bail out a few companies that don't like the position they have gotten themselves into.  Others are doing so knowingly, urging for various reasons that certain selected corporations should receive an unearned priority over Alaska's own need for additional revenue.

The genesis of the tension is not, as the Forbes article mistakenly suggests, SB 21, the law passed in "2013" that made Alaska's oil tax structure more competitive for those producing oil.  Instead, the law at issue is part of a separate piece of legislation that goes back much further, largely to era when Sarah Palin was Governor.

That law, codified largely at AS 43.55.028, https://goo.gl/zzIIB4, does provide that the state will reimburse producers meeting certain criteria some of their costs of production.

But that commitment by the state comes with a significant caveat.  The state's obligation is explicitly limited to the amounts available at any given time in an "oil and gas tax credit fund" established pursuant to the statute.  Importantly, the statute provides that the state is only obligated to fill the fund at a certain rate.

From the start, the statute has provided -- and potential claimants have been aware -- that the state is only obligated to fill the fund based on the level of the state's tax receipts and the price of oil.  At oil prices below $60 per barrel, the state is required annually to contribute 15% of the state's production tax receipts to the fund.  At oil price levels of $60 per barrel and higher, the percentage is set at 10%.  AS 43.55.028(b) and (c).

The reason for the limitation is explicitly to limit the level of contributions the state is required to make to the fund at any given point in time, particularly in times -- such as now -- when state revenues are low and the cash is needed elsewhere.

Because those limitations are clear in the statutes governing the program, the producers that have been involved are well aware of them and accepted the risk that contributions to the fund -- and thus, the rate of reimbursement -- would be slowed when oil prices were low.

Indeed, the statute expressly provides that there may be times when "the total amount of ... claims for refund exceed the amount of available money in the fund."  AS 43.55.028(g). In those situations, the statutes and regulations provide for the manner in which the available funds will be allocated.

What the Forbes article picks up on is an effort by some producers now to jump the statutory process and cause the state to put more money into the fund than required by the statutes, so that they are paid earlier than the law provides.

The producers effectively are not seeking enforcement of the statute; they are seeking to end run it.

In other words, now that the risks they knew were there and accepted at the time they entered the program have materialized, they want the state to hold them harmless from the consequences and continue to make payments as if the price of oil -- and thus, the state's cash flow -- had remained high.

The effect on the state of accommodating those requests is clear.

The size of the state's immediate deficit will grow beyond the levels contemplated by the statute, requiring the state to increase its draw from savings in order to transfer additional monies to the producers earlier than required.  Because of the accelerated draw down on savings, the effect also will be to increase pressure for additional PFD cuts and other taxes.


In short, the effect will be to give an extra-statutory benefit to some producers, at the direct expense of the state and its citizens.  

Some suggest the state nevertheless should make the additional payments quicker, asserting that the state will economically benefit from earlier than anticipated oil production. But those that make the argument apparently have not run the numbers.

By the end of FY 2017 the state will have paid out about $3.5 billion in reimbursements, almost 8% of the size of the Permanent Fund principal at the same point.  By the end of FY 2018 the state will owe an additional $1.15 billion.

If the program had not existed, those amounts would have been saved and invested, not only preserving the amount from loss, but also producing additional revenue to the state in the form of investment earnings.

Compared to that, to date the state has not even recovered a significant fraction of the $3.5 billion thus far invested in the program, much less any financial return on those payments.  Some argue that those returns may come in the future.  But that is speculative, while in the meantime if the money instead had been retained and invested along side the Permanent Fund it would be steadily producing a stream of earnings year after year.

The result is, on a net present value basis -- the way that investors weigh returns -- the state would have come out miles ahead if it had retained and invested the money.

By reducing the level of the state's savings even further, paying out the amounts owed under the program earlier than required as Caelus and others now urge will just make that difference bigger, and the state's fiscal problems that much worse.

Ironically, some now arguing to accelerate the payments beyond the schedule required by the statutes are among those that also argue the #AKLNG project is no longer worth pursuing because, in their view, the private sector has backed off investing its money upfront in the project in an amount proportionate to its interest.

The same reasoning applies to the oil credit program.  The program -- and the resulting state payments -- exist in the first place because the private sector has not found the prospects sufficiently robust to attract the needed level of private capital.  If the test for state investment is whether the private sector is interested in putting up its own money equal to its ownership interest, this program fails as surely as does the #AKLNG project.

We have argued previously that the oil tax credit program should be terminated.  Why we need to halt the reimbursement of oil credits — and howhttps://goo.gl/vyyfEx.  Because it hasn't, the state is continuing to pour money into it rather than alternative investments that would produce better returns.  By foregoing those better returns, the oil tax credit program is making the state's fiscal picture worse, not better.

Now, some urge a course of action that would make that already bad decision even worse, by accelerating the drain on the state's savings even faster than the statutes require, in order to transfer more money more quickly to private corporations than the statutes require.

Those corporations knew the rules and the risks of the game when they started their projects.  Now that some of the risks are coming home to roost, they want to change the rules to bail themselves out at the expense of the state.

While they continue to make the claim, in our view those that support the efforts to change the rules aren't fiscal conservatives. Instead, they are simply "crony capitalists" -- those who seek to manipulate government rules to benefit themselves over others -- of a different sort.  See Alaska's Crony Capitalistshttps://goo.gl/zTHwvS.

Monday, November 14, 2016

What today's ADN story on the 'Musk Ox Coalition' misses ...

In an article in today's Alaska Dispatch News, political reporter Nat Herz discusses the central legislative role being assumed by five representatives -- members of the so-called "Musk Ox Coalition" -- who caucused with the Republican-led House Majority last session, but who are shifting to a largely Democrat majority this session.  The Musk Ox revolt: How the Alaska House flipped from Republican control for the first time in two decadeshttps://goo.gl/XbozJU.

While Herz's story does a good job going back to the origins of the Coalition at the end of the 2015 session, it noticeably leaves out any mention of one key -- what the Coalition members themselves identified at the time as being a "strongly" held -- position on fiscal issues.  Because of continued importance of fiscal issues, the position they took then continues to have significant relevance today, but is one about which Coalition members appear to have remained silent -- and, thus, quietly may be attempting to drop -- as they transition from one side of the aisle to the other.

As Herz correctly notes, the "Musk Ox Coalition" first surfaced publicly in a joint May 20, 2015 letter to then-Speaker Mike Chenault.  The letter was in response to an ill-fated proposal by House leadership to move substantially all of the money then contained in the Permanent Fund earnings reserve to the Permanent Fund principal.

The move would permanently have taken the past accumulation of what Governor Jay Hammond called in his book Diapering the Devil, the "other half" of the Permanent Fund earnings stream -- what Hammond intended to be available for "essential government services" -- off the table, significantly reducing the flexibility of both that and future Governors and legislatures to deal with the state's fiscal situation.  See Diapering the Devilhttps://goo.gl/FFTi9M (Hammond:  "I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity. … [Once the money wells were ‘pumping money,’ in other words, producing earnings] each year one-half of the account’s earnings would be dispersed among Alaska residents …. The other half of the earnings could be used for essential government services.”)

The Musk Ox coalition opposed the move, expressing what we believed then and still do now, a well-placed concern "about how manipulating these funds now might impact the ability of the earnings reserve to play an effective long-term role in reaching sustainable, balanced budgets ...."

In his story, Herz picks up on some of that, but leaves out this piece of the letter and then, "Musk Ox coalition" position:
... we strongly believe that major actions having to do with the Permanent Fund, such as this, should go before the voters. (emphasis added)
This position has significant relevance as the Musk Ox members move to the other side of the aisle because some in the new, largely Democrat majority that they are joining already are suggesting that significant cuts in the PFD necessarily must be a part of any fiscal solution.  At least in our view -- and we would anticipate, the view of most Alaskans -- such a step certainly would constitute a "major action having to do with the Permanent Fund," triggering the need for a vote, at least in the then mind of the Coalition members.

To us, a timely and highly relevant question then is what role, if any, the position has played in the move of the Musk Ox Coalition members to the other side of the aisle.  Does the position remain a "strongly" held belief of the members and, if so, how have they addressed it in the course of the move.  And if they haven't, does that mean they have dropped it, and if so, why was it "strongly" held then but not anymore.

Herz's story doesn't even mention, much less probe the issue.  We hope that future stories on the subject will.  It was a critical piece of the position taken by the Coalition members in 2015.  Now that they are assuming a significant role in the upcoming legislature, it is important to understand whether the position will remain so once they cross the aisle.

 For those interested, a full copy of the May 20, 2015 letter follows: