Wednesday, April 30, 2014

#AKbudget| SMH ... Governor, Governor

Having a group of Generation Y friends pays off in many ways, including keeping me current on the latest in urban slang.  I have long since bookmarked the "Urban Dictionary" to use as a translator when emailing (so old school), instant messaging (more Generation X, except when on Facebook and then acceptable to Generation Y) or texting (now we are in Generation Y's wheelhouse) with my friends in that group.

Amazingly, it appears, I have even started to think in those terms.  Thus it is when I saw the latest tweet (also a Generation Y thing) from Governor Parnell claiming "Reducing Debt and Controlling Spending" as part of his "2014 Legislative Accomplishments," that my immediate reaction was to think "SMH."  For those of you that don't have your Urban Dictionary (UD) cued up, "SMH" stands for "shaking my head" and, according to the UD, is "[u]sually used when someone finds something so stupid, no words can do it justice."

Actually as it turns out, not even the Governor is willing to back up the claim.  When you click on the link in the tweet to the underlying press release and start parsing through the words, "Reducing Debt" turns into "paying down Alaska's unfunded pension liability," which is not actually debt but more an accounting classification, and "Controlling Spending," turns into "reducing spending by $1.1 billion," true-ish on the surface (this year's spending level is $6.19 billion compared with last year's $7.2 billion), but a level which, because of declining revenues, still leaves the state budget this coming year in deficit to the tune of $1.65 billion, the second highest in the state's history

In other words, put into proper context the results of this legislative session are to "controlling spending" as killing one mosquito (I was outside in Anchorage yesterday, "they're back") is to dealing with an oncoming swarm.  Yep, you are going to have one less bite -- out of the hundred or so you are about to endure.  But do any of us really claim victory for having stopped the one?  Exactly, SMH.

This is going to be a long, long ... excruciatingly long coming campaign if the Governor isn't even starting it off by telling Alaskans the truth.

The truth?  Properly accounting for what went on with the PERS/TRS payment, the 28th Legislature this session reduced (spent away, blew another hole in) Alaska's fiscal reserves -- those this generation effectively is holding in trust for Generations X, Y, Z and all those that follow -- by another 10% and combined with its actions the previous session, has now spent away fully 35% (or more than $6 billion) of the fiscal reserves that existed on the state's books at the time they walked in the door.

The truth?  Effectively what is going on is this generation of Alaskans is spending away money it holds in trust for future generations in order to make this generation's life a little more comfortable (and the contractors benefitting from the continually high capital budgets a little more profitable), but at the expense of leaving future generations with a substantially reduced standard of living.

Oddly enough, back in the day I came to my political awareness at the same time as the so-called "Children's Crusade" led by then 52-year old Minnesota Senator Eugene McCarthy (he seemed older than that at the time).  In a different way, that battle was about one generation writing checks that the following generations were having to cash.  And, in a different way, that battle started largely because the older generation failed to tell the truth about what was going on so that everyone could confront it together.

Sadly enough, that is now what is going on here -- this generation of Alaska leaders are writing checks that future generations are going to be required to cash, and then are lying about what they are doing.

This generation of Alaskans easily could enjoy life on what the University of Alaska-Anchorage's Institute of Social and Economic Research (ISER) has calculated to be a "sustainable budget" level.  If they did, future generations would enjoy the same.

But this generation apparently isn't satisfied with what economists refer to as "intergenerational equity" -- instead it is taking more than its fair share, leaving future generations of Alaskans with less and less.

So, as with the Children's Crusade of the 1968 Presidential Campaign, increasingly it appears that it may be becoming time for a Fiscal Crusade in Alaska.  If those currently in the lead are unwilling to confront reality, it may be time for new leadership to emerge.

As I said at the start ... SMH.

Monday, April 28, 2014

#AKbudget| Now I know how Joe Wilson felt ...

Click here for video.
Let me make very clear at the outset of this short piece, I don't condone what Rep. Joe Wilson did on that evening in September 2009. Wilson, as you will recall, is the South Carolina Republican who shouted "you lie" as President Obama talked about immigration reform before an assembled Joint Congress. It was disrespectful, inappropriate and ill-conceived.

But this morning I realized what must have come over Joe Wilson when he did what he did, and why there is a chance I might have done the same thing this morning if I had heard the following statement being uttered on the Alaska Senate floor while I was in the gallery.  This is from Senator Lesil McGuire's end-of-session newsletter circulated earlier today:
It is with great pleasure that I write to fill you in about all the accomplishments of the 28th Legislature. We set out with four major goals: improving education; making energy more affordable; getting a handle on our budget; and pushing back federal overreach. I am pleased to report that we crossed the finish line with big wins on every one by passing legislation providing comprehensive funding for Education, creating an Alaska LNG Pipeline, a comprehensive corrections reform bill, and a sustainable and responsible budget.
The urge would have been great -- and given how deeply I feel about this issue, probably uncontrollable -- to do a "Joe Wilson" and shout, "you lie."  At the very least, what would have emerged would have been a very audible whisper to the same effect, a head shake and then my face buried in my hands.

As I have explained in great -- some say excruciating -- detail elsewhere, this Governor and the 28th Legislature not only have failed in achieving a sustainable -- and responsible -- budget, in fact they have taken a huge, giant, unthinkably large leap backwards.

During their two year term, this Legislature has passed -- and the Governor signed last year and is likely to sign again this -- spending bills producing the two single largest budget deficits in Alaska's history. In doing so, this Governor and Legislature in one short, two-year term, will have wiped off the books fully 35% of the state's financial reserves that existed the day they came into office.

And cumulatively, they have so badly damaged the "nest egg" that the current generation of Alaskans holds in trust for future generations that the state's future sustainable spending levels now likely have fallen to somewhere in the $4 billion-ish per year range, rather than the mid-$5 billion range that existed when they came into office.

This Governor and Legislature came into office with high expectations and lofty rhetoric about exercising "fiscal responsibility".  They have failed miserably -- let me repeat and be clear, failed miserably -- at the task.

Joe Wilson's words came out of my mouth as I read Sen. McGuire's laughable summation of this Legislature's accomplishments.  I am just glad that I wasn't in the Senate gallery and she wasn't on the Senate floor when she said them.

Friday, April 25, 2014

#AKbudget Where's PERS/TRS ...

Earlier today, as the legislature headed toward adjournment, the Legislative Finance Division (Leg Fin), which serves somewhat the same purpose for the legislature as the Congressional Budget Office does at the federal level, released a "Draft Short Fiscal Summary" of the FY 2015 budget.  Such fiscal summaries -- which are prepared at various times by both Leg Finance and the Governor's Office of Management and Budget -- are often used by those who work on and think about state budget issues, including me, as the basis for related calculations.

As with others I have been waiting on Leg Fin's fiscal summary, in my case to see how they propose to handle the contributions approved this year toward PERS/TRS, the state's retirement funds.  In sum the Governor proposed and the legislature has approved a transfer of $3 billion from the Constitutional Budget Reserve to PERS/TRS.  But properly understood, some portion of that is effectively in lieu of the annual contribution which otherwise would be required to be made as part of the Operating Budget, and some portion is an extraordinary, one-time contribution which is being made to make up for underfunding which occurred in prior fiscal years ("This year, Gov. Sean Parnell ... proposed $2 billion in addition to the required $1 billion minimum payment, what's being called a "$3 billion cash infusion.")

Surprisingly, the draft appears not to include any of the transfer as part of the annual budget, effectively undermining the usefulness of this year's fiscal summary in developing year-on-year comparisons of spending levels.  The relative treatment shows up on line 23 of the draft:

Click for larger view.
While the summary reflects the $634 million being contributed to PERS/TRS in FY 2014, it reflects only $5 million for FY 2015 (which is largely related to administrative costs), notwithstanding that, in fact, the legislature has approved $3 billion in such funding.

While I do not believe that the failure to include an annual component for this category of spending is the consequence in any respect of ulterior motives, it does make an apples-to-apples comparison of year-to-year spending levels difficult.  It clearly is inappropriate, for example, to compare last year's spending level (line 36) of $7.187 billion to this year's $5.823 billion.  As reflected on the draft fiscal summary, this year's number leaves out a significant component of spending that indeed is occurring this year, but for whatever reason is not included in the number.

More importantly for the purpose that some may have in mind, it is inappropriate to use the number to compare against ISER's "sustainable spending" level that I have talked about extensively in other posts on these pages.  That number -- which for FY 2014 was $5.5 billion and for FY 2015 is $5 billion -- is not tied to any particular categories of spending, but rather reflects total spending levels that the state can afford without degrading its future fiscal position.  Because the PERS/TRS contribution counts as spending for that purpose, the failure to include it as part of the $5.823 billion shown above makes that number non-comparable to ISER's "sustainable spending" levels.

When comparing year on year spending any commentator (and I believe, because it purports to do the same thing, the fiscal summary) should include at a minimum some annualized component of PERS/TRS spending for FY 2015.  In preparing my running totals during the latter days of the session I have included $345 million, which is the amount that will be included in the same location next year (at p. 4).

Adjusting for that amount and taking all of the other numbers from the Leg Fin summary, the properly adjusted level of spending for FY 2015 to be used for comparative purposes is $6.17 billion, and the deficit is $1.65 billion.

While below FY 2014 spending levels, the amount nevertheless is 12% and 23% above ISER's calculated sustainable spending levels for FY 2014 and FY 2015 respectively.

Thursday, April 24, 2014

Norway, Petoro and this summer ...

As some readers know, for the past two summers the Institute of the North (ION) has sponsored policy-oriented "fact finding" missions to other Arctic nations in order to take a deeper dive into how they are addressing energy, economic and other issues commonly faced by northern countries.  The first year (2012), ION sponsored a mission to Norway, the second year (2013) to Iceland.

This year ION is sponsoring a mission to Finland, which promises to hi-light different issues and the approach being taken in other norther nations to address them.  The mission is June 15-20; ION explains the purpose this way:
In Finland, Alaska business, policy and community leaders will spend four days exploring Finland’s economic and resource development agenda, better understanding its position in the Arctic, and learning more about issues ranging from icebreakers to education. Not only will Alaska leaders have an opportunity to learn about what Finland is doing right, but the group will be able to share Alaska’s lessons with those they meet along the way and bring back to the state the results of those conversations.
I participated in the first mission, to Norway, and can personally attest to the value the insights from these missions bring.

In light of recent events in Alaska, ION recently has enhanced this year's tour even further, by adding an additional stop back in Norway on June 20, the last day of the mission.  The purpose of this stop is to meet with Petoro, the Norwegian state owned oil company that participates as a co-working interest owner/investor in all of the country's oil and gas fields.

As readers of these pages will know I believe strongly that Petoro's success offers significant lessons of use to Alaska.  Those potential lessons have been made even more relevant with the passage this year of SB 138, the Governor's proposal for the state to participate as an owner (well, at least an owner of parts) of the Alaska LNG project.  As did the meetings with other parts of the Norwegian oil and gas sector (state and private) during the first mission to Norway, I anticipate the meeting with Petoro will provide significant insights into the manner in which a government which owns the resource can play a significant and helpful role in the development of that resource.

I understand from Nils Andreassen, ION's Executive Director, that some slots remain for those interested on the Finland mission.  Nils' contact information is here.  I have a preexisting commitment earlier in the week, but believe that this opportunity is so important I will be joining for the meeting with Petoro.

Monday, April 21, 2014

#AKbudget| The morning after the "final" day ... which wasn't

As readers will know from other sources, the Alaska legislature has gone into overtime after being unable to complete action on all the bills (it wants to take up) within the 90 days it otherwise sets aside for these things.

While I had intended this morning to make a semi-final (for me) calculation of the damage done to the state's fiscal picture by this session (and it is substantial), three of the bills that remain outstanding will have a significant effect on that -- the capital budget (which is currently in the House), the omnibus education bill (which is in the Senate) and the refinery tax credit legislation introduced at the end of the session by the Administration (and is now back over in the House after being amended by the Senate).  As a result, final (or even semi-final) calculations must wait.

That said, shortly ago Legislative Finance posted a summary of the House Finance Committee's final version of the capital budget.  Presumably it will go to the floor later today and, barring unforeseen circumstances, be adopted by the House and then sent to the Senate for subsequent action.

This version provides for $19 million more in spending than the version previously provided by the Co-Chair.  I have not attempted to isolate where the increases are; presumably those will be explained when the version is discussed on the House floor.

I also have taken the time this morning to reflect further on how to incorporate the refinery tax credit legislation into the budget model.  As explained in the Fiscal Note accompanying the bill, the credit first operates as an offset against corporate income taxes otherwise due the state, which would reduce revenue, but in the event the credit exceeds that amount, the refiner then also can request that any remaining credits "be refunded by the state."

Each refinery is able to claim up to $10 million in credits per year; there are four refineries (including Flint Hills, which also is entitled to the credit if it reopens under either its current or a future owner) in the state.  As the Fiscal Note explains, it is unlikely that all refineries would qualify for all of the credits each year.

As a placeholder, I have assumed half ($20 million) in the available credits will be taken in FY 2015.  Because it operates the same for budget purposes, I have simply included that amount as a separate line item in the calculation rather than allocate it between revenue reduction and claimed refund.

As did yesterday's version, this version also assumes the education bill is finally resolved at the overall cost (if not in the same manner) as the version that emerged from Senate Finance.  That cost is estimated at $110 million.

As noted below, the effect of these changes is to increase the anticipated FY 2015 deficit to $1.7 billion.

Except as noted above, the sources for this analysis remain the same as used for yesterday's.  We will update further as the pictures for the final education, capital and if changed, the refinery tax credit become clearer.

Sunday, April 20, 2014

#AKbudget| The morning of the final day ...

Given developments yesterday, as of noon today I have the current status of projected state spending for FY 2015 at somewhere around $6.16 billion (resulting in a projected one-year deficit of $1.66 billion) with more changes likely as the House works through the final version of their capital budget and the Senate's proposed final version of the education package, and the Senate (and subsequently, the House) deal with the final version of the refinery bailout package.

Surprisingly, there is no other public source of information which attempts to do the same calculations on a real time basis.

The components of the calculations are as follows:

The sources are:  Revenue (Spring Revenue Sources Book), Op Budget (yesterday's Conference Committee close out), Cap Budget (HFIN CS, adjusted to add an additional $110 million in increased education funding per SFIN version), PERS/TRS (this one is difficult because of the one-time injection, but estimate of "annual" portion of the injection based on extrapolating from projected FY 2016 levels).

At this level, in its two years this Governor and Legislature will have spent (including the PERS/TRS injection) roughly $6.2 billion (or more than one-third) of the state's roughly $17 billion in cash reserves that existed at the start of the Legislature, leaving Alaska with only a little over $10 billion in reserves as it deals with projections of a remaining decade of budget deficits, at p. 7).

We will continue to refine these numbers as the session comes to a close.

Friday, April 18, 2014

#AKpolitics| New Alaska Focused Website Launches ...

Yesterday marked the launch of Alaska Politics & Elections (APE), a new website focused on Alaska politics, policy and elections.

Managed by Tom Anderson, also host of the weekday Tom Anderson Talk Radio Show which covers news, politics and public policy issues from Alaska's key MatSu Valley region, the new website is intended to be an Alaska political and policy junkies dream, capturing "as much information as possible relating to campaigns statewide, from city to state to federal, that include or involve Alaskans."

Consistent with the format of Tom's radio program, the website is intended to be a source of both news and analytical thought.  Initial contributing writers include former CIA analyst Fred Fleitz, foreign relations and Middle East expert Jonathan Greenberg, Alaska economist and analyst Bill Reid and health insurance and financial expert David Frazier.  I am honored to join that distinguished panel to write on oil, gas and fiscal policy issues.

The site already is up and running with the initial pieces available online.  My first piece, Governor Parnell's budget shell game, is focused on Alaska's fiscal future, what I believe should be one of the major issues addressed in this coming election cycle.  In future pieces I intend to write about the upcoming referendum on oil tax reform (SB 21), the proposed Alaska LNG project and, as the election cycle develops, the positions being taken by various candidates, both statewide and regional, on oil, gas and fiscal policy issues.  I also intend to surface some thoughts, such as a statewide initiative requiring state government to adopt sustainable spending policies, intended to help set the tone in future election cycles.  Think of something like George Will focused on Alaska.

Readers of this page will recall that I was an early adapter and supporter of the now widely followed and influential blog by Amanda Coyne.  I have the same feeling about this effort.

I will continue to write here and on the main blog, posting on the main blog also the pieces I write for APE.  I also have added the headlines from APE to the "Daily News of Interest" available in the right hand column of the main blog and the feed to Keithley Consulting's online newspaper, "The Alaska Oil & Gas Daily."

As usual, we will see how this goes, but I am looking forward to the effort.

Thursday, April 17, 2014

#AKbudget| Doing the math.3 ...

The last couple of days I have been building an Excel spreadsheet to do some analysis of Alaska's revenue, spending and deficit levels.  Yesterday I published a small piece that analyzed Alaska's spending levels since 2000 by Governor and compared what current spending levels would be currently if those under previous Governors had been increased -- as some have suggested -- to keep pace with inflation.

In the two cases I analyzed I discovered current spending levels have outstripped inflation by double (comparing Governor Knowles to Governor Parnell) or more than double (comparing Governor Palin to Governor Parnell).

Evidently feeling I was not having enough "fun with facts" various commentators suggested I do the same comparison by population growth.  While I am not convinced that is a good measure, population numbers are relatively easy to access and so, I present the same comparisons here for whatever value others think they may have.

The state's population has grown by 8.8% between 2009 (the last year before this Governor became responsible for the budget process) and the Department of Labor's current "baseline" prediction for FY 2015.  (Inflation based on the CPI for the same period is 10.1%).  Increasing the FY 2010 budget by population growth would result in a budget for FY 2015 of $5.54 billion (compared with the $6.5 billion currently projected).

The state's population has grown by 18.3% from 2002, the year of Governor Knowles last budget.  (Inflation for the same period is 31%).  Increasing the FY 2003 budget by population growth would result in a budget for FY 2015 of $2.94 billion (again, compared with the $6.5 billion currently projected).

Given their comments I doubt these are the results the various commentators anticipated -- both appeared to contemplate adjusting for population growth would produce higher "comparable" budgets than adjusting for inflation, but the numbers are what they are.  By either measure the growth of the current (and, in fact, all budgets prepared under and signed by this Governor) have far outstripped any other comparable measure of growth during the same period.

Wednesday, April 16, 2014

#AKbudget| Doing the math.2 ...

Excel is an interesting tool.  Once you take the time to load the raw data, it then provides numerous ways to think about and analyze the data.

Yesterday, I loaded state revenue and spending data since FY 2000 in order to demonstrate the backup to the claim some were questioning that this legislature is about to produce the two highest budget deficits in Alaska's history.  The results are published here.

Once having done that I realized I could analyze the data in various time series, including by which Governor was responsible for which budgets.  Interestingly, yesterday morning on The Glen Biegel Show (in a segment that began at 5:35) Governor Parnell claimed the "Democratic controlled [state] Senate" was responsible for the high spending levels early in his Administration.

But that's not correct, of course, since the Alaska Constitution provides the Governor with the power to veto individual legislative appropriations, the so-called power of "line item veto" (Section 2.5), and enables an override only upon the concurrence of three fourths (75%) of the legislature (Section 2.6), a nearly impossible task.   If the Governor thought the budgets were excessive, he could have vetoed the portions he thought were so.  Even at the height of the Bipartisan Senate Majority, he easily could have mustered 16 legislators (likely in the House alone) to sustain.  He didn't and instead accepted the resulting spending levels.

So, as with the other Governors before him, he -- and the legislatures that passed them -- own the budgets they enacted.

Recognizing that the budget process for a coming fiscal year starts in the summer and is fairly far along by the time a new Governor takes office (and thus in a transition year is more a reflection of the previous Governor than the current), here is the amount of spending (in $ Billions) since 2000 each Governor  has authorized -- and the average -- during their term in office.

Some have argued that the increases in the budgets over previous levels are due to inflation.  Using the CPI as the measure, overall inflation between 2009 (the last year before this Governor became responsible for the budget process) and 2014 has been roughly 10.1%.  Applying inflation to the FY 2010 budget (prepared in 2009) would result in a budget for FY 2015 of $5.61 billion.  This year this Governor and legislature's FY 2015 budget is likely to land somewhere in the range of $6.5 billion, an increase of over 25% from 2009 levels.

Interestingly, applying inflation to Governor Knowles' last budget (prepared in 2002) would result in a budget for FY 2015 of $3.27 billion.  At $6.5 billion, this year's actual budget will almost double the inflation adjusted level of Governor Knowles' last budget.

As they say, the numbers speak for themselves.

Tuesday, April 15, 2014

#AKbudget| Doing the math ...

Last week I wrote what now has become the second of three columns on the main blog about the current budget debate ("#AKbudget| A postscript to “The FY 2015 end game (and its not looking good) …”).  Shortly after, I received a note outlining some steps the current legislature claims to have taken to reduce spending, and outlining a further defense which subsequently became the subject of the third -- and latest -- in the current budget series ("#AKbudget| Round 3 of “The FY 2015 end game (and its not looking good …).

As I did some research on the issue I sent out a tweet that caught some attention.  The tweet said as simply as it could in 120 characters:
#AKbudget To be clear, this Governor and #akleg are about to own the two biggest budget deficits in AK's history.
The link at the end of the tweet was to the website for the Office of Management and Budget, a key information source (along with the websites for the legislature's Legislative Finance Division and the Department of Revenue's "Revenue Sources Books and Forecasts"), for state financial information.

Apparently that is not good enough for some, as I have been told some in the Administration (not in OMB, of course, but elsewhere) are now pushing back on the claim.  So, for the "deficit deniers" in the room, here are the budget deficits -- and the source from which the information is taken -- from FY 2000 forward (prior to that Alaska didn't have enough money to even contemplate running a deficit of these magnitudes).  (As a shorthand, the same information generally can be derived from the OMB website, by referring to the "Fiscal Summary" included for each budget year under the tab "Budget Reports".  I have used the alternative sources listed below because, due to timing, they tend to be more precise.)


FY 2000-2003: DOR Revenue Sources Book Fall 2009, p. 87
FY 2004-2013:  DOR Revenue Sources Book Fall 2013, p. 94
FY 2014-2015:  DOR Revenue Sources Book Spring 2014, p. 3

FY 2000-2013:  Leg Finance Fiscal Summaries ("Pre-Transfers Authorization" (or calculated equivalent), taken for prior fiscal year from "Legislature Budget" column)
FY 2014:  Same source as for FY 2000-2013, except "Pre-Transfers Authorization" taken for prior fiscal year from "Governor's Request" column)
FY 2015:  Estimated as described at #AKbudget| The FY 2015 end game (and its not looking good) …

Tuesday, April 8, 2014

Natural Gas for Alaskans ...

Click here for full presentation. 
I was asked, for the monthly meeting of the Southcentral Chapter of the Retired Public Employees of Alaska, to make some sense out of (I think the proper phrasing was "put in context") the state's various current natural gas projects.  The person extending the invitation suggested the presentation needed ultimately to answer the question:  will Southcentral continue to have reliable gas service.

So, I started with the answer -- yes -- and went from there. The slidedeck is available by clicking on the link in the caption to the picture or here My appreciation to the RPEA for the invitation, their attention and questions.  That is a very, very knowledgeable crowd and it was a fun exchange.