Friday, October 31, 2014

Completing the record ...

In the final days of the current election campaign some supporting the current Governor and incumbent legislators have tried to make much of the fact that the state budget has been reduced the last two years. But that needs to be viewed in the context of the complete record.

As the chart at the end of this column makes clear, the budget increased the first two years following Parnell's 2010 election by $2.3 billion/year, a 42% increase (from $5.47 to $7.78 billion); in the two subsequent years it has been reduced by $1.6 billion (a 21% decrease), for a net overall increase over the four year period of roughly $.7 billion (13% percent).  During the same period inflation has risen only 9%.  In short, despite the reductions, the Governor and legislature haven't even reduced the budget to where it was at the beginning of Parnell's term, much less started to repair the damage that occurred in the meantime by making the additional reductions necessary to return the budget to sustainable levels (the ISER calculation of the sustainable level made before the beginning of the last session was $5 billion).

Some argue that the increase over the first two years was the fault of the Bipartisan Senate Coalition.

But Art 2, Secs 15 and 16 of the Alaska Constitution provide that "[t]he governor ... may, by veto, strike or reduce items in appropriation bills," which may be overturned only by a supermajority (three-fourths) of the legislature sitting in joint session.  Even in the "dark days" of the Bipartisan Coalition (many of whom were Republicans), the Governor would have been able to rally the support of 16 members from the House alone to uphold a lower, sustainable budget level. He didn't even try. Instead, he signed the highest and third highest budgets in state history.

Finally and as importantly, even though the Governor and legislature did reduce spending over the last two years, those reductions haven't even kept pace with the fall in revenues over the same period. From FY 2013, revenues have dropped from $6.92 to $4.52 billion (a fall of $2.4 billion).  During the same period, however, spending has only dropped from $7.8 to $6.2 billion (a reduction of $1.6 billion).  Focusing on only one line of the budget, the spending line, is similar to the sound of one hand clapping -- it produces nothing.  In order to paint an accurate picture, a consideration of both the spending and revenue lines is necessary.

Those focusing only on the spending line over the last two years are attempting to mislead voters into thinking the Governor and past legislature exercised sound fiscal judgement.  They didn't; the state is worse off financially than it was when the current Governor and the current legislature took office.  Completing the record tells the full story.

Friday, October 24, 2014

Alaska's Fiscal Situation: How bad it may become ...

As those that follow these and the related micro-blog pages (largely, here and here) know, over the past few weeks I have been closely watching the decline in oil prices, delving into the fundamentals (such as the oil price necessary to support the budgets of the various petrostates), talking to those that know these things better and trying to get a handle on where this situation may be headed.

The reason, of course, is because, like other petrostates, Alaska depends heavily on oil revenues both to run state government and to help drive its economy.  As the various articles I have discussed on these pages and elsewhere make clear, the price drops are real and, in other petrostates similarly dependent on oil revenues, are being treated with serious concern.

Thusfar in Alaska, however, the concern has been limited to the odd article here or there.  Early in the month -- when it appeared that oil prices might stabilize in the neighborhood of $90 -- Tim Bradner wrote a column which analyzed the potential effect on state revenues at that level ("North Slope prices down $20/barrel since July").  A week ago Dermot Cole wrote an article outlining some of the potential effects on the state of a deeper and more persistent drop ("World oil price decline creates multibillion-dollar budget risk for Alaska").  And this morning, the Juneau Empire is running an article by Katie Moritz that carries some reaction from the Parnell Administration about the potential effect of the price drop on state finances ("Slumping oil prices means widened budget gap").

But thusfar, most political leaders have looked like they are engaged in a game of dodge ball when the issue has arisen.  Yesterday morning, for example, Michael Dukes asked me at the end of a discussion between the two of us on his morning talk radio show what one question I would ask Gubernatorial candidate Bill Walker -- who was coming up in the next segment -- if I had the opportunity.  Following up on a column I had written on these pages a week ago ("The most important question of this election …."), I said the question I would ask was something along the lines of, "What steps will you need to take to govern in a world of $90 oil".  While Walker was complimentary of these pages in his response, he never actually got around to answering the question, nor for that matter has Governor Parnell or any of the legislative candidates I have asked or heard asked the same question over the past few weeks.

The fact is, however, I have become increasingly convinced "how does Alaska deal with $90 (or lower) oil" is going to be the key question that not only the state's political leaders, but in fact most Alaskans are going to be forced to confront at least over the next year.  

The size of the problem the state potentially is facing is staggering.  To start putting my arms around it, over the last couple of days I have put together a spreadsheet that analyses what happens to this year's budget at various oil price levels.  There are a couple of caveats that are important to keep in mind when reviewing the preliminary results.

First, it is important to keep in mind that the actual price which ultimately will determine the outcome will be the volume-weighted average price for the fiscal year (July 1, 2014 - June 30, 2015) as a whole.  Although experienced during low production months, the prices received for ANS stayed above $105/barrel through most of the first month of the current fiscal year, at or above $100/barrel for most of the second and at or above $90/barrel for most of the third.  Prices have fallen below $90/barrel since that time, however, closing Wednesday at $81.42/barrel and if that defines a new normal for the remainder of the fiscal year, the weighted average is much more likely to be in the $80's than anywhere else.

Second, it is important to keep in mind this quick look may slightly overstate the adverse impact on the state budget at lower price levels.  The analysis uses the standard rule of thumb that each dollar drop in the price of ANS results in a commensurate drop of $90 million in state government revenue.  As a result of the flattening of the production tax rate at lower oil prices, the revenue impact may decline slightly as oil prices go lower.  Directionally, however, this chart correctly captures the relative impact on the budget of lower oil prices.

Reading left to right, the chart determines at the price levels listed in the first column and at the level of state spending enacted by the legislature and signed by the Governor earlier this year (second column), the resulting total state revenues (third column) and deficit (fourth column) that will result.  The fifth column (Percent Deficit) reflects the amount of total state spending that will need to be financed by savings, the sixth (Remaining Savings) reflects the combined amount of the Constitutional and Statutory Budget Reserves that will remain at the end of the year after they are tapped to cover the deficit and the final column the number of years that the state's budget reserves will be able to continue to fund deficits of the resulting magnitude before being exhausted.

Click on chart to enlarge.

So, for example, if oil prices for the year end up averaging $90/barrel, the resulting revenues will be somewhere in the range of $3.2 billion (against spending of $6.2 billion), the deficit $3 billion, the percent of the budget necessarily financed from savings 49%, the amount of the CBR and SBR remaining at the end of the year $9.8 billion and the years that the state can afford to continue down that path before exhausting its savings 3.2.

For someone that spends a lot of time looking at numbers like these, the results are scary.  Unfortunately, they also are what Alaska is about to face in the real world.

Saturday, October 18, 2014

Things worth reading ...

Two recent articles in Foreign Policy are worth reading.  The first, "When the Petrodollars run out," analyzes the ability of various global petrostates -- and let's not kid ourselves, Alaska is one of those -- to withstand what the writer views as a prolonged decline in global oil prices.   Unfortunately, Alaska is never directly mentioned in these sorts of articles, but normally I am able to come up with numbers for Alaska that enable me to place it in the analysis.

This article focuses on three factors to determine vulnerability -- percent of government revenue derived from oil, percent of GDP derived from oil and the size of the government's sovereign wealth fund.  The higher the first and second, and lower the third, the more vulnerable the government.

Alaska is off the charts in terms of percent of government revenue derived from oil.  At 90+%, Alaska easily ranks among the Top 5 in the world -- on a par (and actually, a little ahead) of Libya, Brunei, Kuwait, Saudi and Bahrain.

Alaska is somewhat better positioned in terms of of percent of GDP derived from oil -- although Alaska's number is a little misleading.  According to the most recent data from the Bureau of Economic Analysis, Oil & Gas Extraction represents "only" (remember that we are comparing this to other petrostates) roughly 25% of Alaska's current GDP, relatively low among its peers.

The challenge with Alaska, however, is that oil-related dollars also drive a number of other economic sectors, which if included, would make the number much higher.  For example, state and local government accounts for another 8% of GDP.  Because a large part of the revenues driving those activities are derived from oil, one could make a case for accounting for a significant part of that percentage in the oil column as well.  But that may be the case also for some other petrostates and so, rather than divert off on what could become a days -- if not weeks -- long exercise attempting to make certain everything is stated on an apples to apples basis, I am good with continuing to think of Alaska as somewhere in the middle of the pack on this criteria.

Alaska is also relatively well positioned in terms of the size of our sovereign wealth fund.  While not as large as Saudi's ($743 billion) or Kuwait's ($410 billion), at $50 billion Alaska's fund is larger than most of the rest.  Interestingly, on the three factors discussed in the article, Alaska most (and in fact, closely) resembles ... Libya.  That's not a good thing.  Read more here.

The second article from earlier this month, "Oil Prices Are Falling, Not Oil Regimes," somewhat examines the same issue, though more from the standpoint of budget issues.  Again, Alaska is not mentioned but can be inserted into the story.  Alaska's current budget has a breakeven price of $117/barrel, not the highest in the world -- Iran's is estimated to be $130 -- but, as with the percent of government revenue derived from oil -- in the Top 5 globally.  As the article points out, that is not a good place to be -- at all -- at this particular moment in history.  Read more here.

Saturday, October 4, 2014

A conference (today) on "Alaska's Fiscal Future" ...

Today (Saturday, October 4) at Anchorage's Z.J. Loussac Public Library's Wilda Marston Theater, an all day conference on Alaska's Fiscal Future. Drop in for all or pieces either in person, or by tuning in at Hot Talk KOAN or KVNT Valley News Talk.  The agenda:

Wednesday, October 1, 2014

Parnell Claim: "Pants on Fire!"

Earlier this election cycle one of the websites that does this sort of thing -- the Tampa Bay Times' -- rated a Mark Begich ad as so false it deserved the organization's ranking reserved for only the most outrageous political claims -- "Pants on Fire!"  The claims which qualify for that rating are those where "the statement is not accurate and makes a ridiculous claim."

If Politifact were following the current Alaska Governor's race I anticipate they would give the same ranking to a claim made yesterday in an email blast sent out by the Parnell campaign.  The blast is below, with the claim circled.

The circled portion reads:  "With a balanced budget and record spending reductions I made with legislators, a Parnell-Sullivan ticket ensures we live within our means. We cut $1 billion in the 2013 legislative session and another $1.1 billion in the 2014 legislative session."

With one exception -- each of the budgets were made with legislators -- neither of the sentences are even remotely accurate and both make ridiculous claims.  

The state's unrestricted general fund (UGF) (the category on which analysts commonly focus when talking about state budget matters) in Parnell's last three budgets has been far from the commonly understood meaning of the word "balanced" -- where spending equals or is lower than revenues.  According to revenues taken from the Department of Revenue's latest Revenue Sources Book (2014 Spring) (Table 2-1) and spending taken from the fiscal summaries prepared by the legislature's Legislative Finance Division, with an adjustment made for FY 2015 as described below, the results of the last three budgets are as follows (in $billion):

None even remotely approaches "balanced" (except in a Juneau-speak world where they assert something is "balanced" if it can be covered by savings retained from previous years) and, in fact, the last two are the highest deficits in the state's history.  

Most of the second sentence is equally wrong.  Looking again at the spending column above (which is derived from the fiscal summaries prepared by the Legislative Finance Division, as adjusted), the spending cut made in the 2013 session (which considered and passed the FY 2014 budget) was approximately $500 million (far from the claimed $1 billion) and that in the 2014 session $1.1 billion.  (The spending level initially reported by Legislative Finance for FY 2015 is $5.83 billion, but needs to be adjusted to add back in $350 million for PERS/TRS in order to make the comparisons apples-to-apples.)  The Parnell claim reaches for various below-the-line cash flow adjustments made to reflect an assortment of transfers from and into reserves held in other accounts (such as various loan funds and AHFC) to claim other numbers.

Finally, not even Parnell's own Office of Management and Budget backs up the bulk of such claims.  In its own analysis of the enacted FY 2015 budget, OMB shows both the FY 2014 and FY 2015 budgets ending up in the red (deficits) even after including the below-the-line transfers.  Its analysis of the FY 2013 budget also shows a final, post transfer deficit.

As the state begins to face a future of significantly lower oil prices than previously forecast -- which alone may balloon this year's deficit from $1.6 billion to $2.5 billion -- it is important that the state's leaders speak honestly with voters about the condition of Alaska's finances.  Parnell's "Pants on Fire!" claims don't even remotely do that.  Alaska -- and Alaskans -- deserve better, much, much better than the inaccurate and ridiculous claims they received from the Governor in this email blast.

Alaskans deserve the truth.