Saturday, December 26, 2015

Current Crude Oil Price Forecasts (as of 12.26.2015) ...

During a recent discussion I suggested that the oil price forecast embedded in the Administration's most recent 10-year budget plan was too low and, thus, tended to overdramatize the extent of Alaska's current fiscal situation.  Others challenged that view, suggesting instead that the Administration's outlook was too optimistic.

While a number of public and private entities publish oil price forecasts I have gathered above the most recent set of long-range forecasts made by a selection of organizations that I generally look to when assessing the current outlook for prices.  With the exception of the IMF (International Monetary Fund), I believe that all of the forecasts are stated in nominal (inflation adjusted) dollars and, with the exception of the DOR (Alaska Department of Revenue) forecast, all are focused either entirely or in significant part on Brent or comparable, waterborne crudes.

Adjusting the IMF number for inflation would put it slightly above the World Bank projection.  The price for ANS generally trades at a slight ($1-$2) discount to Brent, although in recent days sometimes it has been higher than the reported Brent price.

When making the comment I had in mind particularly the DOR forecast price for 2020 ($71), which is about $10 (or roughly 12%) below the most recent forecasts by the IEA (International Energy Agency) and OPEC.  Extrapolating from estimates included as part of the DOR's Fall 2015 Revenue Sources Book the difference is worth about $300 million in additional annual revenue to Alaska, certainly not enough to close the immediate cash budget gap, but a not insignificant amount when viewing the process as putting a series of pieces in place.

While I appreciate that the World Bank and IMF (both global financing agencies) have projected lower prices for the same period, my experience has been that the EIA, IEA and OPEC tend to have a better handle on future price trends and thus, when there are differences, tend to give more weight to them.

Monday, November 9, 2015

A quick, but good, discussion about Alaska's choices ...

An exchange today with a "Facebook friend" led me to articulate my thinking on some pieces of Alaska's current fiscal situation as directly as I am capable of mustering.  (Some previously have suggested I have not been always and entirely clear on my points. Of course, I always think I am clear ... but then, I also think the Cowboys still have a chance of making the NFL playoffs this year.)

For those interested, I have included the exchange here. (For those not familiar with Facebook -- but really, is there anyone who reads this blog (all five of you) that isn't -- click on the "See more" link to see the full post, then click on the "comments" link below that to see the exchange.)

Want to understand one of the big differences between the Walker & Goldsmith/ISER fiscal approaches. It's apparent on...
Posted by Brad Keithley on Monday, November 9, 2015

Sunday, August 9, 2015

Sunday Morning Note ...

Sunday mornings are normally the time that I sit back, make an extra pot of coffee, and catch up on some of the past week's data.  Since I am doing them in any event I thought I would start throwing them up here, both as another place to capture them and to make them available to anyone else who may find them of value.

Here are what the numbers represent:

Oil.  The numbers are the Friday close price, as reported on the CME Group website for the indicated month (in this case, September) for West Texas Intermediate (WTI) and Brent for the immediate, one-year, two-year and, just for grins, five-years forward.

Natural Gas.  The Henry Hub (HH) price is the same as for oil, the Friday close price, as reported on the CME Group website for the indicated month for the immediate, one-year, two-year and, again just for grins, five-years forward.  Because there is no publicly reported regular market price for Asian LNG I include a couple of numbers for reference.  The first is the price reported publicly on the CME Group website for Platt's JKM (Japan/Korea Marker).  Platt's JKM is regularly reported privately as part of Platt's subscription services.  I am not certain where CME Group obtains the data they use, but it is close enough to actual to serve my Sunday morning purposes.  The second number I include for reference ("BGK") is one of my own design, and simply is the average of the prices reported for the same time period of the WTI and Brent prices, divided by 5.55 (the number of million BTU's contained in a standard barrel of oil), in other words the average oil futures price for the same time period reported on a per MMBTU basis.  While I certainly would not trade on this number, it captures at least some of the JKM market characteristics, which generally price LNG as a factor of oil prices, and indicates directionally where LNG prices might be headed if they continue to be based on oil. (I would note that both the Singapore and Japanese OTC Exchange are currently attempting to develop liquid markets in LNG futures, but have not yet started publicly reporting the resulting prices.)

The final piece is any other data (or data related information) that I picked up and put in my "read later" folder during the week.  This week a report from earlier in the week by the Financial Times ("Oil falls to $50 a barrel") made it into the folder and is included here.

Wednesday, July 22, 2015

Are the #AKLeg R's about to wimp out, again ...

In June, at the end of the Second Special Session, the Alaska Legislature passed HB 2001, the FY 2016 Operating Budget.  As passed, the legislation contained the following provision at p. 15, lines 25-28:
No money appropriated in this appropriation may be expended for services to persons who are eligible pursuant to 42 United States Code section 1396a(a)(10)A)(i)(VIII) and whose household modified adjusted gross income is less than or equal to one hundred thirty-three percent of the federal poverty guidelines.
Unlike others, this language was not preceded by the phrase "It is the intent of the legislature that ...," which commonly is understood to convey non-binding guidance similar to the passage of a legislative resolution.  Instead, as with the limitations on the use of state money for abortions immediately preceding this provision, the language is phrased in the strict prescriptive, "No money ... may be expended for ...."

At the time legislators explained that the language would prohibit the use of state funds to implement the Governor's proposal to accept Medicaid Expansion (which is made available under the referenced federal statute) without further action by the Legislature.  The reasons for such caution are manifest.  As the AP reported just this week, the costs of Medicaid Expansion in at least some states are skyrocketing beyond those anticipated at the time it was adopted (see "Medicaid Enrollment Surges, Stirs Worry About State Budgets").  In a state with significant budget issues already, that is the last thing Alaska needs.

Importantly, upon review the Governor did not veto the provision at the time he signed the legislation as he had the right to do under the second sentence of Art. 2, Sec. 15 of the Alaska Constitution ("The governor ... may, by veto, strike or reduce items in appropriation bills. He shall return any vetoed bill, with a statement of his objections, to the house of origin.") and which he did with other provisions.  Absent veto, the legislation became law at the time the Governor signed the bill.

Last week, the Governor announced that, despite signing the legislation specifically prohibiting the state from spending any state funds to do so, he intended to accept and implement Medicaid Expansion.  Just as I would anticipate in the event the Governor attempted to violate other provisions of the law, including the similar provision relating to state funding of abortions, I expected Legislative leadership, including the members of the House and Senate Finance Committees that vetted and inserted the language in HB 2001, immediately to file suit in court to prevent the Governor from going through with his intentions.  They enacted the law; they promised Alaskans they were protecting them by doing so. I would expect them to seek to enforce it.

Shockingly, however, they haven't.  None of them, not even the ones that promised Alaskans they were protecting them, have.  In doing so they have put at risk not only this legislation, but -- and focus on this John Coghill, Charlie Huggins and Mike Dunleavy -- also other, similarly enacted legislation, like the provision prohibiting state funding of abortions that immediately precedes it.

As I searched for an answer as to why legislators were failing to act to uphold their own legislation, earlier this week I had the following exchange with a former Majority Leader of the House of Representatives.

@kylejo574 Wait, we are going to rely now on Walker's AG and Juneau LegLegal to define legality? Isn't that what the courts are for?

Even more disappointing has been learning that some legislators who, as members of the Majority, voted for the legislation appear subsequently to have encouraged the Governor to ignore it.  This, for example, from KTUU's story on the Governor's action ("Walker expands medicaid without lawmakers"):
Sen. Lesil McGuire, R-Anchorage, said some legislators in her party are likely sighing with relief to not have to vote on the politically difficult but publicly popular issue. 
"Behind the scenes, there were many lawmakers that were encouraging him to go ahead and do it through executive proclamation," said McGuire, who has publicly supported expansion since her 2014 campaign for lieutenant governor. "It certainly takes the pressure off the Legislature. It puts the decision in the right person's hands."
As I have said on other occasions, personally I might vote also for Medicaid Expansion if done after or at the same time as the enactment of critically important Medicaid reforms and the costs fit within a sustainable budget.  Some in the Legislature adopted the same view and said they were providing for exactly that route by enacting the provision, deferring further action until reforms and limits could be put in place.

Now, however, just as they have before on other budget measures, legislative R's are proving that although they talk a good game, they come up woefully short when its time for the rubber to meet the road.

All of the so-called "fiscal conservatives" that voted for HB 2001, and now are rolling over as the Governor flouts the law they enacted, should be ashamed.  And now that the precedent is being established, those that think it will be different next time when this or a subsequent Governor ignores the abortion or other, similar provisions of future legislative actions, should think again.

As they did following the 2012 election when they vowed to enact sustainable budgets, the legislative R's -- all of them, because any of them could go to court to enforce the law they passed -- are about to wimp out by ignoring their own law.  If they do, explain to me why anyone should trust them again.

Monday, June 15, 2015

A graphic comparison of the Administration and ISER models ...

Over the weekend I worked on and published on "page one" of this blog a comparison and critique of two economic models designed to look at Alaska's fiscal situation ("The (much) better economic model for #AKFuture …").  

The first model was that released last weekend as part of Governor Walker’s “Conversations with Alaskans”. That model is available for download here (*see additional footnote at the end of the piece here).  The second was prepared by long-time Alaska economist Scott Goldsmith and released earlier this year by the University of Alaska-Anchorage’s Institute for Social and Economic Research, the best non-partisan economic think tank in the state. That model is explained and available for download here.

As I discussed at length in the weekend piece, there are significant differences between the two models and what they imply about Alaska's fiscal future.

After publishing the piece, yesterday a reader wrote that while they understood the points it would be helpful if I could find a way to demonstrate them graphically.  After thinking about it this morning I have worked the models and copied the results at the start of this piece.

The two graphs reflect the same base economic case to the extent the models permit.  The case incorporates: an FY 2016 oil price of $70 escalated thereafter by inflation; spending levels that start at an FY 2016 level of $5.3 billion, then decline to $4.83 billion in FY 2019 before starting to climb again at the rate of inflation plus 1% for population growth (which largely incorporates the analysis contained in Scott Goldsmith's most recent paper on sustainable budgets, "The Path to a Fiscal Solution: Use Earnings from All Our Assets" at p. 5); a constant inflation rate of 2.25 (the Administration's) and 2.3 (ISER) percent; contribution to state revenues of the portion of the permanent fund earnings reserve remaining after payment of the PFD and inflation proofing beginning in FY 2017 and various other factors as nearly equal between the two models as the options permit.

As the graphs show, despite the same (or nearly same) inputs, the results are startlingly different.  As I noted in this weekend's piece, the lead graphic in the Administration's model (the left one above) continues to show a chronic and substantial fiscal gap that users of that model are then encouraged to close through the use of additional, mostly tax-related but in some instances PFD limiting "revenue options."  

The ISER model, however, shows that the long term effect of simply adding the earnings reserve to the revenue stream is sufficient to close the gap, without the need for any more options.

As explained somewhat in yesterday's piece and in much greater detail in the series of ISER papers indexed here, the difference largely is in the scope of the vision incorporated into the models.

In addition to providing users with the option to change the first year price of oil, the ISER model also permits users the additional option of looking forward and adding (or subtracting) levels or sources of oil (or gas) production which may occur in the future. Those additions are one of the two best sources of new revenue to state government (in the sense they add, rather than take dollars from the private Alaska economy).  In this morning's run, I mostly used the default setting for those options contained in the ISER model, changing only the long term production decline rate to 2%, which many have estimated is likely to be the result of the passage of SB 21.

The Administration’s model, on the other hand, largely fixes the forward looking oil production curve to reflect the Administration’s own, admittedly highly conservative view of future production levels.  As explained in the weekend piece, it also appears artificially to limit the ongoing contribution levels available to the general fund from the permanent fund earnings reserve.

As the results show, the effects of excluding these factors are substantial.

These limitations make the future deficit levels produced by the Administration's model appear much larger than they actually are likely to be, with the consequence (whether intentional or not) of making the user believe that they need to toggle more and increasingly heftier “revenue [i.e., tax] options” in order to close the future gap.  The ISER model, on the other hand, enables users to make much more realistic judgments about the need for new "revenue options."

Readers who have not previously caught up with this weekend's piece are encouraged to do so by clicking here.  Hopefully these graphics will help additionally make the same points.

Thursday, April 23, 2015

Is Walker moonwalking a key campaign commitment: Sen. Micciche asks an important question, the answer indicates the Administration is back peddling ...

Is Governor Walker beginning to back peddle (or to borrow Michael Jackson's phrase for his equivalent dance step, "moonwalk") on his commitment to sustainable budgets?  It is beginning to sound that way after listening to Office of Management and Budget Director Pat Pitney's response to a key question from Senator Micciche during today's Senate Finance hearing.

Over the past several years Dr. Scott Goldsmith of UAA's Institute of Social and Economic Research (ISER) has published a series of papers focused on developing a sustainable budget for the state. The papers are collected here.  The most recent ("The Path to a Fiscal Solution: Use Earnings from All Our Assets"), which we will write about more later, was published earlier today.

During the campaign, Governor Walker on his campaign website and during various speeches said this about sustainable budgets:
I will make the hard choices necessary for a sounder fiscal future, including putting in place a sustainable budget. I will make sure the investment climate in Alaska supports those goals, which includes a favorable fiscal climate for citizens and companies investing in our economy.
​When asked during the campaign what he meant by a "sustainable budget," then candidate Walker repeatedly referred to the analysis and work done by Goldsmith.  In Goldsmith's most recent work on the subject, done earlier this year, he put the sustainable level of spending -- the sustainable budget "number" -- at $4.5 billion.

​Earlier this year during his State of the Budget Governor Walker said he had "asked [his] commissioners to tell [him] what their departments would look like in four years if their budgets were 25 percent smaller than they are today." The level "their budgets ... are today" he was referring to was roughly $6 billion, and so a 25% reduction from that level would bring state spending down to the $4.5 billion sustainable level outlined in Goldsmith's most recent work.  Presumably, given Walker's campaign statements that was not a coincidence.

​So, with that in mind Sen. Micciche asked Pitney during the hearing for an update on what to expect going forward.  Given the Governor's previous commitment to "make the hard choices necessary ... [to put] in place a sustainable budget," Micciche essentially described this year's cuts as the initial effort, and asked Pitney what the Legislature and Alaskans should be expecting going forward.

Pitney's response was, well from the standpoint of honoring Walker's campaign commitment, horrible.

Over the course of her answer to Sen. Micciche, and then a follow up from Sen. Dunleavy, Pitney said at various times "we're not ready" make those cuts, talked about "areas of inflexibility" and said that the Administration was beginning to look at "more holistic solutions," which Sen. Dunleavy in his follow up correctly characterized as "taxes."

Indeed, Pitney seemed even to attempt to walk back from the first round of cuts incorporated in the current budget -- which those around the table characterized as being "about 9%" from previous levels -- saying in response to Sen. Dunleavy's follow up, in some cases the current round of cuts "have gone too far."

Sen. Micciche characterized her answer as "disappointing."  From the standpoint of someone who has worked on these issues a long time and sees the impact which the state's failure to achieve sustainability will have both on future Alaskans and investors's perceptions of the state -- the two constituencies which Walker repeatedly mentioned during the campaign -- it is something much more than that.

Going forward it is useful to keep in mind that in order to collect each $200 million in new revenue through taxes, the state will need to raise the equivalent of roughly $275 per Alaska man, woman and child (or $1,100 per family of four).

Assuming the Senate and House finally resolve their differences somewhere in the middle, this year's budget likely will come in around $5.5 billion.  As Goldsmith points out in his last two papers, even assuming the state uses both of its revenue streams (oil and investment earnings), and including a healthy increment of new revenues from a successful LNG project, the state's long term revenue level will average out only at around $4.5 billion.

That means if the Administration stops cutting spending now, and relies instead on taxes (or other "revenue" options such as cutting the Permanent Fund Dividend (PFD) in order to divert more money to state government) to make up the difference, the state will need to raise the equivalent, each year, of $1,375 per Alaska man, woman and child, or $5,500 per family of four.

What those in the Administration fail to recognize is the significant impact that will have on Alaska's private economy.  At a personal level, for example, think how many fewer things you will purchase from Alaska merchants if, as a family of four, you are sending $5,500 per year you previously had to spend or save through your family budget instead to the state government.

Moreover, the prospect of diverting $5,500 per family of four out of the private economy into the government economy raises serious concerns about other impacts.

In a previous study analyzing in part the effects of reducing the PFD in order to increase the money flowing to state government, Goldsmith said that in Alaska, increased government spending generally goes to capital projects, a form of spending that generally "generates less employment and increased income inequality" than broad based spending in the private sector.  So, the Administration's approach not only would damage Alaska's private economy, it may worsen both employment and income equality at the same time.

Candidate Bill Walker was right.  Alaska's leaders need to make "the hard choices necessary for a sounder fiscal future, including putting in place a sustainable budget."  If Pitney's comments are any indication, Governor Bill Walker is going the exact opposite direction.

Senators Micciche and Dunleavy, along with the remainder of the Senate Finance Committee, are to be commended for asking important questions to which Alaskans deserve answers.  They were disappointed with the answers; Alaskans should be very concerned as well.

Wednesday, April 22, 2015

And now for the debate on taxes and cutting the PFD ...

At least judging from my Twitter and Facebook (this generation's water cooler) exchanges, while the Senate Finance press availability yesterday succeeded in raising awareness of the state's current fiscal situation, it also triggered off the start of what is likely to be an increasingly intense debate on taxes and cutting the PFD (in order to transfer a portion to government spending).

This from my Twitter feed this morning (which started when I wrote a note to my friends in Great Alaska Schools):

Tuesday, April 21, 2015

Why tap into savings at all? Why not cut more instead? ...

As readers of these pages will know, I favor using money from the earnings reserve to fund the deficit projected for the FY 2016 budget, instead of money from the Constitutional Budget Reserve (CBR). The reason is because, under Art. 9, Sec. 17(c) of the Constitution, drawing money from the CBR requires an affirmative vote of three-fourths of the members of each house of the legislature.   That is the reason -- and the only reason -- why the House Majority currently is negotiating with the House Minority over the budget. Going that route clearly will increase spending from those levels previously passed by the House.

Using money from the earnings reserve, on the other hand, is governed by Art. 2, Sec. 14 of the Constitution and only requires an affirmative vote of a majority of the membership of each house.  No negotiations with the Minority -- and thus, no compromises that result in increased spending -- are required to tap this reserve.

Today, some suggested as a third route reducing spending to the levels necessary to avoid tapping either reserve.  ("Why tap into savings at all? Why not cut more instead? ...")

This is a portion of the exchange that resulted.  For those interested, the full discussion, which took various other twists and turns, is available here.

[T]he need to use the CBR gives Tuck and the Democrats power they haven't had in years. ...
Like · Comment ·
  • ...
  • David Nees ... if they really want to depower Democrats. They just use earning reserve
    9 hrs · Like · 1
  • Carol Carman I am perplexed... why tap into savings at all? Why not cut more instead? Here is just one example of overspending that does NOT accomplish a single thing (compare test scores with money spent):
  • ...
  • Andy Sorensen Why not have majority pass scaled down budget w/o CBR. Then propose second budget that requires CBR and let Tuck/Dems pass or not?
    1 hr · Like
  • ...
  • Brad Keithley Carol & Andy ... Spending in the current year will likely end up around $6.2 - 6.3 billion. At that level we will fully deplete the SBR by the end of the current Fiscal Year. The proposed budget level passed by the Senate and House for this coming year is roughly $5.3 - $5.5 billion, a roughly 12% cut from the current year. The amount of oil and other revenues (i.e., before adding investment income) projected in the Spring update for this coming year is roughly $2.2 billion. So, the amount of additional cuts that would need to be made to avoid calling on additional reserves is roughly another $3.3 billion, which in total would require a roughly 68% reduction (cut) from current year spending levels. Put another way, if it shut everything -- and I mean everything -- else down, at that revenue level the state possibly could cover 90% of the levels budgeted for K-12 and Medicaid. Everything else would be completely and totally gone. The threat of doing that, of course, is completely unrealistic and if made, would just prolong this agony further. The realistic choice is to either fund the difference from the CBR or the earnings reserve. The CBR requires a 3/4 vote of each body and, as we are seeing, will cost a lot to achieve. The earnings reserve requires only a majority vote of each body and can be done with agreement between the two majorities without involvement of the minority. Those are the facts ...