Sunday, October 30, 2016

So, after all that, what is the R position on cutting the PFD???

Earlier this year, the Senate voted 14-6 to permanently cut (or to use the euphemism favored by those voting in favor, "restructure") the PFD, and transfer the difference from the private sector of the Alaska economy to the government sector.  The votes on SB 128, the bill which incorporated the cut, are recorded at

At the time that the Senate voted to take the step, they already had been advised in a paper authored by three economists from the University of Alaska-Anchorage's Institute of Social and Economic Research -- the state's best economic think tank -- that doing so was the “most regressive” and would have the “largest adverse impact on the [overall Alaska] economy” of all the state’s fiscal options. Short-Run Economic Impacts of Alaska Fiscal Options, at A-12, A- 15 (March 2016).

But they did it nonetheless.

Their vote for the cut -- and as a result, to tax the overall Alaska economy -- has haunted the reelection campaigns of two of those who voted in favor -- Senators Cathy Giessel and John Coghill -- ever since.  The question it has raised is, at the end of the day when push comes to shove, whether they ultimately side with the government economy against the overall Alaska economy.  Some believe, as do we, that if they do then at least from a fiscal policy perspective there isn't a compelling reason to reelect them.

Subsequently, the House Finance Committee voted down the Senate's bill, killing it for the session.  The Governor, however, used the bill as part of the justification for making a one-year cut in the PFD, by line-item vetoing this year's PFD down to the level it would have been had the Senate's bill passed.

Earlier this month Senator Mike Dunleavy, one of those who voted against the PFD cut in the first place, announced his intention to introduce a bill at the start of the upcoming session to reverse the Governor's action and restore the PFD to its full level for this year.  Some viewed the bill -- and support for it -- as a potential way for those running for reelection to demonstrate that they had rethought the issue and were prepared to reverse course.

Yesterday, Senator Giessel's campaign posted a video on her campaign Facebook page that seemed to take the bait by announcing her support for Senator Dunleavy's effort.  It quickly was picked up and reposted by several supporting her campaign.

Because the video did not expressly address SB 128 we questioned on one of those reposts the meaning of the late-coming support.  Our concern was that by only supporting Senator Dunleavy's one-year fix and not expressly addressing SB 128, Senator Giessel left open the door later to continue her support for the longer-term cut embodied in SB 128.

Our question quickly was slapped down by the poster with the response that "it's ok to make a mistake and work at fixing it," leaving the impression that the support for Senator Dunleavy's effort was a recognition that the earlier vote had been a "mistake."

We were prepared to let it go at that when all of the sudden Alaska Republican Party Chair Tuckerman Babcock popped up in the exchange, not only muddying the water but in our mind also reversing whatever positive effect the video had created.  Here is the exchange that followed:

Tuckerman Babcock You generally make better far better arguments than that Brad Keithley. There is a substantive and significant difference between debating and legislating (Giessel) and unilateral confiscatory action (Governor Walker)..
LikeReply22 hrs
Brad Keithley Hahahahaha ... and you generally offer far better defenses than that, Tuckerman. If I am reading your post correctly, you now appear to be suggesting that Sen. Giessel continues to stand by her vote for SB 128 (because it was done by "legislating"), and is supporting Senator Mike Dunleavy's bill only because the Governor implemented the same cut (she voted to make permanent) by veto.

To me, trying to make a nuanced procedural argument like that is too cute by half. Whether done by "legislating" or veto doesn't matter to the overall Alaska economy. Cutting the PFD is the “most regressive” and has the “largest adverse impact on the [overall Alaska] economy” of all the state’s fiscal options. Short-Run Economic Impacts of Alaska Fiscal Options, at A-12, A- 15 (March 2016). As Lynn suggested in her response its a mistake either way.

In my view you are trying to paint way too fine a line. Just when I was beginning to climb out of my indifference to how that race turns out, I think you just convinced me to go back in.
LikeReply21 hrsEdited
Tuckerman Babcock That is rather prickly of you! I doubt I have that much sway with you. I do not speak for Senator Giessel, I was merely making my own observations. Apparently you do not care much whether public policy is legislated or imposed by fiat. That is a "nuance" that is rather important to my philosophy.
LikeReply21 hrs
Brad Keithley Tuckerman ... Well, except when Sean did it. There is a time and place for vetos; that is why the Alaska Constitution provides the authority. I certainly wouldn't write them out of the Constitution wholesale on the grounds that they somehow constitute "fiat." And if you (or Sen. Giessel) were really concerned about that issue, I would have thought there would have been a much greater effort put behind the Constitutionally-provided remedy, the veto override.

But more to the point, I generally don't really care much about whether policy is implemented procedurally by legislation or the exercise of Constitutionally-provided executive power. I care much more about what the policy actually does, however implemented. In this case the outcome of cutting the PFD is clear, it hurts the overall Alaska economy. I agree with -- and support -- those who consistently have stood against it in whatever form. Someone who was for it (SB 128) before they were against it (veto) ... well, I have no idea where they stand now on the policy issue.
LikeReply21 hrsEdited

So, we are back to the starting point:  what is Senator Giessel's, Senator Coghill's and the Republican Party's position on the PFD cut?  From this exchange it now appears to be simply to reverse the one year effect of the Governor's veto (because it was "imposed by fiat"), then go back to supporting SB 128 (rule by "legislating").

If that's the case we go back to our original position on the issue.  If the ARP, Senator Giessel and Senator Coghill believe permanently cutting the PFD is good policy, then at least from a fiscal policy perspective we don't believe there is a compelling reason to reelect them.

Friday, October 28, 2016

UA throws a few coins in the bucket, tens of millions need to follow ...

Yesterday, University of Alaska (UA) President Jim Johnsen announced that UA was proposing to cut a few of its sports programs.

The University treated it as a major event, worthy of a press conference that required at least Johnsen and one of the University attorneys to fly down from Fairbanks.

The combined savings?
Johnsen said the proposed elimination ... will ... save $1.2 million.
To be honest, that's not even a decent "tip" percentage on the level of cuts that are needed.

Last month we analyzed the level of state funding that UA receives compared to the level received by UA's own, self-identified "peer" institutions.  UA identifies three such peers -- the Montana University System (which includes both the University of Montana and Montana State), the Southern Illinois University System and the University of Maine System.

Here was the result of the analysis:
This coming year the University of Alaska will receive roughly $325 million in state appropriations. That equals $21,875 per student FTE. 
Let that sink in for a moment. UA will receive from the state this coming year over $20,000 -- $21,875 to be precise -- per student. Over $20,000. Per. Student. 
The next closest "peer," as defined by the University itself, doesn't receive even half that per student. According to the most recent published figures, the University of Maine System will receive $210 million in state funding this coming year. That works out to $10,500/student FTE. 
The other two "peers" are even lower. The Southern Illinois University System receives $6,406/student FTE .... The Montana University System receives $5,780/student FTE ....
If UA received the same as the per student average received by its own self-selected peer institutions, state funding would level off at roughly $120 million (a reduction of more than $200 million -- a fifth of a billion dollars -- from current levels). Even if UA received the same as the per student average received by the highest of its own self-selected peer institutions, state funding would still level off at roughly $168 million, a savings of still more than $150 million from current levels.
The cut in University spending Johnsen announced yesterday?  It amounts to a reduction  of $75 -- yes, seventy-five dollars -- per student FTE.  

That is 0.6% -- yes, six tenths of one percent -- of the more than $11,000 reduction per student FTE needed to bring state funding for UA in line with merely the highest level of any in UA's own self-defined peer group.

As we said above, that's not even a decent "tip" percentage on the overall level of cuts required to bring UA in line with its own, self-selected peer group.

And the irony?  Johnsen announced the cut with one UA Athletic Director earning $100,000+ seated next to him, talking on the phone to another UA Athletic Director also earning $100,000+ on the other end.

Uh, guys?  There is at least one additional cut -- which would have amounted alone to an additional 10% -- you could have made right there while you were at it.

We appreciate making cuts is hard.  But if we are going to go about it $1 million at a time, every dime of state savings, and all of the PFD, are going to be long gone before we even get halfway there.

Big steps are required, now.  The longer the University -- and other state agencies -- take to make them, the lower the level of state savings -- if any -- that will remain by the time they finally finish.

Let's at least get 10% of the way -- that's $15 million in reductions -- next time before we ramp up the drama.  This much drama for what amounts to a bad tip isn't going to get the job done.

Sunday, October 23, 2016

Bill Walker's "Pants on Fire" claim about the PFD ...

If there were an Alaska state edition of the Pulitzer Prize-winning PolitiFact fact check blog,, our guess is it would rate an ongoing claim being made by Gov. Bill Walker and others in this election cycle about the PFD as "pants on fire" false,

Walker's claim is this: "If we do nothing, the [Permanent] fund's earnings reserve will likely be depleted within four years. Then dividends will be zero.

The first sentence is bad enough.  If Alaska government actually does absolutely nothing -- nothing -- in the intermediate future, doesn't for example:
  • Reduce spending to long term sustainable levels (the FY 2018 number is $4 billion, just $300 million lower than the level approved for FY 2017,,
  • Implement Governor Hammond's 50/50 vision for use of the earnings from 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,] [e]ach 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.” -- Gov. Jay Hammond, Diapering the Devil, or
  • Correct the Permanent Fund "inflation proofing" mechanism that currently is double counting for inflation -- and as a result, depleting the Permanent Fund earnings reserve at the rate of roughly $1 billion/year,,
  • And oil prices don't recover as most analysts now anticipate (the non-partisan Energy Information Administration's Annual Energy Outlook 2016 published in July of this year, for example, estimates Brent oil prices recovering to $84.59/bbl by 2020; the Governor is basing his projections on oil prices continuing to hover at $54.48 at that point,,
then it is possible the Permanent Fund earnings reserve might be depleted at some point.

Even then, the "four year" prediction is highly unlikely, which would earn the statement on its own a PolitiFact "Mostly False" ranking. ("MOSTLY FALSE – The statement contains an element of truth but ignores critical facts that would give a different impression.").

But the second sentence of the claim -- "Then dividends will be zero" -- is absolutely "pants on fire" false. ("PANTS ON FIRE – The statement is not accurate and makes a ridiculous claim,"

Why?  Because except in the most rare and unlikely case, PFD's are not paid out of the accumulated earnings reserve.  Instead, they are paid out of the annual revenue stream produced each year from investments made by the Permanent Fund Corporation.  That revenue stream is a renewable resource, it occurs each year.

Thus, as long as the Permanent Fund produces earnings each year adequate to cover the amount there will be enough to pay the full PFD; the level of the accumulated earnings reserve, which is the basis for Governor Walker's claim, is irrelevant -- it does not matter to the calculation.  Even if it is depleted, there will still be a flow of money to pay the PFD.

What is the projected ability of that earnings stream to cover the PFD?  Well, here is the non-partisan Permanent Fund Corporation's take on it from their most recent (July 31, 2016) "Financial History & Projections," (there is a lot of data on this sheet; we have highlighted the relevant portion):

In all, repeat all -- and one more time just in case you missed the point the first two times, repeat all -- of the forecast years through FY 2026 (well beyond Walker's four year claim), the "Statutory Net Income" from the Fund, which is the cash flow from which the PFD is paid, is more than sufficient to cover the full PFD.  Indeed, in almost every year the "coverage ratio" -- the amount of cash flow available to cover the PFD obligation -- is more than 2x (200%).  Even in the "worst" forecast year (FY 2018), the coverage ratio is still 1.87x (187%).

As a result, Walker's claim that depleting the earnings reserve will reduce the dividend to "zero" "is not accurate and makes a ridiculous claim," in other words it is "Pants On Fire" false.  

With that, so is the basis he claimed for cutting the PFD this year.  The cut wasn't needed to preserve the PFD.  The PFD is and would continue to be doing just fine as it is.

The same reasoning underlies why even Walker's claim that "the [Permanent] fund's earnings reserve will likely be depleted within four years" is mostly false.

In addition to funding the PFD, the annual earnings stream grows the accumulated earnings reserve.  The amount by which it does is not explicitly stated on the Permanent Fund Corporation's report, but can be derived from the numbers that are there.  From FY 2018-23 (the next four fiscal years), even if none of the bullet point steps listed above are taken, the accumulated earnings reserve is still projected by the non-partisan Permanent Fund Corporation to increase by roughly $2.1 billion.  Even if only the inflation proofing mechanism is fixed from the above bullet point list, the accumulated earnings reserve will still grow by $5.943 billion.

As a result, even if Walker is otherwise correct that "we do nothing," it is highly likely that the accumulated earnings reserve -- which has nothing to do with the ability to maintain the PFD -- will last longer than four years.  In short, using the PolitiFact scale, even that claim is "mostly false."

Walker was elected in 2014 claiming that he would be "open and transparent" about Alaska's fiscal situation.  Unfortunately, he is increasingly becoming anything but, and indeed, now is dropping down into the depths of "Pants On Fire" dishonesty, at the time Alaska -- and Alaskans -- need clarity and transparency most.

Thursday, October 13, 2016

Those who argue that state government is "running out of savings" are misleading Alaskans ...

Those who argue for cutting the PFD often assert as "fact" that, absent other action, state government will run out of savings in two years.   But that is not a "fact;" instead it is a fiction used to make the state's situation seem much more dire than it is in an effort to stampede government and citizens into supporting a cut in the PFD.

Their argument is based entirely on the current status of the Constitutional Budget Reserve (CBR), one of the state's savings accounts.  According to the Legislature's Legislative Finance Division (LFD), the balance in the CBR was $6.3 billion as of July 1, 2016 and, based on the Administration's revenue and spending assumptions for FY 2017, will be $3.5 billion as of June 30, 2017, the end of FY 2017. at 3.

Using, again, the Administration's revenue and spending projections, those that make the argument then assume that most or all of the remainder will be drained during the subsequent fiscal year, FY 2018.

The fallacy of the argument is that the CBR is the state's only savings account; it's not.

Those looking again at the same LFD report, at 3, will see a line under the heading "Undesignated Reserves" for the "Permanent Fund Earnings Reserve Account," (ERA) which grows nearly $2 billion over the year from $7.3 billion (July 1, 2016) to $9.2 billion (June 30, 2017).

Understanding that account is critical.  Some argue that the account is the source of funds for the PFD and it is that. But it also is much more than that, which those arguing to cut the PFD quickly overlook because it gets in the way of their narrative.

The account is a creature of AS 37.13.145,

To understand that statute requires first understanding Governor Hammond's objective when establishing the Permanent Fund and later, the PFD.  Here is what he said in Diapering the Devil,
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,] [e]ach 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 statute implements that vision in this way.  Now that the "money wells" (the Permanent Fund) are pumping, the earnings derived from the Permanent Fund go to the earnings reserve account.

From there a portion (one-half measured as provided by the statute) is then distributed to the dividend fund to be "dispersed among Alaska residents" and a portion is sent back into the Fund to cover inflation.

The remainder -- "the other half of the earnings [which] could be used for essential government services" -- remains in the ERA.  So, after the PFD is distributed each year, what remains in the ERA is the accumulated portion that Governor Hammond envisioned being available for "essential government services."  The fact that it has been accumulated rather than previously spent doesn't change its purpose; it still was meant, and remains available to be used, "for essential government services." It is, in essence, a second source of savings for that purpose.

Once understanding that the PFD debate changes significantly.

Instead of "only two years remaining" in savings, the amount in savings immediately grows to more than $12 billion, enough to withstand at least four more years of deficits, even on the surface.

But looking past the surface it is even more than that.  As Governor Hammond envisioned, once the money wells started pumping they have continued to produce earnings.  The same earnings that continually replenish and fund the "one-half of the account’s earnings ... dispersed among Alaska residents," also continue to replenish the "other half of the earnings" -- those available to "be used for essential government services."

So, unlike the CBR -- which is a static number capable of being drawn down -- the earnings reserve is continually being filled with new earnings, making it capable of sustaining continued draws (if limited to the "other half of the earnings") for a long time to come.

As we have argued on these pages since 2010 Alaska is desperately in need of fiscal reform, but it is not facing a dire, immediate emergency which justifies cutting the PFD, which according to the University of Alaska-Anchorage's Institute of Social and Economic Research has the "largest adverse impact on the economy" of any of the state's fiscal options.

Those that claim otherwise -- those that claim that Alaska only has "two years" of savings remaining -- are engaged in fear mongering of the worst kind at the very time Alaska -- and Alaskans -- need to hear the truth.  They are misleading Alaskans.

Saturday, October 8, 2016

Bill Walker is the "adult in the room" only for those worried more about the government economy than Alaska overall ...

SMH. From Friday's The Midnight Sun: 
"PFD Battle — Alaska Republicans continue to struggle to find a foothold in the battle over PFD funding after getting outflanked on both sides. Gov. Bill Walker securely holds the adult in the room “'using PFD money to fill the budget shortfall is the responsible thing to do” position ....'"
That may be the "adult in the room .... position" for those (a) in the roughly top 25% of Alaska incomes that are looking for someone else to shoulder the burden otherwise coming their way if current spending levels continue and the shortfall is covered through a mechanism which takes an equal percentage of income from all Alaskans, or are (b) more interested in bailing out the government economy than in protecting the state's overall economy.

But for the remainder of Alaskans -- which if the Moore poll reported deeper down in The Midnight Sun column is correct appears to be the majority -- the more likely "adult in the room" position is much different.  Here are the reasons why.

Alaska is in an economic recession. That's not an opinion; it's an economic fact applying the traditional test.  (See also "The Recession Arrives," (“'[With] the given caveat there is that there is no official (statement),' economist Dan Robinson, chief of the Research and Analysis Section the Alaska Department of Labor said Tuesday '... by any definition…basically, yes,' Alaska is in [a recession]."))

By taking money out of the economy, Walker's PFD cut is making it worse. Again, that is not an opinion; it's a fact applying traditional economic principles. ("Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation." By removing money from the economy, the PFD cut is the exact reverse.)

He is making it worse by a lot.  The PFD cut amounts to over 2% of Alaska total personal income, a non-trivial number in economic terms. The PFD cut takes Alaska's overall income level back to 2014 levels, at the very time Alaska is in a recession.

And there are other alternatives available to deal with the state's fiscal situation which have less of an impact on the state's overall economy. Again, that is not an opinion it's a fact. According to a study by the University of Alaska-Anchorage's Institute of Social and Economic Research earlier this year, "the PFD cut ... has the largest adverse impact on the [overall Alaska] economy" of any of the fiscal options. at A-15.

Given that, while those interested in protecting current government spending levels or in their own economic self-interest may argue Walker is the "adult in the room," for those interested more in the health of the overall Alaska economy he is not.  Instead, the PFD cuts simply pander to one segment of the economy at the expense of Alaska as a whole.

Some also argue that Walker is the "adult in the room" because he is the "only one with a plan." But that also is not true.  

This page and others have long advocated an alternative approach to developing a long-term sustainable budget.  Using the Goldsmith model as the starting point, the approach combines budget cuts, the use of the portion of the earnings from the Permanent Fund remaining after the PFD and some savings to work our way through the current down cycle in oil prices.  See "Alaska's Fiscal Situation:  Past, Present & Future,"

That approach is disliked (and disparaged) by those who are more concerned about the government economy than the overall economy because it results in deeper government spending cuts than if they are able successfully to convert a significant portion of the PFD to government revenues.

Thus, to them it doesn't count as "a plan" because it doesn't achieve their objective. 

But just because it is not a plan they like doesn't mean it isn't a plan.  In fact, it is the only plan that prioritizes the broader Alaska economy over just one segment.

Alaska needs a Governor -- and a plan -- that looks out for the overall economy, for Alaska overall.  Increasingly, Bill Walker does not appear to be that person or to represent that plan.

He may be the "adult in the room" among those focused on the government economy, but as the Moore poll appears to suggest, increasingly he isn't among those that think about more than that.