Saturday, November 26, 2016

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

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

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

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

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

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

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

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

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

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

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

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

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