Friday, December 16, 2016

Our first takeaways on the FY 2018 #AKbudget ...

Earlier last month we published and discussed on these pages a worksheet we had prepared to evaluate the Fall 2016 Revenue Sources Book, and FY 2018 Budget and related 10-year forecast.  What we will be looking for in the Revenue Sources Book and Budget ...

Yesterday, the Administration simultaneously published both the Fall 2016 RSB,, and proposed FY 2018 budget/10-year forecast,  This morning we filled in the worksheet, adding three more points of analysis -- "PFD as a Percent of Earnings," "Total 50/50 Draw on PF" and "Percent of PF Earnings Taken by Gov't."

While we will write on the budget much, much more in the days ahead, there are a few things that leap out almost immediately from the spreadsheet.

First, as we anticipated might happen projected oil revenues are being driven down by what we believe to be arbitrarily low oil price and production numbers.  While the FY 2018 oil price number is effectively the same as that forecast by EIA, the state's projections quickly depart from EIA's, falling effectively to 80'ish% of EIA's in two years. The production numbers are surprisingly lower from the outset and will deserve more attention in the days ahead.   The effect of these differences are significant, as low oil price and production numbers produce low oil revenues, which in turn produce high deficits, which then in turn drive the perceived need for so-called "new revenues" from PFD cuts and other measures.

Second, while the Administration and others attempt to continue to sell the restructured PFD as still "half" of that produced under the current statute, the spreadsheet reveals that it both starts lower than half, and quickly falls even lower, to about a third of that provided under the current statute by FY 2027.  Put another way, the level of the PFD cut proposed by the Administration will reach nearly two-thirds by FY 2027, just ten years from now.

the split of Permanent Fund earnings between the PFD and government also quickly deteriorates.  Far from Governor Hammond's original vision that individual Alaskans receive 50% annually of the earnings produced by the Permanent Fund, under the proposed budget individual Alaskans start with only 23% in FY 2018, which then deteriorates further to 18% by FY 2027.

Finally, although the Administration says that they are abandoning so-called (but no longer necessary) "inflation proofing," they aren't taking maximum advantage of the Permanent Fund earnings stream.  Calculated using the rolling five year average of earnings currently used to calculate the PFD, the Administration is only utilizing 81% of the available revenue stream in FY 2018, falling to 68% by FY 2027.  Calculated using instead the annual revenue stream without averaging, the Administration is only utilizing 76% of the available revenue stream currently, falling to 66% by FY 2027.

Not utilizing the full revenue stream while at the same time cutting the PFD has largely the same effect as so-called "inflation proofing."  It continues to build up the size of the Permanent Fund at the same time as cutting the benefits from it to the current generation of Alaskans.  It also leaves untapped additional sources of available governmental revenue, while at the same time taking money out of the private economy, worsening the recessionary effect on the economy more than necessary.

At first glance we have not found any explanation for the approach, particularly in the current recessionary economy, and are unclear what it could be.

In sum, at first glance we believe both the revenue projections and the budget raise significant issues that reflect on both its reliability and fairness to Alaskans.  We will be talking about that much more in the weeks ahead.