Saturday, August 12, 2017

Who has been for and against preserving the PFD thusfar in the 2017 sessions ...

Yesterday we reacted to Rep. Chris Birch's announcement of his intention to run for reelection, or if Sen. Meyer decides not to run for reelection, that seat.  Here is what we said (https://goo.gl/nrpHZA):
"Chris Birch lost me when he voted to cut the PFD. 
According to every economic study done the last two years, cutting the PFD has the "largest adverse impact" on the overall economy of all the new revenue options, is "by far" the worst option for Alaska families and at the level of cuts supported by Birch, put an additional 12 - 15,000 Alaskans (2% of the population) below the poverty line. 
By supporting PFD cuts Birch has prioritized continued government spending and protecting the Top 20% of Alaskans from paying their fair share of those costs, at the expense of the overall Alaska economy (at the very time it continues to slip deeper into recession), working Alaska families and those teetering on the poverty line. 
We will be looking forward to supporting other candidates in his district who bring a brighter outlook for the overall Alaska economy and a fairer outcome for all Alaskans."
Later in the day a reader asked us who else we viewed similarly in this coming election cycle -- who has "lost us" by voting to cut the PFD this session.  Here is the gist of our response:
"There are several votes this past session that could be used as a litmus test, but most involve the same vote split and Rep. Birch is on the wrong side of all of them.

From the House side, probably the most charitable (from the perspective of giving members the benefit of the doubt) was the floor vote March 17 on Amendment No. 102 to the FY 2018 Operating Budget.
 
The Amendment read: "Delete "The sum of $793,795,000." Insert "The amount authorized under AS 37.13.145(b) for transfer by the Alaska Permanent Fund Corporation on June 30, 2017, estimated to be $1,501,000,000."

Here was the vote (https://goo.gl/yF14XF): 
Yeas (a vote for paying the full FY 2018 PFD): Chenault, Eastman, Johnson, Millett, Neuman, Pruitt, Rauscher, Reinbold, Saddler, Sullivan-Leonard, Talerico, Thompson, Tilton, Wilson 
Nays (a vote to cut the FY 2018 PFD): Birch, Drummond, Edgmon, Fansler, Foster, Gara, Grenn, Guttenberg, Johnston, Josephson, Kawasaki, Kito, Knopp, Kopp, Kreiss-Tomkins, LeDoux, Ortiz, Parish, Seaton, Spohnholz, Stutes, Tarr, Tuck, Westlake, Wool 
On the Senate side, the most direct measure likely was the vote on SB 26, which would restructure the Permanent Fund going forward by, among other things, permanently reducing and capping the PFD. 
Here was the vote on that (https://goo.gl/3AyFxi): 
Yeas (a vote permanently to reduce and cap the PFD): #Bishop, Coghill, #Costello, #Egan, Giessel, #Hoffman, #Kelly, #MacKinnon, #Meyer, #Micciche, Stedman, Stevens, von Imhof

Nays (a vote for retaining the PFD as is): Begich, Dunleavy, Gardner, Hughes, Olson, Wielechowski, Wilson
All of the House members are up for reelection this coming year. Those Senators voting "Yes" on SB 23 (in other words, to cut the PFD) up for reelection this year are preceded by an #."

Thursday, August 10, 2017

KTVA (and others) still don't get it about cashable oil credits ...

In a story Tuesday KTVA tried -- and failed yet again -- to get the cashable oil credits story right. See, "Alaska ended cash credits to oil companies, but still owes nearly $1billion,"  http://bit.ly/2uvsbLt.
In an apparent effort at a deeper dive, KTVA bought hook, line and sinker the story line being peddled by some oil companies that the state is not performing on obligations related to the program.  


Here is KTVA's take:
"Alaska advertised itself to companies in the Lower 48 with brochures carrying a promising message: 
'For the entire lifecycle of your project, the State of Alaska is there for you. We do not just talk big, we follow through big — with cash!,” a 2014 brochure published by the Alaska Department of Revenue reads. ... 
"For years, Alaska did follow through on its promise — with cash. But suddenly, everything changed. Low prices meant less money for state coffers, and ... the state hasn’t paid them off since. 
"Companies began halting projects in Alaska — saying they’d been banking on the state’s promise.
'There’s now a phenomena out there spoken about by companies and investors called the ‘Alaska risk factor,’ and it refers specifically to the unpredictability of the State of Alaska, particularly in paying off the credits that we agreed to pay, said Giessel."
As was clear in the materials circulated at the time what the state agreed to pay was defined by statute, not what some are now backreading into brochures.  And this is what the applicable statute, AS 43.55.028, http://bit.ly/2tYCbyJprovided at the time, provides now, and indeed has provided from the beginning of the program :

(a) The oil and gas tax credit fund is established as a separate fund of the state. The purpose of the fund is to purchase transferable tax credit certificates issued under AS 43.55.023 and production tax credit certificates issued under AS 43.55.025 and to pay refunds and payments claimed under AS 43.20.046, 43.20.047, or 43.20.053. 
(b) The oil and gas tax credit fund consists of: 
(1) money appropriated to the fund, including any appropriation of the percentage provided under (c) of this section of all revenue from taxes levied by AS 43.55.011 that is not required to be deposited in the constitutional budget reserve fund established in art. IX, sec. 17(a), Constitution of the State of Alaska; and 
(2) earnings on the fund. 
(c) The applicable percentage for a fiscal year under (b)(1) of this section is determined with reference to the average price or value forecast by the department for Alaska North Slope oil sold or otherwise disposed of on the United States West Coast during the fiscal year for which the appropriation of revenue from taxes levied by AS 43.55.011 is made. If that forecast is 
(1) $60 a barrel or higher, the applicable percentage is 10 percent; 
(2) less than $60 a barrel, the applicable percentage is 15 percent.
The only obligation of the state is to appropriate annually the percentage of the production taxes received by the state ("all revenue from taxes levied by AS 43.55.011") provided in subsection (c).  And the state has done that every damned year since the start of the program.

While the state could appropriate more money to the fund, as it did in some prior years, it is not now and never has been obligated to do so.  No one representing the state could promise or, contrary to Sen. Giessel's claim, agree to pay more because the statutes -- which were referenced in the materials distributed to the potential participants and clear on their face -- didn't authorize anything more.

What Sen. Giessel and others are urging now is for Alaska to go beyond, indeed far beyond, the obligations made in the statute, not live up to them.  They want the state now to pay annually to the oil companies additional monies that the state never promised, agreed to pay or have even the remotest statutory or legal obligation to pay.

The reasoning behind the statute was clear.  In times of high revenues the state would pay more into the fund and companies would recoup their claims (by cashing in the credits) at a fairly fast rate.

In times of lower revenues, however, the state was "obligated," "promised," and "agreed to pay," only lower amounts into the fund and the companies would recoup their claims at a slower rate.

Now that oil prices have dropped and the lower revenue -- and thus, slower recoupment rate -- apply, the companies are trying to change the rules through a PR effort.  It is bad enough that some legislators, trade groups and industry mouthpieces are going along with that.

It is just plain disappointing that one of the state's news organizations continues to fall for the "alternative facts" hook, line and sinker.

Come on, KTVA, you are better than that.

Saturday, August 5, 2017

Must Read Alaska has this one wrong ...

Thursday, Must Read Alaska posted a commentary headlined "In Alaska, it’s unions vs. workers in the private economy,"  http://bit.ly/2hwpjM8.

The gist of the commentary was that, by supporting Governor Walker and various other candidates, the unions have helped to create an "anti-development" state government which is undermining supposedly "shovel ready" construction projects which otherwise would employ Alaska workers.

Must Read Alaska is reading the situation wrong.

We believe the struggle really is between those in the Top 20% who want to maintain continued state spending on things that benefit them (like construction projects) while paying no taxes on the one hand, and the remaining 80% of Alaskans who would end up bearing the burden of such projects through the continuation of deep PFD cuts to fund them.

What Must Read Alaska attempts to paint another way, is actually the remaining 80% fighting back and saying, "no more capital spending" until the state figures out some way to do it other than by shoving the financial responsibility onto their backs.

If the Top 20% were prepared to pay a proportionate share of their income even remotely equal to what they propose the other 80% give up through PFD cuts, then there might be enough funding available to pursue the projects.

Without that, however, all that Must Read ultimately is advocating is that 
a large majority of Alaska families continue to suffer significant reductions in their income in order largely to benefit a handful of Top 20% construction contractors and subcontractors.

Whether or not they realize it, Must Read also is advocating a position which would significantly worsen the overall Alaska economy. According to the March 2016 ISER study, there is a huge difference in the effect on the overall Alaska economy between money spent on construction budgets and, alternately, to fund the PFD.

Because a large part of 
a state dollar spent through the capital budget leaves the state immediately for steel and other speciality goods, spending a state dollar on capital projects only returns $0.65 in overall Alaska income. According to ISER, a dollar distributed through the PFD, on the other hand, ultimately returns $1.40 in overall Alaska income, more than two times that spent on a state capital item.

Continuing to suck dollars out of the private sector through PFD cuts in order to recycle them through government capital spending certainly would benefit a few -- particularly state construction contractors and subcontractors -- but at the expense of the large majority of Alaska families and the overall economy.

Frankly, it's thinking like this -- "let's build big projects" -- that led to the surge in state overspending during the 2010-14 Parnell-era timeframe and sowed the seeds of the state's current fiscal difficulties. While some in the Top 20% want to continue to "let the good times roll" through continued government capital spending directed to projects that will benefit some of them, that will only send the overall Alaska economy even further into a tailspin.

From the perspective of the overall Alaska economy and the large majority of Alaska families, the state is much better off restoring the PFD and letting individual Alaskans and Alaska families decide where to spend the money, instead of redirecting the money through government in order to benefit a select few construction contractors and subcontractors.

Bottom Line:  At least in this case the conflict isn't between unions and the private sector workers, it's between what some in the Top 20% want for themselves and their friends on the one hand, and the health of the overall Alaska economy and Alaska families on the other.

Friday, August 4, 2017

How gullible is Alaska ...

A rash of news articles and commentaries this week are focusing on oil company BlueCrest's announced decision to "pause" activity at its Cook Inlet Cosmopolitan Unit while it arranges a new round of financing.

From all of the headlines and commentary many seem to think that the project has been cancelled, and that it's the state's fault that it has. 


For example, this is how the Alaska Dispatch News headline read, "Oil company says it likely can’t continue to drill unless state pays tax credits," http://bit.ly/2vonMgQ. KTVA's lead was "BlueCrest Energy halts project on the Kenai, says state credits are the cause," http://bit.ly/2we899p.

In response, many are calling for the Governor and legislature to reverse course and "honor" the state's alleged "commitments." For example, the Alaska Chamber has started running a Facebook ad campaign based on that very theme. 
http://bit.ly/2uaRNAZ

But for those that read further down -- and you have to read all the way to the 26th paragraph, fourth from the bottom, of the ADN article to get there, but for those that do -- you soon realize this really is about something else: BlueCrest only has hit a "pause" while it deals with a financing issue.
"Johnson said BlueCrest officials decided on Tuesday to pause drilling after they realized they can't secure a loan fast enough to drill a third well.
"'There's a limit on how quickly you can borrow tens of millions of dollars,' he said. 'It's not easy to do.'"
So, what is really going on here?

It's all about financing options.  Blue Crest, like any profit-maximizing enterprise, wants to arrange the lowest cost financing it can.

Financing from the State of Alaska through the cashable oil tax credit program is the cheapest of all -- it doesn't cost the company a thing:  no interest, no equity stake, no obligation to repay if things don't work out, no obligation even to continue drilling if you decide it's not worth it.  It's just a straight up, no cost subsidy, designed to artificially lower the cost of exploration and development in Alaska (and in doing so, subsidize Alaska's high cost oilfield service sector) by transferring part of the cost to the state.

The financing does come with one risk, however.  As we have discussed previously on these pages, under the program the participants share with the state the risk of lower oil prices and production levels.  If the state's revenue from oil production taxes -- which are largely driven by oil price and production levels -- decline, so does the extent of the state's obligation to contribute to the fund that cashes out the credits.

In short, if lower oil prices result in the state receiving reduced revenue from oil production then the state has the right -- and indeed, from an overall fiscal policy perspective, some would argue the obligation -- to stretch out the rate at which it pays the credits.  See "Oh good lord," http://bit.ly/2vpnpmr.

The companies participating in the program knew -- and by participating in the program, accepted -- that risk from the outset; the terms have been in the statutes since the program first began.

But that doesn't mean they agreed not to try to push the envelope a little -- or a lot -- if the risk of lower oil prices, and thus stretched out payments, materialized.

And as those risks have materialized, the companies -- BlueCrest is only the latest -- have done exactly that: tried to push the envelope.

Many companies, like many consumers, treat financing terms as negotiable.  They respect the terms if the future stays as anticipated (or turns out better for them than) at the time the financing was negotiated.

But if things change adversely, then companies try to change the terms of the financing as well.

During the current oil downturn banks and other sources of debt financing have become accustomed to approaches from oil companies seeking a variety of changes in the terms of their loans, such as extensions of their repayment obligations or even the conversion of all or a portion of the debt (with the attendant obligation of repayment) to some sort of equity.

What is going on here with BlueCrest is the Alaska version of that.

As the tie between the terms of the cashable oil tax credit program and oil price levels has become a constraint, BlueCrest and others are attempting essentially to renegotiate the terms of the financing by pushing the state to contribute additional funds to the program earlier than (i.e., in advance of) when required.

As BlueCrest's Johnson admits (albeit in the 26th paragraph of the ADN article), it's not that the companies don't have other financing options, it's just that they cost more and take some time to arrange.

If instead Alaska can be convinced essentially to waive the terms of its program, so much the better.  Zero cost financing always trumps other options.

And unlike dealing with other sources of financing (which always extract some sort of fee for changing the terms of their deals), the costs involved in such efforts appear to be minimal.  All that it appears to require to persuade at least some (like the Alaska Chamber
) is a dash of extreme verbal hyperbole (about no one ever "trusting" Alaska again) and some lobbying fees.

Other, commercial sources of financing quickly would see through -- and even more quickly dismiss -- the hyperbole.  The response would be essentially, "let's see, the terms of the program explicitly give us the right to do what we are doing. You are way off base (i.e., "nuts") to claim that it's 'untrustworthy' to utilize those rights when the risks we explicitly agreed to share materialize."

And they would be immune to political lobbying.

But BlueCrest and others are hoping the state will react differently to the hyperbole (what some call "puffing" or in other contexts, "alternative facts") and lobbying. 


Maybe Alaska is that gullible -- some in the business community and legislature, see http://bit.ly/2wsKj93, 
appear to be -- but we certainly hope those making the final decisions aren't.

Wednesday, August 2, 2017

Oh good lord ...

The Alaska Journal of Commerce's Andrew Jensen and I must have different Alaska Statute books sitting on our desks (or in my case, in my browser bookmark list).  I just checked; mine is up to date.  Jensen may want to check his.

In yet another of his editorial screeds, Jensen writes this under the headline "The deadbeat, do-nothing Legislature,"  https://goo.gl/vweoFh:
"Instead of beginning to settle the hundreds of millions in unpaid liabilities owed to small oil companies that already spent the money in good faith, the Legislature ended the program and will stiff those companies for a third straight year after Gov. Bill Walker vetoed $630 million in payments in 2015 and 2016. 
"Deadbeat and do-nothing barely begins to cover it."
When used as a verb, Google defines "stiff" this way, https://goo.gl/9YUciW:
1. cheat (someone) out of something, especially money. ("several workers were stiffed out of their pay")
2. ignore deliberately; snub.
Let's set the record straight in the event anyone relies on the Journal of Commerce editorial page anymore accurately to report the facts (surely a dwindling subset of the population these days).

The state has "stiffed" none of the oil companies -- none.  As we have explained repeatedly, the last two years as well as this coming one the state has paid annually exactly what it has owed the oil companies involved in the cashable oil tax credit program under the statutes as they have been in effect since the day the program began.  See "
Today's vote will demonstrate whether Alaska legislators believe in the rule of law,"  https://goo.gl/UgNgy9.

Let me say that again. Each. Year. The. State. Has. Paid. The. Oil. Companies. Exactly. What. They. Are. Owed.

The statute provides that the state shall pay each each year into the "oil and gas tax credit fund" -- from which payments are then made to the qualifying oil companies -- a statutorily-established percent of the production tax revenues projected to be taken in by the state that year.  The state may pay more each year, but the state's statutory annual obligation is limited to the percentage.

The state has paid the specified percentage every year of the program, including the last two and, as a result of the capital budget, the next upcoming.  It has complied with the statute and has paid exactly what it has owed.

In some past years the state used the discretion provided under the statute to pay more, but that doesn't obligate it to do so in other years.

Under the statute, the oil companies share with the state some of the risk of falling oil prices and production levels.  If production tax revenues decline, so do the state's annual obligation to pay into the fund.  Now that the risk has matured, the oil companies would like to dodge their share of it by cajoling the state into voluntarily paying more into the fund than required by the statute.

Understandably given the state's fiscal situation, the state has declined.  That isn't "stiffing" the oil companies; it's simply applying the statute as written.  Those truly concerned about the state's overall fiscal situation -- instead of one subset of it -- would be screaming if the state did anything else.

Jensen clearly needs to go read the statutes -- and maybe his dictionary -- again.


But we do agree with Jensen on this -- the Legislature is a deadbeat.

While not the oil companies, we agree the Legislature in fact has "stiffed" someone this session; well, approximately 635,000 someones.

As we have explained previously on these pages, the Alaska Statutes clearly require the state each year 
(by using the word "shall") to "transfer from the earnings reserve account to the dividend fund established under AS 43.23.04550 percent of the income available for distribution under AS 37.13.140."

For the first time since the founding of the Permanent Fund Dividend program in the early 1980's, the Legislature has refused to comply with that obligation, transferring less than half of the amount required under the statutes.  See "The Alaska Legislature tosses out the Rule of Law," 
https://goo.gl/Fb7iv7.

The result?  The Legislature is shortpaying -- yes, "stiffing" -- each and every one of the 635,000'ish Alaskans that likely will qualify for the PFD this year a little north of $1,200 (or nearly $5,000 for the archetypical family of four).


And in doing so, the state also is shortpaying -- again, "stiffing" -- the overall Alaska economy the nearly $1.1 billion in additional income, counting the multiplier effect, that otherwise would flow into the hands of Alaska families and individuals, and through them, Alaska businesses, in the coming year.

That's an additional reduction in overall Alaska income of roughly 2.5% in an economy that already is in a worsening recession.

You would think the editorial page of an organization that publishes under the name the Alaska Journal of Commerce and claims to provide "the most in-depth and accurate information about business in Alaska" would be concerned about -- or at least mention -- such an effect on the overall Alaska economy and Alaska business when writing under the headline the "deadbeat" Legislature.


But no, the Journal's editorial page apparently prefers to focus instead only on what essentially amounts to fake news -- that the state is "stiffing" oil companies.

One of the problems Alaska faces currently is that its government continues to lurch from one side to the other trying to help out specific segments of the economy at the expense of the whole. It is focusing on saving specific trees while the forest as a whole withers.


Similar to the important role played by the editorial pages of the Financial Times, the Wall Street Journal and The Economist at the national and international level by 
keeping policymakers eyes focused on the overall economic prize, the editorial page of the Journal of Commerce could do at the state level.

Unfortunately, it's not.  It's become just another special pleader in a state that already has more than enough.

Sunday, July 30, 2017

The thing that's missing from the public discussion of our economy

To us, part of the reason why the importance of the PFD cuts is not well understood (and thus, being trivialized by some) is because the public discussion of the state's economy continues significantly to overweight the importance of jobs data and underweight the importance of income.  "How bad is Alaska’s recession? Economists call it ‘moderate’ so far",  http://bit.ly/2vcdVKJ.

From a macroeconomic perspective, jobs -- on which this ADN story and much of the public debate focuses -- are important largely because they help to generate income, the amount of money being injected into the economy, which in turn, drives the level of money circulating in the economy.

But in Alaska "jobs" are not the only thing that drives income.  The PFD also is a significant contributor.  In fact, at least one study suggests on per dollar basis the PFD is an even larger contributor to income -- and thus, the overall Alaska economy -- than jobs. According to the March 2016 ISER analysis of various state fiscal options, taking into account the multiplier effect a dollar spent preserving a state job generates roughly $1.30 in overall Alaska income.

A dollar distributed as a PFD, however, generates roughly $1.40 in overall Alaska income, roughly 7.5% more than if spent preserving a state job. "SHORT-RUN ECONOMIC IMPACTS OF ALASKA FISCAL OPTIONS," http://bit.ly/2vVJOoC at III-9.

The continued reduction in Alaska income (adjusted for inflation) is a significant part of what is really driving the storyline for Partycraft -- the centerpiece of the ADN's piece -- and other parts of the state's retail sector. There is less overall income in the economy, individuals have less and thus, are spending less.

 And a significant contributor to the decline in income over the past two years has been the PFD cuts. Counting the multiplier effect, the cuts have pulled nearly $1 billion (roughly 2.5%) of overall income annually out of the state's $40 billion income economy now, two years running.

Especially in an economy already in a recession, cutting income by an additional 2.5% is hugely counterproductive. For those that do better thinking about things in the context of jobs, using the ISER data the PFD cuts are the equivalent of laying off roughly 7,500 state workers (which, counting the multiplier effect would result in 12,000 total job losses statewide).

Just think of the headlines that would generate -- "Walker to lay off 7,500 state employees".  Yet, that is exactly the macroeconomic equivalent of what Governor Walker last year, and the state legislature this year has done with the PFD cuts.  Resulting headlines about the macroeconomic effect on the economy?  None.

Job declines are important, but it's the overall loss in income -- which is being supercharged by the PFD cuts -- that is the real story.  But that is a story not being told well, and thus, not affecting policy the way that it should.

Saturday, July 29, 2017

The Alaska Legislature tosses out the Rule of Law ...


Thursday we wrote a column discussing an issue we considered important to that day's vote on the capital budget.  Our question was whether the legislature would vote in the capital budget to finish fully funding two annual statutory obligations which remained underfunded after completion of the FY 2018 operating budget.  Today's vote will demonstrate whether Alaska legislators believe in the rule of law, http://bit.ly/2eWWTdf.

Turns out, they didn't.  While the legislature did vote to finish funding cashable oil tax credits, the legislature for the first time since the creation of the Permanent Fund Dividend (PFD) in the early 1980's failed to fully fund the PFD
 at the level required by the governing statute.

(The votes on the final capital budget are at the top. The Senate vote is on the left; the House vote on the right. Green indicates a vote in favor of the final capital budget, which failed to fully fund the PFD. Red indicates a vote against by the member, in a number of instances based on the ground that the budget did not fund the PFD.)

As we noted in our previous piece,
AS 37.13.145(b) provides that 
"[a]t the end of each fiscal year, the corporation shall transfer from the earnings reserve account to the dividend fund established under AS 43.23.045, 50 percent of the income available for distribution under AS 37.13.140."
The Permanent Fund Corporation currently estimates the amount required to be transferred under that provision during FY 2018 is $1.54 billion. https://goo.gl/Qjbyps The legislature included $760 million in the FY 2018 Operating Budget. https://goo.gl/bpLvQi  

The legislature failed to make up any of the remaining $780 million shortfall in finalizing the capital budget.  The impact is to shortpay each PFD by roughly $1,250 (or $5,000 for an archetypical family of 4).

That is a statutory obligation owed to its own citizens that state government refused to honor.

As we have discussed repeatedly on these pages, cutting the PFD has a large, indeed according to a March 2016 report from the UAA Institute of Social and Economic Research, the "largest" adverse impact 
of all of the various "new" revenue options most have considered on the overall Alaska economy and families.  Especially given that Alaska already is in a deepening recession, that alone is sufficient reason to be deeply concerned about the decisions made by legislators Thursday.

But Thursday's vote is deeply troubling also for another reason. It's because in refusing to fully fund the state's statutory fiscal obligation to its own citizens, the legislature also tossed aside the rule of law as it applies to state fiscal policy.

As we said in our earlier piece, 

"The rule of law is the legal principle that law should govern a nation, as opposed to being governed by decisions of individual government officials. ... Rule of law implies that every citizen is subject to the law, including lawmakers themselves. In this sense, it stands in contrast to an autocracy, dictatorship, or oligarchy where the rulers are held above the law."
A large portion of Alaska fiscal policy is based on statutory formulas.  The formulas -- which cover such things as the K-12 BSA, pupil transportation and Medicaid spending -- accounted for roughly 45% of FY 2017 UGF spending.  Once the numbers are tallied, they likely will account for slightly more than that in the FY 2018 budget.

While in the midst of the recent fiscal debate some have suggested amending the formulas, few have recommended ignoring them.  The reason is because they are contained in statute and, to date, legislators (and other observers, including us) largely have defended them as provided by law and, thus, untouchable.

But that defense went out the window in Thursday's vote.

Like the others, the PFD is based on statutory formula. But unlike the others, in its votes on both the FY 2018 Operating and Capital Budgets the legislature failed to honor the formula.

To be blunt, it failed to follow the Rule of Law.

In doing so, the legislature has entered a new era.  As 
the above definition makes clear, the rule of law "implies that every citizen is subject to the law, including lawmakers themselves."

Now that the legislature has ignored clear statutory direction, Alaska appears to be entering into an era where, at least with respect to fiscal policy, the rulers consider themselves "above the law."


There is a problem with governments that go down that road.  They are unreliable.  This time the legislature has dodged its statutory fiscal obligation to its own citizens.  Once a government starts down that road, however, others dependent on other statutory payment obligations legitimately realize that it is only a matter of time before it happens to programs in which they have an interest and start to hedge accordingly.

Statutes -- particularly fiscal statutes -- are there for a purpose. They are intended to convey reliability and certainty, and in doing so, sustainability.

Those with the green buttons beside their name just put investors and others on notice that the Alaska statutes provide none of that going forward.  Even where a statute says "shall," the legislature has demonstrated that it feels free to ignore it.

Thursday, July 27, 2017

Today's vote will demonstrate whether Alaska legislators believe in the rule of law

Sometime today the Alaska legislature will vote on the FY 2018 capital budget.  The vote will demonstrate whether legislators believe in the rule of law.  The rule of law is sometimes spoken of this way:
"The rule of law is the legal principle that law should govern a nation, as opposed to being governed by decisions of individual government officials. ... Rule of law implies that every citizen is subject to the law, including lawmakers themselves. In this sense, it stands in contrast to an autocracy, dictatorship, or oligarchy where the rulers are held above the law."
There will be two tests in today's vote about whether legislators believe in the rule of law.  One relates to AS 43, the portion of the Alaska Statutes relating to revenue; the second relates to AS 37, the portion of Alaska Statutes relating to public finance.

The test under AS 43 involves cashable oil tax credits.  AS 43.55.028 provides the manner in which funds are deposited in the "oil and gas tax credit fund," from which cashable oil tax credits are paid.  AS 43.55.028(b) provides that the amount deposited annually shall include "the percentage provided under (c) of this section of all revenue from taxes levied by AS 43.55.011 that is not required to be deposited in the constitutional budget reserve fund established in art. IX, sec. 17(a), Constitution of the State of Alaska."

Earlier this year the Administration estimated that the amount required to be deposited this year under that provision is $77 million.  https://goo.gl/G4rVSA at 6. The legislature included $57 million in the FY 2018 Operating Budget. https://goo.gl/pvKS1Y  The question for today will be whether the legislature appropriates the additional $20 million necessary to fully fund the statutory requirements of AS 43.55.028.

The test under AS 37 involves the PFD.  AS 37.13.145(b) provides that "[a]t the end of each fiscal year, the corporation shall transfer from the earnings reserve account to the dividend fund established under AS 43.23.045, 50 percent of the income available for distribution under AS 37.13.140."  Other statutes provide the manner in which that amount shall be paid out as the PFD.

The Permanent Fund Corporation currently estimates the amount required to be transferred under that provision during FY 2018 is $1.54 billion. https://goo.gl/Qjbyps  The legislature included $760 million in the FY 2018 Operating Budget. https://goo.gl/bpLvQi  The question for today will be whether the legislature appropriates the additional $780 million necessary to fully fund the statutory requirements of AS 37.13.145(b).

There is nothing that distinguishes the two statutes (or others, such as the K-12 BSA funding mechanism) from the other.  Each provides clear rules regarding the use of state funds enacted by past legislatures, signed by past Governors and included in Alaska statutes. Each creates programs on which various sectors of the Alaska economy have come to rely.  Each creates economic benefits important to the overall Alaska economy.
 
Each establishes a rule of law.

We will find out today which Alaska legislators believe in following the rule of law -- and which believe they are above it and are entitled to pick and choose which they apply.  And if they do, we also will find out which parts of the Alaska economy -- and Alaska families -- they favor over others.

Wednesday, July 26, 2017

In three paragraphs, why the Alaska Senate may flip D in the next election ...

Perhaps without realizing it, three paragraphs in a story Monday by KTOO (Juneau Public Media)'s Andrew Kitchenman help explain why the Alaska Senate may flip D (or its close cousin, "Bi Partisan") in the next election.  "Capital budget compromise unlikely to restore PFDs, address oil and gas tax credits," https://goo.gl/Xc3337.

Here are the paragraphs:
"The Senate capital budget didn’t include additional money for dividends. 
"But the Senate capital budget did include $288 million more for oil and gas tax credits. ...
"Senators have noted that the state owes companies more than $1 billion in credits that they must receive."
Why do those paragraphs foreshadow a flip in the Senate?  Because they make clear that, under current leadership the Senate is favoring parts of the oil industry over Alaska families and the overall Alaska economy.

The undisputed conclusion arising from various economic analyses over the last two years is that cutting the PFD, which Senate leadership has consistently pursued over that time period, does serious damage to Alaska families and the overall economy. Cutting the PFD, for example:


  • "Has the largest adverse impact on the economy [of all the new revenue options] per dollar of revenues raised," https://goo.gl/ZxR1Hw at A-15; 
  • "[W]ill likely increase the number of Alaskans below the poverty line by12-15,000 (2% of Alaskans)," https://goo.gl/iuTjv2 at 14.

As we explained yesterday, on the other hand there already is a statutory approach in place for dealing with the accrued, cashable oil & gas tax credits. "If this is the "deal" on the capital budget, we will urge a "no" vote," https://goo.gl/vX7fES.

The Senate leadership's efforts to change that statutory approach to accelerate the payments to some oil companies, while at the same time changing the statutory approach dramatically to cut the PFD -- with the resulting adverse effect to the overall Alaska economy and Alaska families -- clearly favors some in the oil industry over Alaska families and the overall Alaska economy.


In the intensity of an election cycle -- particularly one involving a Governor's race -- that bias will show through and put in play the seats of those Senators supporting the position.  If the D's are wise enough this time to capitalize on it by zeroing in on the inconsistency and promising to reverse the priority (something they failed to do in the last cycle by running "me too" candidates on PFD cuts), they are highly likely to carry a number of the seats.

The results for the state's overall oil industry could be devastating.  Proposed changes to the state's overall oil tax structure, which this session have been confined to the House, likely would be greenlighted through a changed Senate.  By trying to get more for some oil companies by accelerating the payment of cashable oil credits, the industry may lose a lot for all.

The realization of that potential likely is the reason we continue to hear rumblings of the intention by some to support primary opponents to several current Senate R's in next year's election cycle.

The view is that some Senate R's have walked too far out on the rhetorical plank to be salvageable against disciplined D challengers.  Replacing them with less tone-deaf R's may be the only way to maintain the seats.

There is a long way to go yet before the 2018 elections and things certainly may change along the way.  But if on election night 2018 the Alaska Senate flips, some will look back on the three paragraphs above and say they saw it coming.

Tuesday, July 25, 2017

If this is the "deal" on the capital budget, we will urge a "no" vote ...

Last week Rep. Jason Grenn -- a member of the House Finance Committee -- posted the following tweet, referring to a piece that first appeared on Alliance blog, Alaska Headlamp.
There are several things about the infographic that are not accurate.  For example, to date the state has paid out over $3.5 billion in cash credits, not the "$700 million" referenced at the top of the graphic. The "$700 million" presumably refers to the additional, nearly $700 million accrued in past cash credits yet to be paid even with the termination of the program effective this past July 1.

The accurate total amount that Alaskans are projected to pay in cashable credits? $4+ billion.

For another, the "billions" claimed at the bottom of the graphic in "new, recoverable resources" and "state royalties over the life of the new fields" have yet to be proven.  Estimates related to the "Smith Bay Discovery," for example (on which the claim of billions is predicated), are based on the results of two wells, have not yet been affirmed by independent reservoir engineers and have not even remotely yet been demonstrated to be commercially recoverable.  If they aren't, they won't pay a dime in additional state royalties.

And even if they ultimately do, there has been no demonstration that Alaskans will financially benefit to a greater -- or to even the same -- extent than if the $4+ billion spent on the program had been invested instead by the Permanent Fund Corporation.  If they don't, measured against the alternative use of the funds on a net present value basis (the way investments typically are measured), Alaskans will have lost money from the program, not made "billions."

But while Grenn's naive gullibility about the claims made in the infographic ("This infographic ... shows what tax credits did for our state") are problematic in their own right, that isn't what concerns us most about his post.

Instead what concerns us most is his use of the term "obligations," especially given the upcoming vote this week on the capital budget (which potentially may include additional funds toward the $700 million in accrued credits).

That phrasing in Grenn's tweet mirrors that included at the bottom of the Alliance's graphic and typically, when used by the Alliance and other oil company allies, refers to the $700 million in accrued credits.  Their claim usually is that the state has an "obligation" to fully fund those credits as they are being accrued.

For example, in a post the week before last, the Alaska Oil & Gas Association ("AOGA") claimed that the state's refusal to fully fund the credits as they are being accrued constituted a "continued failure to fully reimburse companies for earned tax credits." As we pointed out in a commentary last week AOGA's claim is simply not true.  See "We aren't done yet with cashable oil credits," https://goo.gl/7uv11F.

The scope of the state's "obligation" with respect to the accrued credits is clearly defined by AS 43.55.028, http://bit.ly/2tYCbyJ).  Under that statute, the state's only "obligation" is to deposit each year in an "oil and gas tax credit fund" a percentage of the revenues projected to be received in that year from production taxes. The accumulated cashable credits are then paid according to statute up to the amount existing in the fund. If the fund doesn't contain an amount sufficient to pay all of the accumulated credits in any given year, the statute clearly contemplates that the remaining, not yet funded credits are rolled over to the next year.


According to the Administration, the amount required to be deposited in the fund this year -- and thus, required to be paid out to oil companies holding credits -- is around $77 million, a far cry from $700 million.

In short, the state's "obligation" with respect to the credits only arises as funds are required to be allocated under the statute to pay the credits.  In the coming year that amount is $77 million. There is no "obligation" beyond that.

Under the statute, the state may appropriate additional amounts to the fund annually, essentially to pay some credits in advance of the time at which they otherwise are required to be paid, and in past years of high oil revenues the state did that. But there is no "obligation" to make any additional payments.  The only "obligation" is to make the annual payments required by AS 43.55.028(c) -- and as we explained in our column, to date the state consistently has done that.

As a result, Rep. Grenn's claim that "[n]ow we must create a plan to honor those obligations" is hugely misleading.  There already is a plan to honor them. It's codified in statute. The fact that some in the oil industry and its hangers on want more than what the statute currently requires doesn't justify "creating" a new plan." There already is an existing plan in place to honor the only obligations that actually exist.

Rep. Grenn's statement also is especially ironic given his earlier vote this year for an operating budget that shortpays the Permanent Fund Dividend.

As noted above, AS 43.55.028 establishes the extent of the state's obligation with respect to cashable oil credits.  The equivalent statute defining the state's obligation to its own citizens with respect to the PFD is at AS 37.13.145(b).  That statute provides as follows:
At the end of each fiscal year, the corporation shall transfer from the earnings reserve account to the dividend fund established under AS 43.23.045, 50 percent of the income available for distribution under AS 37.13.140.
Notwithstanding that explicit language, Rep. Grenn voted with others earlier this month in passing the FY 2018 operating budget only to transfer to the dividend fund roughly 25 percent of the income available for distribution.

It is ironic -- and hugely disappointing --  that a Representative now focused on creating a new "plan to [over] honor ... obligations" when they relate to oil companies, voted explicitly to under 'honor" the state's obligations clearly set forth in statute when it came to Alaskan families.

Moreover, as we have outlined in other posts, cutting the PFD:
  • "Has the largest adverse impact on the economy [of all the new revenue options] per dollar of revenues raised," https://goo.gl/ZxR1Hw at A-15;
  • "[W]ill likely increase the number of Alaskans below the poverty line by12-15,000 (2% of Alaskans)," https://goo.gl/iuTjv2 at 14.
We understand a legislator advocating that the state "honor" its obligations to oil companies if at the same time he or she advocates that the state honor its obligations as well to its own citizens -- and its own economy.  

Grenn, however, is not doing that.  Instead he is arguing for "honoring" -- indeed, over honoring -- the state's obligations to the oil companies while at the same time he has voted to dishonor (i.e., shortpay) the state's obligations to Alaska families and economy.

We certainly hope that is not the "deal" that has been cut on the capital budget by the state's legislative leaders.  If it turns out that it is, we will be strongly urging a no vote.

Wednesday, July 19, 2017

There is nothing good about this, but some would make it even worse ...

There is nothing good about this news, but there are things some are suggesting in response that could make the situation even worse for the overall Alaska economy and Alaska families. "S&P joins Moody’s in downgrading state," https://goo.gl/ujtN24

The economic analyses published these last two years consistently have reached the undisputed conclusion that cutting the PFD, which seems to be the knee jerk reaction of some whenever the state's fiscal situation makes the headlines:
  • "Has the largest adverse impact on the economy [of all the new revenue options] per dollar of revenues raised," https://goo.gl/ZxR1Hw at A-15;
  • "[W]ill likely increase the number of Alaskans below the poverty line by12-15,000 (2% of Alaskans)," https://goo.gl/iuTjv2 at 14.
As we have said repeatedly on these pages, we don't believe any of the "tax and spend" programs some have proposed in response to the state's fiscal situation are necessary. Instead, we believe using the Hammond 50/50 approach Alaska is well positioned to ride out the current low in the oil price cycle without self-inflicting any further damage on its economy. See "The Special Session version of “Implementing Governor Hammond’s 50/50 Plan," https://goo.gl/nE15Eo.

But, as we also have said repeatedly if we nevertheless are headed down this road it should be done with the least damage and disproportionate effects possible. We believe that replacing both the Senate and House proposals (both the PFD cut and income tax components) with a single flat tax -- a tax that imposes an equal distributional burden regardless of income class -- does exactly that.

Neither S&P's nor Moody's have suggested that cutting the PFD is necessary, or even appropriate.  Frankly, they don't care what Alaska does to get its state finances back in order.  Their only concern is that we do.

But Alaskans should care because we have to live with the consequences.  And making the situation even worse for our overall economy and Alaska families is the last -- the very last -- thing that any should be thinking about doing.

Monday, July 17, 2017

How much would the Senate's proposal to advance pay cashable credits cost Alaskans ...

Earlier today we wrote an article discussing in part the Alaska Senate Majority's proposal in its version of the FY 2018 capital budget to "advance pay" so-called "cashable" oil credits accrued prior to Saturday night's passage of HB 111 (which terminates the program from July 1 forward).  See "We aren't done yet with cashable oil credits ...," https://goo.gl/7uv11F.

The Senate's proposal is to deposit $288 million in state savings into the state's "oil and gas tax credit fund" this year, which would then be used to cash out additional credits potentially up to five years in advance of the time that the statutes require the state otherwise to pay them.

A reader asked this evening how much the Senate Majority's proposal to advance pay the credits "costs" Alaskans.

As we  thought about it, one way of looking at the issue is to analyze what the amount would mean to Alaska families if used this year to make an additional, supplemental payment on the PFD -- which the Alaska Senate Majority has proposed to underfund this year relative to the requirements of the governing statute -- instead of being used to overfund the "oil and gas tax credit fund."

In other words, to look at how much the Alaska Senate Majority's proposal would cost Alaskans in terms of a reduced PFD.

The answer is roughly $450 per Alaskan ($288 million, divided by 636,000 -- the number of Alaskans that qualified last year for a PFD, https://goo.gl/P2DFtc), or $1,800 for a family of four.

Put another way, if the money was used to make an additional payment this year on the PFD rather than to make "advance payments" of cashable oil credits, the level of this year's PFD would be at roughly 70% of its statutory level, rather than the 50% level which is currently reflected in the FY 2018 operating budget.

In short, adoption of the Alaska Senate Majority's proposal would cost each Alaskan 20% of their PFD.

We aren't done yet with cashable oil credits ...

While Saturday's just-before-midnight vote terminated the "cashable" oil credit program going forward, the issue of what to do with the remaining amounts accrued before its termination remains.

A potential upcoming battle on that issue was signaled in the press release issued following Saturday night's vote by the Alaska Oil & Gas Association (AOGA), the producer trade group, repeated in this piece by KTVA's Liz Raines, "Legislature ends cashable oil tax credit program," http://bit.ly/2uydrig.

Here is what AOGA had to say: "If Alaskans want to see exciting new oil fields developed and new oil flowing through the pipeline, then fiscal stability must be established in Alaska. The constant moving of the goalposts and continued failure to fully reimburse companies for earned tax credits is not only frustrating, but makes Alaska’s chances of attracting desperately needed investment worse with each passing year."

The reason that may signal an additional battle is AOGA's claim in the release that there has been a "continued failure to fully reimburse companies for earned tax credits."

That assertion is simply untrue.  Not only has the state met its commitments to date, the fact is the state has more than fully complied with its annual reimbursement obligations since the cashable oil credit program began.

Under the governing statute (AS. 43.55.028, http://bit.ly/2tYCbyJ), the state is obligated to deposit each year in an "oil and gas tax credit fund" a percentage of the revenues projected to be received in that year from production taxes. The accumulated cashable credits are then paid according to statute up to the amount existing in the fund.  If the fund doesn't contain an amount sufficient to pay all of the accumulated credits in any given year, the statute clearly contemplates that the remaining, not yet funded credits are rolled over to the next year.

That is what the statute always has provided.  Any producer participating in the program has been on notice of that aspect since the outset.

To this point, the state has always annually deposited at least the statutorily required amount.

Under the statute, the state can appropriate additional amounts to the fund, essentially to pay some credits in advance of the time at which they otherwise are required to be paid, and in years of high revenues the state did that.  But the statute does not require the state to do so.

The limitations contained in the statute were intentional and designed to limit the state's financial obligation, especially during periods of low oil revenues, to the specified amounts. AS 43.55.018(c) provides specifically that "[t]he applicable percentage for a fiscal year under (b)(1) of this section is determined with reference to the average price or value forecast by the department for Alaska North Slope oil sold or otherwise disposed of on the United States West Coast during the fiscal year for which the appropriation ... is made. If that forecast is: (1) $60 a barrel or higher, the applicable percentage is 10 percent [of production tax revenues]; (2) less than $60 a barrel, the applicable percentage is 15 percent."

Under the statute, those percentages set the limits of the state's annual reimbursement obligation.  The state doesn't owe any more.  The decision in any given year not to advance pay more isn't, as AOGA appears to claim, a "failure to fully reimburse" companies for earned tax credits. It is simply the exercise by the state of holding to the limits on its annual funding obligation built into the program from the outset.

The amount at issue is not insignificant.  According to a May 2017 presentation by the Department of Revenue the amount of accrued cashable credits totalled roughly $670 million as of that time.  http://bit.ly/2tZhK53 at 9. According to the same presentation, the amount that the state is obligated under the governing statute to deposit into the fund during FY 2018 is roughly $77 million. Id. at 6.

Contrary to AOGA's apparent claim, limiting the state's FY 2018  deposit into the fund to the $77 million contemplated by the statute -- and rolling over the remaining, roughly $600 million to subsequent years -- is not a "failure to fully reimburse" the remaining credits, it is simply implementing what the statute always has contemplated.

Earlier this session the Senate proposed through the capital budget to deposit an additional $288 million (above and beyond the $77 million required by the governing statute) in the fund. See "Alaska Senate proposes $288 million for oil company subsidies, plus cash for King Cove road," http://bit.ly/2u1RWFj.

At a time when the state is financially challenged, and especially when it already has cut the PFD two years in a row, we opposed the Senate's proposal to advance pay an additional, supra ("a prefix meaning 'above, over' or 'beyond the limits of, outside of-”) -statutory amount of cashable oil credits and continue to do so.

The AOGA's false assertion about the state's past treatment of the claims may foreshadow yet another run at the advance payments as the House and Senate work to finalize in the coming days what hopefully will be a minimal FY 2018 capital budget.

We hope the leadership of the two bodies do not go down that road, and will oppose it again if they do.

Saturday, July 15, 2017

The latest round of "Don't tax you, don't tax me ..."

Recently we wrote a column built around the famous quote from former U.S. Senate Finance Committee Chairman Russell Long describing his view of the gist of the message regularly delivered by lobbyists and others coming before the Committee.

Long's summation of the message most delivered:  "Don't tax you, don't tax me, tax that fellow behind the tree."  See "To my many friends in the oil industry, I am increasingly repelled ...," http://bit.ly/2tenNno.

That same phrase came to mind last night as I read Nat Herz's article on the terms of the "compromise" on HB 111 (the oil tax bill) that purportedly is going before the Senate and House today.  "Alaska House members return to Juneau as hopes rise for an oil tax deal," http://bit.ly/2tVR7hf.

Don't get us wrong.  If the proposal is as Herz describes it, we think the "compromise" -- which largely adopts the Senate's approach -- is good policy.  In the context of global options, the approach should continue to encourage -- or at least, not discourage -- productive investment in Alaska when evaluated by investors against comparable projects elsewhere.  That is an important piece of Alaska's overall economic puzzle.

But that doesn't mean the approach still doesn't smack of "don't tax you"-ish favoritism.

As it has boiled down over the session, extended session and now two special sessions, the core of the disagreement between the House and Senate over the bill relates to the "replace" portion of the "repeal and replace" approach to what has come to be called "cashable oil credits." The Senate has proposed to replace the credits with a provision that permits producers to deduct 35% of the costs they incur prior to first oil in calculating their subsequent production taxes. For successful projects -- i.e., those that reach first oil -- that amounts with some delay to the same rate at which they would have been paid cashable credits.

In the midst of some other bells and whistles, the House has proposed 25%.

According to Herz's article, "The deal on the table appears to be largely in line with an earlier offer from Kelly's Republican-led Senate majority, which has favored replacing the system of cash payments with one that allows companies to earn tax deductions at the same rate — 35 percent of losses."

The reason that smacks of "don't tax you"?  Because the Senate held the line firmly when it came to dealing with oil taxes.  The approach there? "Don't tax you (the oil industry)."

That is a far different approach than they (and to a lesser extent, the House) have taken when it comes to middle (including upper middle) and lower income Alaska families.  There, the approach has been "tax that guy behind the tree."  And not just by a little.  The Senate's proposed reduction (i.e., tax) on the PFD, which forms a not immaterial share of the overall income of those Alaska families, is a staggering 50%.

Some will try to defend the different treatment by arguing that oil production is vital to the Alaska economy, and thus, because taxes play a role in driving investment (that in turn drives production), treading softly on changes to oil taxes is important to the state's overall economic health.

But guess what? The same is true of the PFD.  According to ISER's March 2016 study, cutting the PFD has the largest adverse impact on overall Alaska income of all the fiscal options available to government, and the largest adverse impact on both income and jobs of any of the so-called "new revenue" options.

Yet, that step -- with its attendant costs to the overall Alaska economy -- is the first lever the Senate has proposed to pull as it (finally) starts to deal with the state's fiscal situation.  And they have proposed to pull it extremely hard, after including the multiplier effect reducing overall Alaska income in the aggregate by nearly $1 billion (out of only a $40 billion economy) in one fell swoop.

As a result, frankly it's disingenuous for the Senate or anyone else to try to distinguish their position on oil taxes on the basis of economic harm.  If they truly cared about the overall economy, they wouldn't be taxing the PFD either -- at least, not anywhere near to the extent they have proposed.

Instead, what this demonstrates simply is that the Senate (and again, to a lesser extent, the House) cares only about protecting some parts of the economy -- in this case it is the oil industry and its hangers on -- rather than the overall economy or the Alaska families that form the core of it.

For them, the proposed approach still remains "tax that guy behind the tree."

As we have said repeatedly on these pages, we don't believe any of these "tax and spend" programs are necessary. Instead, we believe using the Hammond 50/50 approach Alaska is well positioned to ride out the current low in the oil price cycle without self-inflicting any further damage on its economy. See "The Special Session version of “Implementing Governor Hammond’s 50/50 Plan," https://goo.gl/nE15Eo.

But, as we also have said repeatedly if we nevertheless are headed down this road it should be done with the least damage and disproportionate effects possible. We believe that replacing both the Senate and House proposals (both the PFD cut and income tax components) with a single flat tax -- a tax that imposes an equal distributional burden regardless of income class -- does exactly that.

That approach doesn't leave any one part of the overall Alaska economy -- or any one segment of Alaska families -- "behind the tree." It treats all the same.

Friday, July 14, 2017

How an op-ed in the Financial Times foreshadowed Wednesday's oil tax hearing debacle ...

Wednesday's conference committee hearing on HB 111 (the House oil tax bill) made clear that the differences between the state's two legislative bodies are widening -- rather than narrowing -- as the current special session winds down. For those that didn't follow Wednesday's events, a good summary is here, House maneuver proposes no deductions on oil taxes, https://goo.gl/4kkprp.

As we were following along, it dawned on us that the outcome had been foreshadowed in a commentary earlier in the day by the Financial Times' Martin Wolf. Although most of that piece was about national issues, https://goo.gl/7DmjzS, there was one paragraph that struck hard as speaking directly to Alaska's situation as well.  It came in the penultimate paragraph and said this:
For that tragedy I blame the rise of US “pluto-populism”. Behind this is something remarkable: the US income distribution is now more like that of a developing than an advanced country. Populism (of both left and right) is a natural consequence of high inequality. 
A chart comparing the level of US income inequality compared with other countries is available at the article.

The point Wolf was making in that part of his piece is that as income disparity rises, people increasingly look at issues from the perspective of income class and support those positions that favor their particular class.  Lower income classes -- and their representatives -- increasingly take positions that attempt to close the disparity by shifting additional resources to their side of the ledger (or at least, avoid further attrition); upper income classes -- and their representatives -- increasingly take positions designed to blunt those efforts and preserve (or in some instances, even increase) their higher income levels.

In nations where income distribution levels are closer -- as for example in Germany, Scandinavia and Canada -- people tend to take the view that a rising tide lifts all boats and adopt positions that are designed to help the economy overall, rather than care more about their share of it.  Because income distribution is closer, there is a sense that all will participate in any success.

However, in nations where income distribution levels are further apart or significantly widening -- such as in the United States -- "populism" on both the left and right obscures the focus on the overall economic "boat."

Viewed through that prism, Wednesday's hearing -- which reflected an increased level of "left" populism -- makes sense and frankly, is an understandable counter-point to what some on the "right" previously have proposed.

As readers of this page will know from previous commentaries, cutting the PFD -- the Senate's proposal for two years running -- has a huge, disproportionately harsh effect on lower and middle income Alaska families (not to mention having the "largest adverse effect" of all the so-called "new revenue" options on the overall Alaska economy).

To a significant degree, the Senate's proposed PFD cut is and always has been a populistic genuflection to those on the right
-- largely those upper income Alaskans who want to avoid personal taxes significant to them and, as a consequence, seek to shift the burden for funding government elsewhere (which happens to be on to their middle and lower income counterparts).

Viewed in context, Wednesday's left-leaning actions by the House were simply a response to the Senate's previous move to the right.

Consistent with Wolf's conclusion in the FT piece, this sort of tit-for-tat between left and right is fully capable of going on for a long time.  Even though doing so undermines the overall economy (as both Alaska's left and right already have done), both sides are likely to view that simply as collateral damage to their larger effort.  As long as each proposal is viewed as favoring one side of the divide (left or right) over the other, the other will view its primary mission as counter-punching.

How do we get out of this do-loop?  By finding a way to spread the burden of government proportionately across all classes so that no one income class views any particular step as advantaging or disadvantaging them over others.

As we have said repeatedly on these pages, we don't believe any of these "tax and spend" programs are necessary. Instead, we believe using the Hammond 50/50 approach Alaska is well positioned to ride out the current low in the oil price cycle without self-inflicting any further damage on its economy. See "The Special Session version of “Implementing Governor Hammond’s 50/50 Plan," https://goo.gl/nE15Eo.

But, as we also have said repeatedly if we nevertheless are headed down this road it should be done with the least damage and disproportionate effects possible. We believe that replacing both the Senate and House proposals (both the PFD cut and income tax components) with a single flat tax -- a tax that imposes an equal distributional burden regardless of income class -- does exactly that.

If we do that, we can get back to working on proposals that prioritize the overall Alaska economy.  Until we do that, Wolf's "populism of both left and right" will continue.  Alaska's overall economy will be the victim.

Monday, July 10, 2017

Alaska's recession is getting worse and government is making it even worse yet ...

The latest Alaska GDP (Gross Domestic Product) update paints a dismal picture of an already weakened Alaska economy that is growing even more bleak. https://www.adn.com/business-economy/2017/07/07/alaskas-gdp-just-saw-its-longest-decline-on-record/

What is going on here? A recession. The National Bureau of Economic Research defines an economic recession as this: "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." The Alaska economy is down on all those measures.

What causes a recession? "Recessions generally occur when there is a widespread drop in spending (an adverse demand shock)."

What cures them? "Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation."

How has Alaska government responded to the state's current situation? Bizarrely, by doing the exact opposite.

Instead of taking steps to increase the amount of money & spending (driven by income) in the Alaska economy, government has contracted it by taking money out.

How has it done that? By dramatically reducing the PFD, the economic channel that, according to a March 2016 ISER study, has the greatest income multiplier -- i.e., produces the most overall Alaska income -- of all the fiscal options available to the government.

What has it done with the PFD? There are two ways of looking at it, both bad. One is that the government has sidelined the money, leaving it in savings, reducing income (at the very time Alaska needs it most) without replacing it at all. The second way of looking at it is that government has redistributed the money as government spending. The problem with that is that the level of overall Alaska income generated when redistributed through government spending is much lower than when distributed and spent by individual Alaskans through the PFD. Indeed, when spent as capital spending the multiplier effect is even negative (as in, a large chunk of the money leaves the state's economy immediately without generating Alaska income).

Either way you look at it state government has and continues to make the overall recession worse, not better. That is a development which, if Alaska had the same type of economic press coverage as occurs at the national level, would cause public outrage and likely doom the reelection prospects of all those involved.

And even more disappointingly, state government has made the economic situation of many individual Alaska households -- and indeed, those that can handle it least -- even worse still. Rather than spread the burden of its adverse actions across the spectrum of Alaskans proportionately (by income, the best measure of how Alaska families are capable of handling the burden), by cutting the PFD government has focused the bulk of the burden on lower, lower middle, middle and even upper middle income Alaska families. Astonishingly, those allocated the smallest share of the burden -- the Top 20% of Alaska families by income -- are those who would be the best positioned to bear the most.

Even more astonishingly, Alaska Democrats/Independents, who one would normally expect to resist such massively disproportionate results, are largely as culpable as Republicans in these efforts. The Alaska House Majority Coalition's proposed blend of PFD cuts and income tax is so heavily weighted by the PFD reduction component (which caps the PFD by converting the calculation from realized earnings to a POMV, then cuts the PFD further by reducing it from 50% of the resulting "new earnings" stream to 33%) that the disproportionate impact on lower, lower middle, middle and upper middle income Alaska families is only slightly less draconian than that proposed by the R-led Alaska Senate Majority.

If you think Speaker Bryce Edgmon, Majority Leader Chris Tuck, Finance Co-Chair Paul Seaton, "Independent" House Finance Committee members Reps. Jason Grenn & Dan Ortiz, or any other member of the House Majority Coalition is looking out for the interests of the overall Alaska economy or the bulk of Alaska families any better than the Senate Republicans, you are sadly mislead. All that they are proposing to do is redirect the money they are taking out of the overall Alaska economy to a different set of recipients. That set of favored recipients will be better off, but the overall economy will still be headed to the same place.

In short, from the perspective of the overall economy and the bulk of the Alaska families -- what we focus on most -- all that the House Majority Coalition is doing is largely taking a different road to the same place.

It doesn't have to be this way. As we have said repeatedly on these pages, we don't believe any of these "tax and spend" programs are necessary. Instead, we believe using the Hammond 50/50 approach Alaska is well positioned to ride out the current low in the oil price cycle without self-inflicting any further damage on its economy. See "The Special Session version of “Implementing Governor Hammond’s 50/50 Plan," https://goo.gl/nE15Eo.

But, as we also have said repeatedly if we nevertheless are headed down this road it should be done with the least damage and disproportionate effects possible. We believe that replacing both the Senate and House proposals (both the PFD cut and income tax components) with a single flat tax -- a tax that imposes an equal distributional burden regardless of income class -- does exactly that.

If government is going to make Alaska's economic situation worse by pulling money out of the private sector and respending it less efficiently through government, at least the burden of the mistake should be spread proportionately across Alaska's families, not concentrated on any one sector.

Saturday, July 8, 2017

To my many friends in the oil industry, I am increasingly repelled ...

Former Senator from Louisiana and long-time US Senate Finance Committee Chair Russell B. Long had a saying to summarize the positions often taken by lobbyists on tax policy: "Don't tax you, don't tax me, tax that fellow behind the tree."

I am reminded of that saying often when reading or listening to something from one of Alaska's Top 20% (of income) about Alaska's current fiscal situation. Their plea (especially when writing or speaking in one of their media or trade association echo chambers) tends to be, "Don't tax you (the oil industry, the source of much of the Top 20%'s income), don't tax me (with an income tax), tax the other 80% of Alaskans behind the tree with PFD cuts."

That saying came to mind again when reading rumored R gubernatorial candidate Scott Hawkins' latest piece in Top 20% mouthpiece Must Read Alaska. "Worst negotiators in modern Alaska history?," https://goo.gl/rwQSxx. It is largely yet another screed about why we need to save "the state" (but in reality, mostly the Top 20% whose businesses, like Hawkins, are tied to the oil industry) from the evils of changes in oil taxes (some of which were recommended a couple of years ago by an R led task force).

Imagine the even greater outrage Hawkins and others in the Top 20% would be voicing if someone was actually proposing to increase government take on the oil industry or, perish the thought, their income, by 30%, 16%, 9% or heck, even 5%. We already have heard the screams of outrage at the House's proposal to convert to government, on average for a family of four, 4.5% of the Top 20%'s income through a combination income tax/PFD cut.

Yet, that is exactly what the Top 20% proposes to do to middle and lower income Alaskans. As we have discussed previously (and is reflected in the attached chart), again for an average family of four, the Top 20%'s preferred Senate alternative proposes to take over 30% -- nearly a third!! -- of the income of the lowest 20% of Alaskans, nearly 16% from the next tier (lower middle), nearly 9% from the next tier (middle income), over 5% from the next tier (upper middle), but only 1.9% -- not even 1/15th of what they propose to take from the lowest 20% -- from themselves.

Personally, I am increasingly repelled by such seemingly non-stop, self-righteous pleas by some in the Top 20% on behalf of themselves and the oil industry. I remain firmly convinced we need to approach changes to oil taxes with extreme caution in order not to undermine the gains made in investment and production levels through SB 21. But I have to admit I increasingly understand the motivations of those pushing for larger changes when reading articles from Hawkins and others in the Top 20% defending the current structure while at the same time supporting massive increases in government take (through PFD cuts) from lowest, lower middle, middle and even upper middle income Alaska families.

To my many friends in the oil industry I would say that those who are defending the industry in that way aren't doing the industry any favors.

Instead, at least in my mind, they increasingly are tying the industry in many minds with the worst of the elitist, self-serving, Scrooge-like and anti-economic -- remember, cutting the PFD has the "largest adverse effect" of all of the so-called "new revenue" options on the overall Alaska economy -- rhetoric coming these days from the Top 20%.

That seems the surest way to lose the looming oil tax battle, not win it.

As we have said repeatedly on these pages, we don't believe any of these "tax and spend" programs are necessary. Instead, we believe using the Hammond 50/50 approach Alaska is well positioned to ride out the current low in the oil price cycle without self-inflicting any further damage on its economy. See "The Special Session version of “Implementing Governor Hammond’s 50/50 Plan," https://goo.gl/nE15Eo.

But, as we also have said repeatedly if we nevertheless are headed down this road it should be done with the least damage and disproportionate effects possible. We believe that replacing both the Senate and House proposals (both the PFD cut and income tax components) with a single flat tax -- a tax that imposes an equal distributional burden regardless of income class -- does exactly that.

We also believe going down that road best serves the interests of those -- like us -- focused on maintaining and expanding productive oil investment in the state. In our view, the road outlined by Hawkins and others -- which preserves their and the industry's position but at the increasing expense of average Alaskans -- ultimately leads to a whiplash in oil policy and a return to the policies of 2007-13. -- Brad Keithley, Managing Director, Alaskans for Sustainable Budgets