Things worth reading ...

Two recent articles in Foreign Policy are worth reading.  The first, "When the Petrodollars run out," analyzes the ability of various global petrostates -- and let's not kid ourselves, Alaska is one of those -- to withstand what the writer views as a prolonged decline in global oil prices.   Unfortunately, Alaska is never directly mentioned in these sorts of articles, but normally I am able to come up with numbers for Alaska that enable me to place it in the analysis.

This article focuses on three factors to determine vulnerability -- percent of government revenue derived from oil, percent of GDP derived from oil and the size of the government's sovereign wealth fund.  The higher the first and second, and lower the third, the more vulnerable the government.

Alaska is off the charts in terms of percent of government revenue derived from oil.  At 90+%, Alaska easily ranks among the Top 5 in the world -- on a par (and actually, a little ahead) of Libya, Brunei, Kuwait, Saudi and Bahrain.

Alaska is somewhat better positioned in terms of of percent of GDP derived from oil -- although Alaska's number is a little misleading.  According to the most recent data from the Bureau of Economic Analysis, Oil & Gas Extraction represents "only" (remember that we are comparing this to other petrostates) roughly 25% of Alaska's current GDP, relatively low among its peers.

The challenge with Alaska, however, is that oil-related dollars also drive a number of other economic sectors, which if included, would make the number much higher.  For example, state and local government accounts for another 8% of GDP.  Because a large part of the revenues driving those activities are derived from oil, one could make a case for accounting for a significant part of that percentage in the oil column as well.  But that may be the case also for some other petrostates and so, rather than divert off on what could become a days -- if not weeks -- long exercise attempting to make certain everything is stated on an apples to apples basis, I am good with continuing to think of Alaska as somewhere in the middle of the pack on this criteria.

Alaska is also relatively well positioned in terms of the size of our sovereign wealth fund.  While not as large as Saudi's ($743 billion) or Kuwait's ($410 billion), at $50 billion Alaska's fund is larger than most of the rest.  Interestingly, on the three factors discussed in the article, Alaska most (and in fact, closely) resembles ... Libya.  That's not a good thing.  Read more here.

The second article from earlier this month, "Oil Prices Are Falling, Not Oil Regimes," somewhat examines the same issue, though more from the standpoint of budget issues.  Again, Alaska is not mentioned but can be inserted into the story.  Alaska's current budget has a breakeven price of $117/barrel, not the highest in the world -- Iran's is estimated to be $130 -- but, as with the percent of government revenue derived from oil -- in the Top 5 globally.  As the article points out, that is not a good place to be -- at all -- at this particular moment in history.  Read more here.

A conference (today) on "Alaska's Fiscal Future" ...

Today (Saturday, October 4) at Anchorage's Z.J. Loussac Public Library's Wilda Marston Theater, an all day conference on Alaska's Fiscal Future. Drop in for all or pieces either in person, or by tuning in at Hot Talk KOAN or KVNT Valley News Talk.  The agenda:

Parnell Claim: "Pants on Fire!"

Earlier this election cycle one of the websites that does this sort of thing -- the Tampa Bay Times' Politifact.com -- rated a Mark Begich ad as so false it deserved the organization's ranking reserved for only the most outrageous political claims -- "Pants on Fire!"  The claims which qualify for that rating are those where "the statement is not accurate and makes a ridiculous claim."

If Politifact were following the current Alaska Governor's race I anticipate they would give the same ranking to a claim made yesterday in an email blast sent out by the Parnell campaign.  The blast is below, with the claim circled.

The circled portion reads:  "With a balanced budget and record spending reductions I made with legislators, a Parnell-Sullivan ticket ensures we live within our means. We cut $1 billion in the 2013 legislative session and another $1.1 billion in the 2014 legislative session."

With one exception -- each of the budgets were made with legislators -- neither of the sentences are even remotely accurate and both make ridiculous claims.  

The state's unrestricted general fund (UGF) (the category on which analysts commonly focus when talking about state budget matters) in Parnell's last three budgets has been far from the commonly understood meaning of the word "balanced" -- where spending equals or is lower than revenues.  According to revenues taken from the Department of Revenue's latest Revenue Sources Book (2014 Spring) (Table 2-1) and spending taken from the fiscal summaries prepared by the legislature's Legislative Finance Division, with an adjustment made for FY 2015 as described below, the results of the last three budgets are as follows (in $billion):

None even remotely approaches "balanced" (except in a Juneau-speak world where they assert something is "balanced" if it can be covered by savings retained from previous years) and, in fact, the last two are the highest deficits in the state's history.  

Most of the second sentence is equally wrong.  Looking again at the spending column above (which is derived from the fiscal summaries prepared by the Legislative Finance Division, as adjusted), the spending cut made in the 2013 session (which considered and passed the FY 2014 budget) was approximately $500 million (far from the claimed $1 billion) and that in the 2014 session $1.1 billion.  (The spending level initially reported by Legislative Finance for FY 2015 is $5.83 billion, but needs to be adjusted to add back in $350 million for PERS/TRS in order to make the comparisons apples-to-apples.)  The Parnell claim reaches for various below-the-line cash flow adjustments made to reflect an assortment of transfers from and into reserves held in other accounts (such as various loan funds and AHFC) to claim other numbers.

Finally, not even Parnell's own Office of Management and Budget backs up the bulk of such claims.  In its own analysis of the enacted FY 2015 budget, OMB shows both the FY 2014 and FY 2015 budgets ending up in the red (deficits) even after including the below-the-line transfers.  Its analysis of the FY 2013 budget also shows a final, post transfer deficit.

As the state begins to face a future of significantly lower oil prices than previously forecast -- which alone may balloon this year's deficit from $1.6 billion to $2.5 billion -- it is important that the state's leaders speak honestly with voters about the condition of Alaska's finances.  Parnell's "Pants on Fire!" claims don't even remotely do that.  Alaska -- and Alaskans -- deserve better, much, much better than the inaccurate and ridiculous claims they received from the Governor in this email blast.

Alaskans deserve the truth.

This is what I know ...

For more information on "It's Our Future" click here.

I am working on a longer piece on the importance of fiscal policy in this election, and as usual when I start have prepared a list of the things to use as a reference. Here is the list:

• Bill Walker, Alaska Libertarian Party candidate Care Clift and Alaska Constitution Party candidate J.R. Meyers all have said they support putting in place a "sustainable" budget. That term has a clearly defined meaning, backed up by a series of papers prepared by UAA's Institute of Social and Economic Research (ISER). 
• Recently, Governor Parnell is reported to have said he supports a "balanced sustainable budget." "Balanced" and "sustainable" budgets are two different things.  Under a "balanced" budget government rides down revenues until there are none left or it creates other sources (e.g., through an income tax). Under a "sustainable budget" government deposits excess revenues received in good years (i.e., those years with revenues over the sustainable level) in what ISER refers to as a "nest egg" to produce earnings to supplement and sustain the same level of overall spending in later years (adjusted for inflation and population growth) when other revenue sources aren't sufficient. In the process government avoids the need to create additional revenue sources (i.e., an income tax) in later years as revenues from previously primary sources decline. 
• Moreover, in recent discussions Governor Parnell apparently has claimed to some to have submitted balanced budgets to the Legislature each of the last five years. Even his own Office of Management and Budget, however, admits that last year's budget was over $1 billion in the red when submitted, so not only is what he means by the term "balanced sustainable" unclear, it's not clear what Parnell means even when he uses the term "balanced."
• The current budget, which already is projected to finish $1.6 billion in the red, is based on an assumption of oil prices averaging $105/barrel over the current fiscal year (July 1, 2014 - June 30, 2015).  So far in the fiscal year, oil prices have been at or above that level only 30 days.  Oil prices currently are in the range of $95/barrel and both the futures market and a number of analysts are predicting continued softness in the months, if not years ahead.  
• At current production and tax levels, each $1 change in the price of a barrel of oil changes general state revenues by roughly $90 million.  If oil prices end up averaging $95 for the fiscal year instead of $105, the state budget will end up $2.5 billion in deficit, an all time record and after the previous reductions caused by the deficits and other legislative actions of the last two years, will eat through roughly 20% of the state's remaining unrestricted savings.
• In response to the above, Governor Parnell and his supporters generally rely on his "record" of having reduced the state's budget by $1 billion each of the last two years.  That is not entirely accurate.  Approximately $350 million of that reduction is attributable to ignoring one year's worth of payments generally made out of the operating budget to support PERS/TRS.  When those are added back in, as they should be to produce an apples to apples comparison, the reduction is only in the range of $1.6 billion.
• Moreover, the reductions are from the record budget levels that Parnell himself approved earlier in his term, and haven't even kept pace with the rate of reduction in state revenues over the same period .  Despite the claimed spending reductions, the current budget is still the fourth highest in state history and is estimated to produce a $1.6 billion deficit (the second largest in state history) which as noted above, may balloon to $2.5 billion if lower than projected oil prices persist.  Whatever reductions have occurred, they haven't been remotely enough to put the state back on the sound fiscal footing it was before the Governor started approving record budget increases.  
• Most important, the relevant question to the Governor (and any candidate) this election is not where the state has been, but where it is headed.
• The state's current track is threatening to undue quickly the gains in investor confidence achieved through SB 21.  On its current track the state will run through its remaining savings somewhere between five years from now (at the $2.5 billion/year deficit level) and seven years (at the $1.6 billion/year deficit level).  Investors reasonably anticipate that, when faced with the need to increase revenues (as savings run out), the state will increase taxes on industry first before moving on to other revenue sources.  Without a clear and reliable plan for dealing with the situation, investors already are leery of making significant new investments that rely on revenue streams to achieve anticipated returns lasting longer than four to five years at the outside.
• Beyond that, the state's current track also is leading directly toward what ISER predicts will be "institution of broad-based [income, sales or both] tax and use of a portion of the earnings from the Permanent Fund."  Essentially, on the current track future Alaskans will be left holding the obligation to pay for the bloated spending decisions made by this one.
• In my opinion, fiscal policy is the key issue at the state level in this election cycle.  ISER has said that, on its current track, the state is heading toward a "fiscal crisis" and "economic crash."  The consequences are severe and that track has to be changed now -- by the Governor elected this coming election -- in order to avoid those consequences.  

• The Final Point.  As of this writing, there are 35 days between now and Election Day.  Three candidates -- Walker, Clift and Myers -- need to tell Alaskans how they will achieve a sustainable budget,  within what time frame and how it will avoid the outcomes of the current track.  One candidate -- Parnell -- has to explain in the first place what his plan is for changing the current track that Alaska is on (i.e., what he means by the words he is using), then how he will achieve that plan, within what time frame and how it will avoid the outcomes of the current track.
• The clock is ticking:

Maybe Governor Parnell doesn't understand ...

... what the real fiscal issue is in this election.  It's partly about his past record -- the four largest budgets and two largest budget deficits in Alaska's history.

But that really is only the prologue to the real question -- what is each candidate's plan going forward for dealing with a situation that the University of Alaska-Anchorage Institute of Social and Economic Research (ISER), the state's best economic think tank, calls an approaching "fiscal crisis" and "economic crash" which, if not headed off, will result in the "institution of broad based [income, sales or both] taxes, and use of a portion of the earnings of the Permanent Fund,” just to maintain minimum levels of government services.

The reason the thought the current Governor doesn't understand the real issue crosses my mind is because of a brief Twitter "skirmish" that broke out this afternoon after I published a blog piece discussing a recent statement by Bill Walker that he will "[put] in place a sustainable budget" if elected.  As I discuss in detail in the piece, a sustainable budget is something the state should have -- and some promised to -- put in place two years ago before the legislature enacted and the Governor signed back-to-back the two largest budget deficits in state history.  If they had, the state wouldn't be facing as severe a problem as it is now.

But they didn't and Walker (as well as two of the other candidates for Governor, Alaska Libertarian Party candidate Care Clift and Alaska Constitution Party candidate J.R. Myers) recognize that, as it was two years ago, a sustainable budget remains the best option now -- especially when compared with an income tax and reduced PFD as alternatives.

After publishing the piece, someone with the Twitter handle @AKpolitico -- I don't know the person's real name and he or she doesn't disclose it on their Twitter page, but who from past tweets clearly supports and may be part of the Parnell campaign -- decided to play cute and attempt to score political points off my commentary.  The problem, however, is that they didn't come to the effort with any notion of what Parnell's going forward plan is for dealing with what ISER terms the coming "fiscal crisis" and "economic crash."  All they wanted to do was try to pick on Walker's.  I've played enough poker to know that you don't start the game until all sides have anted up.

As I have thought about it since and gone back to read some of @AKpolitico's prior posts I have come to the conclusion that maybe @AKpolitico is part of the Parnell campaign and maybe they couldn't engage because Parnell doesn't understand what the real fiscal issue is.  Now that is downright scary.

In any event, here is a replay of the "skirmish."  I will leave it to each of you to draw your own conclusions.  Mine are those above.

Bill Walker: “I will … put in place a sustainable budget.” http://t.co/4QfiNHzTaz #akgov #akelect #akleg
— Brad Keithley (@bgkeithley) September 27, 2014

@bgkeithley how do you reconcile that with his support from every big spending interest group? Already seen Walker talk out of both sides
— AKpolitico (@AKpolitico) September 27, 2014

Your time is better spent rationalizing record deficits under Parnell #actionsnotwords @AKpolitico: how do you reconcile ... #akelct #akgov
— Brad Keithley (@bgkeithley) September 27, 2014

@bgkeithley We know Parnell's record & can judge ourselves if cutting $1B in each of last 2 yrs is enough. Ask again: what would Walker cut?
— AKpolitico (@AKpolitico) September 28, 2014

Parnell's record? Four largest budgets, two largest deficits in Alaska history & #noplanforwardfromhere @AKpolitico: We ... #akelect #akgov
— Brad Keithley (@bgkeithley) September 28, 2014

The only apparent Parnell forward plan is spend until AK needs an #incometax #cutPFD @AKpolitico: We know Parnell's record #akelect #akgov
— Brad Keithley (@bgkeithley) September 28, 2014

@bgkeithley What's Walker's plan?
— AKpolitico (@AKpolitico) September 28, 2014

Walker says sustainable budgets, what's Parnell's? #incometax #cutPFD #ObamaHope? @AKpolitico: What's Walker's plan? #akgov #akelect #akleg
— Brad Keithley (@bgkeithley) September 28, 2014

Another, more personal way to look at state spending numbers ...

Yesterday after publishing an earlier piece listing "Four basic Alaska budget facts and a reminder ...," a friend and I engaged in an exchange about how to make the numbers meaningful to Alaskans not as immersed in the numbers as some.  Usually I resist spending much time on those endeavors, largely because I know what I am good at -- and that isn't one of them.  Because I still had the Excel workbook up where I have all of the data, however, I recalculated the numbers as our discussion went along and, at the end, have to admit that the result produced some interesting numbers.

As it went on, the goal was to restate state spending under the various Alaska Governors since 2000 (i.e., the last 15 years), adjusted for inflation (so that the spending levels are not distorted by time) and -- this is the part that my friend convinced me to use to put it on a more understandable level -- stated on a per capita basis, in other words the amount of state spending broken down by each Alaska man, woman and child resident in the state at the time the spending occurred.

The resulting spreadsheet follows, but the quick take away was this:

• During the Knowles Administration, Alaska state government spent $4,928 per Alaskan; 
• Murkowski: $5,777; 
• Palin: $8,579; and thus far during
• Parnell: $8,864.  

The final element was to add in on the same basis what the current level of sustainable spending is -- in other words the amount which, if spent today and the remainder of state revenues put aside for the future, could be sustained for decades into the future without the need for increased taxes or diversion of earnings from the Permanent Fund.  The result (based on current population):  $6,585.

I have to admit these are very interesting -- and useful -- numbers.

Some interesting dynamics at work in the #AKgov race ...

While Amanda Coyne and others in the past have rightfully cautioned against putting too much weight on Alaska polls conducted by Public Policy Polling, there are a couple of interesting results in PPP's latest, released yesterday, that have me intrigued.  The results are the responses to Questions 8 and 9, which are as follows:

The thing that intrigues me is the shift that occurs when the two third-party candidates for Governor are eliminated from the survey and those that otherwise are intending to vote for them essentially are asked to reallocate their vote between the incumbent and Bill Walker.  Tellingly, Walker's lead over the incumbent goes from 1% to 4%, apparently because of the movement of a significant portion of the third-party voters going to Walker.

Of course, neither of the third-party candidates are expected to drop out of the race before the election.  But the numbers nevertheless are intriguing to me because I remember well the 1992 Presidential election, when Ross Perot played a similar, albeit larger, role as a third party candidate.  Polls conducted early in the race put Perot at somewhat significant numbers.  Those dwindled, however, as the election date came closer and voters became concerned that, in a plurality take all contest, casting a vote for Perot instead of one of the top two candidates left the voter out of the decisionmaking process.  The result was a significant movement in the final weeks away from Perot and toward one of the other two, leading candidates.

But those voters took their issues with them and broke surprisingly strong toward the end for Bill Clinton as he increasingly warmed to the budget issues that had propelled the rise of Perot (and George Bush did not).  

Of course, those favoring the Alaska third-party candidates in the current poll are concerned about a number of issues, and some of their supporters are so firmly committed to the cause that it is unlikely they will be swayed to vote for one of the two frontrunners even toward the end.

But from all appearances at this point this election is going to remain close to the end and both of the frontrunners will be looking for every vote they can.  As they contemplate strategies on how to attract some voters away from the two third party candidates it will be important to remember that, like Perot before them, both third party candidates have put budget issues -- and specifically, achieving a sustainable budget -- at the center of their agenda.  See, e.g., "A Statement on Alaska's Future," by J. R. Myers, the Alaska Constitution Party candidate, and "Top Three Concerns for Alaska," by Care Clift, the Alaska Libertarian Party candidate.

Looking back on the 1992 election over time, I have come to realize that there are a number of ways for third party candidates to become successful.  One, like Angus King in Maine, is to be elected.  But a second, lesser preferred, but nevertheless good outcome is to have your issue become the defining one of the election.

A few years after the 1992 election, noted Presidential historian Michael Beschloss had this to say about Ross Perot's run:

“[Perot] was the first candidate really in a big way to float the idea that the deficit was a bad thing .... By the time Bill Clinton was elected that fall, if he had not done something about the deficit he would have been in big trouble and that was largely Ross Perot’s doing.”

In short, even though he wasn't elected, by running Perot put "the federal budget deficit, an issue previously ignored in elections," on the map, and made it "a major part of almost every presidential campaign since."

Care Clift and J.R. Myers are doing the same thing with budget issues in Alaska.  As the PPP poll indicates, the race is shaping up to be tight, with undecideds and third party voters positioned to play a major role.  In an effort to attract those voters both major candidates are going to have to deal with the issues that have propelled support for the third party candidates, and more than anything else those relate to the state budget.  As in 1992 at a national level, by the time this is over the winning candidate may well be the one that has articulated the best plan going forward for securing Alaska's fiscal future.

And that will be the result of Care Clift and J.R. Myers doing what they are doing now -- pressing the issue and continuing to give voters an alternative if the two frontrunners don't step forward with their own solution.  Even if they don't ultimately win the election, as Perot's in 1992 their campaign will have succeeded by creating an environment in which the winner will be in "big trouble" if he doesn't do something about state fiscal issues.