This morning's discussion with Paul Jenkins ...

This morning I joined Paul Jenkins on air for a bit to discuss the Alaska budget.  Paul is the editor of the on-line newspaper Anchorage Daily Planet and is sitting in this week as the guest host of the Rick Rydell Show.  Paul is someone I have joined on air a number of times over the years when asked.

Paul and I started with my take of the Governor's proposed budget and went from there.  My point, as it has been consistently, is that the Governor and his proposed budget are focusing only on the government economy and, in the process, hurting the private and more importantly, overall Alaska economy.

The discussion provides a good overview of the problems I see with the Governor's approach, and what I view as the better way forward.  Those interested can listen in by clicking on "start" icon below, or by going to the link here:  http://650keni.iheart.com/media/play/27568778/?timeCodeStart=3130.

The conversation starts at 52:10 into the segment.

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

Earlier last month we published and discussed on these pages a worksheet we had prepared to evaluate the Fall 2016 Revenue Sources Book, and FY 2018 Budget and related 10-year forecast.  What we will be looking for in the Revenue Sources Book and Budget ..., https://goo.gl/1kutBL.

Yesterday, the Administration simultaneously published both the Fall 2016 RSB, https://goo.gl/mCPfgH, and proposed FY 2018 budget/10-year forecast, https://goo.gl/R8GxSI.  This morning we filled in the worksheet, adding three more points of analysis -- "PFD as a Percent of Earnings," "Total 50/50 Draw on PF" and "Percent of PF Earnings Taken by Gov't."

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

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

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

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

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

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

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

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

Catching up on the blogs ...

Hmmmm, from the blog, Must Read Alaska (Dec. 5, 2016):

"Where is the business community and who might emerge as a person with the courage to lead during the toughest fiscal situation since the late 1980s? Who has the business credibility, grasp of the issues, potential for broad electoral appeal, and the political savvy to put together a strong campaign?

Some mention the name Brad Keithley, but he’s not likely to pass the opposition research test. As a career attorney, his profession can hurt him.

Others say Joe Beedle (Northrim Bank president), but Joe has landed the job of a lifetime. He has not shown political ambitions, preferring to move the needle in lower key ways.

John Sturgeon has almost folk hero status in Alaska after battling the Park Service all the way to the U.S. Supreme Court. He’d have to re-register as a Republican, but he does have broad appeal because of his David-and-Goliath taking on of the federal government."

For the complete article, go to https://goo.gl/99BvgJ.

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

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

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

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

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

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

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

Oil Price:  We will compare the oil price forecast included in the Fall RSB against the projected price levels included in the federal, non-partisan Energy Information Administration's (EIA) 2016 Annual Energy Outlook, https://goo.gl/KmyL0K  The EIA projections are largely in line with those being published by other governmental agencies and private consulting groups.  

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

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

Unrestricted General Fund (UGF) Investment Revenue from Permanent Fund Earnings:  As readers will know, in the collection of his final writings, Diapering the Devil, https://goo.gl/FFTi9M,  Governor Jay Hammond had this to say about his vision for the Permanent Fund:

I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity. … [Once the money wells were ‘pumping money,’ in other words, producing earnings] each year one-half of the account’s earnings would be dispersed among Alaska residents …. The other half of the earnings could be used for essential government services.

We will evaluate the extent to which the Administration's proposed budget implements Hammond's "50/50" plan -- as a means of addressing the deficit -- by comparing the Administration's proposed draw of the available "other half" of Permanent Fund earnings with the levels which would be available if Governor Hammond's proposed plan was fully implemented.

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

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

Why some self-proclaimed "Alaska fiscal conservatives" aren't ...

Over the last few days we have seen several posts linking to the following article from an upcoming issue of Forbes. Alaska And Oil: A Lesson In Biting The Hand That Feeds You,  https://goo.gl/yTFe28.

Based on the article, many of the posts claim that the Governor "reneged" on promises made by the state, or in some instances, that the Governor "violated the law" by vetoing last summer several hundred million dollars in payments authorized in the budget passed by the legislature to be made to certain oil companies.

The posts are uniformly wrong.  

The Governor's veto decision did anything but "renege" on "promises" made by the state or violate the law.  Instead, his veto decision actually enforced a statutory limit the legislature itself was seeking to overlook and, as such, was a prudent response to Alaska's tightened fiscal situation.

Those who argue to the contrary are, at the very least, unwittingly arguing that Alaska should draw down its savings beyond the levels required by statute in order to bail out a few companies that don't like the position they have gotten themselves into.  Others are doing so knowingly, urging for various reasons that certain selected corporations should receive an unearned priority over Alaska's own need for additional revenue.

The genesis of the tension is not, as the Forbes article mistakenly suggests, SB 21, the law passed in "2013" that made Alaska's oil tax structure more competitive for those producing oil.  Instead, the law at issue is part of a separate piece of legislation that goes back much further, largely to era when Sarah Palin was Governor.

That law, codified largely at AS 43.55.028, https://goo.gl/zzIIB4, does provide that the state will reimburse producers meeting certain criteria some of their costs of production.

But that commitment by the state comes with a significant caveat.  The state's obligation is explicitly limited to the amounts available at any given time in an "oil and gas tax credit fund" established pursuant to the statute.  Importantly, the statute provides that the state is only obligated to fill the fund at a certain rate.

From the start, the statute has provided -- and potential claimants have been aware -- that the state is only obligated to fill the fund based on the level of the state's tax receipts and the price of oil.  At oil prices below $60 per barrel, the state is required annually to contribute 15% of the state's production tax receipts to the fund.  At oil price levels of $60 per barrel and higher, the percentage is set at 10%.  AS 43.55.028(b) and (c).

The reason for the limitation is explicitly to limit the level of contributions the state is required to make to the fund at any given point in time, particularly in times -- such as now -- when state revenues are low and the cash is needed elsewhere.

Because those limitations are clear in the statutes governing the program, the producers that have been involved are well aware of them and accepted the risk that contributions to the fund -- and thus, the rate of reimbursement -- would be slowed when oil prices were low.

Indeed, the statute expressly provides that there may be times when "the total amount of ... claims for refund exceed the amount of available money in the fund."  AS 43.55.028(g). In those situations, the statutes and regulations provide for the manner in which the available funds will be allocated.

What the Forbes article picks up on is an effort by some producers now to jump the statutory process and cause the state to put more money into the fund than required by the statutes, so that they are paid earlier than the law provides.

The producers effectively are not seeking enforcement of the statute; they are seeking to end run it.

In other words, now that the risks they knew were there and accepted at the time they entered the program have materialized, they want the state to hold them harmless from the consequences and continue to make payments as if the price of oil -- and thus, the state's cash flow -- had remained high.

The effect on the state of accommodating those requests is clear.

The size of the state's immediate deficit will grow beyond the levels contemplated by the statute, requiring the state to increase its draw from savings in order to transfer additional monies to the producers earlier than required.  Because of the accelerated draw down on savings, the effect also will be to increase pressure for additional PFD cuts and other taxes.

In short, the effect will be to give an extra-statutory benefit to some producers, at the direct expense of the state and its citizens.  

Some suggest the state nevertheless should make the additional payments quicker, asserting that the state will economically benefit from earlier than anticipated oil production. But those that make the argument apparently have not run the numbers.

By the end of FY 2017 the state will have paid out about $3.5 billion in reimbursements, almost 8% of the size of the Permanent Fund principal at the same point.  By the end of FY 2018 the state will owe an additional $1.15 billion.

If the program had not existed, those amounts would have been saved and invested, not only preserving the amount from loss, but also producing additional revenue to the state in the form of investment earnings.

Compared to that, to date the state has not even recovered a significant fraction of the $3.5 billion thus far invested in the program, much less any financial return on those payments.  Some argue that those returns may come in the future.  But that is speculative, while in the meantime if the money instead had been retained and invested along side the Permanent Fund it would be steadily producing a stream of earnings year after year.

The result is, on a net present value basis -- the way that investors weigh returns -- the state would have come out miles ahead if it had retained and invested the money.

By reducing the level of the state's savings even further, paying out the amounts owed under the program earlier than required as Caelus and others now urge will just make that difference bigger, and the state's fiscal problems that much worse.

Ironically, some now arguing to accelerate the payments beyond the schedule required by the statutes are among those that also argue the #AKLNG project is no longer worth pursuing because, in their view, the private sector has backed off investing its money upfront in the project in an amount proportionate to its interest.

The same reasoning applies to the oil credit program.  The program -- and the resulting state payments -- exist in the first place because the private sector has not found the prospects sufficiently robust to attract the needed level of private capital.  If the test for state investment is whether the private sector is interested in putting up its own money equal to its ownership interest, this program fails as surely as does the #AKLNG project.

We have argued previously that the oil tax credit program should be terminated.  Why we need to halt the reimbursement of oil credits — and how, https://goo.gl/vyyfEx.  Because it hasn't, the state is continuing to pour money into it rather than alternative investments that would produce better returns.  By foregoing those better returns, the oil tax credit program is making the state's fiscal picture worse, not better.

Now, some urge a course of action that would make that already bad decision even worse, by accelerating the drain on the state's savings even faster than the statutes require, in order to transfer more money more quickly to private corporations than the statutes require.

Those corporations knew the rules and the risks of the game when they started their projects.  Now that some of the risks are coming home to roost, they want to change the rules to bail themselves out at the expense of the state.

While they continue to make the claim, in our view those that support the efforts to change the rules aren't fiscal conservatives. Instead, they are simply "crony capitalists" -- those who seek to manipulate government rules to benefit themselves over others -- of a different sort.  See Alaska's Crony Capitalists, https://goo.gl/zTHwvS.

What today's ADN story on the 'Musk Ox Coalition' misses ...

In an article in today's Alaska Dispatch News, political reporter Nat Herz discusses the central legislative role being assumed by five representatives -- members of the so-called "Musk Ox Coalition" -- who caucused with the Republican-led House Majority last session, but who are shifting to a largely Democrat majority this session.  The Musk Ox revolt: How the Alaska House flipped from Republican control for the first time in two decades, https://goo.gl/XbozJU.

While Herz's story does a good job going back to the origins of the Coalition at the end of the 2015 session, it noticeably leaves out any mention of one key -- what the Coalition members themselves identified at the time as being a "strongly" held -- position on fiscal issues.  Because of continued importance of fiscal issues, the position they took then continues to have significant relevance today, but is one about which Coalition members appear to have remained silent -- and, thus, quietly may be attempting to drop -- as they transition from one side of the aisle to the other.

As Herz correctly notes, the "Musk Ox Coalition" first surfaced publicly in a joint May 20, 2015 letter to then-Speaker Mike Chenault.  The letter was in response to an ill-fated proposal by House leadership to move substantially all of the money then contained in the Permanent Fund earnings reserve to the Permanent Fund principal.

The move would permanently have taken the past accumulation of what Governor Jay Hammond called in his book Diapering the Devil, the "other half" of the Permanent Fund earnings stream -- what Hammond intended to be available for "essential government services" -- off the table, significantly reducing the flexibility of both that and future Governors and legislatures to deal with the state's fiscal situation.  See Diapering the Devil, https://goo.gl/FFTi9M (Hammond:  "I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity. … [Once the money wells were ‘pumping money,’ in other words, producing earnings] each year one-half of the account’s earnings would be dispersed among Alaska residents …. The other half of the earnings could be used for essential government services.”)

The Musk Ox coalition opposed the move, expressing what we believed then and still do now, a well-placed concern "about how manipulating these funds now might impact the ability of the earnings reserve to play an effective long-term role in reaching sustainable, balanced budgets ...."

In his story, Herz picks up on some of that, but leaves out this piece of the letter and then, "Musk Ox coalition" position:

... we strongly believe that major actions having to do with the Permanent Fund, such as this, should go before the voters. (emphasis added)

This position has significant relevance as the Musk Ox members move to the other side of the aisle because some in the new, largely Democrat majority that they are joining already are suggesting that significant cuts in the PFD necessarily must be a part of any fiscal solution.  At least in our view -- and we would anticipate, the view of most Alaskans -- such a step certainly would constitute a "major action having to do with the Permanent Fund," triggering the need for a vote, at least in the then mind of the Coalition members.

To us, a timely and highly relevant question then is what role, if any, the position has played in the move of the Musk Ox Coalition members to the other side of the aisle.  Does the position remain a "strongly" held belief of the members and, if so, how have they addressed it in the course of the move.  And if they haven't, does that mean they have dropped it, and if so, why was it "strongly" held then but not anymore.

Herz's story doesn't even mention, much less probe the issue.  We hope that future stories on the subject will.  It was a critical piece of the position taken by the Coalition members in 2015.  Now that they are assuming a significant role in the upcoming legislature, it is important to understand whether the position will remain so once they cross the aisle.

 For those interested, a full copy of the May 20, 2015 letter follows:

Musk Ox Coalition letter (May 20, 2015) from Brad Keithley

An initial reflection on the election: Charting a way forward on fiscal issues

While we still have the addition of absentee and questioned ballots to go before becoming final, at first glance the state election returns appear to have produced mixed signals from voters on the best way forward on Alaska fiscal policy.

While two incumbents from the House majority lost and two from the Senate who voted in the last session permanently to cut the PFD were returned, others from the House majority who were heavily challenged nevertheless survived.

And most significantly of all, five of the "House Finance six" -- the six members of the House Finance Committee who voted against the Senate's proposed permanent PFD cut -- were reelected, including two (Reps. Pruitt and Wilson) who were directly and heavily targeted by their opponents and PAC's for having voted against the Senate's bill.

While some will question whether there are any clear signals that arise out of those sorts of mixed results, we believe from a fiscal perspective there are at least three significant ones.

The first is that voters support cutting state spending further.  Even the two Senators who voted permanently to cut the PFD last session campaigned heavily on the need for additional budget cuts. So did the heavily challenged, but surviving House majority members.  Those who campaigned on maintaining government spending, particularly the two who challenged the incumbent Senators and some who challenged incumbent members of the House majority, largely lost.

The second is that voters did not ratify making PFD cuts.  While the two Senate incumbents that voted to cut the PFD survived, one did so only after endorsing Senator Dunleavy's proposed PFD Restoration Act, and more importantly as we noted above, so did five of the House Finance six, despite two being directly targeted by their opponents and PAC's for having voted against the Senate's bill.

If there was a broad consensus in favor of cutting the PFD we believe at least one of the targeted House Finance 6 majority members would have been defeated.  This is not to argue that there is a broad consensus in favor of retaining the PFD, but simply that there was no broad consensus either to cut it.

The third is that while there is no broad consensus yet on the overall outline of a fiscal plan (other than generally to make further spending cuts), there is a consensus that there needs to be a "plan."  Clearly, members of the House majority were weakened this election cycle because of the perception that they had not developed a plan to deal with the state's fiscal situation.  Some lost, others had tighter elections than they had before.

But as we note above that does not mean that the voters were enthralled either with the Governor's plan or with the plan subsequently adopted by the Senate, both of which centered around PFD cuts.  The incumbent Senators that voted for it also had tighter than usual races, from opponents that, in view of the other results, weakened themselves significantly by not also emphasizing spending cuts.  And as also noted above, five of the House Finance 6, and both that came under intense fire in the general election, retained their seats even though they voted against the Senate plan.

So where does that leave us as a way forward.  

Frankly, we believe it should lead Alaska to look for a different way forward from that proposed by the Governor and adopted by the Senate last session.  Consistent with the results of the election, that way should make additional spending cuts and forego efforts to rely on PFD cuts or other taxes to recycle revenues out of the private economy to the government economy.

And the best way to achieve that, we increasingly believe, is to travel "back to the future," by looking again to Governor Hammond's original fiscal plan -- the plan that created the Permanent Fund and PFD in the first place -- as the way forward.

As outlined in Hammond's Diapering the Devil, https://goo.gl/FFTi9M, his original plan was this:

I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity. … [Once the money wells were pumping,] [e]ach year one-half of the account’s earnings would be dispersed among Alaska residents …. The other half of the earnings could be used for essential government services.

Alaska already has implemented the first and second parts of the plan.  The first --  "to transform oil wells pumping oil for a finite period into money wells pumping money for infinity" -- describes the Permanent Fund itself.  The second -- "[once the money wells were pumping,] [e]ach year one-half of the account’s earnings would be dispersed among Alaska residents" -- describes the PFD.

The third step in the plan -- "[once the money wells were pumping,] ... [t]he other half of the earnings could be used for essential government services" -- has never been implemented, however. 

As we have explained elsewhere, implementing the final part of the plan could provide an additional $1.2 - $1.7 billion in revenue annually over the next five years, without damaging the overall economy through PFD cuts or other taxes.  Fully implementing Governor Hammond’s 50/50 plan (or, how to find another $1.5 billion in annual revenue without PFD cuts and taxes)…, https://goo.gl/7Ct8B5 (a slide deck summarizing the approach follows this column).

Combined with the use of the accumulated savings created by the unspent part of the past "other halves" and limiting overall spending to the long-term sustainable budget level, the approach also provides the means to continue to cushion Alaska through the current downturn until commodity prices -- and thus, state revenues -- start to recover.  Those who argue that state government is "running out of savings" are misleading Alaskans ..., https://goo.gl/SLpZFd.

And even if it reduces savings somewhat, the approach doesn't jeopardize the state's long-term ability to continue to pay the PFD.  Bill Walker's "Pants on Fire" claim about the PFD ...,  https://goo.gl/kPL363.

In short, coupled with the use of Scott Goldsmith's sustainable budget model to keep overall spending within long-term sustainable revenue levels, reverting to Governor Hammond's original plan produces a result that stabilizes the state's fiscal situation going forward without adversely affecting the state's overall economy.  See Finding Alaska's Future: FY 2018 Sustainable Budget,  https://goo.gl/lpVAwh.

In the last legislative session, some jumped quickly, too quickly we believe, to a plan that relied on making significant cuts to the PFD -- and causing significant injury to the overall Alaska economy -- in order to continue funding government.  The House Finance Committee stopped the effort and we believe, by reelecting five of the six that voted to do so, the voters expressed agreement with that decision.

But voters also appear to have sent a message that they want a fiscal plan going forward.

Returning to Governor Hammond's original fiscal plan provides a clear way forward that achieves both objectives.

That, to us, charts a way forward on fiscal issues in a manner that both best serves Alaska's overall economy and honors the outcome of the election.

Presentation to Alliance Emerging Leaders (11.1.2016) from Brad Keithley

Where have we heard this before -- oh yeah, from the same people ...

Two pieces in last week's Alaska Dispatch resulted in a big sigh ("a long, deep, audible breath expressing sadness, tiredness, or a similar feeling") as we read them.

The first was an article reporting on a Facebook post by soon to be (but not soon enough it turns out) former Senator Lesil McGuire. Anchorage Republican senator attacks one of her GOP colleagues running for re-election, https://goo.gl/9kL7Jw.  The second was an op-ed piece by current Senator Cathy Giessel. Sen. Cathy Giessel: Sustainable budget is Alaska's top priority, https://goo.gl/3duk09.

The reason we sighed at the second -- Senator Giessel's piece -- was mostly because we had heard it before from her -- in 2012 to be exact.

In a press release announcing the formation of a new majority caucus following the 2012 election, where the Republicans ousted what had been a disastrous Bi-Partisan Senate Majority ahead of it, Sens. Giessel, McGuire and others identified their "Top Three Areas of Focus."  The third was this:  "Develop sustainable capital and operating budgets for current and future generations."  https://goo.gl/niydts

Sounds familiar, doesn't it.

The fact is, the reason the claim still sounds fresh is because in the four years since the R's haven't gotten the job done.  In her op-ed piece, Sen. Giessel claims that in the four years since the 2012 election the legislature has "reduced the budget to levels last seen nearly 10 years ago," but the fact is that is only in one category of the budget, and then only if you accept certain accounting tricks employed last year to make even that number appear lower than it was.  See An exchange with Rep. Mark Neuman on the #AKBudget,  https://goo.gl/p5aIuo.

While the R's have reduced state spending in some areas, that progress largely has been offset by a tsunami of cash oil tax credits which have engulfed the budget in the meantime.  And as Chair of the Senate Resources Committee Senator Giessel has been right at the center of that particular disaster -- which isn't over yet.

According to the Administration's forecasts, even with the so-called "reforms' passed this last session, Alaska state government -- and through it, Alaska's citizens -- still remain on the hook for nearly $1.2 billion in accumulated cash credits coming up in FY 2018 alone, and continuing cash payments out the door even beyond that.  In total, the program is expected to cost the state nearly $6 billion through FY 2025.  https://goo.gl/uDwqYk at 12-13.

To put that in perspective, that is nearly 15% of the current principal held in the Permanent Fund.

Had the amount been invested alongside the Permanent Fund principal instead of in the form of cash credits, the amount already would be producing significant financial returns for Alaskans with more to come long into the future.

Instead, the few incremental royalty and tax revenues thus far generated by the resulting production have not even covered the program's costs, much less produced a return.  Because of the time delay alone, on a net present value basis -- the way that investors measure the relative returns of two competing opportunities -- the cash credit program never will produce a value greater than Alaskans would have realized if the money simply had been invested alongside the Permanent Fund instead.

In short, continuing that program has not progressed Alaska toward a sustainable budget; instead, it -- and Senator Giessel's continuing support for it -- has made the budget even more unsustainable.

We also sighed at this passage in Senator Giessel's piece:

Alaska's future demands a broader discussion of revenue to preserve basic government services. I welcome that deliberation. At the same time, the private sector has lost thousands of jobs with more expected. I am not willing to put your house payment at risk to fund a government that still needs to make reductions.

Yet, the fact is "putting [Alaskans] house payment at risk" is exactly what Senator Giessel -- and other Republicans -- voted to do this past session when they passed SB 128, the bill which permanently would have cut (or what those in favor prefer to say, "restructure") the PFD.

According to the University of Alaska-Anchorage's Institute of Social and Economic Research, cutting the PFD is the "most regressive" of all the state's fiscal options.  Short-run Economic Impacts of Alaska Fiscal Options,   https://goo.gl/ZxR1Hw at A-12 ("The reduction in the PFD is the most regressive of all [the fiscal options].")

That means on a percent of income basis cutting the PFD takes the most of all the fiscal options out  of the paychecks of lower and middle income Alaskans -- the very ones that that struggle the most to meet their house payment.

Indeed, according to another recent ISER study, it is an approach also that, standing alone, pushes between 12,000 -15,000 Alaskans --  2% of the population -- that are currently above, back below the poverty line.  Permanent Fund Dividends and Poverty in Alaska, https://goo.gl/iuTjv2 at 14.

That is not taking steps that avoid putting "your house payment at risk;" instead, voting for SB 128 was the one thing that was the most likely to do exactly that -- and that is the very step she chose.

Recently, Senator Giessel has indicated support of a bill by Senator Dunleavy that would reverse the Governor's one-year PFD cut implemented earlier this year by veto.

At first some, including us, took that as a sign that Senator Giessel was admitting her earlier vote for SB 128 was a mistake, which at least would have made her claim to be concerned about "house payments" less hypocritical.

But turns out, it wasn't.  According to the Chairman of the Alaska Republican Party, the concern had more to do with the way in which the Governor had made the PFD cuts, not the substance of the action. So, after all that, what is the R position on cutting the PFD???, https://goo.gl/AJ802T.

Senator Giessel was even more direct about the issue on her campaign Facebook page.

Re-Elect Senator Cathy Giessel

October 29 at 8:14am · 

Alaska needs a real solution for our fiscal issues, not the money grab pushed through by Governor Walker.

And what would have been the right solution?

Re-Elect Senator Cathy Giessel A solution would have been to apply the grabbed $1000 to the budget shortfall. ...

In short she is upset not because the Governor cut the PFD, but because he didn't apply it to something else government related when he did. 

Our frustration with soon-to-be-former (but not soon enough) Senator McGuire is similar.

As reported in the Alaska Dispatch News, McGuire lashed out last week at Anchorage Rep. Lance Pruitt over his vote against SB 128 when it reached the House Finance Committee.  https://goo.gl/9kL7Jw  There, Rep. Pruitt, along with fellow Republican Reps. Lynn Gattis, Dan Saddler and Tammie Wilson, and Democrat Reps. David Guttenberg and Scott Kawasaki formed a bi-partisan majority effectively to kill the bill.

In her post soon-to-be-former (but not soon enough) Senator McGuire claimed that Rep. Pruitt voted as he did over re-election concerns, suggesting that to do so reflected a "lack of leadership."

In our view, though, Senator McGuire is the one that has lacked leadership, or indeed even a basic understanding of the state's economics.

As note above, even at the time Senator McGuire cast her vote for SB 128, the Legislature already had been advised by ISER that doing so would have the “largest adverse impact on the [overall Alaska] economy” of all the state’s fiscal options. Short-Run Economic Impacts of Alaska Fiscal Options, https://goo.gl/ZxR1Hw at A- 15 (March 2016).

Yet, she did it anyway to help bail out some of her friends and supporters whose entire business models have come to depend on government spending at the expense of average Alaskans. See Alaska's Crony Capitalism, https://goo.gl/zTHwvS.

Understanding that, it becomes clear that soon-to-be-former (but not soon enough) Senator McGuire's rant simply employed the diversionary tactic often used by those caught red-handed --  accusing others of the things of which they are, in fact, the guilty party.

While we haven't always agreed with Rep. Pruitt, he is right on this issue and displayed both courage under fire and leadership in casting his vote to help kill SB 128.  See, "Why We are Supporting Lance Pruitt in East Anchorage House District 27", https://goo.gl/OkI73B.

As for Senator McGuire, fortunately soon she finally will become a forgotten footnote in Alaska history.

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

Earlier this year, the Senate voted 14-6 to permanently cut (or to use the euphemism favored by those voting in favor, "restructure") the PFD, and transfer the difference from the private sector of the Alaska economy to the government sector.  The votes on SB 128, the bill which incorporated the cut, are recorded at https://goo.gl/o76S5o.

At the time that the Senate voted to take the step, they already had been advised in a paper authored by three economists from the University of Alaska-Anchorage's Institute of Social and Economic Research -- the state's best economic think tank -- that doing so was the “most regressive” and would have the “largest adverse impact on the [overall Alaska] economy” of all the state’s fiscal options. Short-Run Economic Impacts of Alaska Fiscal Options, https://goo.gl/ZxR1Hw at A-12, A- 15 (March 2016).

But they did it nonetheless.

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

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

Earlier this month Senator Mike Dunleavy, one of those who voted against the PFD cut in the first place, announced his intention to introduce a bill at the start of the upcoming session to reverse the Governor's action and restore the PFD to its full level for this year.  https://goo.gl/9AEubz  Some viewed the bill -- and support for it -- as a potential way for those running for reelection to demonstrate that they had rethought the issue and were prepared to reverse course.

Yesterday, Senator Giessel's campaign posted a video on her campaign Facebook page that seemed to take the bait by announcing her support for Senator Dunleavy's effort.  https://goo.gl/TC2oPM  It quickly was picked up and reposted by several supporting her campaign.

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

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

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

Tuckerman Babcock You generally make better far better arguments than that Brad Keithley. There is a substantive and significant difference between debating and legislating (Giessel) and unilateral confiscatory action (Governor Walker)..

Like · Reply · 22 hrs

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

To me, trying to make a nuanced procedural argument like that is too cute by half. Whether done by "legislating" or veto doesn't matter to the overall Alaska economy. Cutting the PFD is the “most regressive” and has the “largest adverse impact on the [overall Alaska] economy” of all the state’s fiscal options. Short-Run Economic Impacts of Alaska Fiscal Options, https://goo.gl/ZxR1Hw at A-12, A- 15 (March 2016). As Lynn suggested in her response its a mistake either way.

In my view you are trying to paint way too fine a line. Just when I was beginning to climb out of my indifference to how that race turns out, I think you just convinced me to go back in.

Like · Reply · 21 hrs · Edited

Tuckerman Babcock That is rather prickly of you! I doubt I have that much sway with you. I do not speak for Senator Giessel, I was merely making my own observations. Apparently you do not care much whether public policy is legislated or imposed by fiat. That is a "nuance" that is rather important to my philosophy.

Like · Reply · 21 hrs

Brad Keithley Tuckerman ... Well, except when Sean did it. There is a time and place for vetos; that is why the Alaska Constitution provides the authority. I certainly wouldn't write them out of the Constitution wholesale on the grounds that they somehow constitute "fiat." And if you (or Sen. Giessel) were really concerned about that issue, I would have thought there would have been a much greater effort put behind the Constitutionally-provided remedy, the veto override.

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

Like · Reply · 21 hrs · Edited

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

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

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

Yesterday, University of Alaska (UA) President Jim Johnsen announced that UA was proposing to cut a few of its sports programs. https://goo.gl/ctQlzr

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

The combined savings?

Johnsen said the proposed elimination ... will ... save $1.2 million.

To be honest, that's not even a decent "tip" percentage on the level of cuts that are needed.

Last month we analyzed the level of state funding that UA receives compared to the level received by UA's own, self-identified "peer" institutions.  UA identifies three such peers -- the Montana University System (which includes both the University of Montana and Montana State), the Southern Illinois University System and the University of Maine System. https://goo.gl/nR2sne

Here was the result of the analysis:

This coming year the University of Alaska will receive roughly $325 million in state appropriations. That equals $21,875 per student FTE. 

Let that sink in for a moment. UA will receive from the state this coming year over $20,000 -- $21,875 to be precise -- per student. Over $20,000. Per. Student. 

The next closest "peer," as defined by the University itself, doesn't receive even half that per student. According to the most recent published figures, the University of Maine System will receive $210 million in state funding this coming year. That works out to $10,500/student FTE. 

The other two "peers" are even lower. The Southern Illinois University System receives $6,406/student FTE .... The Montana University System receives $5,780/student FTE ....

If UA received the same as the per student average received by its own self-selected peer institutions, state funding would level off at roughly $120 million (a reduction of more than $200 million -- a fifth of a billion dollars -- from current levels). Even if UA received the same as the per student average received by the highest of its own self-selected peer institutions, state funding would still level off at roughly $168 million, a savings of still more than $150 million from current levels.

The cut in University spending Johnsen announced yesterday?  It amounts to a reduction  of $75 -- yes, seventy-five dollars -- per student FTE.  

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

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

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

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

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

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

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