WHAT IS A SUSTAINABLE DRAW FROM THE PERMANENT FUND? Commonwealth North Fiscal Policy Study Group

Transcription

1 WHAT IS A SUSTAINABLE DRAW FROM THE PERMANENT FUND? Commonwealth North Fiscal Policy Study Group January 31, 2017 Scott Goldsmith Institute of Social and Economic Research University of Alaska Anchorage

2 Inevitable and Prolonged Tug of War No Income Tax! No Dividend Cuts! No Sales Tax! No More Budget Cuts!

3 Proposals for Use of PF Earnings ACCESS TOTAL EARNINGS OF PF--POMV (Constitutional Endowment) Fold Earnings Reserve into PF Corpus Draw 4.5% - 5% of PF value from PF Corpus Divide draw between UGF and PF Dividend IMMEDIATE PLUG--SB114 (Statutory POMV) Draw 5% of PF value from PF Earnings Reserve for UGF Pay PF Dividend from 75% of Royalties (with a floor) STABILIZE REVENUE STREAM GOVERNOR WALKER PROPOSAL (Statutory Sovereign Wealth Fund) Dump SB21 revenues and additional 25% of Royalties into PF Corpus Draw % of PF value or $3.2 Billion from PF Earnings Reserve for UGF (inflation adjusted amount that sustains PF value) CREMO PLAN (Constitutional Endowment) Similar to POMV except ALL petroleum revenue deposited into PF Pay PF Dividend from 50% of Royalties

4 Which Draw Mechanism Produces the Best Sustainability Tradeoff? Do we care about the future? What do we think the future will look like as petroleum production continues to fall? A flow of income from current financial assets and the projected future petroleum revenue stream which, if adopted now, could be maintained consistently long into the future--adjusted for inflation and population growth.

5 Hypothetical Investment Rate of Return 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Inflation Nominal Rate of Return Real Rate of Return (RRR)

6 One RRR Estimate

7 RRR : Actual History

8 Investment Nominal Rate of Return: Where Should It Go? Nominal Return 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Inflation Proofing Population Adjustment Depletion Allowance Sustainable Draw 0.0%

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10 Current Practice: Inflation Proof Contributions Nonspendable Fund Balance Contributions Unrealized Gain Assigned Balance: (Earnings Reserve) $ $5.3=$ $9.0 = $55

11 2017 Partial vs. Full Inflation Proofing CONTRIBUTIONS 2.3 % x $41 billion = $941 Million TOTAL FUND (POMV) 2.3 % x $55 Billion = $1.27 Billion

12 Inflation Proofing: Who Needs It? Value of Contributions increases if Unrealized Gain counted Nonspendable Fund Balance Assigned Balance Contributions Unrealized Gain $ $5.3=$ $9.0 = $55

13 Unrealized Gains Accumulate in Nonspendable Fund Balance (Slow Turnover of Portfolio) Statutory / Accounting Return = 50% Under spend today

14 Unrealized Gains Cashed out from Nonspendable Fund Balance (Fast Turnover of Portfolio) Statutory / Accounting Return = 88% Over spend today

15 Unrealized Gains Cashed out from Nonspendable Fund Balance (In Between Turnover Rate of Portfolio) Statutory / Accounting Return = 66% Just Right spend today

16 Investment Nominal Rate of Return: Where Should It Go? Nominal Return 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Inflation Proofing Population Adjustment Depletion Allowance Sustainable Draw 0.0%

17 Will Need for Public Services Grow With Population? Other measures of the cost of government?

18 Alaska Population Growth

19 Investment Nominal Rate of Return: Where Should It Go? Nominal Return 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Inflation Proofing Population Adjustment Depletion Allowance Sustainable Draw 0.0%

20 Why a Depletion Allowance? To Sustain the Total Endowment from Petroleum Reserves?

21 Sustaining the Endowment: Transformation from Petroleum in the Ground to Money in the Bank PETROLEUM IN THE GROUND MONEY IN THE BANK Sustainable Deposit Rate depends on How Much Petroleum Revenue Remains to be Collected in the Future STYLIZED HISTORY << >> FUTURE

22 Historical Depletion Allowance Is this the right amount?

23 My Estimate: Owner State Endowment TOTAL (FY 2018) In the Bank In the Ground* $98 Billion $57 Billion $41 Billion Known Conventional Oil $25 Billion Other Oil $5 Billion Gas $11 Billion * Estimated Net Present Value of Future Petroleum Revenue

24 Assumptions: Optimally Manage What We Can Control Known Conventional Oil Production 4% Oil Price tracks ADOR, then 3.5% growth New Conventional Oil NPRA Heavy Oil Shale Oil Gas Commercialization in 2026 Gas Revenues to State $1.00/mcf Real Rate of Return on Investments 5.0% Population Growth Rate.5% Inflation Rate 2.25%

25 How Much Can We Spend Today from the Endowment? NEST EGG (FY 2018) $98 Billion Multiply: MSY Take Rate 4.5% (5%-.5%) Equals: MSY Take $4.4 Billion Current Petroleum Revenues (fluctuates yearly)? Investment Income (endowment draw minus current petroleum revenues) Minus: PF Dividend $4.4 Billion -? $ 1.4 Billion Equals: Endowment Draw for UGF $ 3 Billion Plus: Non-Petroleum GF Revenues Equals: UGF MSY $.5 Billion $ 3.5 Billion

26 Sources for UGF Spend Transition of UGF Spend down to $3.76 Billion in 2021 before resuming growth

27 Sources for UGF Spend: Random Oil Price Use of investment income fluctuates yearly.

28 Financial Draw is Residual to Hit Sustainable Spend Target

29 Wrap Up Sustainability should be based on ENTIRE Endowment Sustainable draw depends on size of ENTIRE Endowment Fixed draw rate from financial asset does not account for Depletion of petroleum asset Variation in petroleum revenue from price fluctuations POMV with doubling of Royalty Deposit into PF would provide an approximate solution Implementation of limit on spending from Endowment based on Sustainability Analysis would be best solution (but politically challenging)

30 Good News Scenario? Known Conventional Oil Production 4% Oil Price exceeds ADOR Forecast New Conventional Oil NPRA Heavy Oil Shale Oil Nest Egg $103 Billion MSY $4.9 Billion GF MSY $4.0 Billion Gas Commercialization in 2026 Gas Revenues to State $1.00/mcf Real Rate of Return on Investments 5.25% Population Growth Rate.5% Inflation Rate 2.25% $4.0 billion UGF can grow with inflation & population

31 Best News Scenario? Known Conventional Oil Production 4% Oil Price exceeds ADOR Forecast New Conventional Oil NPRA Heavy Oil Shale Oil Nest Egg $103 Billion MSY $5.5 Billion GF MSY $4.5 Billion Gas Commercialization in 2026 Gas Revenues to State $1.00/mcf Real Rate of Return on Investments 5.25% Population Growth Rate 0% Inflation Rate 2.25% $4.5 billion UGF can grow with inflation

32 Bad News Scenario? Known Conventional Oil Production 4% Oil Price tracks ADOR Forecast, then 3% growth New Conventional Oil NPRA Heavy Oil Shale Oil Nest Egg $86 Billion MSY $3.9 Billion GF MSY $2.9 Billion No Gas Real Rate of Return on Investments 4.5% Population Growth Rate 0% Inflation Rate 2.25% $900 per capita tax allows UGF to grow from $3.76 billion starting in 2021

33 Worst News Scenario? Known Conventional Oil Production 4% Oil Price tracks ADOR Forecast, then 3% growth No New Conventional Oil No NPRA No Heavy Oil No Shale Oil Nest Egg $81 Billion MSY $3.2 Billion GF MSY $2.3 Billion No Gas Real Rate of Return on Investments 4.5% Population Growth Rate.5% Inflation Rate 2.25% $1,750 per capita tax allows UGF to grow from $3.76 billion starting in 2021

34 Alternatives Moving Forward: Cost / Benefit Analysis BASE CASE BAD NEWS Tradeoff for one year is less revenue ($600 million) against a stronger economy. Which do you prefer?

35 WHAT IS A SUSTAINABLE DRAW FROM THE PERMANENT FUND? Commonwealth North Fiscal Policy Study Group January 31, 2017 Scott Goldsmith Institute of Social and Economic Research University of Alaska Anchorage