Alaska State Chamber of Commerce: FY2017 Fiscal Briefing

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1 Alaska State Chamber of Commerce: FY2017 Fiscal Briefing by Scott Goldsmith Institute of Social and Economic Research University of Alaska Anchorage Anchorage, Alaska January 20, 2016

2 Outline for Today Fiscal Gap Recent History Fiscal Gap Bogus Solutions Fiscal Gap 3 Tools for a Solution The Biggest Tool Use Asset Earnings Proposals to Use Earnings Keep it Simple The Governor s Proposal Sustainable Spending Criteria for Choosing a Plan

3 Fiscal Gap: What Me Worry?

4 Fiscal Gap: Bump in the Road

5 Fiscal Gap: New Reality? 2015 based on $50 oil

6 A Tale of Two Graphs

7 Fiscal Gap: Holding Our Breath--not a Solution

8 Fiscal Gap: A Gas Pipeline is NOT Our Salvation

9 Fiscal Gap: Higher Oil Price? Fall 2015 price forecast = $50

10 Fiscal Gap : Zombie Solutions Natural Resource Development Value Added Processing Economic Diversification Infrastructure Investments in Power and Transportation Footloose Industry Renewable Energy Eliminate Federal OverReach

11 Non-Petroleum Natural Resources: $8.5 Billion (2011 Market Value) u Mining $ 3,588 u Seafood $ 1,328 u Timber about $ 150 u Agriculture -- u Furs -- u Tourism $ 1,483 u Retirees about $ 1,500 u Air Cargo??? Value determined at point of production except for mining.

12 The Alaska Economic Structure: The Myth

13 Alaska: An Island Economy

14 Fiscal Gap : Nickel and Dime Solutions ü ü ü ü ü ü ü ü ü ü ü Lottery Marijuana Tax School Tax Health Care Provider Tax Increase the. Fish Tax Mining Tax Tourism Tax Gas Tax Alcohol Tax Tobacco Tax

15 Fiscal Gap : Silver Bullet Blank Solutions u Squeeze Petroleum Increase Production Tax Minimum Eliminate GVR (lower tax rate on new oil) Increase Production Tax Rate / Progressivity Gas Reserves Tax u Optimize Financial Asset Portfolio Pension Obligation Bonds Adjust Debt to Equity Ratio Leverage Assets

16 Fiscal Gap : 3 REAL Tools q MORE BUDGET CUTS q INCOME TAX/SALES TAX/PFD REDUCTION q EARNINGS FROM STATE ASSETS PICK ANY 3 FROM THE LIST ABOVE!

17 Use Permanent Fund Earnings: Short Term Effects Biggest single tool in solution No solution without this tool Centerpiece of a workable GAME PLAN No Negative Economic Impact Positive Economic Impact from Confidence Boost Relatively easy to implement And..

18 Buy Time to Prepare for the Inevitable and Prolonged Tug of War No Income Tax! No Dividend Cuts! No Sales Tax! No More Budget Cuts!

19 Proposals for Use of Earnings u 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 u CREMO PLAN (Constitutional Endowment) Similar to POMV except ALL petroleum revenue deposited into PF u 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) u 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) Pay PF Dividend from 50% of Royalties u SUSTAINABILITY--SUSTAINABLE SPENDING (Statutory) Dump all Petroleum Revenues into Permanent Fund Draw amount from PF Earnings and Earnings Reserve that, equals the Sustainable level Divide draw between UGF and PF Dividend

20 Fiscal Structure: 2 Policy Switches 25% ROYALTIES OIL REVENUES Share to PF PERMANENT FUND CORPUS EARNINGS RESERVE % Amt Draw Type SPENDING GENERAL FUND PF DIVIDEND

21 2 Critical Assumptions Future Petroleum Revenues Return on the PF

22 Walker Proposal for Closing General Fund Deficit (Billion $) $5.2 = $.9 + $3.3 + $.6 + $.4 CUTS DEFICIT $ GF SPEND $5.2 DRAW FROM EARNINGS OF STATE ASSETS** NEW TAXES 2017 GF SPEND (includes $. 8 of earnings diverted from PFD) $4.8 REVENUES $1.7 CURRENT REVENUE* * Current Revenue is net of redirection of oil production tax (and royalty) to PF ** Draw is net of PFD payment

23 UGF Revenues in 2015 (Bill $) BUSINESS Corp Income Tax 136 Mining 39 Fishing 26 Tourism 7 Misc 38 Persons is $375 per capita = $1 per day PERSONS Insurance Tax 59 Tobacco Tax 41 Motor Fuels Tax 42 Alcohol Tax 18 Licenses, Charges, Fees 54 Misc 63

24 Increase Taxes on Business ($50) Sector Increase Mining $39 $51 $12 Fishing $26 $46 $20 Tourism $7 $22 $15

25 Increase Use Taxes ($100) Tax Increase Motor Fuels $42 $88 $46 Tobacco $41 $68 $27 Alcohol 18 $58 $40

26 Introduce Broad Based Tax ($200-$400) Tax Increase Income $0 $200 $200 Sales

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29 Cut Spending (-$400) Sector Change % Change Operations $4,100 $3,950 -$ % (-12% over 2 years) Capital $100 $200 $100 Oil and Gas Credits $500 $100 -$400 LNG $0 $50 $50

30 State UGF Budget History 2.0% real 4.5% real

31 What About the PFD? 50% PF REAL EARNINGS $ PERMANENT FUND DIVIDEND SPENDING $1.4 Replaced with 50% of Royalties Diverted to general fund spending $ PERMANENT FUND DIVIDEND SPENDING $.6 $.6

32 Walker Plan: Total 2017 Draw from State Assets (Billion $) Earnings Reserve Draw To Pay UGF Expenses $ 3.3 Unutilized Permanent Fund Earnings To UGF $2.5 Diverted from DIVIDEND $.8 Royalty To DIVIDEND $.6 Oil Taxes to UGF $ TOTAL DRAW $4.2

33 SB114: Total 2017 Draw from State Assets (Billion $) Earnings Reserve Draw at 5% To Pay UGF Expenses $ 2.6 Unutilized Permanent Fund Earnings To UGF $1.9 Diverted from DIVIDEND $.7 Royalty To DIVIDEND $.7 Oil Taxes to UGF $ TOTAL DRAW $3.8

34 Sustainable Spending: Total 2017 Draw from State Assets (Billion $) Earnings Reserve Draw to Pay UGF Expenses And Dividend Earnings To UGF Earnings to Dividend? 2017 TOTAL DRAW (Assume DOR nest egg)? $3.5 $ 3.5

35 What Should We Sustain? VALUE OF OUR FINANCIAL ASSETS VALUE OF OUR DEPLETING ASSETS OIL AND GAS

36 What Should We Sustain? Current Value of the PF = Governor Current Value of PF and partial value of Future Petroleum = SB 114 Current Value of PF and total value of Future Petroleum = Sustainable Spending Other Possibilities =???

37 Recalculate the Draw (hypothetical): What If We Think Future Petroleum Revenues Will Be Higher

38 Some Criteria for Choice SUSTAINABLE STABILITY OF REVENUE STREAM IMPOSE DISCIPLINE ON SPENDING FAIR TO ALL ALASKANS UNDERSTANDABLE IMPLEMENTABLE FLEXIBLE PROTECT ASSETS MINIMIZES UNINTENDED CONSEQUENCES

39 Fragile Economy

40 Strategy Moving Forward? u THIS YEAR Budget Cuts Structured Use of PF Earnings Business and Use Taxes u NEXT YEAR 4 Sided Battle u More budget cuts u Income tax u Sales tax u Dividend reduction

41 Alaska State Chamber of Commerce: FY2017 Fiscal Briefing by Scott Goldsmith Institute of Social and Economic Research University of Alaska Anchorage Anchorage, Alaska January 20, 2016

42 Sustainability Target A spending level based on 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.

43 Complication: 2 Assets in Portfolio Cash in the Bank Revenues from Future Petroleum Production Coordination Needed during Transition to Complete Rentier Fiscal Structure Value of Financial Asset Must Increase at Rate to Offset Decrease in Value of Petroleum

44 Quasi-Sustainability of Gov Plan Value of Portfolio Falls Tomorrow Due to Overspending Today