The Alaska budget, the state legislature, percentages and other significant numbers …

The Alaska State Capitol building, Downtown Juneau, Alaska.Percentages and other numbers are interesting things.  By selecting different sets you can make things look small or large.

For example, Rep. Lora Reinbold defended her vote last Thursday against the Operating Budget in part using a percentage, claiming that the proposed budget only cut 5% from spending.  Looking at the actual numbers compiled by the Legislative Finance Division (LegFinance) tells a different story, however.

Using LegFinance’s analysis of the final House bill as a base, Rep. Reinbold’s percentage is right if you focus only on certain categories of state spending (what collectively are referred to as “Agency Budgets”), and compare only what those familiar with these things refer to as the FY 16 Adjusted Base (essentially the spending level for FY 2015 adjusted for “normal” year to year changes) against the proposed FY 2016 spending level before the House when she made her speech.

But if you look instead at what is now estimated to be actual spending levels for the same, certain categories for FY 2015 (the year doesn’t end until June 30, so the figures being used are still estimates) against the actual spending level before the House when she made her speech, the percentage rises to 8.4%.

And if you compare instead the estimated actual spending level for all items covered by the Operating Budget (both the “Agency Budgets” and “Statewide Items”) for FY 2015, adjusted to include PERS/TRS for both years, against the proposed FY 2016 spending level before the House when she made her speech, the percentage still rises to 6.7%.

But none of those numbers tell the whole story of what actually is going on with state spending.  Total state spending is composed of two general categories — Capital and Operating.  Focusing solely on the Operating Budget, as Rep. Reinbold did last Thursday, only tells part of the story.  Understanding the total story requires a focus on both categories.

Adjusted again to include PERS/TRS for both years, combined Capital and Operating spending for FY 2015 is now estimated to be $6.32 billion.  On the other hand, assuming operating spending is held to or near the level adopted by the House and both bodies accept the Governor’s proposed capital budget, approved FY 2016 spending is now estimated to be in the range of $5.45 – $5.5 billion, a roughly $820 – $870 million, or 13%, reduction over FY 2015 levels.

That is not an insignificant reduction.  According to the most recent figures, real Alaska GDP currently is in the range of $51 billion.  As a result, at $850 million the decline in spending roughly equals 1.5% of Alaska GDP.  A reduction of that magnitude is manageable, but it is not appropriate to dismiss it as insignificant.

Other numbers also are important to telling the complete story of what is going on with Alaska state spending.

In an extended discussion in an online forum, one commentator yesterday asserted essentially that the proposal to achieve a sustainable budget is doomed because oil revenues will not support the resulting level.  In her words,

I’ve been told that they must reduce only to 5.5 billion this year.
I’ve been told they must reduce to 5 billion next year.
I’ve been told they must reduce to 4.5 billion the year after that.
Then the budget is supposed to be balanced.
BUT, revenue this year is 2.4 billion.
It is a HUGE gamble to think revenue (price of oil) will increase enough to cover our projected budget.

But the sustainable budget approach has never been based solely on oil revenues.  Because it calculates a revenue stream that is intended to last indefinitely, beyond the time when oil revenues play a significant role in Alaska state spending, the sustainable budget approach always has included in the calculation some revenue produced from a return on Alaska’s financial assets.

Last year (FY 2014), total state revenues, including returns from oil and from Alaska’s fiscal assets (but excluding federal revenues), totalled $14.7 billion.  Even with oil prices down, this year (FY 2015), total state revenues are nevertheless estimated to be $6.9 billion.  And next year, even with oil prices anticipated to be down further, total state revenues nevertheless still are estimated to be $6.8 billion.

Importantly, some of that revenue is appropriately dedicated to continued growth of the Permanent Fund, but excluding that and taking only the conservative 4% return on the state’s financial assets used in the calculation of the sustainable budget number still produces a total anticipated revenue stream for next year of $4.84 billion.  Excluding the return on the state’s financial assets from the calculation of available revenue is like a two-income family basing its budget only on one of the incomes.  It significantly understates the revenue which the family has available to support itself, and may lead to the family taking drastic measures, like foregoing payments on its health and life insurance, when its total income stream does not require such steps.

This is not to say that the budget doesn’t need to be cut more.  Under current conditions, $5.5 billion in spending still is too high to be sustainable and needs to be reduced in the additional two steps I have discussed in previous commentaries on this page (see here, here and here) to $4.5 billion.

And it is not to say that Alaska doesn’t face a potential revenue challenge.  The current sustainable budget level is calculated in part based on the Department of Revenue’s projection that oil prices will rise significantly by the end of this decade.  If, as seems likely now, that outlook undergoes significant modification when next year’s oil price forecast is made, the anticipated future revenue streams from oil will change and at least that component of the sustainable budget number will go down.

But it is to say that the actions thus far of the current legislature are not as bleak as painted by alleging that the proposed level of spending cuts this session is only 5%, and that we are basing sustainable state spending level of $4.5 billion only on revenues from oil.

The situation is better than that and, thus far, I believe that the legislature has been responsible in responding to it.  But we still have a few more weeks to go ….

My thoughts on the final House Operating Budget …

APE-Government-Spending-610x406Wednesday the full House Finance Committee, and last night the full House passed CSHB 72(FIN), the Committee Substitute for the Operating Budget submitted earlier this session.

As readers of these pages know, I have followed and commented extensively on state fiscal matters generally, and the progress of this year’s Operating Budget specifically.  My comments on this year’s Operating Budget have been reflected most recently here and here,  My thoughts on the votes taken this week — and even more importantly, where we go from here — are captured in the following letter I sent this morning to the Chairs of the House Finance Committee and Subcommittees.

Fri, Mar 13, 2015 at 6:13 AM

To: Rep.Mark.Neuman@akleg.gov, Rep.Steve.Thompson@akleg.gov, Rep.Dan.Saddler@akleg.gov, Rep.Bryce.Edgmon@akleg.gov, “Rep. Lynn Gattis” <Rep.Lynn.Gattis@akleg.gov>, Rep.Cathy.Munoz@akleg.gov, Rep.Lance.Pruitt@akleg.gov, “Rep. Tammie Wilson” <Rep.Tammie.Wilson@akleg.gov>

Re:  Congratulations on CSHB 72(FIN)

This is to ​congratulation you​ as Chairs of the House Finance Committee and Subcommittees​ for passing ​in Committee ​and moving ​through the ​full House ​yesterday an Operating Budget that is within the parameters needed to advance toward a sustainable budget over a three year period.  Assuming the Senate ​(and if needed, subsequent Conference) ​meets the same bottom line objectives when the Operating Budget is taken up there and that the Capital Budget stays within the range reflected in the Governor’s proposal, your actions have taken the first step in a three-year process which, once completed, will bring long-term fiscal stability to the state.

​I emphasize three-year process because it is critical to remember that the work of restoring fiscal stability has only begun this year, it is not yet completed.

As you are aware, Scott Goldsmith and others at the University of Alaska-Anchorage’s Institute of Social and Economic Research (ISER) have long worked on and advocated a plan to put Alaska’s budgets on a sustainable path.  Earlier this year Dr. Goldsmith updated his work, concluding that the current “sustainable budget” level is $4.5 billion (UGF, operating and capital spending combined).  Assuming that the Governor and Legislature return in future years to a historical norm of roughly $250 million/year in capital spending, this means that total operating spending must be reduced to $4.25 billion (UGF) by FY 2018, the end of the three year transition in order to achieve long-term sustainability.

The version of the Operating Budget ​you and the full House​ passed this week provides for a total operating budget of $5.3 billion (UGF), down from $5.44 billion in the Governor’s proposed budget.  While those actions halt the increasing trajectory of past operating spending and begin to turn the state’s fiscal ship around, as is apparent from comparing the current level of spending with the ​level needed to achieve sustainability there is more, much more that needs to be done to secure Alaska’s fiscal future.

To that end it​ is important for you to use a portion of the Committee’s (and subcommittees’) time the remainder of this session, and during the coming period between sessions, to identify the areas and means by which the Operating Budget can be reduced to $4.75 billion (FY 2017), and then to $4.25 billion the session following that (FY 2018).  Given the realities, Alaska state government​, including the formula programs,​ must learn to live within a significantly smaller fiscal footprint going forward.  Thoughtfully re-envisioning the state’s operations to fit that smaller fiscal footprint will take effort​ and should continue unabated.

It also may be useful to schedule a hearing on the sustainable budgeting approach sometime during the remainder of this session to help Alaskans better understand the fiscal issues the state faces and the appropriate path to the solution.

I appreciate the reductions in spending you already have made and the additional reductions required in the future are significant steps, but necessary if Alaska is to be fair to both current and future ​Alaska generations and to maintain the state’s attractiveness as a place for long-term investment.  Without taking those steps, work by ISER and others have made clear that Alaskans will be faced with broad-based taxes and the use of a portion of the earnings from the Permanent Fund.  As importantly to the state’s economy, investors looking at making significant upfront investments dependent on long term payouts will be ​increasingly ​reluctant to follow through on those steps if faced with an uncertain state fiscal climate – and the prospect of new or increased taxes – at the time their projects would begin to produce revenues.

As I have said previously, please do not hesitate to let me know if I can be supportive of your efforts as you continue to face these issues.  This is a critically important time in Alaska’s history.  Again, I commend you on your efforts thus far.

Brad

Bradford G. Keithley
645 G St., Ste 100, No 796
Anchorage, Alaska 99501

CELL/TXT:   214.675.0038
FAX:          214.279.0692 (efax)
E-MAIL:       bgkeithley@gmail.com
WEB:          http://bgkeithley.com

The coming week in House Finance …

APE-Government-Spending-610x406The House Finance Committee this week is scheduled to mark up and take action on a Committee Substitute for the proposed Operating Budget.

Given the state’s current fiscal situation, this is a critically important week in Alaska’s history.  As proposed by the Governor, the Operating Budget stands at $5.47 billion, 97 percent of proposed state spending this year and as a result, responsible for driving the budget not only well beyond sustainable levels, but even well beyond the first step the Governor previously has said must be taken in the near term to reduce spending to sustainable levels.

Through substantial efforts, collectively the House Finance Subcommittees early last week proposed substitutes which bring the total within sustainable levels.  But public testimony Wednesday and Thursday was filled with those affected by various of the proposed cuts, seeking reinstatement of “just their piece” of course, but in the aggregate proposing to drive spending back over sustainable levels. Continue reading

A note to the House Finance Subcommittee Chairs …

APE-Government-Spending-610x406After following and reviewing closely the collective work of the House Finance Subcommittees last week, as finalized and presented early this week to the full House Finance Committee, I sent the following note this morning to the Chairs of the Subcommittees.  The results of their efforts are available here; a  good summary is here.

Wed, Mar 4, 2015 at 8:03 AM

To: Rep.Mark.Neuman@akleg.gov, Rep.Steve.Thompson@akleg.gov, Rep.Dan.Saddler@akleg.gov, Rep.Bryce.Edgmon@akleg.gov, “Rep. Lynn Gattis” <Rep.Lynn.Gattis@akleg.gov>, Rep.Cathy.Munoz@akleg.gov, Rep.Lance.Pruitt@akleg.gov, “Rep. Tammie Wilson” <Rep.Tammie.Wilson@akleg.gov>

Re:  Congratulations for the work of the HFIN Subcommittees

This is to congratulate you collectively as Chairs of the House Finance subcommittees on your work thus far in addressing the current budget situation.

As you are aware, Scott Goldsmith and others at the University of Alaska-Anchorage’s Institute of Social and Economic Research (ISER) have long worked on and advocated a plan to put Alaska’s budgets on a sustainable path, which is fair to both current and future Alaskans and, because of the resulting long-term fiscal stability, would significantly increase Alaska’s attractiveness as a place for long-term investment.  That approach has been endorsed by many who have looked at these issues deeply, including most recently Commonwealth North and the Alaska Chamber.

Earlier this year Dr. Goldsmith updated his work, concluding that the current “sustainable budget” level is $4.5 billion (UGF, operating and capital spending combined).  Recognizing that achieving that level will require significant reductions in the Operating Budget, and as a result, significant changes in the way that state government operates, many who have looked seriously at these issues have concluded that the reductions are best accomplished over three years, with achievable reductions in total UGF spending to $5.5 billion for FY 2016, $5.0 billion for FY 2017 and $4.5 billion by FY 2018.  While a graduated approach results in reductions in the state’s financial nest egg, and thus, a reduction in the sustainable budget level, the approach strikes a reasoned balance against the considerable effort that is required to re-envision parts of state government.

While Governor Walker’s proposed budget came some of the way toward the goal for FY 2016, it did not reach it.  As previously calculated by Legislative Finance, the Governor’s proposed “pre-transfer” UGF budget totals approximately $5.62 Billion.  As I look at the numbers, the work of the subcommittees incorporated into the Committee Substitute appears to have gone the rest of the way in setting a path to accomplish the goal for FY 2016.  When added to the capital budget proposed by the Governor, your efforts have reduced the proposed “pre-transfer” UGF budget to $5.43 Billion.

I appreciate that over the next few days during the full Committee’s deliberations there will be objections, sometimes strenuously articulated, to some of the cuts and that there may be some need to reorder priorities within the overall amount.

The important and hard won collective achievement of the subcommittees should not be lost in the process, however.  Having accomplished the critically important beach head of limiting total FY 2016 UGF spending to less than $5.5 Billion, the full Committee should stay focused on protecting that achievement going forward, both in finalizing the Operating Budget and when addressing the Capital Budget when it comes to the House.

Maintaining FY 2016 spending at no more than $5.5 Billion through the remainder of the legislative process and setting a certain path toward achieving similar reductions in FY 2017 and 2018 in order to reach sustainable levels will require a great deal of additional hard work both in this session and going forward.  In recognition of the moment, however, I wanted to stop and congratulate the subcommittees on achieving an important first step.  Having watched the sessions I know that it required difficult work.  I commend and appreciate you making the efforts it took.

Brad

Bradford G. Keithley
​Keithley Consulting, LLC
645 G St., Ste 100, No 796
Anchorage, Alaska 99501

CELL/TXT:   214.675.0038

FAX:           214.279.0692 (efax)
E-MAIL:       bgkeithley@gmail.com
WEB:          http://bgkeithley.com

Continue reading

My turn on “Boring Talk” with Pat Race …

Pat Race's Boring TalkJuneau’s Pat Race, aka Twitter’s @alaskarobotics and one of the most perceptive of Alaska’s up and coming generation, has started a new podcast series on his blog called “Boring Talk.”

As Pat describes it:

Boring Talk is a podcast where I’ll be exploring Alaska politics through long, boring conversations. This is a personal thirst for understanding but I’ll be sharing my (largely unedited) conversations because I think civic discourse is important in the age of Twitter and maybe there’s some information here that will be valuable to other Alaskans.

At his request, I sat down with him while in Juneau last week for a discussion on state fiscal issues and a few questions about what I perceive as my role in them. The result is available here.  It should come with a warning — it’s 30 minutes and likely lives up to the title (“Boring Talk”) unless you are either my mother, or really into these things.

If Pat does what he is capable of doing — asking penetrating questions and bringing interesting people into the studio (present company excluded, of course) — it’s a series that will be well worth following.   The one he posted a couple of days ago with Katie Moritz, the Juneau Empire’s new — and very good — political reporter is an excellent example.

You can follow the series on his website — alaskarobotics.com — or, again, by following his posts on Twitter @alaskarobotics.

The Urgent Need for a Sustainable Alaska Budget

The following ran as a Community Perspective piece in both the online and print editions of the Fairbanks News-Miner (Wednesday, January 28, p. A6)   under the headline “Gov. Walker on track to sustainable budget,” as a Commentary in both the online and print editions of the Anchorage Dispatch News (Thursday, January 29, p. B4) under the headline “The urgent need for a sustainable Alaska budget,” and as a My Turn piece in both the online and print editions of the Juneau Empire (Tuesday, February 3, p. __) under the headline “Urgent need for a sustainable budget.”

Alaskans for a Sustainable Budget (9.22.2013)During the fall, a large number of candidates campaigned on the theme of putting in place a sustainable budget.  For example, on his campaign website Governor Bill Walker said this, “I will make the hard choices necessary for a sounder fiscal future, including putting in place a sustainable budget.”

When asked during the campaign what they meant by sustainable budgets, most candidates, including Governor Walker, referred to work on the subject by Dr. Scott Goldsmith of the University of Alaska-Anchorage’s Institute of Social and Economic Research (ISER).  According to Goldsmith, a sustainable budget is a spending level which, if implemented today can be maintained indefinitely into the future, adjusted for inflation and population growth.

In other words it is a baseline revenue level which both current and future Alaskans can count on indefinitely without resorting to income or sales taxes or a diversion of the permanent fund dividend. Continue reading

Alaska Fiscal Policy: Where we are headed …

Co-Chair (and Chugach Electric Association, Inc. General Counsel) Mark Johnson and I closed the books yesterday on another exceptional two-day conference on “Energy in Alaska” (retitled this year, “Energy Markets and Regulation in Alaska”) put on annually by Law Seminars International.  We have been co-chairing the seminar since … well I am not quite sure I can recall.

As we shuffled the deck a bit in light of the election and other recent events, I ended up giving a set of remarks focused on Alaska’s current fiscal situation, which incorporated for the first time a look at the “work in progress” FY 2016 budget prepared by the Parnell Administration and transferred to Governor Walker’s Administration as part of the transition.  That proposed budget, and what the Walker Administration has to say about it, is available here.

My presentation is above.  My comments on the “work in progress” budget are at slide 10.

The conference always results in great discussions with serious people during the breaks and after each day’s set of presentations are completed.  This year’s was no exception.

At the reception following the first day’s events I appreciated the opportunity to explore in detail each of the five options for closing this year’s budget gap.  They are, in no particular order — cuts in spending, use of remaining savings, “raiding the PFD” (either directly or indirectly by spending from one of the accounts used in the calculation of the PFD), income taxes, sales taxes and transfer of increased responsibility (and cost) for government services to local government.

At the conclusion I came to realize that a realistic solution to “where we are headed” necessarily will involve all five.   I will be writing — and talking — about that more in the coming weeks.

Parnell propsed FY 2016 budget contains a $3+ billion deficit …

Fiscal CliffLast Friday the Walker Administration released the proposed FY 2016 budget that former Governor Parnell had been working on prior to the election and transmitted to the new administration as part of the transition process.

While there will be more — likely much more — to say about the proposed budget in the days ahead, it is worth noting a few highlights at this point to help start a needed conversation on the state’s current fiscal situation and the choices going forward. Continue reading

Fiscal leadership needed now …

Fiscal Cliff (pulling back)In August 2006, staring into a potential fiscal abyss created by an unplanned shutdown of the entire Prudhoe Bay field due to leak issues,  then Governor Frank Murkowski immediately announced two steps designed to curb state spending and reduce the potential drain on state savings, while additional analysis was being done.

The first step was an immediate freeze on new state hires.  The second was to direct the Office of Management and Budget to review the then-current capital budget to prepare a list of capital projects that could be “phased” (i.e., deferred) until the potential fiscal problems created by the shutdown were “better defined.” Continue reading

With election over, time to realize Alaska faces huge fiscal challenge …

Fiscal CliffMy appreciation to the Alaska Dispatch News for running the following op-ed piece in both its online and print editions (Tuesday, November 18, p. B4), and to the Fairbanks News-Miner for doing the same in both its online and print editions (Wednesday, November 26, p. A8). The piece ran under the headline “Governor-elect will have to cut deep to keep Alaska budget sustainable” (ADN online), “Walker must cut deep to make budget sustainable” (ADN print), and “State entering bleak budget times” (FNM online and print).

Sometimes the buzz created by election campaigns tends to mask what is going on in the “real world.” The most recent Alaska election cycle is a good example. While the Walker and Parnell campaigns debated through the fall about whether the state budget should be cut in the next year by 5 percent, 16 percent or something in between, in the real world state revenues have been plummeting to levels that make those numbers seem like artifacts of ancient history. Continue reading

The elephant in the room …

Last evening, at the first session of the Walker Mallott Transition Team, what some have called the “elephant in the room” — the state’s fiscal situation — took center stage.  To Governor-elect Walker’s credit the session was designed specifically to do that.  As he had told KTUU’s Austin Baird earlier in the day, Continue reading

Alaska Fiscal Policy: Dealing with $80 oil …

At the request of the (Anchorage Municipal) Budget Advisory Commission, yesterday (November 5) I made a presentation on Alaska Fiscal Policy.  When I was first asked to give the presentation the working title was “The need for implementing sustainable budgets.”  Due to dramatic changes since then in the oil markets, however, by the time I gave it yesterday the title was “Alaska Fiscal Policy:  Dealing with $90 $80 oil.” Continue reading