Implementing Governor Hammonds 50/50 Plan (Fairbanks "Budget Blitz" 2.16.2016)

Implementing Governor Hammond’s “50/50” Plan …

and one other thing

Fairbanks “Budget Blitz”February 16, 2017

Brad Keithley (bgkeithley.com)Founder, Alaskans for Sustainable Budgets

Agenda• Some background• Governor Hammond’s “50/50” Plan

• What is the objective of the Permanent Fund• How does the Permanent Fund work• How would 50/50 work• Why maintaining the PFD at 50% of earnings is important

• “And one other thing”: Some thoughts on the upcoming oil tax debate

Feb. 16, 2017 Alaskans for Sustainable Budgets 2

Alaskans for Sustainable Budgetswww.ak4sb.com

Some Background


What is the issue• We don’t disagree that the state is facing a serious fiscal challenge, but we do question how deep it is

• And the issue doesn’t just involve the state budget:• Most of the alternatives also affect the private sector, and• Most of the alternatives also affect future Alaskan generations

• Finally, Alaska is in an economic recession: we should avoid Government making it worse

• The issue should be what is in the best interests of the overall Alaska economy and treats all Alaskans fairly, not just what quickly raises more revenue for government


How big is the fiscal problem (the Administration’s view) …


But is it really that bad …


Administration forecast v. EIA (oil price) & projected decline rate (production) …

And what are the savings levels …


Plus, there are knock‐on effects


Effect on overall Alaska income …

And what about all Alaskans


A $1000 PFD cut translates into:• A loss of 21.5% of the disposable income of the lowest 10% (by income) of Alaska households

• But only 0.6% of the highest 10%

...that the Permanent Fund (or other revenue measures) don’t have a role to play in finding a solution, but:• Need to accurately gauge the size and urgency of the problem,• Need to consider the impact on the overall economy, and • Need to consider effect on all Alaskans

Do what is necessary, don’t overcorrect


We aren’t saying …

Back to Basics: What is the objective of the

Permanent Fund


Governor Jay 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,] 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.”

‐‐ Diapering the Devil, at 15, 19


How does the Permanent Fund work


Alaska Constitution, Art 9 §15

“At least twenty‐five percent of all mineral lease rentals … received by the State shall be placed in a permanent fund, the principal of which shall be used only for those income‐producing investments specifically designated by law as eligible for permanent fund investments. All income from the permanent fund shall be deposited in the general fund unless otherwise provided by law.”


A One Stop Information Shop


A little easier on the eyes•Permanent Fund principal (corpus)• 25% of mineral revenues• Unrealized gains (retained in fund)

• Earnings • Statutory net income (SNI) (i.e., realized cash)


Where do the earnings (SNI) goOnce the “money wells” are pumping, each year:

“… one‐half of the account’s earnings would be dispersed among Alaska residents”

• Done: PFD“…. The other half of

the earnings …”• NOT “for essential government services”

• Instead “inflation proofing” and “earnings reserve”


FY 2017 Activity & Balances


The key to unlocking the “Other half”: So‐called “Inflation proofing”

The size of the “other half” depends on “Inflation Proofing”

Without IP With IP

FY 2018 $1.5 B $0.4 B

FY 2019 $1.5 B $0.5 B

FY 2020 $1.6 B $0.6 B

FY 2021 $1.6 B $0.6 B

FY 2022 $1.7 B $0.7 B


… [Once the “money wells” were pumping,] …. The other half of the earnings could be used for essential government services.”

Is separate "Inflation Proofing” necessary

Permanent Fund Corporation Executive Dir. Angela Rodell, minutes of Feb. 16, 2016 testimony before Senate State Affairs (https://goo.gl/AOLwbr):

“MS. RODELL explained that … [t]he current Permanent Fund asset allocation consists of 80 percent self‐inflation proofing funds. Their market value already incorporates the concept of inflation. Inflation proofing as designed forty years ago is not as necessary today.MS. RODELL noted that … [i]nflation proofing … is no longer necessary for preserving the purchasing power [i.e., to protect against inflation].”



Sen. Lesil McGuire, minutes of Feb. 16, 2016 testimony before HFIN (https://goo.gl/MgpCpa):

“Senator McGuire … relayed that Angela Rodell, Executive Director, Alaska Permanent Fund Corporation reported that … roughly 80 percent of all of the funds' assets self‐inflation proof. … She announced that the yearly budget line item of between $703 million to $1 billion to inflation proof the fund was ‘in effect, a direct injection of new capital into the corpus.’”



Walker Administration’s “FY 2018 10‐year (fiscal) plan,” 12.15.2016 (https://goo.gl/R8GxSI), which as part of moving to a use of Permanent Fund earnings based on percent of market value (POMV) also proposes to eliminate separate inflation proofing:

“Since earnings of the Permanent Fund have averaged 10 percent annually, the fund will be protected from the effects of inflation.”


The goal of “Implementing 50/50”

Achieving Governor Hammond’s original purpose:

… [Once the “money wells” were pumping,] 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.”


How would 50/50 work


Changes the revenue line …

Feb. 16, 2017 Alaskans for Sustainable Budgets Corrected 25

... and the deficit


The overall effect

Traditional “Other half”

Draw on Reserves

Reserves Balance

Year Spending Oil Other

FY 2017 $4.30 $12.77

FY 2018 $4.39 $1.10 $0.52 $1.54 $1.23 $11.54+

FY 2019 $4.47 $1.34 $0.53 $1.53 $1.07 $10.47+

FY 2020 $4.56 $1.36 $0.55 $1.60 $1.05 $ 9.42+

FY 2021 $4.65 $1.38 $0.56 $1.77 $0.94 $ 8.48+

FY 2022 $4.75 $1.43 $0.58 $1.90 $0.84 $ 7.64+

Total $5.13


Next five years using Administration’s revenue numbers, if spending held to $4.3 adjusted for inflation & pop growth:

Protecting “self‐inflation proofing”

• “Self‐inflation proofing” contemplates that draws from the earnings reserve roughly mirror the so‐called “real” (after inflation) rate of return

• The level of earnings realized over time appears largely to be consistent with that objective, but could be subject to manipulation going forward

• For that reason and others, there are various proposals to set a firm draw rate (Governor: 5.25%, Sen. Stedman: 4.5%, Rep. Seaton: 4.75%, Former Sen. & PFC Board Member Steve Rieger/PFC: 5%)


The effect of various draw ratesFY 2018 ($B) Current

(Dunleavy)5.25%(Gov)

5.0%(Rieger)

4.75%(Seaton)

4.5%(Stedman)

PF principal only ($46.72)

$1.54$1.23 $1.17 $1.11 $1.05

PF+ERA ($56.44) $1.48 $1.41 $1.34 $1.27

• In addition to draw rate, a key consideration is what the draw is calculated on• The PF principal only (leaving the ERA to be used as savings), or• The PF + ERA (essentially converting the ERA to principal)

• These assume the resulting earnings stream is split 50/50 between the PFD and “essential government services”


Alaska is in a recession(or, “Why is it important to keep the PFD at 50%)


Economic role of the PFD

Effect: Creates a private Alaska economy more like

Texas than Angola• Under Statehood Act, Alaska can’t privatize mineral interest

• Thus, absent PFD, Alaska private economy receives no oil & gas royalties – all goes to the government

• Cutting the PFD moves toward Angola, away from Texas


Cutting the PFD hurts the overall Alaska economy

• Not all fiscal options have the same impact on the overall economy – some are worse than others

• Cutting the PFD has the largest adverse impact on the overall economy: • By income of all the state’s fiscal options, and

• By any measure of all the state’s revenue options.

Short‐Run Economic Impacts of Alaska Fiscal Options, at III‐9, A‐15 (March 2016)


… and increases poverty and income disparity

‘For every $100 million raised with PFD cuts, the ten percent of Alaskan households with the lowest income lose 3.3 percent of per‐capita disposable income, compared with only 0.1 percent among households with the highest incomes.’

Under SB 128 ($650MM+ PFD cut):• Lowest ten percent would lose more than a 20% of their annual disposable income immediately,

• Wealthiest ten percent will lose less than 1% of theirs.


“Reducing the PFD by $1,000 will likely increase the number of Alaskans below the poverty line by 12‐15,000 (2% of Alaskans).”

Poverty Income Disparity

The effect on the overall economy

• HB 115 (Rep. Seaton) uses both PFD cut (to 33% of earnings) and income tax to raise revenue

• Saves some jobs, but lowers overall income, increases poverty levels and increases income disparity


Why we focus more on “income”• Better measure of the amount of money circulating in the economy• Critically important during a recession• “Recessions generally occur when there is a widespread drop in spending.”

• The fact that jobs remain positive while income goes down reflects the fact that some with jobs are either not spending marginal dollars (saving) or spending Outside

• Maintaining spending in the economy is important to dealing with the recession and maintaining a strong economy


And why we focus on low income

• Not a “bleeding heart” or “populist” concern (as some have suggested)

• But ruthlessly economic• Increased poverty (or near poverty) levels add to state costs (operating budget)

• As importantly, ISER data shows that low income Alaskans spend all or almost all of their marginal dollars (as opposed to saving/deferring) and more of it stays in‐state (as opposed to going Outside)

• Income disparity also creates significant education, job skills issues


… Finally, “one other thing”


A moment on oil taxes (Alaska’s “other” fiscal policy)

Oil production generally is tied to investment levels (an example from 2013 testimony)…


… and investment levels …

… in a given region are tied to the competitiveness of that region’s returns

• There are more opportunities globally than there are investment dollars

• Those regions that succeed are those that offer better returns

• There are many more things involved in determining competitiveness than tax rates (e.g., regulatory lag, drilling costs, infrastructure)• But tax rates are the one thing over which state government has the clearest control


Looking (again) at oil taxes

• Alaska went through an extensive competitiveness review in 2013 in developing SB 21• Set production tax rates at levels and using a method which the majority determined achieved competitiveness

• From my perspective, SB 21 has succeeded in restoring Alaska’s relative share of global investment in a very difficult time

• Now we appear to be embarking on another review of oil taxes and credits• HB 111 (House Nat Res) would make significant changes


Our view• Focus should be on what is necessary to maintain competitiveness for investment• Maintain “fair share” of global investment, and• “Fair share” of revenues will follow

• Current production tax rates (SB 21) are working• Attracting investment that has enabled Alaska to maintain activity during a huge global downturn

• There is a problem with reimbursable oil tax credits• Not competitively required (88 Energy: “globally unique fiscal system”)

• “Investment” not producing a return equal to what same money could earn through Permanent Fund


Conclusion• The earnings stream from the PF is not being used to its maximum potential to help solve the fiscal crisis• Hammond: “The other half of the earnings could be used for essential government services.”

• Fully implementing Governor Hammond’s “50/50” plan helps balance the budget and avoids the significant adverse economic effects of cutting the PFD (or other tax measures)

• Helps build a sustainable budget and overall economy



www.ak4sb.com

Implementing Governor Hammonds 50/50 Plan (Fairbanks "Budget Blitz" 2.16.2016)

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