Implementing Governor Hammond's 50/50 Plan (World Trade Center Anchorage 2.22.2017)

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

WTC Anchorage “Meet & Brief” LuncheonFebruary 22, 2017

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

Agenda

• How bad really is the state’s fiscal situation•What is Governor Hammond’s “50/50” Plan and how would it work•Why is it important to maintain the PFD and what are the consequences of reducing it

Feb. 22, 2017 Alaskans for Sustainable Budgets 2

www.ak4sb.comAlaskans for Sustainable Budgets

How bad really is the state’s fiscal situation


What is the issue

We don’t disagree that the state is facing a serious fiscal challenge (as we have been saying since 2012), but ...

… there are some legitimate questions about how deep it is


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


But is it really that big …


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

And what are the savings levels …


... of assuming that the fiscal conditions of the day will remain the same into the futureThis time, we need to accurately gauge the size and urgency of the problem


We have a history …

Do what is necessary, don’t run to the other side of the (fiscal) ship ‐‐ that has consequences also

What is Governor Hammond’s “50/50” Plan and how would it

work


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 PF currently work•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”


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].”


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. 22, 2017 Alaskans for Sustainable Budgets Corrected 17

... 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 $4.3B 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”


Why is it important to keep the PFD at 50%

(… and what are the consequences of reducing it)


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

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)


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

… 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.’


“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

Doing the numbers …

Saves some government‐related jobs, but lowers overall Alaska income …


HB 115 (HFIN) uses both PFD cut (to 33% of earnings) and income tax to raise government revenue …

Doing the numbers …… and vastly increases Alaska poverty and income disparity …


Is this really the “kind of Alaska we want to live in”

•Reduced overall Alaska income• Increased poverty levels• Increased income disparity …


… in order to save some government‐sector

related jobs

Conclusion• We don’t believe that enough attention has been paid to gauging the state’s fiscal situation accurately and, thus, we are in danger of “running to the other side of the ship”

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

• As he intended, it helps to build and maintain a sustainable budget and overall economy



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Implementing Governor Hammond's 50/50 Plan (World Trade Center Anchorage 2.22.2017)