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Alaskas Fiscal Challenge

Gunnar Knapp
Director and Professor of Economics
Institute of Social and Economic Research
University of Alaska Anchorage
Forum on Alaskas Fiscal Future
Loussac Library
Anchorage, Alaska
October 4, 2014

Alaska faces a fiscal challenge.

What is the challenge?


What are our options
for dealing with the challenge?

?????
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Alaskas fiscal challenge


How will we balance uncertain but probably falling
oil revenues with growing demands and
obligations for state spending?

Oil revenues matter!


Oil revenues account for about 90% of the states unrestricted
general fund revenues which pay for most state government
services, capital projects, and debt and retirement obligations.
Alaska General Fund Revenues (adjusted for inflation)
14000

12000

Non-Oil Revenues

Oil Revenues

10000

8000

6000

4000

FY12

FY10

FY08

FY06

FY04

FY02

FY00

FY98

FY96

FY94

FY92

FY90

FY88

FY86

FY84

FY82

FY80

2000

FY78

Revenues (millions of 2012 dollars)

Our oil revenues are driven by . . .

Oil production
Oil production costs
Oil prices

Our oil revenues will probably decline in the future, because

Oil production will probably decline


Costs of oil production will probably increase
Oil prices probably wont increase enough to offset lower
production and higher costs

North Slope oil production will probably decline in the future

Production from new fields hasnt been enough to offset the decline
in production from existing fields
Maybe new investment will stop or reverse that decline
but it looks more likely that production will fall

Source: Alaska Department of Revenue, Fall 2013 Revenue Sources Book

Our future oil production is fundamentally uncertain.


We just dont know how much oil will be discovered and developed.
Historically, we havent been very successful in predicting future oil
production.
North Slope Oil Production: Historical and Projected
1800

1600

1400

Historical

thousands of barrels per day

1200

Fall 2004 Projections


Fall 2005 Projections
Fall 2006 Projections

1000

Fall 2007 Projections


Fall 2008 Projections
Fall 2009 Projections

800

Fall 2010 Projections


Fall 2011 Projections
600

Fall 2012 Projections


Fall 2013 Projections

400

200

0
1995

2000

2005

2010

2015

2020

2025

2030

2035

Oil production costs also affect our oil revenuesbecause our oil
production taxes are based on producers net profits after deducting
these costs. Oil production costs have been rising.
Future oil production costs are fundamentally uncertainbut it seems
likely that they will keep rising.

Our oil revenues depend critically on oil prices.


For most of the past decade, the effects of falling oil production on state
oil revenues were offset by a dramatic increase in oil prices.
Tax changes which increased the states share of oil production value
also contributed to the rise in revenues.
State Unrestricted General Fund Revenues and Oil Prices
14000

$140

Non-Oil Revenues
Oil: Other oil revenues

$120

Oil: Production taxes


$100

Oil: Royalties
Average Oil Price (ANS West Coast)

8000

$80

6000

$60

4000

$40

2000

$20

FY12

FY10

FY08

FY06

FY04

FY02

FY00

FY98

FY96

FY94

FY92

FY90

FY88

FY86

FY84

FY82

$0
FY80

Oil price ($/barrel)

10000

FY78

Revenues (millions of 2012 dollars)

12000

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Future oil prices are fundamentally uncertain!


We just dont know how oil prices will change.
Historically, we havent been very successful
in predicting future oil prices!
ANS West Coast Oil Prices: Historical and Projected
140

120

100
Actual
Fall 2004 Projections
millions of dollars

Fall 2005 Projections


80

Fall 2006 Projections


Fall 2007 Projections
Fall 2008 Projections
Fall 2009 Projections

60

Fall 2010 Projections


Fall 2011 Projections
Fall 2012 Projections
40

Fall 2013 Projections

20

0
1995

2000

2005

2010

2015

2020

2025

2030

2035

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Because oil production, prices and costs are all fundamentally


uncertain, our future oil revenues are fundamentally uncertain!
Historically, we havent been very successful
in predicting future oil revenues!
Unrestricted General Fund Oil Revenues: Historical and Projected
12000

10000
Actual
Fall 2004 Projections
Fall 2005 Projections

8000

millions of dollars

Fall 2006 Projections


Fall 2007 Projections
6000

Fall 2008 Projections


Fall 2009 Projections
Fall 2010 Projections

4000

Fall 2011 Projections


Fall 2012 Projections
Fall 2013 Projections

2000

0
1995

2000

2005

2010

2015

2020

2025

2030

2035

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Even though future revenues are uncertain, it seems likely that Alaska
oil revenues will decline in the future, beause.

North Slope oil production will probably decline


Oil production costs will probably rise
World market conditions suggest that oil prices arent likely to rise
dramaticallyand might fall.

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We dont know for certain that oil revenues will decline.

Maybe oil production will stabilize or increase.


Maybe prices will riseit happened before.
But we cant ignore the possibility that oil revenues will fall!

Regardless about how optimistic you are about future Alaska oil
production or prices, it would be foolhardy to deny that our future state
oil revenues could decline significantly.

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While state oil revenues are likely to decline, demands for state
spending are likely to grow.

Inflationcosts keep rising


Alaskas population keeps growing
Health costs keep risking
Our debt and retirement obligations are likely to grow
We face growing operations and maintenance costs for the roads
and buildings weve built in the past
Many Alaskans want more spending
More and better state services . . .
Education
Public safety
New capital projects
Roads, bridges, energy projects
A huge natural gas export project.
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Growing demands are whyeven after big cuts the past two years--state
general fund spending is more than twice as high as it was in 2005.

State Unrestricted General Fund Spending


$10,000

$6,000

Capital
budget

$4,000

$2,000

Operating
budget

Sources: Legislative Finance Division (spending data) and Department of Revenue


(Fall 2013 revenue projections). Current oil prices are about $95/barrel.

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

$0

2005

millions of dollars

$8,000

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Lower oil revenues combined with higher spending are why we are now
facing big deficits.

State Unrestricted General Fund Spending and Revenues


Revenues

$10,000

$6,000

FY14 & FY15


projected
revenues:

Capital
budget

@ $110/barrel

$4,000

@ $100/barrel
@ $90/barrel

$2,000

Operating
budget
2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

$0
2005

millions of dollars

$8,000

Sources: Legislative Finance Division (spending data) and Department of Revenue


(Fall 2013 revenue projections). Current oil prices are about $90/barrel.

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We cay pay for deficits by drawing down our savings reserves.


But we cant go on paying for deficits indefinitely.
At current projected revenues, our savings reserves of $15 billion could
run out in less than ten yearsor a lot sooner if oil prices fall farther.

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We cant go on indefinitely spending more than our revenues.


Unless we are very lucky with oil production, production costs and oil
prices, within a few years we will probably face difficult fiscal choices
between unpopular options.

Spending less money


Imposing new taxes
Using Permanent Fund earnings
Other options?

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The longer we delay in making hard fiscal choices,


the harder they will become.

Bigger cuts in spending


Higher new taxes
Using more of Permanent Fund earnings
Other options?

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