In last week’s column, we first looked at Gov. Mike Dunleavy’s (R – Alaska) proposal Ten-year plan FY23. As those who read the column will recall, we concluded that the Plan was unsustainable and, in terms of projected spending levels, unrealistic. If, as the saying goes, a budget reflects your values, the values ââthat emerged were to prioritize âgimmicksâ (making expenses appear smaller than they are by not using realistic adjustments) rather than the franchise.
This week, we take a look at what it would take to make the 10-year outlook for fiscal 23 both realistic and sustainable.
In doing so, we rely heavily on part of the âBudget plan modelâ from the MinistÃ¨re du Revenu (DOR model) released in early November. We must admit that at the start, we were not a fan of the DOR model. In fact, on the revenue side, it includes the oil prices projected in the DOR “Preliminary Fall 2021 Revenue ForecastâWith little flexibility for detailed adjustment year by year. As we noted in a previous column, these oil prices are largely unusable as they move away from current market levels.
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But it turns out that the expense side of the DOR model is much more useful. While not exactly the same to the nearest cent, the 10-year spending levels used as a baseline in the DOR model are close enough to those included in the FY23 10-year plan to provide useful information on the impact. certain adjustments authorized by the DOR model may have on the expenditure levels contained in the ten-year plan FY23.
The most important of these is the inflation factor. Reflecting the Dunleavy administration’s apparent goal of significantly removing future spending levels without making any real cuts, the DOR model benchmark and FY23 10-year plan use ultra-low adjustment factors in their calculation of spending levels. future expenses. The DOR model, however, provides users with a tool to apply different inflation rates at a higher level. (The DOR model does not allow the user to see where inflation is applied, so it may underestimate the impact to some extent, for example, by not applying inflation to the capital budget benchmark. But after doing a few basic checks, it seems to come close.)
In our effort to adjust the FY23 10-Year Plan to reality, we looked at two more realistic inflation factors. The first is the inflation factor of 2% currently used by the Permanent Fund Company in its projections, which is also the long-term average rate targeted by the Federal Reserve. The second is the current, 2.5% “10-year breakeven inflation rate” reflected in the Treasury securities market.
Here are the resulting 10-year spending levels (compared to levels reflected in the FY23 10-year plan and the DOR model benchmark). We note that these projections retain all of the spending cuts – such as reductions in pension accruals and the expiration of the refundable oil tax credit program – included in Governor Dunleavy’s proposal. As envisioned by DOR’s model, they simply adjust what’s left for inflation:
Applying the calculated projected revenues to current market oil price levels and using the POMV and unrestricted federal revenue “adjustment” levels included in the FY23 10-Year Plan, the surplus levels and annual budget deficits for each alternative are as follows:
Because it reflects current market expectations, we believe the current market 10-year breakeven point (2.5%) is the most realistic inflation adjustment. The reformulation of the ten-year fiscal plan for fiscal year 23 (until 2030, the same period covered by the DOR model) with this adjustment gives, in our opinion, a much more realistic outlook over 10 years:
Even the Dunleavy administration would not claim that the CBR is “healthy enough” to fill these deficit levels. As a result, further measures are needed to offset deficits in order to make the state’s fiscal position sustainable.
Some will immediately say âspending reductionâ. But the administration offered nothing other than changing the retirement amortization rate and the expected expiration of the refundable petroleum tax credit program. In addition, as the Legislative Assembly’s Tax Policy Working Group concluded in its August 2021 Final Report, the most realistic scenario is âreductions in the order of $ 25 million to $ 200 million over several yearsâ¦ achieved through structural and statutory reforms that maintain service levels but improve efficiency. Â°
Although, if achieved, these would help reduce the above deficits, they do not eliminate them.
At the opposite extreme, others will immediately say âPFD cutsâ. But as we explained in a previous column, of all the different income options, PFD reductions both have “the most significant negative impact on the economy” and are “by far the most significant measure. expensive for Alaskan families â. Sustainability isn’t just measured by a balanced budget, but also by the fact that it’s done in a way that both improves the economy and treats all families in Alaska fairly. PFD cups fail both tests.
In addition, by proposing to restructure the PFD by replacing the current statutory formula with POMV 50/50, the governor has already included in his base budget an average reduction in the PFD over the next decade of around $ 600 million / an (the difference in the inflation adjustment between the two approaches that we discuss later here). For those who want a contribution from the PFD as part of a global tax solution, this is a permanent reduction of 25% of the statutory PFD, an already substantial contribution.
Instead, we believe it’s time to look to developing additional income (or, more accurately, substitutes for even deeper PFD cuts) as the appropriate next step in achieving a budget. long-term sustainable. At least at some level, the administration has to think so too, as the DOR model includes the ability to switch between various ‘revenue options’, such as changing petroleum taxes, adopting an oil tax. sale and increase in the current fuel tax.
Based on our realistic budget deficit analysis above, we believe the level of replacement income required to achieve a sustainable budget is in the order of $ 500 million per year, the average of the projected deficit levels of FY24 to FY30 using the 2.5% inflation factor.
Interestingly, the Legislature already has a detailed analysis of what is required of various options to achieve this level of revenue. Both 2017 and 2021 the studies carried out for the legislature by the Institute on Taxation and Economic Policy on various revenue options are easily summarized at this level.
Each of these levels could be reduced if, as part of an overall package, the legislature and administration simultaneously agreed to budget cuts, the adoption of one or more of the other revenue options included in the model. DOR, or both.
As we discussed broadly in a previous column, each of these options has different impacts on the overall economy and families in Alaska. We’ll take a closer look at them in the context of the revised 10-year outlook in next week’s column.
Brad Keithley is the Managing Director of Alaskans for Sustainable Budgets, a project focused on developing and promoting economically sound and sustainable state fiscal policies. You can follow the work of the project on its website, at @ AK4SB on Twitter, on his Facebook page or by subscribing to its weekly podcast on the sub-stack.