Earlier this week Governor Mike Dunleavy (R – Alaska) finalized the state’s FY22 and FY23 fiscal plans by announcing his line item vetoes of the FY22 Supplemental and FY23 budgets approved earlier by the Legislature.
As the following chart – which breaks the budget along statutory lines into traditional UGF spending (ex-Permanent Fund Dividend) and PFD distributions – shows, even after the vetoes both the FY22 and FY23 traditional UGF budgets still are significantly higher than those enacted over the previous five years.
While the current spending levels are important, more important to us from the standpoint of developing a sustainable – and equitable – long term fiscal plan is what this budget implies about future budgets. To analyze that, we have used the decisions implicit in this budget to help update the Dunleavy administration’s FY23 10-year outlook included as part of its December 2021 budget package.
While at first blush the temptation might be simply to use the enacted FY23 budget as the baseline and adjust for inflation and subsequent known changes from there, some initial adjustments are required first. As Governor Dunleavy indicated in his news conference announcing his final budget decisions, “most of the increases [in the FY23 budget] are one-time payments rather than a rise in annual expenses.”
We explain the adjustments we are making to account for that and other factors in each of the categories below.
Agency Operations. The FY22 spending level for Agency Operations, before the supplementals added this last session, was $3.9 billion. As approved by Dunleavy, FY23 spending for Agency Operations is $4.2 billion (8% higher), including $50 million in fiscal notes to cover the additional spending approved by statute during the last session. While there are in other categories, we don’t see anything in the increased amount for Agency Operations that qualifies in “one-time payments.” As a result, we use the full $4.2 billion in building the baseline for the updated 10-year outlook.
Statewide Operations. The FY22 spending level for Statewide Operations, before the supplementals added this last session, was $430 million. As approved by Dunleavy, FY23 spending for Statewide Operations is $655 million, 52% higher. Governor Dunleavy is correct about this category; it includes a significant one-time payment of $330 million (after vetoes) to the “oil & gas tax credit fund.”
Statewide Operations generally include three categories of spending: debt service, retirement payments, and fund capitalizations. In discussing the latter category in its FY23 10-year plan the administration said “The largest item in the fund capitalization category is the statutory payment for oil and gas tax credits owed by the State, which are projected to be fully paid off in fiscal year 2026. … Unrestricted general fund transfers are anticipated to be minimal in the out years.”
We understand the $330 million included in the FY23 budget provides an amount sufficient to fully pay off the remaining oil and gas tax credits. As a result, we have excluded those from the FY23 amount for Statewide Operations in building the baseline for the updated 10-year outlook. We include the amounts for debt and retirement, as well as the remaining amount for fund capitalizations, included in the 10-year plan.
Capital. The FY22 spending level for Capital, before the supplementals added last session, was $240 million. As approved by Dunleavy, FY23 Capital spending is $734 million, three times higher. By its very nature, Capital spending is largely made up of one-time commitments, however. The question in building an updated 10-year outlook is what to include as an estimate for future years.
In both its FY23 10-year plan and in the Department of Revenue’s (DOR) most recent fiscal model, the administration includes $155 million annually for ongoing capital spending. While given the FY23 experience we are somewhat inclined to quibble and at least use the $240 million from FY22, if not more, in building the baseline for the updated 10-year outlook, we won’t and incorporate the $155 million used by the Administration.
Supplementals. One line item not included in either the administration’s 10-year plan or DOR’s revenue model is a provision for supplementals, which add more money to a given year’s budget in the subsequent year’s session. Not including some provision for supplementals in forward looking projections routinely understates the size of ultimate spending in any given fiscal year.
The size of recent past supplementals varies widely. Over the past five years, this session added $770 million in supplementals to FY22, the 2021 session added $62 million in supplementals to the FY21 budget, the 2020 session added $399 million in supplementals to the FY20 budget, the 2019 session added $93 million to the FY19 budget and the 2018 session added $137 million to the FY18 budget.
While the average annual amount added over the period is nearly $300 million, for purposes of building the baseline for the updated 10-year outlook we have used half that, or $150 million per year.
Inflation. One of the most important factors in making any forward projection is what inflation rate to use, and what to apply it to. As we understand it, the administration’s FY23 10-year plan, completed before the most recent round of inflation started spiraling, uses 1% and applies it only to the Agency Operations portion of the budget. DOR’s baseline fiscal model does the same, but provides the ability to change the inflation rate for any given year or group of years.
As we discussed at length in a previous column, the St. Louis Fed regularly publishes market measures of inflation expectations, which we in turn summarize weekly, on Sunday’s, in posts on our Facebook and Twitter pages. The most recent post reflects market expectations of annual inflation rates of 2.82% over the next five years and 2.30% in the five years beyond that.
We have applied those rates, in full, to the Agency Operations portion of the budget. Because they are set amounts, we have not applied an inflation adjustment to either the debt or retirement portions of Statewide Operations.
The Dunleavy administration’s 10-year plan also does not apply an inflation adjustment to the fund capitalization portion of Statewide Operations, or to projections for Capital spending. While we see some justification for that, we don’t believe that those categories of spending are entirely immune from inflation and so, apply an annual adjustment to both equal to half the rate of the inflation factor we use for Agency Operations. We also apply the “half inflation” adjustment to the amount provisionally included for Supplementals.
CBR Repayment. We strongly believe that, like other debt, the Constitutional obligation (Art.9, Sec. 17) to repay past draws taken from the Constitutional Budget Reserve (CBR) should be reflected in each 10-year outlook. While there are several ways to do that, our preferred alternative is to include a provision for repayment as a line item directly in the plan.
Adjusted for the estimated payback in FY22 projected in OMB’s FY23 Fiscal Summary, the CBR still will be owed roughly $12 billion as of the end of FY22. Using a 10-year amortization of the outstanding amount would add $1.2 billion to the annual budget. In our updated 10-year outlook we have used a 15-year amortization of $830 million per year. Because the final FY23 budget already projects a payback of $639 million, the FY23 repayment included in our 10-year outlook is only the difference between the two, or $190 million.
Summing all of the adjustments together, here is the spending side of our updated 10-year outlook.
Because of the adjustments discussed above, the resulting FY23 baseline ($5.0 billion including the CBR payment, $4.8 billion without) is substantially lower than the recently enacted FY23 budget ($5.8 billion including the CBR repayment, $5.6 billion without). However, largely due to the increase in Agency Operations approved in the FY23 budget and the inclusion of line items both for estimated supplementals and CBR repayments, the starting baseline is significantly larger than projected both in the Administration’s FY23 10-year plan and DOR’s April revenue model.
The differences between our updated 10-year outlook and the administration’s FY23 10-year plan and DOR revenue model continue to expand over time largely due to the significant differences in inflation rates and the categories to which the inflation rates are applied.
Revenues. Of course, to be complete any updated fiscal plan also needs to address revenues. As regular readers of these pages may recall, each Friday we post to our Facebook and Twitter pages weekly updates of our Goldilocks charts, which update projected revenues for then-current oil market futures prices, as well as the most recent projections of the statutory percent of market value (POMV) draw available for government under three scenarios – current law (after the statutory Permanent Fund Dividend), Governor Dunleavy’s proposed POMV 50/50 and the approach proposed last session in SB199, POMV 25/75.
As of the time we are writing this column, the projected revenues underlying the most recent Goldilocks chart for POMV 50/50 – the approach appropriate to an update of the administration’s 10-year outlook – are these.
Net. While some may already be doing so, readers don’t need to scramble to calculate the projected net annual position. We summarize it here, including both with and without the CBR repayment.
Over the 10-year period at projected UGF spending and revenue levels, POMV 50/50 produces a surplus four years and deficits the remainder. In total over the 10-year period, the overall net deficit is relatively minor, at $1.3 billion, or 2.5% of projected spending.
At projected “total” spending levels – traditional UGF plus CBR repayment – POMV 50/50 produces a surplus the first two years and deficits the remainder. On net over the 10-year period, the overall deficit is more substantial, at $8.9 billion, or 14.5% of projected spending.
Now that we have established the baseline, we intend to take a much deeper dive in future columns into the implications of these numbers for short-, mid- and long-term Alaska fiscal policy. No surprise, but as a tease, we would suggest these numbers only reinforce our view that, going forward, Alaska needs to adopt a more equitable revenue source than hugely regressive PFD cuts to cover future deficits.
One final note. Occasionally some readers will mention that, especially on smartphones, some of the print in the charts we include in these columns is too fine to be easily read. Although there are ways to deal with that, some readers may find it easier to look at the charts instead where we reprint these columns on our Substack page. There, the charts can be popped out into their own, separate page.
Brad Keithley is the Managing Director of Alaskans for Sustainable Budgets, a project focused on developing and advocating for economically robust and durable state fiscal policies. You can follow the work of the project on its website, at @AK4SB on Twitter, on its Facebook page or by subscribing to its weekly podcast on Substack.