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Home My WebLink AboutAPA801, ,, .· .... ',·· THE PERNANENT FUND AND THE GROHTH OF THE ALASKAN :E.CONOMY: SELECTED STUDIES . · A Repprt for the . Ho us ~ Special Commi t 'tee· on the .Alàskâ Permanent Fund INSTITUTE OF .SO.CIAL AND E.CO.NOMIC RESEARCH UNIVERSITY .OF AlASKA Anchorage • ·Fairbanks .. • 1 ' l 7 . ' .·· t ..... '·.} r •( 1. THE PERNANENT FUND AND TÜE GROviTH OF THE ALASKAN ;E'CQNOMY: • SELECT,ED STUbi:SS . :: :[',.· Report :for the . · Hous.~ Special, Corn!Jli t 't ee' ... i ·· on the. Al~~ ka Permanent Fund . by Scott Goldsmith "'ith Lee .Gorsuch Lee nuskey Mike Scott and Arlon Tuss ing Dec ember 15, 1977 Institute of Social and Economie Research University of Alaska Anchorage -Fairbanks -Juneau 1 ~ ! 1 . ._ ~ i-. i ~ ._ ..... : - ._ - - L ...... ..... ..... - ...... - 707 A Street~ Suite 206 Anchorage~ AK 99501 UNIVERSITY OF ALASKA FAIRBANKS. ALASKA 9970! INSTITOTE OF SOCIAL AND ECONOMie RESEARCH Representative Clark Gruening~· Chairman Subcornmittee on the Alaska Permanent Fund Alaska House of Representatives 528 West 5th Avenue~ Suite 270 Anchorage~ Alaska 99501 Mr. James Edenso, Deputy Commissioner Alaska Department of Revenue Pouch SB · Juneau, AK 99811 Dear Sirs: December 15, 1977 The Institute of Social and Economie Research hereby submits the enclosed report entitled The Permanent Fund and the Growth of the Alaskan Economy: Selected Studies. The report, prepared under con~ tract to the State Department of Commerce on behalf of the House Subcommittee on the Alaska Permanent Fund, analyzes the economie and fiscal effects of a) alternative contribution levels to the Fund; b) alternative uses of the Fund's earnings; c) selected in-state investments of the Fund; and, d) in-state placement of the 1969 Prudhoe Bay bonus money. The compressed contract period for performing the work precluded the preparation of a preliminary draft and the solicitation of comments. ISER could compensate for this shortcoming by preparing a condensed supplemental report designed to reach a broad audience. This supple- mental report would benefit from any legislative or departmental com- ments the final report elicited. Because the basic analytic tool designed and used in the conduct of the study is a computer program, additional analytical work can be performed efficiently and at low cost. For example~ both the timing and the level of revenu~s~ expenditures and/or contributions to the fund could be easily modified within the structure of the existing program and the cor':t'esponding outputs re-analyzed • PLEASE REPLY BY AIRMAIL - ..... - Il.... ..... ..... ..... ~ l- - ..... i- - UNIVERSITY OF ALASKA page 2 ISER would be pleased to have the opportunity to prepare the supple- mental report and/or conduct additional analyses. We have enjoyed working with the Committee and its staff and trust our work will be of use to the Comm.ittee as it fulf.ills its charge to recommend how the Permanent Fund should be structured and implemented. As you read the report, I call to your attention one unavo.idable conclusion derived from the study. It dramatically underscores the danger of making incremental investment or expenditure decisions without regard for their long-term economie or fiscal effects and poignantly highlights the need for the legislature to engage in long-term fiscal planning. If we can provide any further information or elaboration of the study' s findings, we will be pleased to do so at yom" request. LG/m en cl. With best regards • Sincerely, 1 . ·C' 6~ 4"'é;y~v.;;YÎ- Lee Gorslch · Direct or PLEASE REPLY BY AIRMAIL ..... .... - ..... L ..... ..... L- - ~ - - - - THE PERMANENT FUND AND THE G~OWTH OF THE ALASKAN ECONOMY: SELECTED STUDIES TABLE OF CONTENTS I. THE PERMANENT FUND AND THE PATTERNS OF STATE EXPENDITURES A. B. Introduction Structure of the Permanent Fund C. The Permanent Fund in the Context of the Alaskan Economy D. E. C.l C.2 C.3 C.4 C.5 Introduction Ass umpt ions A Simulation of the Alaskan Economy Sensitivity of the Basic Case to Increase in Petroleum Revenues Sensitivity of Base Case to Increased Contribution Rate to the Permanent Fund C ._6 Conclusion Target Expenditure Growth Rates Targets Hhich· Take the Supply of Revenues into Account II. IMPACT OF ALTERl\fATIVE USES OF PERMANENT FUND EARNINGS A. B. Introduction Base Case C. The Economie Impact of Alaska Inc. Payments D. The Impact of Alternative Proposals for the Disposition of Permanent Fund Earnings E. Conclusion I-l I-5 I-13 I-13 I~l4 I-33 I-L~B I-52 I-59 I-60 I-74 II-1 II-5 II-14 II-29 II-55 III. ANALYSIS OF ECONOMie IMPACT OF PETROCHEMICAL FACILITIES AND FISH HATCHERIES ON THE ALASKAN ECONONY A. B. c. D. E. F. G. H. Introduction Base Case Aggregate Economie Impacts Regional Economie Impacts State Fiscal Impacts Local Fiscal Impact Per Capita Impacts Conclusion II I-l III-6 III-13 III-19 III-30 III-37 III-40- III-43 -- ------------------------------~--------------------------~--~-L--~ ..... - '..... TABLE OF CONTENTS (Continued) ..... - ~ - - - - - - b.. IV. ALASKA CAP1TAL HARKETS AND STATE FUNDS A •. Introduction IV-1 B. ' The Setting: The Alaskan Financial Sector IV-4 c. Policy Goals IV-8 D. Placement of the Funds IV-11 E, Other Programs IV-14 F. The Impact of the Bank Placement Program IV-17 F.l Growth Impact IV-18 F.2 Equity Impact IV-26 F.3 Efficiency Impact IV-32 G. Conclusions IV-34 ·APPENDICES A. GROWTH IN STATE AND LOCAL GOVERNMENT EXPENDITURES IN ALASKA A.I. Theory of Public Expenditure Growth A-l A.II. Historical Public Expenditures Patterns in .the U.S. A-10 A.III. Alaska Historical Public Expenditure Patterns A-15 B. r10DIFICATIONS TO lvJAP ECONOHETRIC MODEL FOR ANALYSIS OF PERr1ANENT FUND c. B. I. Accommodations to Simula te to 1999 B.II. Treatrnent of Permanent Fund B.III. Treatrnent of State Expenditures B.IV. Renewable Resources Developrnent Fund B.V. Guide to Variables Used in Analysis PETROLEUM REVENUE ASSOMPTIONS C.I. Prudhoe Bay Oil C.II. Prudhoe Bay Gas C.III. Cook Inlet Revenues C.IV. Miscellaneous Variables B-1 B-2 B-6 B-9 B-10 C-l C-3 C-5 C-7 - .... - i - '-' - .... - - - - - t i.... - D. TABLE OF CONTENTS (Continued) METHODOLOGY EMPLOYED IN ALASKA INC. ANALYSIS D.I. Eligibility D.II. Total Shares D.III. Migratory Response Pattern D.IV. Consumption Response Patterns E. ASSUMPTIONS TO RUN REGIONAL IMPACT CASES REFERENCES D-l D-4 D-10 D-18 ...... ' ~ .... ..... ..... ~ ' ..... l- 1 L ,,: ~ ~ - :- """' ------------~-------------------------------1~.~--_.--------~------------~----. THE PERMANENT FUND AND THE GROWTH OF THE ALASKAN ECONOMY: SELECTED STUDIES EXECUTIVE SUMMARY The contract under which this project was done outlined four general study areas. Each centered upon a distinct question related to permanent fund policy. I. What are the long run fiscal and economie prospects for Alaska and what are the impacts on these prospects of the Permanent flli>d? VI z 0 .J -' -<:Q z V'l "" < .... .... 0 0 ii Fig~e 1 shows the basic pattern of future state revenues (R99S) to be one in which the growth of total revenues reflects the cyclical natu:r>e of petroleum related revenues (RP9S). A significant decline in petroleum revenues leads to a corresponding decline in total revenues and adjustment to a lower long term growth path. Figure 1 PROJECTED STATE REVENUES 6~--~~----------~------------------------------------------------------~ 5 4 3 2 1 ,,._ / ;,1 -...._R9 9 1 1 1 -...._s 1 / --;' / ---. ,/ / / / / / / ---,.-' / --- R99S = TOTAL STATE REVENUES . ,,; ,,; ·'"' / / ; / / / ,..,--/ ...... / " / " / ....... "" ...... P. r ......_:1>9 / ,s / ' / ' / ' · / RP9S = TOTAL DIRECT PETROLEUM "'- / / REVENUES --- ~ --,.., ----- 0 19~7~5-------------8~0---------------8~5-.----90 95 2000 YEAR J iii ._ ~ Figure 2 on the same scale presents projected state expenditure growth at rates comparable to three periods of post-statehood growth. -Comparison of Figures 1 and 2 shows that even expenditure growth rates i..... such as experienced by the state immediately ,after statehood cannet be sustained beyond the late 1980s. Figure 2 PROJECTED STATE EXPENDITURES 6 -1 R3 = EARLY STATEHOOD 1 1 1 t 1 l R2 = HlliEDIATE PAST 1 t 1 1 1 f Rl = POST PRUDHOE 1 1 51 1 f 1 R3 / R1 / R2 # ..... 1 / 1 1 1 1 1 ' 4~ 1 / -1 / 1 1 "' 1 /1 1 z Q ..... -' 1 1 .... 1 / ;;; z 3 1 1 1 -1 / 1 ..... "' . .., '/ <C 1 / ... 1 .... 0 1 / 0 L 2 1 /1 1 1~ t/ 1 i1 /~ 0 -----~~----------~------------~-----------1975 80 85 90 95 2000 YEAR L "' z ·o _. ..... ro 3 Ill "' :5 ..... 0 0 8 7 6 5 4 3 2 1 iv A basic simulation of Alaskan economie growth shown in Figure 3 indicates the magnitude of the adjustemnt in state expenditures (E99S) necessary to attempt to maintain state financial solvency. Total expen- diture growth has a ten year hiatus. At the same time, the permanent ~·~~ fund (PFBAL) grows to a level of $3 billion. Figure 3-SI MU LATED STATE FISCAL PQSIT ION including Permanent Fund Part 1 ,- E99S ~ TOTAL STATE EXPENDITLVŒS R99S = TOTAL STATE REVENUES PFBAL = PERHANENT FUND BALAl'lCE 1 1 t t E99S / 1 1 1 1 / / ; /1 / ,--/ / .J,,.,,~---// /R99S , ... l' -... 1 / 1 -----// "' t' 1 ---·--" ,/ ;' 1 --,.,-" · PFBJI.t ;' ,/' ---------~-------------- ,/ ,." ,'/ ,/// ,,,.,,.,.. ;l" . ~~"' . ~ ..... -~~---."""/ 80 ,, 85 90 95 2000 YEAR ~ ~ 1 - ...... - ...... - i ...... i L r ...... ~ - 1 VI z 0 .... ..... -~w ~z Vl /1,~0:: "" .... ._, 0 0 6 4 .2 0 •2 ~4 ~6 ·8 ·10 1 ·12 t 1975 v Figure 4 reflects the fact that in spite of this expenditure reduc- tion and the permanent fund the general fund balance (GFBAL) falls below zero in the early 1990s and reaches -$10 billion in less than ten years. This represents the amount of alternative revenues which must be gener- ated within that period to get the state back on a 11 pay as you go" basis represented by the ratio of total current revenues to current expendi- tures (REVR~T) not including permanent fund contributions . Figure 4 -SI MULATED STATE FISCAL POSITION includ ing Permanent Fund Part Il ""',:::: :r ~ ~G f: IJ ,, ""'-~ 4 ~ ,, ..... ""~~~ -..-.:t'f ~ -.-~~ ~ ~~-~~ -r------ - ---~~ ~ ' -22 -~-~ REVRAT = TOTAL REVENUES/TOTAL EXPENDITURES '\.. ' " '\ '\ '\ GFBAL·= GENERAL FUND BALANCE '\ / ( '\ '\ '\ "' ' "\. ' 1.4 1.2 1.0 QB 0.6 0,4 ! . 80 ti!> ':lU ------~------------~~~~~--------------9~5~------------2~0~0 YEAR "' ];> .... 0 H 1\ l~ ~~ Ill :z: 0 .... ~ C:Q :z: V> "' <( .... .... 0 0 vi At a 25 percent contribution rate and 7 percent return~ the perma- nent :fund generates a substantial amount of annual income (RIPF). As a percentage of total expenditures (PFCON), Figure 5 indicates that its contribution can temporarily exceed 5 percent but will rapidly decline because of a slowdown in the growth of the fund itself. Figure 5 -SELECTED MEASURES OF THE PERMANENT" FUND 8 6 7 6 5 4 3 2 PFCON = PERMANENT FUND EARNINGS ,;,"' tOTAL EXPENDITURES ,,'/ ,, ,,/~ ,, // E9 1 ... ---9s 1 /,.. --1 /' --,/ / __ .... E99S = TOTAL EXPENDITUP~S RIPF = PERMANENT FUND EARNINGS R 1 P F 1 1 1 1. 1 1 1 1 1 1 1 1 5 4 3 2 1 . ------------------------------0 ,.,,..,_ _____ __.._~, 0 1975 80 85 90 95 2000 YEAR "tl m "" () m :z: ... 1 ' - ..... - - .... - - ! [ """" r 1 ! 1.... 1 L 1 ' ' L '- - - - VI Q ·W "' Q z :::> :x: .·Z VI "' .<. ..... ...1 0 Q ..... :z: <. ,_ "' :z. 0 u vii From the perspective of the average citizen of Alaska, the constant dollar (1967 U.S.) value of the permanent fund and the permanent fund earnings (PFBLRPC and RIPFRPC) exhibit long run cyclical behavior. Figure 6 shows they rise rapidly until the early 1990s and then fall off rapidly. Figure 6-SELECTED MEASURES OF THE PERMANENT FUND PART Il 9 r------------------------------------------------------------------ 8 7 6 5 4 3 2 1 ./ 1 1 1 1 1 1 1 1 1 1 1 ,..,....--....._ """"""' ' ' / ...... / ........ / ........ , / ' 1 ' 1 ' 1 ' PFBLRF'C/ ' 1 ' 1 ' 1 ' 1 ', / PFBLRPC = PER CAPITA PER}f.-\NENT \ / FOND BALANCE \ / (Constant Dollars) \\ RIPFRPC = PER CAPITA PER}~\NENT FOND EARNINGS (Constant Dollars) 1 1 ---!_ 1 !fRPC ----- 1 -----------~--~----~~~,~-----80 85 90 95 2000 YEAR .·····----------------------------------------------------------------li··: ... ,. :k ~; ~ ..... ·,.· ;·; ~t:! w [j~ 11': ~.~ .. viii l 01 l.llÎ 5 "' 4 0 :z: <( "' ~ 0 :x: ..... :z: ~ 3 <{ ..... _, 0 0 ..... z <( t- "' :z: 8 2 .The total state expenditure pattern which indicates a decline in the late 1980s is reflected in Figure 7 in a significant real decline in per capita state expenditures (E99SRPC) which puts the level of services about 1995 substantially below present levels,. ,;" ,;" Figure 7-SELECTED IVEASURES OF Tl-lE PER~,;1ANENT FUND PART Ill ,,, ,,..,,---·-'""'"' "' .J.,, • .,r ,,~"" '"' . ;ji' 0' •• ~-,...--~-~-~-~-~--,...---,.,,,, , DIRPA = PER CAPITA DISPOSABLE PERSONAL INCOME (Constant Dollars) . E99SRPC = PER CAPITA STATE EXPENDITURES (Constant Dollars) E99SRPC ~ 0 . 1975 80 85 90 95 2000 YEAR ttt' 1 ,( [f f l- ' ' ~ : '-' L. ..... .... .... i l- i .... 1 L 1 L r L '1 '1 L L ~ 6 4 2 ix The assumption of a 25 per>cent înc:r>ease in petr>oleum revenues begin- ning in 1983 above the level which can pr>esently be r>easonably p:r>ojected changes the timing of futur>e events but not their pattern. In Figur>e 8, the indicator>s of state financial viability from Figu:r>e 4 are r>epeated with values taken fr>om a simulation with higher> assumed levels of petro- leum r>evenues. The gene:r>al fund balance r>emains positive an additional yea:r> but there is very small change in the time when ther>e is a deficit on cur>r>ent account • This r>esults because the availability of incr>eased general fund r>evenues has led to an incr>ease in state spending. This has, in tur>n, gener>ated economie gr>owth and with it seme "feedback" on the demand for> state expenditur>es. Figure 8-POSITION OF STATE ASSUMING 25?-b INCREASE IN PETROLEUM REVENUES ,.,----,;~" ...... ~~(i ,/ -....;;.4( ,.,. ', // ' ~' ' ·--'Ir---' 1.4 1.2 0~-/------------'------'--'~1.0 ' ' ' ' ~-2 0 .... _, co -4 z V1 "' ~-6 .... 0 0 -8 ~10 -12 1975 REVRAT = TOTAL REVENUES/TOTAL EXPENDITURES GFBAL = GENERAL FUND BAL~NCE 80 85 YEAR -"\. --------~ ~ 90 95 \ \ \ \ \ \ \ \ > o.a 0.6 0.4 0.2 "' )> ... 0 ~ ! 1 1 ' ,. 1 1 ' l 6 4 2 x A substantîal încrease in the contribution rate to the permanent fund has the opposite impact on the financial position of the state. Figure 9 shows that ·.in the case of a 95 percent contribution rate expert- diture growth slows such that revenues exceed,expenditures for a longer time than otherwise. However, such a large amount of money becomes ·11 locked in11 to the permanent fund that the general fund balance becomes negative before 1990. Figure 9-FISCAL POSITION OF STATE ASSUMING 100% CONTRIBUTION RATE PERMANENT FUND . --0 ~--;· .... ...,[ .:--==::. ~ .::::_:::::.-:::..::.::.:-:::.:::::..-::::..::::--- z . ' 0 ' ~ 1 -- --2 ' ...> ...... = ...... œ ...... ~ ...,-4 ,c__. '-.~., ...: 0:: < -' .... '\. !5-6 REVRAT = TOTAL REVENUES/TOTAL EXPENDITURES GFBAL = GENERAL FUND BALANCE ' ' ' \. -8 \ \ -10 \ \ \ \ -12 \ \ 1.4 1.1 1.0 0.8 0.6 0.4 0.2 19~7~5------------~8~0----~--------8~5--------------~9~0------------~9~5~------------2~00~ Y EA R .i -t ., 1 ~ 1 :;:,. ·'~, > 1 :':!. gT 1 , .. , 1 r '~ ;,_ ...... ,_ - ' 1..... ' -· ...... xi Larger permanent fund contribution rates remove money from the general fund and thus eliminate the possibility of it being spent on current budget appropriations. The resultant slowdown in economie acti- vity is shown in Figure 10 where total employment (EM99) is plotted in c the two cases of 25 percent and maximum (95 percent) contribution rates. With higher contributions growth is slower in early years but is later more rapid because the larger balance is able to temporarily provide for about 20 percent of state expenditure needs from earnings. Figure 10-1 MPACT OF PERMANENT FUND WITHDRAWALS ON ECONOMIC GROWTH 6 -f.9 • Vl a z "' 5 ~ 4 0 :c ... Q w ·œ 'Q · .. z EN99 EN99' TOTAL EHPLOYMENT (25% CONTRIBUTION) TOTAL E?WLOY~lliNT (95% CONTRIBUTION) /-~ / \ tl J ,_ \ < q-'{(,/ '.... \ 0.0. c,4 ~ ' . , Il ~t<:/ /. /qq / "'"' ";...-,... Il Il 1 Il / 1.6 i 3 "-1 -:;~1 " I l 1 ....... -~-z ,_ ,·z w ~ >- 0 2 -' "-:r ..... I l q ,..., -~ ""q """' / );,'/ c{11 '-; ,.#"' "-"" " ~~ ,....,--"""' '\. \ ~ ' ..... ~ ~ < ~~ ,, ,/ 1 /1 E99SRPC = PER CAPITA EXPENDITURES ""' · /F 1 ,/ IN CONSTANT DOLLARS \'-~9s ,,;"' • ,;~"' (25% CONTRIBUTION) -.!f'c' ,_,JII" • E99SRPC' = PER CAPITA EXPENDITURES · ----"" · / IN CONSTANT DOLLARS '~9 9 Jll" · (95% CONTRIBUTION) ~""" 1.3 :>-0 0 1975 80 85 90 95 2000 YEAR <"l 0 z V> ... > z _, 0 0 ,... ,... > ::0 v> z ... :c 0 c v> > z 0 '"' fi ,; ., 1! xii These simulations and others indicate that in the l980s a very sub- stantial general fund balance will accrue to the state. A relationship between the general fund balance over and above immediate operating needs (PFSUPBL) and the permanent fund (PFBAL) as pictured in Figure lO.A is typical. During the next fifteen years this supplemental fund is likely to be substantially larger than the general _:fund. To concentrate on the permanent fund as a mechanism for controlling the patterns of Alaskan development overlooks this even larger fund source. This supplemental fund should be managed explicitly to allow state expenditure growth to adjust to the realities of state finances after petroleum revenues begin their decline. V1 z 0 .... -' co !: ·VI ~ <( _. --' 0 0 Figure 10.A-RELATIONSHIP OF PERMANENT FUND AND SUPPLE.i' .. ŒNTAL FUND 6~---------------------------~--------------~-------, 4 ·- 2 •• PFSUPBL = SUPPLE}ŒNTAL FUND BALANCE PFBAL = PERNANENT FUND BALANCE ,,-.... . ' "" ~~ ~PFSUPBl ,1 ~ 1 ' / \ t \ 1 ' . \ 1 ' 1 \ t \ 1 \ + \ -----1 ' rfl:!ll.\ __ _ t \ ;..;..,.., 1 ,..,,.,.., t .....-'. 1 ,., ,.,., \ f ~ \ 1 ,// \ t ,;" ' 1 ~"' \ ' ~ ' 1 ~" \ 1 r \ / // \ 1 ~/ ' 1 , -/ ,/.~ \ / / ' 1 ~"' \ ,~,., \ o L c:,l~ ~ ' . ;: 1975 so ss 90 · 95 2000, zi YEAR lliiilll .... ..... .... ..... ·- ..... ..... ~ L L L 1 - L L ~ 1 ..... 8 Vl 6 z 0 .... -' "' ~ ,.., "' <( ~ 4 0 0 2 Il xiii A first step in this direction involves adjusting expenditure growth to hit a target determined by real demand for public services rather than al1owing it to f1uctuate with the vagaries of short term revenues. Figure 11 illustrates one set of state expenditure patterns based upon growth of . state expenditures at the same rate as real per capita personal income • Even in these cases representing conservative (about 12 percent) state expenditure growth, cutbacks are essential in the 1990s. Without fore- sight, a massive cutback is indicated in 1994 in case A whi1e with the larger petro1eum revenues of case B.it is not necessary until 1997, but then much larger. Anticipation of the revenue shortfall 1eads to the smoother case C which allows highest expenditures in the long run. Case D invo1ves more rapid growth of the target and thus earlier and more substantial re- duction of expenditures. Figure 11-POSSIBLE TARGET EXPENDITURE GROWTH RATE A = UNITARY INCO:.IE ELASTICITY SUSTAINED AS LONG AS POSSIBLE B = S~~ AS A EXCEPT 25 PERCENT PETROLEUM REVENUE INCREASE C = SAME AS A EXCEPT MODERATED BEFORE THE CRISIS D = SAME AS C EXCEPT GROHTH RATE INCREASED BY 1 PERCENT OF BASE ~ // \ 1 \, 1 \ \ A \ Y -«-.' \ :7/,.1' .... - c / ;~" ...... -. ~/ ,, --..,.,~ .. , --__ \-....-::::-,...,..... .... \ ,. D ---~~\_/' ""'" ....~~-. .. ·" . " / /'"/ './ "'-" . 1975 80 85 90 95 2000 vr.., D Vl 0 z <t: V1 ::> 0 ::t ..... !: Vl "' < ..... ..... 0 0 ..... z < ..... V> z 0 u 1,4 1.2 1.0 .a·· .6 xiv Figure 12 shows for these state expenditure patterns the implica- tions for the level and growth of per capita real state expenditures. Significantly, even in the case where the revenue shortfall is antici- pated (C) there is a substantial fall in the level of services provided by the state. In the 1990s it is substantially below present levels. Figure 12-lEVE LS OF PE R CAP ITA STATE EX PEND!TURES IMPLIED BY TARGET GROWTH PATHS A = UNITARY INCO~Œ ELASTICITY SUSTAINED AS LONG AS POSSIBLE B = SAME AS A EXCEPT 25 PERCENT PETROLEUM REVENUE INCREASE C = SMŒ AS A EXCEPT HODERATED BEFORE THE CRISIS D = SMIE AS C EXCEPT GROHTH RATE INCREASED BY 1 PERCENT OF BASE ----1 \ ~ A \, \ .\ \ \ ',J' ' ' ' ... " l ..... ' '";-. ..... , ""1.....;: . ~ ......... ~, --...... ·-~-\ - \ \ " 1975 80 85 90 95 2000 YfAR t d •! ; i 'j 1 1 ~ 1 N l,r;~ ~·· ~' t. 1 ~~ ~" w:,, --------------------------------.---------~----------------------------------~~------------------------·--------~ i..Oo i L ~ - ..... ~ ..... ..... ..... - <1'1 7.: 0 _, .... 1 co ~.... :z: V> "' < .... ..... 0 Cl - w... Bt 6 4 r xv More sophisticated targets can be developed for state expenditure growth which take into account explicitly the unique long term revenue situation in Alaska. Figure 13 shows the state expenditure patterns de- rived from two such targets in contrast to the previous case A. Linking expenditures to expectations of future petroleum receipts (B) increases expenditures in the present relative to the future. Linking expenditures to the buildup of the balance in the permanent fund (C) delays expenditure growth until a future date .. This allows larger expenditures supported by higher fund earnings, but ultimately all cases return to essentially the same growth path. This illustrates that the choice of expenditure pat- terns in the short run has implications for longer run growth but ultimately the underlying relationship between non-petroleum revenues and state ex- penditures will re-emerge to constrain state spending • Fig ure 13 -POT ENTIAL BENE FIT MAX!r.r11 Z ING 1; XPEN DIT URE GROWTH PATHS . A = SHOOTH DEMAND RELftTED GROHTH B -GROHTH LIJ:i'KED TO REVENUE EXPECTATIONS C -GROHTH LINKED TO EXCE SS FUND BALANCES ;\ 1 \ cl 1 1 1 1 1 1 1 ...:~ ~· ,.-:4 ~ /' 2 t ~_,";..-' ,.... ~ :;:;.--;....- 0 _.. 1975 80 85 90 95 2000 YEAR :X: !li Finally, in Figure 14 another dimension of the tradeoff involved in the choice of e:x:penditure growth patterns is shawn. The state revenues received in the case C whel:'e growth is linked to revenues received re- sults in higher earnings from fund balances but eventually, because ~- state e:x:penditures are stimulated, the per capita real revenues decline below the other cases. "' 0 z .0: "' ::> 0 20 18 16 ;: 14 z "' C< <t .... ô 12 0 .... Z. <t ,_ "' z 810 8 Figure 14-CONSTANT DOLLAR REVENUES PER CAP ITA . \VITH BEN EFIT MAXH"11 ZING EXPENDITURE GROWTH PATHS A= SHOOTH DEl-!AND RELATED GROWTH B = GROWTH LHTKED TO RE\IENUE EXPECTATIONS C = GROHTII LINKED TO EXCESS FUND BAL.<\NCES 80 85 90 YEAR 12 11 10 90 0 0 CJ 95 95 1 2000 ! . f ..... ..... ..... 1.... :- lW.. li.. r i L. xvii The present state expenditure decisions from this perspective in- volve three tradeoffs which have implications for 1. the size of the economy, 2. the total amount of state revenues, and 3. the long run timing of state expenditures. II. ïfuat are the economie implications of varying the assumptions re- garding use of the earnings from the permenent fund? In particular, what is the effect of Alaska Inc. on the economy and state finances. The economie impact of changes in the use of the earnings of the permanent fund is significant because of the large size of the fund it- self. However, since the fund grows more slowly as time passes the importance of any policy change regarding earnings disposition declines. The most important impact of any use is upon the level of the fund balance itself. Reinvestment of earnings increases the balance signifi- cantly while using the earnings to increase state expenditures leads to rapid depletion of the general fund and any money which can be withdrawn from the permanent fund. Alaska Inc. and a personal income tax rebate occupy essentially middle ground in their impact on the fund since they prevent a faster balance buildup but do not increase demand on the fund as does an increase in state expenditures under the conditions of the 11ratchet effect" of state spending assumed in the analysis. In terms of aggregate economie impact, all alternatives were signifi- cant. Reinvestment of earnings shifts the pattern of growth toward more i ~ ; l ~ ~ Î ~ l 1 1 ~ ij :~ ~ ~ 1 ~ ~ ! 1 ~ 1 li 1 ~ ; 1 1 ~ ~ i 1 j 1 i ' l ~ 1 1 ~ " 1 1 1 j ~ J J ~ î ~ ~ i ' xviii rapid future growth while the opposite is true in the ether. They all reflect the fact that an increase in the level of disposable personal in- come resulting from spending fund earnings results in overall growth of the economy much larger than the original ch~!)ge. The cases in which growth of the economy is accelerated in early years also illustrate the fact that in these cases the slowdown necessitated by the financial difficulties projected for the state would also be larger. Finally~ the Alaska Inc. program seems to be more effective in getting additional income into the hands of individuals than a tax rebate. Be~ cause of the provision of multiple shares after every .five year increment in a person's length of residence, the value of an individual share begins to erode in real dollars less than ten years after the program is insti- tuted. III. What are the economie impacts of the types of projects which might be financially assisted by the pèrmanent fund? In particular, what would be the impact of a large refinery or fisheries enhancement program? The petrochemical and fisheries enhancement projects cannat be di- rectly compared to one another because of the large differences in size of the proposals and also because no explicit assumptions can be made regarding the method or size of permanent fund financial participation. in either project. It is more valid therefore to concentrate on the corn+ parison of each to a base case simulation. The petrochemical facility .i.J - - 1 1: ~ ' ,, [' - - i.i... f - i- - ._ ..... ~ xix represents a very capital intensive project while the fisheries enhance- ment program is labor intensive. Construction of the petrochemical plant leads to a 11 mini-boom11 which 6· results in an apparent long run increase in the level of aggregate eco- nomic activity. The capital intensive nature of the refining process notwithstanding, the employment impact is substantial because the construc- tian phase is relatively labor intensive. Both the 11 boom 11 and the long run economie growth are regionally concentrated in the Anchorage and Southcentral areas. Fisheries enhancement results in growth of the economy which is not accentuated but it is steady and leads to substantial long run in- creases. Because of the regional dispersion of the hatcheries the impact is not concentrated in any regionr. Interestingly, however, nearly 50 percent of the growth occurs in Anchorage where there is no primary employment increase. The refinery provides state tax revenues through the taxation of both business and personal income while the impact of the fisheries enhancement program is primarily in the form of personal tax increases. Revenues generated are significant but less than 1 percent of total state revenues by 1990 in either case. State expenditure growth exceeds revenue growth in each case by a considerable margin because of the target level set for state expenditures on a per capita basis • ~ ·~ m ; ~ ! "· ~ 1 ~ j i ~ ·.~'·. i ~ ~ " ·.~~î .~~.j i ~ ij ~ i 'j ·~ ~ ~ ; ':l :1 1 .v :l 1 ~. ~ ~ ~. ;.1 ri·· ' 1. ~· 1 ~ t 1 ~ ~ ~ " ;; ~ ., tl ~ ~i tt xx In both cases local revenues increase substantially. The re- finery pays a substantial property tax but a significant portion of the local revenue increase cornes from secondary increases in property values. The increases in the fish .hatcheries, case come primarily from secondary increases in property values. IV. What was thè economie impact of the placement of $100 million in time certificates of deposit with Alaskan banks by the State of Alaska between 1969 and 1971? In terms of aggregate economie indicators it is difficult to iden- tify any direct economie impact of this large increase in the amount of capital available to the banking system. Banking statistics for this period indicate a relative shift in portfolio holdings away from loans with a later return to the old ratio. This may be partially explained by four factors operating to limit the capacity of the banks to fully utilize these funds for instate loans: 1. the absorptive capacity of the system to such a large increase, 2. the short average term of these deposits, 3. state regulations requiring substantial collateral backing for state deposits, and 4. state usury laws. In terms of equity effects the 6.25 percent return earned by the state on these loans was well below the average return on the remainder of their North Slope portfolio between 1969 and 1973 of 7.5 percent. The differ- ence between these rates is an indication of the state's "opportunity cost 11 ---~-------_ ...... ______ ...._._""-' ________________ .._---'"'-'-------------~---.._'"--'., ~.,..; ...... ..... - 1 li... i.- l....i ~ :.... '- ..... - - - xxi for these certificates of deposits from the point of view of a profit maximizing objective. On the other hand, there may or may not have been excess profits transferred to the banking sector. It is dependent upon whether the negotiated priee was the result of arms length negotiations and the banks were bidding competitively. Discussions with individuals involved inci- cate this was the case. Aggregate profit statistics can neither verify nor refute this. It is also not possible to determine whether any benefit in terms of lower loan rates reached the consumer because of the increasing interest rates nationally which affected Alaska conditions. In terms of the efficient use of the resources of state government, it must be asked whether this method was the most efficient in terms of the stated objective of stimulating Alaskan economie growth. ..... PART I -THE PERHANENT FOND AND THE PATTERN OF STATE EXPENDITURES -A. Introduction ..... '-f"'1 Using~not unreasonable assumptions regarding the level of future petroleum related state revenues, the Alaska permanent fund will grow 1- to $1 billion in 1984, $2 billion in 1988, and $3 billion by 2000. l-If the dedication rate is raised from the present 25 percent level or if incarne generated by the fund is reinvested, the growth will be more 1 . · rapid. The disposi tian of such a large pool of money would have sig- ï.... nificant impacts upon any economy; but because the economy of Alaska is small, the policies adopted regarding fund contributions and dis- persements of earnings will in future years be of central importance to the course of growth of the Alaskan economy • .... To illustrate the relative importance of the fund in the future Alaskan economy, it can be noted that in 1988 when the fund balance will exceed $2 billion, total personal incarne in Alaska will bè in .... the $10 -$12 billion range. The permanent fund might thus reprèsent .... the equivalent of 20 percent of personal income in a_single year • Lest one assume that this will eliminate all future financial problems for the state of Alaska, it should be kept in mind that in -1969 when the state received a $900 million bonus from the sale of leases around Prudhoe Bay, total state personal incarne was $1.27 billion. -The Prudhoe Bay lease money was equivalent ta over 70 percent of per- sonal income in Alaska for-that year. Yet over a five-year period, the - 1 1 1 1 i i i ~ ! 1 1 ~ ~ ~ ~ ~ ,:1 i.l "1 ~ ~ ,t ! ill ~ 3. ~ i q ~ \1( 1 ~ 1 ! ~ '~ 'i ~ ~ ~ ~. ~ i ;j I-2 bonus money had all been spent and many Alaskans were left wondering where the money had gone and what the return had been. In terms of the state budget, which in 1969 fiscal year was $151 million, the lease bonus was six times larger. Assuming very ~oderate state budget growth in line with historical pat-terns in other states, in 1988 the state operating budget will be on the order of $3 billion. A permanent fund of a size comparable to the 1969 lease bonus fund would at that time need to be $18 billion, rather than its projected level of $2 billion. J Thus; the fund will be substantial but not monumental if viewed in perspective, and its primary impacts on the eco:nomy may not be the result of what the fund can purchase or generate through investment .. activity but rather the result of both the fund operating to channel state revenues out of the normal state spending stream and also of a savings mentality growing out of the fund's existence. The petroleum revenues which support to a large extent state government operations will probably not continue to do so in the future. The permanent fund is a deviee for saving sorne of the revenues received in the present so that they can be spent in the future, when petroleum revenue growth declines either relatively or absolutely. This act of saving, institutionalized in the permanent fund, serves two functions by removing money from the general fund. First, to the extent that it leads to a reduction in state government spending in the present, the growth of the economy is moderated and this, in turn, ..... - !, ._ 1.... ....... ..... ..... i ...... ....... i- - ..... i L L . ._ ------------------------------~~--------------~------~------~--~~-~> I-3 leads to a mode~ation in the rate of increase in the demand for government services in the future. Second, to the extent that the permanent fund manies are ulti- mately available for meeting the needs of the state go~ernment, the permanent fund serves as a deviee to focus thinking on the problem of long-run budget balancing over the complete cycle of petroleum- revenue expansion and decline. It focuses attention on the question of how much expenditure in the state government sectox' in the present is feasible given reasonable expectations about long-run petroleum ~evenues and the necessity ta maintain the state treasury in a positive cash position. ' It is ta these questions that this section ofthe study is ulti- mately addressed. It attempts to indicate the link which exists between the size of the permanent fund at any time and the size of the Alaskan economy. It also presents some preliminary analyses of permanent fund contribution and disposition policies which would help the state budget to remain balanced over the long run and at the same time maxi- mize economie well-being for Alaskans. In attempting to accomplish these tasks, much preliminary infor- mation must be presented regarding the likely size of the permanent fund und er different assumptions, as -well as i ts relative size and importance in the economy, and the size and growth of the Alaskan 1 f 1 1 1 1 1 1 4 iii 1 ~ ~ ~ ~ ~ 1 ~ ~ ;; ~ j 1 ':} }J ;j ~ ~ 1 :~ .~ j ' ;~ ~~ ~ <~ ~ ~ <~ ~ ~ I-4 economy in general. This information will be of general interest, and thus its presentation becomes another objective of this section of the study. J --------------------------------------------------~------------~--------~------------------_.~.~ - - ~ ~ 1..... ~ i - 1..... i l. 1- t- - - I-5 B. Structure of the Permanent Fund An amendmen·t to the Alaska Cons ti tut ion was necessary to establish the Alaska permanent fund. This is because the Constitution specifi- cally forbids the dedication of proceeds from taxes or licenses for any special purpose except in the case of joint federal/ state participation programs. The relevant section of the Constitution is Article IX~ Section 15., which reads as follows: SECTION 15. ALASKA PERMANENT FUND. At least twenty- five percent of all mineral lease rentals, royalties, royalty sale proceeds, federal mineral revenue sharing payments and bonuses 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 incarne from the permanent fund shall be deposited in the general fund unless otherwise provided by law. The letter of intent accompanying the proposed amendment from the governor included the following points of clarification: 1) The permanent fund would not include proceeds from petra- leum exploration, production, and property taxes as listed under AS43.56. 2) The fund would exclude receipts from petroleum reserves and ad valorem taxes as indicated under AS43.58. 3) The manies dedicated to the fund would be used only for income producing investments. I-6 4) The fund could not be utilized to finance the general oper- ating expenditures or general capital improvements of the state.1 Since the approval of ·the amendmen.t by the electorate in Novem- ber of 1976, interest has centered upon interpretation of sorne of the terms used in the amendment and upon the development of legislation to implement the fund. In particular, a workable définition of an invest- ment which is "income-producing" must be developed. In terms of en- abling legislation, the immediate question is that of th~ types of income-producing investments which should be specified by law as eli- gible for permanent fund investment. Questions of organization, manage- ment, and reporting must·also be answered. Because these and other questions are only nO\v being discussed, the analysis in this study must adopt a flexible approach to the modeling of fund behavior and administration. Since the focus of the study is upon not only the relationship between the operation of the fund and the economy, but also upon the long-run adequacy of state government finances, the emphasis in this portion of the study will be upon the permanent fund as a "savings account. '' Other fund objectives are recognized, su ch as 11 communi ty development" and "controlled economie diversification." These objec- tives are analyzed in detail in other studies and thus not directly addressed here. 1 State of Alaska, Department of Revenue, "Permanent Fund,11 Revenue Journal, Vol .. 1, No. 2 (October 1976), pp. 4-5. - ..... ..... [ ~ - - ,_ ..... i 1.- L """"' ..... L L 1 l_ L L -------,----------------------------------------,~-. I-7 The fund proceeds will be placed in investments, sorne of which are within the state and sorne of which are outside the state. Clearly, in- vestments made outside the state will have no direct impact on the private economy of Alaska. Investments mad~ in Alaska may have an impact upon the aggregate Alaskan economy, or they may merely displace an investment which would otherwise have been made by the private sector--by either an Alaskan or a non-Alaskan. To the extent that capital markets operate smoothly and efficiently, then capital in Alaska will be fungible. That is, investors will be aware of all investment opportunities and the probable return on those investments. The Alaska permanent fund would be only one of many investors bidding for the right to make a particular investment. Fungibility of capital may be lacking between Alaska and the rest of the world because of market imperfections in the form of imperfect knowledge of opportunities for investors or imperfect corn- petition. There may be an apparent non-fungibility problem because of a premium required on a particular Alaskan investment because a higher level of risk is involved. Studies indicate that these problems are more likely to arise in small communities and in cer- tain sub-markets of those desiring to obtain loans. If an investment is a form of subsidy, either through a lower than market rate of return or loose loan repayment requ.irements) then there would more likely be a positive increase in overall economie activity as a result of the investment. 1 1 1 1 1 i· 1 1 f ! I-8 For simplicity in the analysis that follows, two assumptions are made concerning permanent fund investments. The capital market in Alaska is assumed to be operating satisfactorily so that capital is fungible," and no investments are made with the expectation of a lower than market rate of return. As a result, the level of the permanent fund at any time does not directly affect the private economy through any investment policy. Permanent fund instate in- vestments merely "back out 11 an investment from another source. It is recognized that this will not be the case in reality, par- ticularly to the extent that the fund is used to finance investments in rural Alaska. However, these assumptions are made with the intent of highlighting the implications of the fund as a nsavings account." To this end, the rate of return on the fund is set at 7 percent in all simulations. At the same time, however, the notion of petroleum revenue pro- ceeds being used to stimulate Alaskan economie activity has not been completely eliminated from the analysis. In addition to the perman- ent fund, there have been created by the legislature two renewable resources funds. According to AS 37.11, 5 percent of the proceeds J of royalties and bonuses will go into a renewable resources development fund. These funds are to "guarantee the enhancement and development of the state's renewable resourcesn and appropriations from this fund shall provide 11 funding for capital and operating expenditures for the rehabili"'- tation, enhancement, and development of renewable resource prograrns.11 ~.!... 1.- ...... ..... """" l ! il- ..... ..... - I-9 Manies paid into the fund, but not expended in that fiscal year, transfer to a renewable resources permanent fund. This fund balance is allowed to grow to $250 million, at which point no additional manies are paid in. The permanent fund principal is inviolate, but the interest on the fund investments must be used for the same pur- poses as the rene'l,rable resources development fund manies. The simulations in this report assume that half the anntial pro- ceeds to the renewable resources development fund are spent and half are channeled into the renewable resources permanent fund. In its peak year of 1986, $50 million flows into the development fund. The permanent fund becomes completely capitalized in 1993, henceforth, earning over $13 million annually at a 7 percent rate. The manies thus generated are assumed to stimulate activity in the agriculture, forestry, and fisheries sector of the economy. The resulting impact on the economy is significant in that sector which grows in employ- ment much more rapidly as a result of this program; but overall, the impact is fairly small simply because agriculture, forestry, and fish- eries is one of the smallest sectors of the economy. In terms of contribution levels and the distribution of earnings, the analysis follows the requirements that are incorporated in the Constitutional amendment. The basic contribution rate is 25 per- cent, and ali earnings of the fund are deposited in the general fund where they are treated like any other source of revenue . I-10 Since these stipulations are subject to change by the legislature, the analysis will sometimes look at other assumptions concerning contributions and earnings than these, but such differences will always be noted. '0:; The permanent fund amendment does not specify whether contri- butions to the fund over and above the minimum rate of 25 percent -c ~1 are subject to the same restrictions regarding type of investment J and withdrawal as the basic permanent fund contributions. A likely interpretation of the amendment would be that any supplementary contributions to the fund would be "captured11 and subject to the same restrictions as the basic contribution. Thus, there would seem to be little incentive for the legisla- ture to lock up permanently additional funds which may be surplus to present needs but required for current expenditures in a few years. On the other band, leaving them in the general fund leaves them vulnerable for immediate spending. This is not a small prob- lem. Even with very rapid growth of state expenditures, the balance in the general fund may well exceed $2 billion in 1984, which is almost equal to the amount in the permanent fund at that time. Concentration on the permanent fund to the exclusion of the general fund thus overlooks a very important component of the state govern- ment financial situation. - 1 I-ll .... ' .... In an explicit effort to take the existence of this probably 1 very large general fund balance into account, a special fund account has been created in the model of state government in this analysis. It can be interpreted in either of two ways. First, it can be -viewed as a supplementary account in the permanent fund, subject to -the same investment restrictions but not to the restrictions on withdrawal to which the compulsory contribution is subject. Since there are no restrictions on either contribution or withdrawal levels and the only factor distinguishing this portion of the permanent fund from the general fund is the rate of earnings growth, this 1.... special fund account could be considered a part of the general fund. It would be that portion of the general fund portfolio which was ~ specifically placed in longer term investments which are thus able to earn a somewhat higher return than general fund balances which may be needèd in the current year. A third possibility would be the actual establishment of a special account, either within the general or permanent fund which would specifically be the depository of excess government revenues ._ which are neither needed in the general fund nor should be locked ' L into a permanent fund. Such an instrument, be it in the general fund, the permanent ~ fund, or in a nevrly created in·terim fund, is necessary not only to distinguish investment classes vrhich have different objectives, but '- I-12 also to highlight the long-run cyclical nature of the economie ex- pansion resulting from the Prudhoe Bay oil discovery. This account would contain the funds which the state has in reserve for a 11 rainy dayrr in contrast to its two other funds. The general fund is necessary to take care of the normal operations of state government on a regular basis, and the permanent fund is always available in a catastrophy but requires a Constitutional amendment to unlock. In sum~ the permanent fund is formulated as a savings account in this study following the outline of the Constitutional amendment. A separate renewable resources development fund functions as a genera- tor of economie activity in the agriculture, forestry, and fisheries industrial sector, and wage and salary increments there flow through the economy to cause further expansion. A large general fund balance of nearly the same size as the permanent fund is noted, and it is argued that this large balance should be singled out and highlighted in the permanent fund analyses which follow. - i- i i ..... L ..... ..... ..... - ..... ..... l- I-13 C. The Permanent Fund in the Context of the Alaskan Economy C.l. Introduction In this seètion, the Alaskan economy is simulated from the present to the year 1999. The permanent fund, as conceived in the Constitutional amendment, is an integral part of the analysis. State expenditures are assumed to grow rapidly as they have in the recent past, and no conscious attempt is made to balance the long-term expenditures with expected long- term revenues . The results of this basic simulation are then contrasted with those of two other simulation experiments. In the first, the level of contri- bution to the permanent fund is dramatically increased from its 25 per- cent minimum to a maximum 95 percent level. The contribution stops short of lOO percent because of the 5 percent required contribution t6 the renewable resources fund. The third case examines the implications of a significant change in expectations concerning the level of petroleum revenues received by the state. A significant increase in petroleum revenues is hypothesized. Before describing the simulation experiments themselves, it is necessary to discuss the assumptions concerning petroleum revenues, state expenditures, state response to deficits on current account, and private economie activity as well as the model used in the simulations . The discussion thus first turns to a review of the assumptions of the analysis. .I-14 C.2. Assumptions C.2.a. Petroleum revenues. In two respects, the assumptions re- gar>ding the level of future petroleum revenues are the most important . to the whole analysis. First, direct revenues fr>om petroleum-related activities in Alaska comprise the largest single solll'ce of revenue to the state. As recently as 1975, the proportion was 15 percent but in 1978, it is estimated that 50 percent of total state revenues will derive directly from petroleum and related activities.2 Indications are that this percentage will continue to grow at least through the mid-1980s to over 60 percent. In terms of unrestricted state revenues, the ratio of petroleum related to total revenues is much higher since restricted revenues comprise about 25 percent of the total. The implication of this is that the size of the state treasury, potential state expenditures, and long-run fiscal viability of the state are all dependent upon the level of petroleum revenues. It is unfor- tunaté that this largest component of the state revenues is also the most difficult to accurately estimate. The second reason that the petroleum revenue assumptions are criti- cal to the analysis is that state government activity in Alaska is one of the most important growth industries in the state. Growth in state government generates growth in the Alaskan economy. The impact of state government growth on the Alaskan economy is particular>ly strong 2 State of Alaska, Depar>tment of Revenue, Revenue Sources FY 1976-78. Juneau, Januar>y 1977. f< ~ . l w ., ' î ai ----------------------------~----------------------------------------~---------------------·-----------· ..... L I-15 ...... b~cause of the large amount of state (and local) governmeht activity as a proportion of total economie activity. Since government is large in Alaska, growth in government naturally results in general economie grmvth. ,, Because changes in the size of the state government sèctor imply significant changes in the si2;e of the state economy and the possibili ties for state spending are limited by the size of petroleum revenues, the level of petroleum revenues and expectations concerning future levels are. i...... a significant factor in the determination of the level of economie acti- vity in the state and future potential levels of activity. The uncertainty ~ surrounding petroleum revenues so trànslates into uncertainty concerning the possible constraints to growth of the Alaskan economy. ~ The çompletion of the Alyeska pipeline earlier this year and the commencement of oil production from the oil fields at Prudhoe Bay has ~o.. generated a large amount of interest in attempting to accurately pre- .dict the level of petroleum revenues accruing to the state in the pres- ent fiscal year, or in the next few fiscal years. Each time there is a change in one of the factors affecting priee at the wellhead or through-..... put, the calculations must be redone to determine t~e immediate fiscal impact. It is obviously important for the state to be aware of its finan- cial position at all times and be able to effectively plan future ex- penditures. One of the goals of this study is to attempt to lay out I-16 for analysis some of the implications of a long-run analysis of the state 1 s fiscal position. Ha>fever, mu ch of the con cern over the startup problems of the pipeline and of the determination of wellhead oil priee seems to center upon the short run only. There is a feeling conveyed ~ that -the whole future of the state government hinges upon the abili ty of a small group of pipeline employees to keep the oil flowing on schedule. The feeling is correct, but the concern is misplaced. The amount of oil Hhich will flow through the pipeline in this fiscal year >'lill determine whether the state government runs a surplus or deficit in this fiscal year. But if the throughput is low this year, there will be a compensatingly higher throughput in a future year. What is im- portant is not the daily, weekly, or mon-thly revenue generated, but the long-term total amount. It is this amount which must be estimated as accurately as possible because in the "long run" of the next 20 years, the future of the state is inexorably related to the level of petroleum revenues. It should be remembered that short-term revenue shortfalls can be overcome as was done by the imposition of the reserves tax in 1975. As long as there is a secure future revenue source, short-term fluc-tuations are a normal occurrence. On the other hand, a revenue shortfall which Hill continue for a long period 1vith no source of funds to fill in the gap cannot be handled as "business as usual. 11 For this reason, the specification of the assumptions concerning the level of petroleum production and petroleum pricing, although '"""' 1 i- L ...... !..... i- ...... :.... - " l' l, 1.... L L - ..... .... I-17 detailed, do not in elude a range to take account of ei·ther uncertainty regarding short-range production levels or unresolved disputes concerning costs of various phases of petroleum transportation, which can be charged off against the priee to obtain the wellhead priee. Hhat is developed ~~- is a fairly conser>vative scenario of petroleum activity and pricing, which forms the basis for all simulations . The scenario is conservative in the sense that it contains no sigi:tificant petroleum discoveries leading to production beyond what is currently producing.3 In addition, the most reasonable priee assump- tions available in the fall of 1977 were used to construct the wellhead values. It is easier to envision a more optimistic, rather than a more pessimistic scenario. A more pessimistic scenario would require either a reduction in pr>oduction rates from their already stated levels or a reduced wellhead value. A more optimistic scenar>io would result from either a priee increase or cost reduction, an increased production rate from existing fields, or the discovery of new commercially recoverable deposi ts in Cook Inlet, Gulf of Alaska, on the North Slope ~ or else1;.1here, or an increase in the severance tax rate. 3A more detailed description of the petroleum scenario assumptions is presented in Appendix C. Many of the assumptions are adopted from work done by the stàff of the Legislative Affairs Agency who were very helpful in providing assistance to develop the scenario. I-18 Table I.l. shows the simulation values for bath total expected petroleum-rela.ted revenues and the subset of petroleum revenues from which permanent fund contributions derive. Total petroleum-related revenues consist of state royalties and bonuses on petroleum and natural gas lands, production (severance) taxes, and the property tax on petroleum related activities.4 This total petroleum revenue series is net of two major items which the state is obligated to pay. The first is the reserves tax paid to the state in fiscal years 1976 and 1977 by the holders of the Prudhoe Bay leases. These payments are netted out of production taxes for which the companies are liable at the rate of 50 percent of the liability until the $500 million in reserves taxes has been repaid. This takes three fiscal years through 1980, at Hhich time state production tax receipts essentially double. The second item netted out of petroleum taxes is the state 1 s liability under the Native Claims Settlement Act. Under that Act, the state is obligated to pay the Native corporations $500 million. The funds are to come from state oil and gas royalties at the rate of 2 percent of the total value of production. This has the effect of reducing state royalty revenues by approximately 16 percent until such 4 d . d . Fe eral royaltles share wrth the state and lease and rental in- come are small components of total petroleum-related revenues netted out for ease of calculation. '- 1..... - - L - 1- .... L 1- I-19 Table I.l Aggregate Petrole~un Revenue Assumptions ,;, :;_;})''.:? :L 9'.lB > 1 ~?'.?i.) J. i.}Ü() L 9rj:J. :l. ~~;.~~ ::~ :;.:: :L ·?;::.:::~; :L "7=:::;/;: :t s:·B ~~:.r :r. '~~) ~J ~5 :;. ·~:· E::~ ·.:.:· t '~;>fJfj ::_ ·~) ~:-~: ~~;.: ·; ()·:;:<<> t ~.:0') t :r. <_;.:·()::? 1 1~)·:_)3 :L ;;_) ·:;:~ ./;. :L ·:_;.:= 9:.~::; :L \;'19:;-;j l ·:;.:.·~.:··.? t 9':)F: î:~:p .:p ::::: ,(~ 6 () <· ~? ~5 -4 {:.; ;,:.~ ~-:!. ..;-:~ :? ~:;' s;,· {· :-:s ~:.:.~ :L :t :t é~ ·:· é :_:_j ;L .:~: ~;S () ~· () -~~~ :L l? ..:-:;. ~/ .;. E~ -4 :L (, ·_:? () .;. ·:·:·; :::: J () :::.< ::? " '/ :i. ~~:: :t t :::·:. {· :? :::~~ ::.? 1 :::) fj .;. :!. ~~-1 l 9 .·:·~-:<3 (· :L :_:_:; 1 ?~:)(') -~ J ~~ l ... -~. (;;, :_:_~i -~· :.5 ::5 :!.;'?(;<· ., ·.? •. ::, t ~) ':;) () ~-(~ ~~:; (? ·<;_ :L -:· 3 ') (} J :j i· ~.:.~ =:) '?()()-~ti( =:SG-·=f 1-.-:'.~ ~:=: : .. ·: ~::) /1 'Î ..,.; ··./ ... .;-'''i .1. -4 ::? {;, ·:· ·_:? .{~ ::::~::;/;. {• -4~::; f?r=~ ?~;. 1l .:· ;,::: ........ ,••, .~·:: .·:.;·!..} ·:- /;.':_;.)::? ·~· ~:::t-4 ~.::.; tl '? .;. ~? ::) .::j ;~~ () ~.. :.2 '? '.? 1 .:-:~j ~-:·:~: ~3 ;J ::? 0 ~' E~ :::; ?:i.3 ,. ?~:'.; <;.: [;~ l;. .;. [; ~-:-~ J. () 0 ~? -~-"? _{~. 911 .• :3 ··:;f'l:"l t .. \"'Y / ~::: (:) -:-::::~ .. :.:: (.~.'70 <· :::;:l. ~::; :? ;;;. -:-~? --:·~-E~ :::; -~· <.l r~ -4· 1 ;:_~ -:· ~) ::·:·; :.::~ ~.::_; :? ·:· .. q ::::;~ ~5 0 () .;. ::::) ~? ;;,~ ~::_; ·;.:-: v :L '.? ~-~ 1 {:) ~-:.:s ~~-~ t ;:::; ::_:2 ~ :.:~: {":· J. ~:) :.:~; .;. é :::) RP9S-Total direct petroleum revenues($ million) · RP7S -Bonus and royalty revenue ($ million) I-20 time as the $500 million obligation bas been paid. In this study, the obligation is fully paid in 1983. The required Native Claims payments are included in the series on revenues from which permanent fund revenues derive. Of total direct petroleum-related revenues, petroleum taxes on production and on property are the major categories which are not in- cluded in the base for calculating permanent fund contributions. Of these two taxes, the production tax results in the larger revenue, yield- ing about 4 times the revenues of the property tax in peak production years. The production tax is based upon a complicated formula, taking into consideration actual individual well output and the decline of the productivity of the individual well over time. For simplicity, a 12 per- cent average tax rate was applied to the value of production to arrive at an estimate of the production tax. The property tax is levied at the rate of 20 mills on certain cate- gories of oil and gas property in the state. Since the determination of the methodology to use in assessing the value of the Alyeska pipeline over time as the Prudhoe Bay field becomes depleted is an unsettled matter, it is difficul t to be precise in estimat ing property tax revenues .. It is assumed that upon completion, facilities decline in value at the rate of 5 percent annually. Royalty and bonus revenue is the major contributor of money into the permanen·t fund. At 12.5 percent of the value of production, this 1 î ~ - l.. 1..1.. i- .... ..... ' ,, - ~.,.. L ----------~--~-~ I-21 revenue source compr>ises roughly 50 percent of total petr>oleum-related revenues over> the per>iod 1977 to 1999. At a 25 percent contribution rate~ the resulting permanent fund contributions~ balance~ and interest earn- · ings grow rapidly in the l980s but then begin to taper> off in the l990s (Table I. 2). Corporate taxes paid by corporations engaged in petr>oleum production may be a significant r>evenue soUr>ce dur>ing the l980s when production rates are high~ but this is largely dependent upon the outcome of r>ecent proposals before the state legislature to modify the existing methods by which the corporate incarne tax assigns income of multistate firms among its states of operation. Corporate taxes are assumed to rise to approxi- mately $60 million in a peak year of 1986 and then to decline fairly rapidly. Corporate incarne tax receipts of the petroleum sector of the economy are not included as a component of direct petroleum-related taxes in Table I.l., because such receipts are not the result of a tax specifi- cally on the petroleum industry. The fields which are assumed to be producing ail and gas are only those which do so presently--Cook Inlet and Prudhoe Bay. In this re- spect~ the assumptions are conservative but consistent with a necessar>ily conservative outlook on the par>t of state government. Oil production from Prudhoe Bay is based upon an 8 billion bar>rel field capacity resulting in a maximum pipeline throughput of 1.7 million barrels per day in 1984 and 1985. Gas production from Prudhoe Bay peaks I-22 Table I.2 The Basic Permanent Fund Case J. !~;:'.~?")' J Si/~J 1 ç;t~'/1:.:.) :L (?~::;() l j>fJ :t . t ·~) ~::; ;.? :L '?F:3 :f. 9~3-4 t 9 ;:~~ ~5 :1. .:_:.~Ei/:. 1 (? ~:~ ~:? .. ;··, .-·~ ··:· .!. '7 Ci.:~:· :L s::;:::;r:? :L ::;:: (? () :f.9•)J 1. {) ~:;_:. ~:.:: J. ·:;) ~;) ~-;::; J !'?::?.·:{. :L ::?~? :.5 \ (_?'){-.') j_ (?·~:;:·_:l 1 ~:;· •) ~:~ j:~: r;· r· f) :t r~ r· I·~ t:r t .. () -~ ;.? ·=· -4 {':;, () ... 1:·~:, :~:: ~ ·4 J ::.:.:~ :::~: •} l 6 t · E; ~5 .;. ~~:; l:·::r 141.932 327.492 t ~s :_:.:; ~-o ·:·::l E: ..:'{. r~ ::~~ -} :=.~~ .;-:·:· 179. 661.h55 ~2~:~;; 1~*~:~67 ~::~ '4 ~·:) ·:· ;,:,:: 0 ~;5 l :.:) .:'{. l .;. !_:_:,; l :~.:: ~:~; t !• .;_;:· :.:s ~.:5 :L :5 ~) ::~~ ·) .-:':~ .l;. :~~ ~~:~ )' -:-B :~:.:~ ~:.=.t :1. ;;:~ ::;.~ t {· ::.:.~ )' :i. 1 ) 7 -:-~~~ () fj ::.:.~ () :L E:~ ·:C -4 ;J 167.703 2186.18 142.675 2328.85 .t ;.~~ J v ~? :? :~~~ 4· ~5 () ;· l ::? 1 () :·:~; .:. :::_:~ .·:'{. ~? ~5 :s :·:~; .. ~ :.?) ~5 i::: n ·> :t <> ·7 :? (~:. --=-f. 1 ~ -4 ~? ? ~:~; .;. 0 ') :·:~ :~~~ '? J {:~ .. ~.:=_; {:: 64.292 2780.86 54.13 2834.99 <~ ~:_:_; ·} ~) .:_;:~ ~-2 ~::! f:~ 0 -:· ~:.:; f$ ~.-::~ f:; {· ./? l :.:5 ::;,~ •) 1 t~ .;. ~? ~~? RPFSl -Permanent fund additions (million $) PFBAL -Permanent fund balance (million $) IPFl -Permanent fund earnings (million $) I PF":L () ~ () ~\ :L {~: ~3 ·4 ·~ ?;1:·:·:.Ei ·•· ,.. .. r r~ :···, ;·1 .! ... ::. -7 '? =:::l '7 ~.:.:~ ;,:.~ -~ 9 ::? l;. ~~;; :·:=:: ·:· )' '/ ~:;:= 4 é -:· ::~ :t (; é() \• (i~~~l '? ·==> -? {:·f ~? :L ·::) :·;~; -~. (;.:· () (, J:!. :L -:-~:_:_; .. :·{. J :i. ;;.:: ? ,. 4 ü (? :L ;·:!. J .;. ~? 9 ~·::; 1 ~5 ~::~; ·:· () ::s 3 l 6 ::s \• () ~:.:~ :t ·;:; :t ·:· ~_:; 0 l:;.: l '/ f:j ·:· )" ::~ :5 J UA{· ·:;.;.o::J l ') () .;. l :.:5 (? l r:.~.,; ..:':} ·:0 •::':; é~ l '-) t:j -:-.-:~;. li-·::) :::.~ 0 t ~· t:: . .-:'{. '- l- L [,, ii- l.... - I-23 in the latter half of the l980s at about 2.4 billion cubic feet per day.· This output is sustained through the early 1990s and then begins to fall off. Prudhoe Bay gas is transported to market through a pipeline along the Alcan route. The bulk of petroleum revenues derive from existing Prudhoe Bay operations, but Cook Inlet oil and gas production contribute a declin- ing absolute amount of taxes and royalties. Since gas production is not projected to peak until the mid-1980s, but ail production is already declining, the two tend to counterbalance one another in early years, and the decline in overall Cook Inlet contributions from its present level of approximately $40 million is very gradual for about 10 years. No additional fields are assumed to produce petroleum, although there is significant exploratory activity carried out in the 1980s. Of importance to the state from a revenue standpoint is a bonus lease sale in the Beaufort Sea area in 1979 i-ihich yields $100 million in revenues. Exploratory activity contributes to employment in the following areas: Beaufort Sea, Lower Cook Inlet, Gulf of Alaska; but none leads to production Hhich pPovides revenues to the state. The most significant variable in the determination of state petra- leum revenues is the Hellhead priee of oil at Prudhoe Bay, because this is the base upon which both royalties and production taxes are calculated. The wellhead priee is determined by taking the delivered refinery priee and subtracting from i t all allowable costs involved in ·transportation :~ I-24 from the wellhead to the refinery. This calculation involves a nurnber of significant issues, sorne of which have yet to be decided and which necessarily result in estirnates which are subject to a large arnount of variability in future years. "'" The refinery priee is dependent upon its location as well as future OPEC pricing strategies and federal petroleum pricing policies. Trans- portation costs are in three categories. The. largest is the Alyeska pipeline tariff, Hhich is yet to be agreed upon although it will probably differ by company. The cost of transportation from Valdez to refinery is most dependent upon refinery location Hith cost rising as the refinery to vrhich the oil is delivered maves eastward. Finally, there are apparently charges involved in the transfer of oil from the field at Prudhoe Bay to the pipeline itself. The initial values for the wellhead priee of Prudhoe Bay oil used in this study were taken from studies done by Legislative Affairs Agency.5 Independent assumptions regarding each cornponent of the equation deter- mining wellhead priee were calculated in that study based upon the best information available at that tirne. The 1978 Hellhead priee used is $7.35 and this rises to $11.95 in 1985, representing an average rise in priee of 7 percent annually. This is predicated upon a 5 percent annual increase in the del.ivered refinery priee of the oil and constant nominal priees :for transporta-tion of the oil. After 1985, the Hellhead priee 5 Legislative Affairs Agency, memo on Underlying Data for Revenue and Permanent Fund Forecasts, and Updated Revenue Impacts of Pump Station #8 Explosion, 1977. ~ . ~ j .... I-25 continues to rise but at a rate which declines to 6 pel.'"'cent by the final year of the revenue estimate in 1999. .The nominal priee of Prudhoe Bay -oil has risen to $17.30/barrel in 1990 and to $30.91/barrel in 1999. i.-The explosion at Pump Station 8 in the fall of 1977 caused a tempo- rary reduction in throughput of the Alyeska pipeline, which is reflected in the revenue projections. In sum, the petroleum revenue projections are generally predicated upon a conservative set of assumptions concerning future events. Prudhoe " Bay reserves are estimated at 8 hillion barrels, and no neH discoveries i. l 1.... of petroleum are assumed. The delivered priee of crude oil rises at 5 percent annually, which is equivalent to a constant real priee after accounting for inflation. The initial wellhead priee of Prudhoe Bay oil may be somewhat optimistic based upon the latest information avail- able concerning decisions about transportation cost levels. Since these costs have not been finally decided upon, however, the correct level to assign to this component of the wellhead priee equation is somewhat speculative. C.2.b. State spending. State government spending, as well as that of other levels of government, tends to be highly correlated with increases t..... in population, the level of priees, and personal income of the population. -For a variety of reasons, discussed in Appendix A, the growth rate in state spending may well exceed that of these three factors combined. -For example, increases in efficiency of delivery of services may lag ..... I-26 those in the economy generally such that priees of state services rise more rapidly than private goods. Also, people may desire to purchase public goods with an increasing percentage of increases in their per- sonal incarnes. -<::·. The pattern of expenditure growth in the state of Alaska has not followed a smooth curve related to these factors because of the great variation over the short period since 1960 of its supply of funds with which to purchase public expenditures. In most states, the pattern of growth of revenues is also fairly smooth and can be correlated to in- creases in population, priees, and personal incarne. As a result, the supply of funds for state expenditures grows in close conjunction with growth in demand for state expenditures. The most significant fiscal event in Alaska since statehood has been the Prudhoe Bay lease sale. Before that time, real state expendi- tures per capita had increased from 8 percent of personal incarne per capita to 12 percent over approximately 10 years. That meant that as real personal incarne per capita rose over that period by approximately $J., 000, or 3 3 percent, real state expendi tures per ca pi ta rose more rapidly and, in fact, doubled from $235 to $487. This indicates that the "income elasticity11 of public expenditures greatly exceeded unity for this period (Table J. 3). Total operating expenditures rose much more rapidly than this, of course, because of increases in bath population and priees over this period. r r~~ ~ r r··---~-~ r~~-( r~~ r r~ [ ~ r~· r··· r~~-( ---------·---·--··----- "· Table I.3 State of Alaska OJ2erating Expenditures Analysis Real Real Real Anchorage Expendi. Personal Ex/Income Total Expendi. Personal Consumer Per In come Rea.l Opera ting Per In come Priee Capita Per Capit<> Per Capita Expenditures Population . Capita (Hillion Index Year (Constant $) (Constant $) (%) (Million $) (Thousand) ($) Constant $) 1967,100 1960 ---36.6 226.2 162 1961 235 2981 8 51.4 236.7 217 705.6 92.3 1962 281 3024 9 63.2 242.8 260 734.2 92.5 H 1963 345 3053 11 80.3 249.9 321 762.9 93.1 1 rv 1964 347 3372 10 82.1 253.2 324 853.8 93.4 -..J 1965 354 3459 10 88.4 265.2 333 917.3 94.2 1966 378 3515 11 100.5 271.5 370 954.3 97.9 1967 409 3750 11 113.6 277.9 409 1042.2 100.0 1968 443 3853 11 129.3 284.9 454 1097.8 102.6 1969 487 4058 12 152.1 ~-516 1195.4 105.9 1970 605 4353 14 ~ 302.4 658 1316.3 109.6 1971 894 4459 20 315.8 312.9 1009 1395.2 112.9 1972 973 4620 21 366.5 324.8 1128 1500.5 115.9 1973 1063 5051 21 421.8 330.6 1276 1670.0 120,0 1974 1025 5108 20 482.3 351.2 1373 1793.9 133.9 1975 970 5394 18 597.6 404.6 1477 2182.;:> 152.3 1976 1149 5618 20 778.9 413.3 1885 2321.8 164.1 1977est. ---892.6 Rate of Increase 1961-76 11.16 4.32 -19.87 3.79 15.5 8.26 3.91 I-28 After 1969, there are tremendous increases in all the entries of Table I.3, except that of real personal income per capita which can be traced to the increased revenues from the Prudhoe Bay lease sale. In a period of only two years, state expenditures as a percentage of real income per capita incr>eased from 12 per>cent to 20 per>cent, and it has r>emained in the 20 percent range thr>oughout the l970s. Viewed slightly differently, what this means is that during the per>iod 1969 to 1976 when r>eal personal income per> capita in Alaska was incr>easing by 38 per>cent~ r>eal state expenditures per> capita increased by 136 percent. The majority of that incr>ease occurr>ed between 1969 and 1972 when r>eal expenditures per> capita doubled. Looking at total operating expenditures over> the same period after Pr>udhoe Bay, an increase of over four times is noted. Most significant, however, is the increase between 1972 and 1975 from $366 million to $598 million--53 percent. Over> that period, r>eal expenditur>es per> capita actually fell in spite of the increase in spending because of lar>ge in- creases in the interim in both population and pr>ices. Becaûse of this abrupt shift in the pattern of growth in state ex- penditur>es since statehood, it .is difficult to use past average r>ates of increase to project futur>e levels of spending by developing some r>ule which might emerge from the past experience. In the early years of statehood, growth in real per capita expenditures was strong and steady; then it took an abrupt jump to a much higher level or plateau in a very r ..... I-29 L short time. Since that time, i t has remained 1..-i thin a fairly close range as a percentage of personal income per capita, although it has continued to grow in this time. The income elasticity during these three periods has ranged from one in recent yea:r-s to three in early years of statehood -to approximately ten in the immediate post Prudhoe Bay years. One fact ·does emerge clearly, of course, and that is that expenditures have been 1 dependent upon available revenues as well as upon demand factors such as L population. !..... Thus, to project state expenditure grm-1th in the futurebased upon historical experience becomes a difficult task. Clearly, the available supply of revenues should be included as a variable in determining the ..... spending level, as should the demand factors of population and personal income. Expenditures would then rise with population and income but also with increases in available state revenues. The resulting increases in state expenditures -vwuld be large because of the large projected in- creases in revenues. Following the experience of the early l970s, if ._ funds are available for spending, they will eventually be spent. Money deposited in the permanent fund is, of course, not subject to the tempta- tian to be spent because of the Constitutional restrictions. Balances in the general fund, however, are available to spend. If increases in state government expenditures continue in the his- torical pattern, there will come a time when revenues will no longer be sufficient to pay for the desired level of expenditures. Since there 1 ·~ 1! i i li ~ ii l 1 1 1 j ~ J .~ 1 M 1 ~ 1 1 ~ ~ ~ .;.l ~ ~ ii ~ i i ~ ~ 1 ! il 1 ' ':~ ~ ï ~ I-30 is no historical precedent for such a case (the reserves tax being merely a solution to a cash flow problem), it is difficult to say how such a situation vrould be treated by the state. The three possible avenues of relief would be tax increases, service reductions, and Constitutionally mandated withdrawals from the permanent fund. Sorne cornbination of the first two alternatives would be the likely solution to the problem. It is impossible to know either what types of taxes would be raised in such a situation or what types of services would be curtailed. Also, it is not possible to know how quickly the state would respond with corrective measures to a perceived long-run deficit. For simplicity in this particular analysis, it is assumed that tax increases are not a viable option. In addition, use of the permanent fund remains impossible. Cutbacks in state government services then become necessary, not only in the operating expenditures but also in the capital account and in trans- fers to local government. Cutbacks in expenditures from the originally desired level occur 1-ïhen the general fund balance is fallipg or at a very low level relative to the level of expenditures. The.actual level of the cutback in spending is dependent upon the current account balance of the state in the previous fiscal year. The larger the deficit on current account in the preceding year, the·larger the reduction in expen- ditures in the current year from the desired level. In sum, determination of the rate of increase in government expendi- tures is difficult to do based upon an historical pattern, because there ._ 1 L L ._ l- ,_ ,_ ~ ,_ I-31 is no well-'-defined historical pattern for Alaskan expenditures. Bo-th supply and demand factors are obviously important and are included in the determining equations. Since past patterns of expenditures neêd not necessarily constrain future expenditure behavior, latter sections of this analysis will look at alternative spending patterns not derived from historical relation- ships. Such patterns may be designed to achieve certain long-run growth goals or be aimed at balancing the budget in the long run, or sorne corn- bination of the two. C.2.c. MAP model and private economy. Detailed descriptions of the MAP econometrie model and its various components are available ir1 • .c . d .. 1-..l' • 6 a varlety O.L papers an p"Lu...> lcatlons. Thus, only a very brief descrip- tion of the basic model is presented here. The model is composed of four submodels. The petroleum scenario model determines petroleum-related employment and state revenues from a set of files containing detailed information on each petroleum prov- ince in the state. As the information available and the circumstances surrounding each province change, this file is updated to reflect that fact. 6 see David T. Kresge, "Alaska f s Grmvth to 1990," Alaska Review of Business and Economie Conditions, January 1976; Daniel A. Seiver, "Alaskan Economie Groivth: A Regional Ho del wi th Induced Migration, 11 Anchorage, 1975; Scott Goldsmith, "Fiscal Options and the Growth of the Alaskan Economy," Anchorage, 1977; and David T. Kresge, et al, Issues in Alaska Development, forthcoming 1978. · I-32 Petroleum and construction employmentfigures from the scenario model are input. into the economie madel. This madel employs a set of equations, econometrically derived using historical Alaskan data, to determine employment, wages and salaries, wage rates, and output in all sectors of the economy. Personal income and the Alaskan priee ~ l w level are also determined. The fiscal model takes as input the revenue projections of the scenario model and develops estimates of all component-s of state and local revenues and expenditures. Certain revenues reduce disposable personal incarne in the economie madel, and different types of expendi- tures positively impact the economie madel through wage and salary pay- ments and demands placed upon particular sectors, such as the private construction industry. The demographie model determines an age-sex distribution for the population. It includes not only birth and death rates but also a migratory response to relative economie conditions in Alaska and the rest of the nation. Economie activity in sorne sectors of the Alaskan economy is deter- mined largely by forces outside the state. This is reflected in the. madel in the fact that the activity in federal government; agriculture, forestry, and fisheries; manufacturing; and petroleum is largely deter- mined outside the model. Growth in activity is projected in all of these areas except for.the federal government. The strongest growth r L L i- il ii L L I-33 is projected in the agriculture, forestry, and fisheries sector because of the expenditures of the renewable resources development fund. Economie activity in other sectors of the economy is determined by demand vrithin the Alaskan economy and the MAP model reflects this in the fact that in these areas, the level of activity is determined simul~ taneously Hith demand, which is measured by the level of disposable personal income. No major projects with the exception of the gas pipeline to trans- port Prudhoe Bay gas along the Alcan route havebeen projected in these analyses except as noted .. C.3. A Simulation of the Alaskan Economy Using the basic assumptions outlined above >vhich include a 25 per- cent contribution rate to the permanent fund, a conservative estimate of future state petroleum-related revenues, and expansive state expendi- ture behavior reflecting the historical growth in expenditures; a basic simulation of the Alaskan economy to the year 1999 can be done. The results can best be presented in four sections. Respec·tively, they deal with indieators of aggregate economie activity, indicators of the state government fiscal position, indicators of individual economie well-being, and indieators of local government fiscal activity. C.3.a. Aggregate indicators. Three basic indicators of aggregate economie activity--population, employment, and personal income--are I-34 :presented in Table 1.4. Population growth is strong throughout the period, averaging approximately 4 percent annually. The natural in- crease is augmented by net inmigration to the state such that the total increase between 1978 and 1998 is 581 thousand, which is significantly larger than the present population. In the decade of 1978 to 1988, the state experiences a population increase of about 150 thousand. Much of the population increase can be attributed to people moving into Alaska to fill new jobs created over the period. Employment does groH by 286 thousand between 1978 and 1998 from less than 200 thousand workers to more than 477 thousand. The groHth rate in employment slightly exceeds that of population, indicating that new employees will continue to have relatively small numbers of dependents. A major cause of the growth in employment will be the increase in personal incarne 'tJhich, when spent in the Alaskan economy, vrill create a dernand for products and services. In nominal dollars which are not corrected for inflation, total personal incarne grov.TS by almost a factor of ten between 1978 and 1998.. It increases from its present range of $3.5 billion to approximately $30 billion. By all of these aggregate indicators, the econorny appears to be strong and growing srnoothly. ..... '- Lw :.... 1 ...... ..... 1- ..... ._ '- L - i.;.,; - I-35 Table I.4 Base Case Aggregate Economie Variables ~!. t?)')~ :L (ji .? :~::: :L {;J?'·:) :t")üO 11:;:·;::~ :1. :t ~:) fj ::.:.:~ :L ·:;.;· ~3 :.:=:: :l ::_;::Dl·~ 4 t") t": ·~:· .!. ::-·:::;;,,.: t (.:.) :t~?~:~? 1"9:::;::::: ::);;:;:·:_:,:: ~L ·:_) (? () :Î. ·~? ~:.~_,r :f. l {? ~/ ~~:~ :L (_~) ~_;.:. :3 :i_(l9-l;. :!. !~)9!:5 1 ~.~) fil {::. 1 ')'))' J POP -Population (thousand) EM99 -Employment (thousand) FtDF :~:f_?F~ ~-~L 1 9 4 () fj ~-() /:.: ~:0:.:: .-:·~ :::.:: ~=:~. -:· o ~s ::? !~ •• -.···: ···.: r~ ... -;. c; .. ;:.: -;. ; c:· .-:·l () ::. .:-~:? E :5 :::; () ,:;) ·t :::5 ::::: ~::~ ~:5 ;? ::_:,:~ ;. )' :L :.:-:: ~.::_; /~ ;J ~· ) ? :t ~.=:_; '_)' ~::; i• ::"::! 0 -;:-~ \• ~-~=; ..:~. ')1 {::~ ~-:;) ~/ ~-(, :~:-~ ~:_:.; .'!: : ::' ~ ... ~ •• : • •• } •• J -~ / • .:{. ~3 6 '? :::=) .;. c (:·> :.::c /:: ·:;.) c~ ·t ~3 ::;:r :_::~ / () =:) .·. :.-:< ~;.:~ ::.:_:~ ~:? :L ::? ~-~.:5 . .:".~ (') ·:::~ :_:_=_; )" :-:} . ::} ·.:? ~? ·_} /~t ·~ ~~:: '7 ~~} D :::~ t ·~ t~.:~ () t r;; 6 ~/ ,~ l;. 0 ::) ·:.:.:· ·4 ~~:~:: ·:· ~~~ .f:3 E r;,;) ;;:5 ·:~} {• ~? ~:J ·::::; Eï··.:i~)s~·-FIT l ~=:~ ::.:·1 ,;. ::.~ 0 :::~ :::::; ~:.~ ::::~ :::_; ·=· / :::~ :t i..J 1 ~\ ~3 Fi ~:5 :::S :.:5 s~ {:) ·:· :::;: :i. 200.283 4026.79 224.712 4985.68 238.31 5673.73 ;? :::~; :::~ ~-1:~) l (:·> ~::; (? :_:_:_; ::5 ., .. ::~ 245.693 6485.98 258o315 7277.32 272.908 8217.38 287.054 9218.44 :::;~ 0 :!. .;. ;.~.~ :t 1 :L () :.:~ 0 :t ·} ~.::.; ~·:~ () (:·:j ·~ () 1 J :L () :·:~ ::.:.:: ~· ~~5 :·:~; :t 1 ·:· <) :::.:: :L :t 1 n o :J .; ;.~~ ··:·· •t ···.~ /\ •l .•' •J l''t ••• ··~= .··~ •'"r •• :; .L. / .;. \i .i. .;::. .1. .~·: . .;:~ / ""'t -~-.·:.". ::::; ::_:.:~ :.s .:, (? ::;:; :~? 'L ?: (:~ .-:'{. (:) "" :t :·:~: ~? ::·:: ;. ~:s ::.:.:: ~5 :t l::. ::.~.~ ~.:s t. .:· ::5 /;. :,:-~ ·:> ~:.) ~:? .l~ '"Y· t::· ··;.· r1 !:~· :"': ..:: .. ~.J .. :} .;. '? ·.J Cf 1 /;: ::~:; {:) ~) ·=-::'~. :L ·_:? ~.5 ~:.:: (:. ·:· :::::: :·:~: \;.! () .:· :s ~? .{~ ::? () é (? l <:· :.=:.Î ..;".~. () l:;. .;. :·~=:: ·;.:: ~::_; ::.:?. ~~~ ::s .. ~-~ li ~· ~:s .·~~ :.::; ~=.:; -:. ::.:.~ :.:~: :::_:. ::.:.~ '? :~:~~ :5 1:? ·:· . .::;. . .:{. :? ~:Y ·:· (? :? ~.:.~ -. PI -Personal income (million $) 1...... "- I-36 C.3.b. State fiscal indicators. The more important categories of state revenues are presented in Table I.5. Total petroleum-related revenues rise rapidly during the mid-1980s to a peak of $2.138 billion in 1986 and then begin to decline until they are $354 million in 1998. Non-petroleum tax revenues show a continuously rising trend which re- flects a healthy annual average growth rate close to 11 percent .. This is, hoHever, slightly less than the growth rate of personal incomes which indicates that in the long run, the existing Alaska. tax structure may be income inelastic and may lag increase in incomes. The personal income tax is the largest revenue generator of the non- petroleum taxes. Presently, the personal income tax contributes more than 50 percent of non-petroleum taxes and that percentage is expected to continue to groH because of the progressiveness which is built into the tax schedule. As individual incarnes rise, the marginal tax rate which they face also increases. The increase in personal income tax receipts _is projected to be approximately ten times in the next 20 years, a rate of increase in excess of the increase in personal income. In the 1990s, the personal income tax will account for perhaps 75 percent of total non-petroleum tax receipts. And since petroleum tax receipts will be declining absolutely, the personal income tax will also comprise a larger percentage of total tax receipts than in earlier years. Earnings on the permanent fund are deposited in the general fund where they are treated as ordinary revenues. Since the rate of earnings - - i.- ...... - ~ ~ ~ t ~ t'? .. ?~? J l:;) ~? ~:~ . ::. 9 ~? ':.~ . .i t':):::::() 1 -~.:) :31 ~;_ .:_;;·d ::.::: :i. ·::.:~ ç:;: ::~: t ·:::-:;::;./!. :;_ =:) ~::·:·;:_:5 ·; ~_;:·n l ·:_~ .. -,;J'.? :;. \} (:) :.~.: ·;_ ,'_? t;(,;.:· t. ··,. ·:.··· ,, .·· .r r"":f'l•"', . . i. ")' / .-::. :L (? =:) ~:~) n·::)/:;. :~. '~.) .':? ~:.:,; :f. :)'.? ,:·:) :J. '}'? t 4~~:-·:~-~ ::;j ;:~: j:> ·:.) ~::; .-:'{, (, () -:· ·./ :.:=_; <:?.:')2 ;. Ji;. ~l '~~.:: (.~) ~' :·::~ :~:.:: . L I :L (:·~= {::, ~.::.i :L :? 6 {) -:· () :~:.:~ :t .(~. <:'{. ·./ v ~::; /~ :i. =:-::! ? () ~-(:·> ~:? J ~·.:.:~ )' ;.:-: ·:> './ t :~2 :L :!. :·:::; .;. ~~:~ -~-:~; '···, ::.:_:: J :.·;:Ç ~3 .; .. L ~:·· :L (/ .. ;·.;./; ~-:r. :.=.:_; t :>· () c·; ·:· :L :::::; . :! . A (-~, ~-5 ·:· ~~=.t :.5 . :!. :_:_:: é: .·.t ~-'.? (:·) l () <_) c. ~ (: ~:.=_; ~?· /~. J. -~ :::::; ':.~_:, E: :L ,. :::_:: ·:? )' (} 0 ~-;:::; {:, ~~} () .-:"~. -:· .t:;. :.:=.; .::>(? .;. /;. :~ .::;. :::_:: (:, ·:· ·;.: .·:;. ··:--!;~· .li ,;", !::· ... ::r .. .J-'•·i •.· ... ,;-.,.} I-37 Table I.5 Base Case State Revenues F~:·r-t? E: F~rf I :;::; IF'FJ ~:.~ ::'J :? -: ::.:; :~~;~ :~~; l :2 0 .;. ~:_:_~ :::.~ 9 () ·:· :~:.:~ :::=:: ·.:..:· -:· :? ::.:.~ ~:_:_; :L :J. -::) :-f:::; () {• :L (:·~ ;::~ ::.:_:~ /) ;::5 .:. ··.;· t::·:: :_:::: :L :3() ~ () ::;: /;. 4 ~-:3 (~) t:~ :::=:; 1 :::=; -:-f3.:S ::_:_; :L )' !.~:: ~~ 0 ,:·:·) "? :L ;_:_:: -~ ~:;.:~ ~:s ~:; :::·:; ·.:? :_:5 .;. c~ t :!. ;,:_:: :L ~~::: ·:· ~:5 ::? ::.:;~ ::? :::.~ ~-\? ~? ·4 {;. 0 ~.:: .;. ? :_::; (,;:. ::::-3 :i. :· 0 ':.:} ') ~:::; ::::;; ·:-:? ~:.:.: \? -4 :;. ~.:: -; ,;Ç:, 3~.::_; .~:.: .. :~. l{. -:· :::::; .·:·:} :-~~. ./Et.":·:~ .;. :3 1 Js ,."• ,~:) :.::; r;. ::.:.~ ::.:_:: :::) ;? ~? O:? .;. ~-::~ -4 ·:·:::0 ·r (,~;;; 1 ~:s 1. ~:: ·:-.-:·:;. ·_:? n :-:~) ~·_::: 'L -:· :.:5 ·:~:. ~~;: ~:.:-1 (:":: -:--:::~ ;? ~!. ::s ::·; ~: ·:· ~.=.:_; '.? :f. ~.?; '? () ·: .. :~~ :~. ::~; 1,/ : ~ ;. !:;.:~ () ,:·::, 611.677 422.287 111.541 658.846 463.517 127.489 692.578 494.706 141.293 732.366 528.883 153.033 782.228 . 570.053 163.02 825.16 603.003 1)1.509 905.355 678.298 178.735 1030.83 775.64~ 184.903 1160.04 891.527 190.159 1357.37 i~12.13 194.66 :L :.:,:_; (·:: ·:.:~ -:· :L ·.:.:: :ï. :.:? ~2 (~ :: -:-0 ·.:.:.: t 9 ~:3 -:· ..:-{. -t} ~:~.) 1879.21 1465.4 201.64 RP9S -Total direct petroleum revenues {million $) RT98 -Total taxes (million $) RTIS -Personal incarne tax {million $) IPFl -Permanent fund earnings (million $) RINS -General fund earnings (million $) RGF99Sl-Total.general fund revenues (million$) F~ I ]\!:3 F~ f3 F. ·~.:: ,~~) ~:~ J 1 :~_:: ~=~ -:· :::::: ·.? ~s :1. 09(S .,. Ol:. 1 :.:=~ .-e{. -:· :i. :.~:.~ (? :t (J~5 :L -;-"?~) : 2 '.? -;· :5 <.~;t (==· l ~:::; :-:~ ~i .;. ·=~) t::; : 33.701 1735.39 ·4 6 .;. (? :t z=:; . :::.~ () () t3 {-() :.::: ~::_; ::::: v :.~:.; :L 4 ~.~.=~ ::~:: :.~:.; ::~; ~- ·.? :L -:· ~:~ c~ {_;.) :~.~ ~:; ~;.~ () -:· ~=? E; ~;:· ... ..:-~. :? !? ;.~~ .:.~.) :t ~:s ,. ::.~~ 113.237 3179.88 :1.32.453 3334.2j t :.::~ ~~_:= ·:· ·.? ··? :.::_; :·:::: ~·:~, (; r::~ -:· -4 ·.? 1 :2 :.:5 -~ ~=.:.i ~:_:; ? ::s ;;~ :i. l y :~? ~:3 l () :L ~-~:? !) (~:~ :?) 0 ':) 0 ·=· ~:.:; ·.:.:: :L ·=· B () ~::; ~? ~? ~? D .:. l~i- :.:) 6 .;. ::.:~ (:: ~7 :~;,~ {.~} :.;:) 6 ·:· ;;:~ ~=~ 0 .;. :~~=: f:::~ :3 ,.-:'{. -:· {:·:; () v ::.:.~ (_;> l} () f ··:} f~ () .;. ::~; 0 \? (:r -:· ~3 ~;~ () ·:· :.;:;; ::.~ :_:.:; (~t -:-;_:_~ :L () ·4 ~·:::; :5 :t ~~~ i• ~:? ·4 () (• 3 t:~ ;::.~ ? '"" ~:~ .·:"1- () ;. ..:-~ ~-:~ ~::; B :!· l} ('; ' I-38 lS constant) the growth in earnings coïncides with the growth in the size of the permanent fund. During the 1980s, the fund increases rapidly and interest revenue increases from almost nothing to more than $100 million. In the next ten years, however, the level of earnings does not double and has barely surpassed $200 million by 1998. In contrast, earnings on "'che general fund balance shov;r an interest- ing rising and falling pattern. For several years) earnings hover near $30 million. In the early 1980s, they rise very rapidly to nearly $140 million, higher than permanent fund.earnings at this point, but then fall precipitously and ominously to zero in 1992. Total general fund revenues reflect the long, significant decline projected for petroleum revenues in late 1980s. In early years, growth is strong and revenues peak in 1986 at $3.334 billion but then a hiatus is experienced during Hhich total revenues actually decline to a nadir in 1992 of less than $2.9 billion. Only in 1996, a full ten years later, is the earlier peak surpassed, but this time in much deflated dollars. At that point, the impact of the decline in petroleum revenues has been absorbed in terms of total revenues. State expenditures grm.:r rapidly through 1987 at an average rate over the ten-year period in excess of 13 percent(Table 1.6). This is consider- ably less than the average growth rate in state expenditures over the histori- cal period since statehood, which was almost 20 percent, and also less than - 1 """ 1 L 1 ..... ;.... r 1 1- - ~-...... :~ '- - ~ - !.·i w... - 1- I-39 Table I.6 Base Case State Expenditure Ana.lysis ~?~l/ ~:._;.: )' ~::: ·i i'"l" .. }i'"l .L ·y / ::·· :L ·~?;J 0 t'):3:L :l. (_);:::;~? :L ·:_) ~J ~.J 1 ')[~/;- :L •":) ;::: ~~:· :~. ·~? ~"":; .::) 'L ~.);;::;·_:.:· .i. ~);3~:::; ·j -::,:: ;:::, ·~:) :~. t? ·:_;.:· () :t ()':) :!. -! ! .. ,. ~ .L l .. · ...... ·., "!. \/ ·~) -.5 :t (? '~! l;. :L ·:_;;:·:;.:::_:s J. ::?'){; 'L ::_;> '7.> ~:? :L o:;.;,:;~:J 'F'1''i'3 l () ·:.:.·: .:.:) -~ .;·::; :5 J;?·_:YJ \\l'.? l ~:~ ::':> 7 ;. p r:_~} :t ~::: l'* ~:::: .;-1 f3 :!. ~?{;•:_:.; ., ;? ~~? () {:: -:~ () )~ ::.:_~ l:;. :1 .. /;. ~-.• :-:} ~:-~~ :::_:: '? ~-:~ ~:i •? J. ~5 3 0 :~:~ H {· E: J :.3 /;. {;·, E3 ~ ~=-~; .j (:~ ~:·; :~. ~· l :·::~ ''?'t"\rr··--·! /l ... ::~n'? . .r -:· .l. -·-~- :.:~~ ü (, ::? -:-~;_;_; ?: B :L ':_;.) -:· ;_:.~ :~:_; :.:s ·.:.:-· :5 r:: -:· ·:? ~5 :_:·:; --~ ~::; :-.'. -:-() ~-?~ :::) U /) :L -~-4 :!. :::~; ? J '.? + :~? :::~: .-:{. 4 :::: ~J \· (: t~} l~. ::~_1.:S (? ·=· l} :~2 ~::; (, ::.:.~ ;] ~-(:; ·.? ~::_; •:) ~-:~ ~5 \• ~.~~ ::~~ :::~ (:! !.,) ~3 {) -:· () ::· '"' '·./ .;.,. () ... t • .} ~· () •) .. , \) .;. () .;. () ·:· !,_} ·:· () ·:· ::.:_:: .t? ~:.:.:~ .;. 7;:~ :::~ (:. .-:·::. ::_:_:~ ~·?:: ~-::_:; ~.~·_; :.::; l~:) -4 "' ::=:: :L :.~:; (·:) E~ ~::< ":· 0 ;::;; :L . err· E~t~ L. ~:.=_; 6 ~~1 <· 2) :t (?. .-:{. ~:5 )} <· ::? :·:~: ~-:·:; ~~~Î {::: :1. ~-(:·) :::j ~::; )~ f::; :f. ·=-9 {J ::) i.) ). ~:5 .;. ::.~ ::~ :t J :L ·~} ·:~) {• J 4 ~p :l ~ :.;~~:2 lü E;:? -:-::.~ G ::.:_:: ::;.~ () ·7 .;. ~=s ~_:_:_; ~.:.:~ ·:· !_:5 <_;) ::.:.~ () ':_;.:: ::_~~ -:· {:':: :.:_:; J /; ~~-: ~? ·: .:_) /} :i. :i. ~~;l (;: ·} ::? ·4 r.S <> .{f. \\ A· :_:_:; :·:) ... , t::" '",> ;··~ ... .. •• -~-;-.,._! ., / c:.c: 769-736 -498.753 505.205 -1360.17 J. {) :;3 ;_:_:; •> ::5 r;~) "'" J ~~;J ;J ')·1 .;- 729.633 -3159.49 1562.25 -4209.96 1330.16 -6010.79 2614.52 -7647.65 E99S -Total State expenditures (million $) E: ;:< r; ti r:~ E: >< C; tJ F;~ · ::.:.:~ =:;,~ () {t fj () i? -:· {:, :4 ~.ï ::;):.:·::() -~ ~:;) ·-·~{. l f J. ~l ::~ :::; ~~;~ ;.." ~:~ ::~) ·4 1 () () :::~ .;. () ~:.~ ~:~; t_? {~: ·:0 :~:,:: ::.~ (:} 1 -:· ~~_::6 -4:S--:·{ .. ;. :.?.;(?l v :L (} .. J. 524.122 1682.55 564.053 1850.37 617~679 2110.45 687.635 2401.18 768.958 2699.54 857.138 73.99 :J :? ~:~ .;. ::) :2 -4 :.3 () J /) ,:. fi J. 820.153 3042.35 711.826. 3107.43 :.=.:_; :.:.:_; ·.:.::~ -:· ~5 ·4 ~-~~ :::~~ -:::.~ () :t -:-.(~ 1 ::::} (;, i} ~ .. -;·:~ ::_:_l t5 ~2 )' :~~ -:· s •:) ;:;~ E~ s ,:. ~=s ~:_:~ :3 .. :) {::: :.::~ t) * ..... () ·!-• .:i 4 ;? f:~ .. ~ 6 ~;.J () .;. l~ ~5 t} l:~} .;. i} :~~:~ ,_ ~J ·=· ~=s (_":. ~;.~ 8 .: ét )·· i) ·> -~ 2) ~-~~ SAVS -Reduction from desired expenditure level (million $) GFBAL -General fund balance (million $) EXCAP -Capital expenditures (million $) .EXCUR -Current expenditures (million $) I-40 the rate between 1971 and 1977, ~v-hich was almost 19 percent. However, it is rapid enough so that real state expenditures per capita increase by 42 percent. After 1987, however, this rate of increase cannat be sustained and actual expenditures must be reduced, signaled by a fall in the general fund balance which, until this time, had been steadily increasing. At this point, total expendi tures have reached a pla·teau from which they do not move for several years. Cutbacks from the desired level of expenditures become larger each year as the general fund balance continues to decline. Because the loss of petroleum revenues has not been antici- pated, the fall in the general fund balance is precipitous as it is drawn down in an attempt to maintain the desired expenditure growth path as long as possible. Non-petroleum revenues do not increase rapidly enough to compensate for the loss in petroleum revenues, however, and the general fund balance quickly becomes negative and continues to fall. By 1998 it is negative by over $7.5 billion, and the deficit is increasing at the rate of $1.6 billion annually. This represents the amount of reve- nues which would need to be raised to maintain the fiscal lntegrity of the state through that period of time even though expenditures have been significantly curtailed and in 1998 are $2.6 billion less than they would have been if there had been no deficit in the general fund. This absolute reduction in state government expenditures must some- how be shared by all those functions which receive funding out of the .... ._ ..... 1 t- l.. .... L ..... .... .... - ~ i - i L .... - - I-41 general fund. In this case, the cu·tback is shared by both the state and the local governments because a large percentage of local revenues are actually state transfers. Because only a portion of local revenues come from the state, local government expenditure,s will be somewhat insulated from this cutback. Since they do not derive such a large proportion of their revenues directly from petroleum activities, they will need to reduce expenditures to a much lesser degree than the state. To illustrate the severity of the reduction required at the state level, a large portion of the required cutback has been channeled into capital expenditures. Surprisingly, the capital expenditure program, which in 1988 is nearly $880 million, must be completely eliminated by 1995. In spite of this, current expenditure growth remains sluggish and does not increase significantly for about a five-year period. In real per capita terms, it falls substantially. Several other statistics can help to put the revenue shortfall problem and permanent fund into perspective in this scenario. CRUNCH is simply the percentage which desired expenditures must be eut back to try to maintain sorne balance. From the point in time that expenditures must be eut back, the gap rises steadily until in 1998 i t is 4Lf percent (Table I.7) . I-42 Table I.7 Base Case Indicators of State Financial Strength (~ F;~ LJ ~\~ c; ~ .. ! , F(E;:\)i=~{~ T E:' F. (;Ci r-~ l ~;:-:?>") l ;:.:.:: ~:.:-~ f~ 19'/9 "L ~:?B(> l ~:.: ~:~ :l. ,, J. l \~:} t:~:J :t ~:? ~::;; ·4 l9E:::; J (p::::;.;:, :l. 9~:::·? :t 9::;~r= :L ·:?~:~::? :.t ::;::•?() l ·:~.:: 1:;.:' :t :t 99:~~~ 1 ':)(.?::::) :t f:~j ~:;) ..:':;. :t ~? ·::" ~=s :t 9!?(; t ·~?t)7' . ~t t;? ·:;} ~3 () ... () .:· () -!· 0 {• () -:· .... \ ~ .. } •{ () v () ~- () •} () .;. (} i· ()v C:{; ~? (}.~l:tf;) o\.:L:s? o{.:t~?.t () -:· ;~:.~ ~:) t () {-:t ::s :.:) () \• :~:.~ ':} :? () \• l {1 !:.:: 0 -:· :f)4::.:.~ () .;. ::.:.~ :.:·:; ,::~\ () + l{ .. /} :L :t {· () ::~ ·.? (: .;. '} () :~~ t v t ~.:.:~ ·4 l ·~ :t ~:53 t {·· t :.;~; ~::~ :L 0:• 1 -4 :.:~ l -~t'/ 1 0:· l ~;_; ::) :t ·} i. .-:"{. ~l J.+())' () ... !) ~:.:; ::;:. () .:-·:? () ~:~ () '"' ~:~ '/ i (r ~ ~::5 ~~:; '.? () ·:· ~:i :s () i· ::~:: :L () ~ ~::5 :::.~ 3 () -~ f:~ ~:.:! () ·=-:? t=:: :.=s () ,;. ~:j ;:,:: /'\ ~-./ -:· o~~?<:~)' CRUNCH -Reduction from desired expenditures level (%) REVRAT -Revenues/expenditures (%) PFCON -Permanent fund earnings/total expenditures (%) () -;. (}.,. () .z. () {• () _, () J ~::_; 0 ~-():~:: () -:-() :::.~ ;_:.:; () -~ () ::? (_:.-~ () -~ 0 ::::; ~-:~ ()~0:3~:; () ·:-()3;:J () -~ () l:;. :::_:~ () ..:-{) . .:·:;. ::-::t 0 ~-()-4i? 0 ~ ():_:_:; :L () ~ 0!:5(\ () -;~ 0 ~:_:.; () -:· () ~~s J () -:-() -4 :_;:; 0 -:· () l} ::~ () ~-0 :~~ ~5 0 •} () ::~-4 '•1 J :J J ~ I-43 L- REVRAT is the r>atio of total r>evenues to total expenditur>es. It is an indication of ~'lhen the state is r>unning a SUT'plus or> a deficl t on cur- i.... r>ent account. BetHeen 1977 and 1987, the state r>uns a surplus almost each year>. In 1987, however, ther>e is a tlil'ning point and from that time for>ward, expenditlil'es exceed.revenues in each year. -Finally, PFCON represents the percentage of current state oper>ating expenditures which is financed out of earnings on the permanent fund. [·1 This per>centage increases during the years when the per'manent fund is t: ~ incr>easing rapidly. It peaks in 1992 at less than 6 per>cent of current expenditures. From that point forward, it declines steadily in spite of -the fact that there is a significant brake being applied to expenditures. In 1998, it is 3.4 percent. This is a small relative amount but, never- theless, not insignificant. From the point of vieH of the average Alaskan individual, several ·' ....... variables are important. Table I. 8 indica·tes that real disposable per- sonal income per capita increases quite steadily over the next 20-year period. This is essentially that component of personal income which is left after federal and state personal income taxes have been netted out. li Real state expenditures per capita do not follm.,-the sàme smooth, upHard ii L path but rather, because of the reduction in state expenditures in the li '1 L late 1980s, fall off substantially after 1988 from a peak value of $1,681 (1967US = 100 is the deflator for these real units). In 1977 the level L is $1,187 and after the rise to 1988, i t falls ·to a lo11 of $1,044 in ..... ~ I-44 Table I.8 Base Case Per Capita Variables r~ IF~: f>{~ E~ l) 9 b 1:;~ 1::= c:: F( ·~;: !:;; ~:~ F;: F' C~ Ft i=· :B !._ F: r: c; :f. (?'.?'./ :1. (?'7~3 l ·:;) '.? ~) 1 ·:;.;-~:.~ () t t)f:;:L l :? B:~~-: :1. 9f3:.:::; ~L ·:? :J .l:. l ::;:rE;~-5 J ~-?:3(- :f_ C)H'_:? ·i ("tr'r:"·, .i. ::! {::.c- 1 (,) ~3~) :L ,;) (? () :t {)0:) 1 l 9 ~? :.~:: ·: c:.:::: ··.:: ... .1 <_;> ~:.:_:. .-:·~- 1 ;:;,_:.. r:;.:o ~.::_~ :t. '·~i ~? /·: ~? ü <.:.) .::} ~-fJ f3 ~~:~ ::) :;? '.? -:· ~? 1 ~:::; () ~~) {; .;. f5 ;:J ::) ~?: :::.;~ ::s ·~ 0 1 :::~: ::~; ::? ~:~:; -:· .·:·:;. :L . :·:~ :.;~: :.::; :::.:: .;. ~:s i~~; ::~; ::~; / ':_~) ;. () 6 :.:::; -4 (:) {:) ·:· ?~ .-:'{. C'• •1 ~· () J. 3 (~;. ::.:.~ :.:5 ·: 6 :.:~ (l ·:~.:: )' -:-~~:~_? ::~: ? () (, -:-:L f; :·:~ :? :.:s !:~; -:-:J. ·.7 :::~ ~? ~? -~-:~ ~-'::.; ./;. ~:~; fj :1. /:. ·=· ,.:·j:. 6 ~5 H J ~;.:.· -=-:~-; .::~) ::=) ') ? ~5 .;. (::. <· :3 ::? (_:.> )' {• :? {:; -·={-J ly () ~-:;·· '·'~ ~:i. :;.~ ~~? '? ~-~:. ll :]l) v:?(,;) :t ~~~~ E~ {) C• ~:.:~ :L 2 ·.:? ~? ·=· -~:} l :,:-) ~? :.:) ·:· (: ::~:: J /{..~~~ ~-=~; -:-~:;; '? l :.::_; () ~::j .;: ~:~ -4 l :.~:.; 3 i~. ·:· :l. :L ~::; r~ ::.::: ~-.-:~:-~:~; J {, ::~~ ? ·=· ::.:-: =:;.:: :t (; {, (:) -.~ J (:.C.: J. ... :~. 1 é: 0 ::·:: .. ·:· :? :~;..> :r. -4 ::? ~;) -:· 6 :_:_:i J .3 ,;_;:= l{. (• ~-~) ~:;.:· t :~:.::90 -i· :L ;J 1 t:·:=:::? -:-;::f.J 3. :!. ~:·~. ~:::: .;. ~3lt :!.;)..::.3 ·• <)3 1 J () 0 ·:· ~3 ,::.1 1 ()~:5G .} t lt J :2 J (_;;; .;-~:=5 ::? :L :L ~:,:; (:'! -:-~::: (·~ 1 4 ;? ·:.) -=· .:S /~:- ·:L ~5 ::S :.~5 ·} .(? 4 J 6 ~:~~ () :· 1:? ::) t ~~? ~.? .~·::. ~\ ~5 .{:;; J. ~?9-·:'{. ·=- :1. ~3 ~:~ ~? .. \ :,5 ':;.:: l~~:~:::)~?+t? J ? i3 ::.:.~ ~ t:~ -4 :t·/, () )' .;. ~? {:) :i. -4 ~:s ~:~s .;. ::.:-· t J. ::::: 1. ~~5 .:. ~:.; :s J. :L ::?:5 ·? fJ:L l()-')6.~()(~ :l: () -3 0 .;. ·.:? ::? ':) .-::~ .. -~~~ -:-:3 :~:.~ (; 9~:-~·:) -;, fJ t::~ .·:?. -:· <> 1 ~=J r:::~ ~:·; ? ~-:::~ .· : :_, i ~~-:~ ·=· :.=s f)' (r ~! .:. ~: ·4 :·~ 1 ? ::.:.~ v 6 () ~s ;;_:~ ;::; :~=:; -:-:t (_) :l. :3 -~~-EJ + f:~ (;, ;J 4 ~) :::? 7 ~5 ~:::~ ·4 ~::_; ~::_; () ... ~=~ () 1 <=~ ~3 !5 ·=· ::~ :~!. ·4 ~? 0 é .. ·) ~:;:: <:::) fj -/ 6 ~~.) ·: ~5 :5 ~? ~? ~::} ~;: + :::~ :1. f~ EJ ::~ ,2 ~ ~J ;J !5 Hl;.Ei ·:. t5()t (}.i-/;:1.)~ ~:3 .-:·{~ () -:-1? !5 .:::~ ;J ..:'.;. () ·:· )' )' ~:? ~? f:5 ::=; ;:. ~5 · .. f.~. ~:.~~ ~.7 {~·f ~~~ \• ;:;~ l l .s ') t -~ ~? .. :~:-'? .5:::~.:::·:. ·:· ~:; :~. ~/ ·:.) '.} /~ .. -::;. ~:::: ·.~.:-~ '" () >·! t 1 ~.;~ i:::~ .;. ..q. :.:::: 814.775 577.493 -·-·;·: .t :;~-~. i:} ,(~. ·_:? l () (: :~=· .·-:~·) '? . 9 --· ~:~i :-::~ é'J ~' :s [5 ,::;_ DIRPA -Per capita disposable personal income (constant $) E99SRPC -Per capita State expenditures (constant $) R99SRPC -Per capita state revenues (constant $) PFBLRPC -Per capita permanent fund balance (constant $) (~ ( / \ \. 1 j 1 i- f L - - - i ~ 11.- L ..... ..... i - - I-45 1994, a value which is less than 90 percent of the starting value. This occurs while real disposable personal income per capita has increased by about 40 percent. The constant per capita value of total state revenues also follows the pattern of petroleum revenues over time. However, the peak in real per capita terms occurs in 1984 at $1,888 and is a for>m of nleading indicator11 of the problem Hhich is developing in state finances but which has not yet surfaced. Total nominal r>evenues will continue to increase for another> two years. By the end of the projection period, per capita r>evenues in constant dollars are far below the level of the late 1970s. The decline corresponds however to a rise in the tax burden on indivi- duals since the personal income tax has a graduated schedule. The permanent furid balance can be viewed in real or constant dollar terms, also. In constant dollars, the total in the fund, divided by the total population, reaches a maximum in 1990 at $851. After that time, however, increments to the fund cannot keep pace with the combined effects of population growth and inflation, and the constant dollar per capita value of the fund falls gradually. By 1998, its constant dollar per capita value is $537. This basic simulation, employing fairly conservative state revenue and expenditure assumptions, has resulted in a very unhealthy situation for the state in the late l980s and l990s. A massive general fund deficit I-46 rapidly develops in spite of quite significant "belt tightening11 to re~ duce state expendi tures. I t is natural to next invest igate hm-1 the situation would be altered if there were a significant increase in the state's petroleum revenues. To this question, the next section is addressed. C.4. Sensitivity of Basic Case to Increase in Petroleum Revenues Any of a number of factors could result in petroleum revenues being rouch larger than projected in the base case. Higher production from existing fields, discovery of new fields, higher wellhead value, or higher tax rates would all result in larger state revenues. It is dif- ficult to place a pr()bability on any of these occurrences. Therefore, a second simulation of the economy was done in which the only change made was to increase the level of petroleum revenues received by the state by 25 percent beginning in 1983 (Table 1.9). It is further assumed that the increase occurs in such a way that royalty and bonus income is un- changed and thus the level of contributions to the permanent fund is unchanged. Petroleum revenues increase approximately $500 million in each year in the mid-1980s. In the aggregate, this allm-m slightly more rapid growth of the economy as reflected by the increase in population over the base simula- tion. The increase grows to 46 thousand people in 1992 and th en be gins to taper off. This reflects the fact that higher levels of government spending, made possible by the additional revenue, have generated jobs and incomes in the private sector of the economy. - .._ - :...; - - ..... :.... ;.... ._ - 1. '?.?/ J. 1._?-"? ;?.~ l ~?',';-'!:? .t "? ~~~ <) :!. (?E~ J :i. ~;.> E ::.~-~ :t t} E~ ~:-~ :t f?E-4 ~L ~;.·· ;;::; ~.:.:; -~ ·::.."~ c, -:: .i. / '.,.! •.. .: :t') E~:.? :L ':? ~:~~ :3 t ~:;): ~::~ [~'x i ~~-,' .> ,-"·. ~r •.::, ::! •1 1 .:::_:. ·:_:.·~ ~;·~. { -/ '··/ ~~~, .···t"J :L (_) ') ~5 :1. ;'.)::?(: :i. ·~_;:Ç?'.? :L')')C I-47 Table I.9 Impact of An Increase in Petroleum Revenues (Measured as the Change From The Base Case) F.: ;:. ;:::; ~3 .... '·./ () C· .· ' .. _} .;. () ~-... l~. :L ~? ... :,-s E~ l:;. ~=? . :·';. ., :~? :::) ~:_:_; ::;_~ ,:'J ~-·;? ...... !.:.=_; :.::~----·· .·. E: :!. -<~. E: ~_:_:_; -:· ;;3 ::5 . .:~ ::? .. <;. -:-:::~ ? ::::: :::~ :.:·:. ; .. :~. ~:-~ :·:~ :L (::. -:· :: .. ·.~ -4 ·')'::'::.·.:~ ,:. ?;:_::_; ~? :·:~; ::_:_; {• <':':: :L ~.--~:: <> :·:~: -:· '? :L 3. ·' .. : {· t -<~- J :_:_:_; :1. -~ 6 :;_ ::.:.~ '7 :· :_:_:;-:_:,; :r. ç·· (:·:· ·.· :~:.:: (::, ::::: H -.· ::.".~ ~~:] !:> C} :::· () .; () G J <> -;· () <> :i. () \• () () ::. 0 -:· () C· ~~- ::) -:· () () J \.-~ -:-() C· J 1-~--;. ·:) :.:·) ·.:.:' ~:::: -~ () ü :L •! ~) -;-·_;· ~-~} :·::) :L :::~ :. .;1./~-:.:·:· :L ~5 ~.. ') (:r ::s ···~; t -:· <·:·:. ?~ (? :~? S·' -;· ~:_:; /;. J :?;; ~·:::; ·:· (; ::;-> ::~:~ :.~~: -~·;· .. -~:.: (_:, .·:}::.) ·:-•)'-:.' .... ::.~ '/ .,. 1 ..... ..:'.;. l:: "":: ··: •,.,> ·:· .... :• .. .1· ... • :L :!. ·i .::) .:::, ~/ :·::; ') ·:· /;. :L ~3 E9 ·:?b. o.} _., '' ·--·· -~ () .;. () {) ::~_:: <> ·: () .() ::? <) .;, <> c~ ~5 C) ~-(J 0 ~~.:; :;:)t:t)~:;; l\. ';,.-" ,;. () ·!· () .;. o ... fj () ~ ::) e -:· :_3· --~-~--4 (J t- :t :_:_:.~ ·./ ·=· ~~s ::~s :_:s () .;. :? () ~~~; ·> :.::;: /: 1 Ct -:· :? :.-.:_, .(. ~-~? (,) :t () ~ ~.:~ 9 :.·::) •} ·_:? ·_:? .:·:·;-() ·> 645.182 -242.886 !s o ·;.:-~ :-::.:.~ / .). .... :1. :::.~ ;r E; -:_:; ~.~.~ 6 ·::J :L ;. -ç~ /:',; :·.~; ~.:.:; '.? (· ::2 :4-::~.:~ ~:~; f} ~~~: ~::_; .? ':? ·;? l -:-.f}J 1. ·? :L :::.:: -:-~:~ :.:~ ~;.:! :~~ ·.? ,.. ::~ 5 :.5 ::·:; !:) ::.:.:: .; .:·~--:_;) :t ;:5 () {; {• ~~ l f) ::_:_; :::·~ ::;~; -~ l.=.~: ~:~1 ::~; ..... {} ~j :: ~:.:,; ~? :.s -~6.297 376.275 520.754 -458.925 .-:".!-.;. ·::} :.:·:~ ... _) ~-·" t f~~ -~:;. ~-~::; './ ~".? ~=.:; (: ::? -;· ·.:.:-: :.:5 ·? 50.991 726.1G5 -708.106 RPBS -Increment to petroleum revenues (million $) POP -Population change (thousand) E99S -Expenditure change (million $) SAVS -Reduction from desired expend,iture level change (million $) R99S -Total State revenues change (million $) · F;~9?:~:; () •) ()-.?~ C=.,.. (j -:-() (! ~~~ () {' () (}. :~~ () .;. ··='t ~~ _,/~ .;. :3 ·:;.> ··1· :.::; ~~; .·:f ·~· é ::f 1(::. {~ () () ~-l~ "-) :~:; !,·;"; ::~; ~) -: ~;_:~ ,/; • .:·:: (~; ::.~~ ~::~ -~ ~J :.::_; :.:.:; ~~~ J. (::, ,~ s} .-:·} 3 :.:s ~/ .q. ·:· :::~; ~:? :L :.::; ~.-:~ ·.:.:: ·:· ::~; ?~ ~? /{. :~) :3 -~ ·4 {:·; :L l{. ? ·7 -~-1 <) :~s 2>9 ~:~ :.~ 3 3 ~:; :2 6 ~? ~ ·4 -<;. :.:.:; :.:.~ :? () .;. () ~:_;,; '.? l ?"? .;. :t ·:_;; () •) t ~=~ ~:5 . t::}:t ~· (<:/{~;, I-48 State government expenditures~ partially determined by the level of available revenues, are considerably larger in the late 1980s and early 1990s than in the base case. The expenditure increase over the base case reaches a high of $913 million in 1992. After that, it falls rapidlyand approaches the base case.7 The intended level of expenditures in this case need not be eut back as sharply as in the basic case, although the difference is not nearly as large as the increased tax revenues. The population increase has resulted in an increase in the desired level of state expenditures, and this has eroded a large percent of the gains to the state treasury from the additional petroleum revenues. This occurs in spite of the fact that total state revenues increase by a multiple of the increase in petroleum revenues. For example in 1989, total revenues have increased by about $234 million over and above the increase in petroleum revenues, about 64 percent more than the reve- nue increase. The percentage by which the total revenue increment ex- ceeds the petroleum increment continues to increase, but the total in- crement falls in later years. In t~rms of two measures of personal well-being, there are slight improvements over the base case (Table I .10). Real disposable income 7 The difference shows large variation in later yea:r>s because of ·the method by which expenditures are :r>educed from the targeted value. This method gives rise to sorne oscillatmy behavior. J --~----~----~---------=~--~--~----~~~~~--~~~----~._a-~----md---*~~------~------~1~ w-d--.1 =, - - i-. ..... L... i..... L l. - ..... ~ ' i L .... ..... ._ - I-49 Table I.lO Impact of An Increase in Petroleum Revenues on Per Capita Variables (Heasured as the Change From The Base Case) :t. :.")~?:? J. ':? ~? ~=~ l =:_)? ~;:~ 19E;() :j_ ?~3 :L :L ;:? F> :~~: 1 s.:~ E:: :::~; :~. :~.:~ t~ --~t l. r:_;) ~::; ~=.:_; t t?E~(: :r. r?~3:/ J =~;7 ~~~ E~ J 9E~·? .i, ···. :""\ :L')>:)·\ J ~:_;;o fj'! ::~~ :!. ':?~?:.:; 1~~.)(_:/-4 ------· -;; J. !:~: .. ... :L () -=? (; :L 99'.? :I. l)!?t:: )) I F~ r:~ (~·; ." .. () .;. t) :i .~ •••• () .C• () :L ····() ":' Ü())t .... () {· () J --~· ü ·=-() 0 :·:~ç .... (_) ~-( ... :t (:·:! •'"':t::· '",i;'"t .~:.: \,::-? /' c, :~? r~ .;: (_;) ~::; 3 ::.~~ ? ~~ ~::. ~:) .. :·:~ ::.:_:: ~) ·:-.-:{. /~ :.::; ::.:.:: :.? •} ~:j ~-~:; '/ -~:3 4 ,. !) 9 t~~) /;. :::;; -:· .. : ... ? ~-~~ /~. :.~~; ·.• :~~:; ::_~; ~:: . :t '.? ·:-~? Ç1 ~::; :? ::.:_; •!· ::~; • .:;. ~-~~~ --·· ~3 t_:.;: ... ~~;; (s ..:-f 1. t v :::.:: ::S :L ~? ~s ·) .. :·f ~.::_; ·.? .... l () ·:;.:1 -~ /; ~:=.~ ::? ~::; 4 ·~ ::.~ :L 9 E: ·:.:) ~::? :3 F~~ f> C: •... () i () () :::~ "" ~J ·:· 0 () ·4 .... () •. ~ (: () ::'{. .... 0 ~· () {) ~::.; .. -.(~ ~ ()() J "" 0 .;. () () ::~~ l~ J •:· :.: .. l~ E~ ~=.=; ~J .-. .;;·:;. ~:. :; :~~~ ;;:} :~:; \• f~ ~::; ·.~'r () .;. :L 0 :? ;? :t •} :::~~ {~-> J. ~:.:j J -~· ·:? ? :;;; l .fi-:t '"" ..:'~t 1 ~-/ :r. . .::} ::s -:· -_~? :~. :.:s :L ~:;~ ~~? -.~ ::.:.-;f) ':? t f~ ,:;:· -:· .;~. :.=s n .. ·:\ !::· .;. () 0 (-:;. f::;:_:~: -:· --=4- .... ) r::~, -:· :s ·.? ;. ~~:; ;;:~ A- .... ~3 '? -:· :L () t ~:5 "/ -~ ..:l ~? .. :·~~ DIRPA -Per capita disposable personal income change (constant $) E99SRPC -Per capita State expenditure change (constant $) I-50 per capita rises slightly as the ayerage wage rate inches up in the l980s because of a slightlyhigher percentage of highe:r:> than average paid em- ployees find work. At the same time, state expenditures per capita ln constant dollars show an increase temporarilyas increases in expendi-. tures occur faster than population growth. This advantage is eliminated in the late 1990s as expenditure levels must be eut back as in the base case. Finally, one can compare the long-term fiscal position of state government in the base case with the case in <vhich petroleum expenditures are 25 percent higher than expected. The 25 percent increase has a beneficial impact on balances in the short run; but in the long run~ the cases are nearly indistinguishable. This result occurs because of the additional population growth generated by the additional state expendi- tures. In 1998 the state is in approximately the same position finan- cially, but the population is considerably larger and revenue growth has not kept pace lvi th exp en di ture growth. To illustrate, in Table I.ll. the ratio of total revenues to total expenditures is in this case observed to remain positive for exactly the same number of years as the base case. In fact, its pattern closely follows that of the base case. The permanent fund is able to contribute slightly less in this instance to total state revenues. In its year of maximum contribution, it provides 4.5 percent of revenu~s. The general fund balance is in a better position, however. In the base case, it "'1 ii -» '.1 j ~ .i.- r L .... ..... - [ 1- i.o... L 10... fi ..... ..... - I-51 Table I.ll Impact of An Increase in Petroleum Revenues ·; ·:· ... ,,. •• t / / :L (,;.:!·.?p :J. 9)') J (? ~:~ () t -:~·i ~:~ :L · J 9E~:~~ :L ·:?Li ~3 :f. (.?C~/.:. :L (_;_:. ~:J ~5 ·i ~--·,r·:= .·· .i. ::"•::;.::; :i. ~~~,! ~3)~ :~.~:.;;ee J =::.:~~::;; \::;. l ~?''·? () l =:_:.; :.:;) ~:. :t ~:~,i() ~? 1 ·_::'·/ -.:·:. ·! ;''<?": ,.., .:. ~'/ ? .(,f J <? ~:? ~5 J (/':_;.::/; J. '? ~;.:. "? :l =:) 9~:::; on Indicators of State Financial Strength (Heasured as the Change From The Base Case) r;~ E: i .. ) F.: /:i T o ... .•'\. =~} ~· .... () -:· /\ \I -.~ ····0,. .... () ~- () .;. :t ~:.? ~::::: () \-. .t ::? ().~.tt.t () .;-o~:?<_;:· (:r -:· ()f:;3 (:r .;. () () > () .,\ 0 J. .... () \• <> () )' ·0<-üO:L ----() -;· (> f~ .. O.:.():f.d .... ~:) -\· c .. <~ ~:;·.:t () -:· 0::) :S ~;. .... (:r .:. () ~.:.:; () ~~ () :s ~:.:·:: .... o ·:· ()=::':-:!. F'FCUf·-.! C} F. }3 t1 L. () .;. '"''() ·~ 0() l o., .... () ..:- () ·=- ...... î.,} ·} ··-()v ()0~~2 ··--() ·> .... () -;-0 () !::; .... (! f• .... () ·:-() :L .. ··().;.()():}. :::~: ::.:.~ 6 ;. () ::> ;::i .... () \\ ()():2 :? o ~::; ~ ~3 :;S Ef -0.002 104.24 ·-0.003 496.85 .... () ~ <> () :~~ :1. D :.?5 ~? .;. ~:_:; ~:~ .... t) -;. () 0 l:·::, :t ~::~ :.·:~; ·:;-> ;• .... 0 .. () C.)::S :L ;:J :>" l;. i' .:f. ::;~ ~ ·~ ~) -:-() {) '? :f. f~ () ::-:> -;. l~ ... ':.} ·:· (~ () =:·::! :!. '.? / () -~ ~2 6 . ... <) -~ ~> ,;, ··-:~-:::)~3 (_:} 0:• t :.;~ ·) ,;. () () ~~; .:~. -~--:: ··.~·:: ~.:: {• :~~~ J. .... () :-c~ C ('::. :I . .3. :~~ E5 ... :1. ·:;;: () ~\ () ·:) :1. :t ~:} t) ·:~} v r:::~ ·4 .... 0 -:-() () .l;. t ()~=s<> <· {:.14 o c~()J .: :. -~ -~·:, ... ~ •··.• .L ·~-C L .. .1' .; •• / • .:} ··--•) ~; ()()..., [5 ./~ ::? ~-~? ,{.; .. ~? REVAT -Revenues/expenditures (change) (%) PFCON -Permanent fund earnings/expenditures (change) (%) GFBAL -General fund balance change (million $) I-52 becomes negative in 1991. In the revised simulation, it remains positive Q~til 1994. By the last year of the simulation, it shows $842 million less of a deficit than the base case, but it also appears to be declining at a more rapid rate. To summarize this case in which petroleum revenues are unexpectedly 25 percent higher than originally assumed, the state's fiscal position improves. The improvement is surprisingly small, however, and in the long run, the state faces essentially the same deficit problem. It is aggravated, however, because in the interim, population growth has been more rapid. This introduces the possibility ·that it would be advantageous to increase the contribution rate to the permanent fund. To that case, the analysis now turns. C.5. Sensitivity of Base Case to Increased Contribution Rate to the Permanent fund In the base case run, state expenditures are determined not only by population and income-related demands but also by the supply of funds available through the flow of revenues and the general fund balance. Sin ce money deposi ted in ·the permanent fund could not be spent on the normal operation of state government, there Has no direct link between the level of state spending and the permanent fund balance. Th.ere is an indirect link, hoHever, whi ch must be investigated. To the extent that money is placed into the permanent fund, it reduces the level of the general fund. This, in turn, reduces the level of state J l : .·~ ~ - : 1 L I-53 ~ f ~ L - - [ i [,_ .... - expendi·tures. It is interesting to speculate about the impact on both the economy and the state 1 s fiscal position of an increase in the per- manent fund contribution rate. A simulation was done to trace those impac·ts. All assumptions were identical to the base case Hith the exception that the contribution rate to the permanent· fund was set at a maximum rate of 95 percent of bonuses and royalties. This allowed for a continued 5 percent contribution to the renewable resources development fund. Two effects could be expected from this change. First, the aggregate growth of the economy would be reduced as a result of reduced government expendittœes. ·secondly, one would expect a change in the state fiscal position as a result. The permanent fund balance will obviously be much larger, but the current account of the state might either improve or deteriorate. In Table I .12, the new larger permanent fund balance is shovm. The balance in this case exceeds $5 billion by 1985 and $10 billion by 1993. Grovrrh trails off in the l990s as before. State expenditures reflect this siphoning off of general fund monies to the permanent fund. Through- out the l980s, expenditures are lower in each year in this case. Surpris- ingly, h01.-rever, in the 1990s state exp en di tures are higher in this case. This must be attributed to the much larger level of permanent fund earn- ings which is being generated and distributed to the general fund. These :t {.:l'"? ~7 :L ~;) :? E~ .1';))19' :t st~ t:J <> J ~;}:::;:t :!. ~~;; r:~ 3 l ~;; :::3 l~. j_ ~~,) f: ~ :.5 :t·)Bt:) l \)f;'/ :1. ::?f:;r:; l':?:::; ~;.:r .1 :'?1:?(} tt?~?l :t (? (,1 :::?. :!. ~~}~:? 2) :t () \?·4 19(?:5 :t ~;:' ·=p (=·J :~. \ .. ~;;:? 7 :f. ~=~\::;;:ü I-54 Table I.l2 ~ct of 95% Permanent Fund Contributions Rate on Selected variables (Measured as the Change From The Base Case) r)F'E{P; L ~:::9'}S ~··.. () .;. \/ <} J. <:}f:; -=· () ·:> 512.848 -118.297 910.259 -355.021 1344.45 -293.331 :L f~ ·4 ~::_; ·:· ':? :!. ~-~· 3 () J ., ~~; :::} l~ ~~~ i:f ;.? () v ~;5 :L ~-~· ::::; ~.':} :L .;. :~ç :~) ( :::~ () i,:) () .:. 1 ::=;; .,.. ::~; 6 '7 ~:-ü "? ~:.:.< ~:~; ~? -4 t~? ... ~5 :t .... ·4 () ;:::; -:· '.? c ;~:~ .{:; . ..:'{. ~5 ·4 ·=-::;:~ :? ..... -::;. ~~:,; :.:~·~ ~· t:~ ~:~ ~:.:; ~5 i) ~:;;· ::.:.-: \• J3 ::: .... :,;_;,17~ (? ;c ~:·:·; 0 J ~:5 /; .-~·{. ~::; { 0 J ·---~5 '.? )' ·.· :.~~; -4 :::.~ (, :L 1 .-:·~ -:-:::_; D .,.. :.:~; 9 ~:_:; ·!· ::,? ~-:~ f~ ;:;;, :.5 J .. .-:;. ·.· () ~:} "" ;;,.: E~ <> .:. ::-:, {::, :·:~~ (;~ ~3 ;::; 3 .. r:~ ·:~: ···· l fS ')' ~· / ·.? :L 7 :L .•:'{. ::.~:: -:· tS r;_:; i;. () .-:"{ .. ;. f; :~.:\ ')' )' .3 f~ () •} ~.-:~; :::.j '.? ~~) ,. l{. ~.:; ~:;. ? ~5 =:;.; s~~ i+ ~s l{. é :~. ~? -=· S.i') ~3 ~? :·? )~ ;'? <!· 6 (: J. (:'; () .;. l ·4 :L ): t) 3' t .jo ;,::. ~:~ f:~() 1 .;. ~l~S;J F; () ~::i ~:5 <· ::::: ·.? ·7 -:· A· (J :~:-~ f;i L /; {:~: -:--4 :.:~ l ::.:.~ ::::: ~;;: ·:> :=s -4 FlCJF~ () -:- () ~ () :5f3 ··-\:) <-· i? ·_/' ~J ···· ;.~~ 0 -~ E5 ~:;~:;,; --.J. ~? ~· :? t5 ,;:} ····_:t fJ ~ ~?c~:s .... ~~~ () \ .. :? .. :~. -~~~ ·> 41:!. .... ~? -4 f: /_.t :? ~5 .... :::_:. ::-~·~ ~-L~ ~_;'f ~.::; .... :.::. 2 .;. '? :~:~ :s .... :~:; ::? .;. .::'~. ~:.:.: ,s . ~':) :3 -:· :·.:-: ~J ~~-) '"" ;~ t ... ·:;:· ,::,. ~3 .... ~.:,:: () -;. l. ë.:~ :? :.3 ·:· '? :.;.~ ~? . ... t; ·:· ·~} ;_:~ -4 :t (.~~ -~ -4 :::; ~:~; ····:t-}~:~~5:L ~3t.~:t9 :? .;. !:j ::; J ~::; ~3 .;. :L ::) ~:) PFBAL -Permanent fund balance change {million $) E99S -State expenditures change (million $) POP -Population change (thousands) ,r - l.. - I ~ l - ~ L f 1 - i..... L. 4.,.. r L - I-55 additional revenues in the 1990s more than offset the increased level of withdrawals into the permanent fund by that time. Aggregate growth of the economy as measured by the difference in population from the base case bas sloi'red considerably because of the reduction in state expenditures. By 1989 the level is nearly 34 thousand less. Then, however, the situation rapidly reverses itself and population growth becomes more rapid, reflecting the increase in the level of state expenditures occurring in the l990s. In personal terms, this forced saving·has had two distinct effects (Table 1.13). The level of per capita real disposable personal income bas declined dm"ing the years of the most stringent forced saving during the l980s. This reflects the fact that the average wage rate of the fore- gone employment exceeds that of the average employee in the state. After the period of maximum forced savings, the situation reverses itself and disposable personal incomes are actually higher than in the base case. The level of real state expenditures per capita follows a pattern of divergence from the base case which is similar to that of disposable personal income. During.the period of maximum saving, the reduction in expenditures exceeds the reduction in the rate of population increase, so that there is a significant real decline fron the growth observed in the base case. As .-ri th disposable personal in come, however, the trend is reversed in the l990s. Although expenditures are not at their I-56 Table I.l3 Impact of 95% Permanent Fund Contributions Rate on Fer Capita Variables (Measured as the Change From The Base Case) }) I ~~~: F> r:\ E: <? () :::; F.: r:~ C~ t ~::.) · .. :;: ~:? () -~ () -:- :t ~:;)"7:::3 () ~ ::)~:s·? -~--() f ;_:_~ ~=s J J')?S.! -~·· .. ;~ :~) ~ :? ~:) ···· fi :::_:~ ~ f5 ~.:s ·7 t l~f~J() ··~· ~::} :? ... ~=~ ·4 -217.342 1 ::_?f$ t <••• ;,~:; ~? ,:. T~:; J. ? -154.047 t <:?[5~2 ~--· ~3 :t .;. ::? ~5 !.~~ .... l .-:~ :::.~ .:-~/ (:'; ~:-~ J (.~.:~ ::J 3 ··~· ;? 9·:: '""' J 4 t y ~? :5 ~:_:_i :L ~7 ~~:; /::;. :?l';.·:· (.1-l ·{ ·---1 ::::) c~ ~~ ~-~-~ ~? :t 9::3~:_:f "'" ~:;.:: :L ·i .t~. ~~:; ~? .... l ~_::;; :_:_:_; .;. :? () ~_) J. ·:?B:::',~ .... :!. ;J .;. '.? :i ~;.~· ' . ., t .3 :::.:: .;. /;. :l !,:~} 1 ~?r:: ·./ .... :3 ~:~; ,. ~::§ () '? ... l ~5 ~-:·:-~ ~ _-:~;. ~,:=.1 :!. 1 (? ~~:5 c~ ····1 ;::; ,. '? ")' ::;) .... t .{~ ~:~ -:-() ::.~-~ :::;:. t ~;;: r~ ·:_; .. ; .... ~t :.:~~ ·~ () ~? :~:.~ .... J .(t (:f -} {.: ::-:) ::. t !;:: ~? () ·,.,; t -:· /; :::~·~:' .... ~~) :.:~; ~--~·::)· :_:_:; ~::; 1 91'.~) :L ·"l··~-{• :.~) :_:5 . .:"::. ·•·· ~-? ~3 ~· ::? .(;, ~-~=-~ ~;. ~:) 9 ::.:_:~ /;. :L -:-::-;:; .-:.= •.• 1 :r. ~.::; ~ n .l:. ::;:; :tt:) 9 :::) .t:} c) ~ .-:+ H :3 ~-:~: ·_:Y .) ~:i {) J ·i :··~ ~·t /. .L ·;-· ·;.· .·.,· ~; !" :e t:,: •:• (j (:: '.? .L .. :-:: .; ,-. .-:~. ::";·>· ::. 1 ~_;_:, J:;.:~ ~:_:.; :2 J ·;-~~3 :2 ..:-{. :L -:-/:i 0 t :!. ·:_;; ~~) (: :l. ?; ~5 l' (::r {·:, D :r. ~:~:~ .(~ -:-,::!. :) .-:'{. :ï. ~;.:·::,...·? (;;: ~-:::~ t 1 .-:'{.:.-:::;.;. ;JJ /) J. ~~;:: (_:.:r E? t .-:{. / .,. f:; t :~·-;~ t :~_:: '/ .;. s J _/! DIRPA -Fer capita disposable income change (constant $) E99SRPC -Per capita State expenditures change (constant $) .J l- ..... L.. - ..... - - ii... ..;.... !: !! lw.. ..... I-57 desired level in this case as they are not in the basic case, the expendi- ture level per capita is considerably higher. Vfuat has essentially happened is that the decreased rate of spending brought about by increased permanent fund contributions has caused aggre- gate growth to moderate, but has also allowed a much larger balance to develop in the permanent fund. Some sacrifice in the current level of expenditures has been traded off against a somewhat higher expenditure level in the future and attendant higher aggregate growth rate. In terms of the fiscal position of the state, the ratio of revenues td expenditures appears considerably more healthy in the long run. Rather than falling less thau 1.0 in 1987 as in the base case, it re- mains g~eater than one until 1992. It does, as in the base case, con- tinue to fall but the ratio over the period is higher than in the base year. The percentage of revenues contributed by the interest generated by the permanent fund is considerable. From 1989 to 1991, it exceeds 20 percent. However, this high contribution rate is not sustainable in the long run as the percentage falls to 10 percent by 1998, its approxi- mate value in 1982. Unfortunately, the position of the general fund balance is worse in this case. It never rises much above a bare minimum level in the 1980s, goes negative in 1988 as opposed to 1991 in -the base case, and by the end of the simulation period has a negative value exceeding the base case by about $L 6 billion • I-58 Table I.l4 Impact of 95% Permanent Fund Contributions Rate on Indicators of State Financial Strength (Measured as the Change From the Base Case) l ~?·;;;··l :1.9/8 1 {? ~?~~~ J.•? ~:~() J. ~;.fr;; 1 :i.')U2 :!. ·~}f::;.3 t ~:? f:~ ~:·{ .. t .:?:a!.:S ;t~-:;>el,~::: 1. <;:~ ~J ~? 1 s.) E3 t:i --~ ----~· ---· --~-·-:~ ,i_ J ~; ~~} () l ::;.>•) J. 19SJ::~~ 1.1~)9:.":) l9~?.-:~. J. 9 f~:; ::~~ :t (~) ·:_;;-{. l ~~)(? "/ :l.'??B F;~ E: tv1 F~ tr ~r () ~· 0 ;- () ~-() '? ~.:~ () -:· ~:.~ ~=~ () .:-:t fj t:;.:· ci~ :t ~~~~? () ~ ~:_:~ () ·} ::_:~_() ,::'; () .;. ::?. () 1 () \\ J l?~?. 0.,20:? () ... :2G:::; ()·-<} 1 .o -~ J.l{-~:5 () <-:t :.::; ~:? () 1\. ()~53 () {t t ~? ·-=1 () .;. () :) ~5 () .... J. l --··()v()():::~ . () -:-() ~~} .... () -:· o :? ~:-:r Pr:·c~fJt·--J (3F-~Bl-~L. o., " 1 .. ) -~ () -'r ····:t(;.;;~ir9l~ ("':: ..... -~--412.211 ()v -533.058 () •:0 0 ~=_; ::.:~ -718.08 () .;. () ,s ')' ~·-· ~: .. :j :~~ :.::; \-() J ::) () i." (J f5A-... ~ l l "? Ç:) v ~:i f:) () .,. ()S~t:} -·~ l .{} ::;} f$ .;. :.:s :;; () ~ :L (){; ···· :t {; ts ·? i· :t ::~: () -;-. :t :t !5 ·-· t '? --~~ ")! ./ .;. t \.) () ·i :t ::? ;::~. -·· l :::~ t3 (:; <· () '? ()~ .. 141 ••·•l/'"?';? o;. 9)T (J .;-:1. ~5 ~:s 1 ·}-t·J-1·-· o,,:i.:s ·· .. :!.37:?1.04 ::) •} 1 ~5 ~~:; .... :t t ·4 ~:5 ·:-~:~ :=:; () ·:· :L :·:~ ~5 .... 1 ~=~ :L ~~:; ,;. .::_:; \!) () ~-l :·:) ·.~:} .... :t () ·;y: f/ ~ ~:; ".? 0.117 -1320.32 0.115 -1031.09 0.095 -:1.340.04 0.092 -1022.04 () ·i () '"? ::) ~ ... l !5 ~? ::~ .;. !5 ? REVAT -revenuesjexpenditures (change) (%) PFCON -Permanent fund earnings/expenditures (change) (%) GFBAL -General fund balance change (million $) 111111 liilifi ~----------~------------------_.~~------------------------------------------------------------- 1.- ..... ...... ' ' ..... ..... ..... L .... I-59 C.6. Conclusions In each of the three simulations, the general fund balance becomes negative in the 1990s. This occurs in spite of a fairly moderate growth rate of state expenditures. Attempts to relieve the situation by a· fortunate increase in pe·troleum expendi tures ·or by an increase in the . contribution rate to the permanent fund do not eliminate the basiè prob- lem but rather only change its dimensions. In the long run, the state is facing a slibstantial deficit. Changing the level of expenditures in the present affects not only how much revenue will be available dir·ectly but also indirectly, as ex- pendi tures genera te increased demand for expendi tures ·through population increase. Recognition of this basic fact naturally leads to the concept of planning the present level of expenditures not only to satisfy pres- ent needs, but also in anticipation of future needs and with the idea of attempting to develop a superior spending strategy not only from the point of view of the present fiscal year but also from the point of view of future years. With this in mind, the next section analyzes the case where a more active approach to the management of state expenditures and the permanent fund is employed in an attempt to maximize bene fi ts of state government in the long run . I-60 D. Targe·t Expendi ture Grmrth Rates The simulations examined under section C are clearly not feasible hecause of the large, negative general fund balances which are generated in spite of significant cuthacks from desired levels of expenditures. Allowing expenditures to grow in an unplanned manner leads to an untenable situation. A more reasonable approach to simulating the future of the economy would be to impose the constraint that, in the long term, the budget for state government should balance. This being the case, a more specifie expenditure target may be established as a goal. Sin ce the demand for s·tate expendi tures is closely correlated wi th growth in population, the level of priees, and personal income, a reason- able target for expenditure growth would be to link it to increases in these factors. Thus, if long-run population growth is 3 percent annually, inflation is 5 percent, and the growth in personal income is 1 percent, then the rate of increase in state expenditures would need to be 9 per- cent. If this were the expenditure growth rate; then real state expen- di tures per ca pi ta \'rould increase 1 percent and the in come elastici ty of state expenditures would be unity. In general, the income elasticity of state government expenditures in most states has historically been near unity or slightly above.8 As noted previously, the average income elastici ty in Alaska has exceeded urü ty sin ce statehood. 8 The priee elastici ty might have been grea·ter th an -1 also. ) ..... - ._ ..... ..... ,_ ~ 1 !· - - 1· , . ....: - I-61 A set of simulations was performed under the assumption of unitary incarne elasticity of state expenditures. Because of population and em- ployment increases, the rate of growth of total expenditures was on the average 10.5 percent for the decade 1979-1989.9 The two simulations dif- fered in their treatment of tight fiscal situations . The basic result in both instances was that the state stayed within its long-run fiscal constraint and in the final simulation year was still registering a positive general fund balance. In fact, in each case sup- plementary contributions were made during the simûlation period to the permanent fund, and sorne of this money in the "interimll fund remains in each case. HoHever, in order to obtain. these results, it is necessary to pulJ_ back from the target level of expenditure groHth in each case--gradually in the former and precipitously in the latter. The pattern of expenditure growth in the two cases is compared in Table I.l5. On the left is a case 9 1'/hen attempting to target growth in expendi tures, i t is important to keep in mind that the rate of population increase and perhaps priee increase is not, in Alaska, independent of the growth rate in expendi- tures itself. This is most pronounced regarding population. For ex- ample, if one is attempting to target growth to be uni·tary elastic vii th respect to personal incarne per capita, estimates of population growth and inflation are necessary. If one assumes 2 percent, 5 percent, and l percent as the growth rates in population, priees, and income, res- pectively, then an increase of 8 percent in total expenditures Hould be targeted. However, if actual population growth were 4 percent because of migration to the state induced by growth in state expenditures, then the actual change in real per capita expenditures would be negative and would be equivalent to a l p'ercent reduction per capi ta in real exp en di tures. I-62 Table I.l5 State Expenditures Growth Under Two Forms of The Unitary Income Elasticity Target F: F: ·r .:· J. .:· :t F'FD,.f:!.,:i. l *7i:7)' l 0 ~:;.:. ·:? ·:· {:) ~5 l (,) ~::~ .. ~;; v ~:) ~5 l •7'?E; :t ::.~~ ·_y :f. ? :t. "? :t ::.:: ·.:."! t .,. l '? t 9:?·:_;.; :L3G::=.; ,. ;;.: 1 :::~; ü ~:5 ,.. ::.~ . :t {)B(> 1 !5 ~;_:; () ~-f5l":r l !.=5 ~:=.i () ·:> J ~:;:::J:L l i:J :·:~; ·::) ~ :.:~ ~=:~ 1 t~ ~3 ;:?' ·1 :.:s '? :L ':)f:j:? :::.~ () .:::. :? :,. ;.:.~ l ~~~~ 0 <::: '?1 ~ ::.~ t s) ;::t :.:~ :~.~ :L () l{ ·:· (? ~:.:~· t /";; l} * ~] ·;l 1. 9 ~=~-4 ~:.: ::::;; () ? ~ .::? ::~: ~?J:())' {• :J.? 1. <? t~ ~::; ~:.:~ ~.~:_; () ~:; 3· {:~'l ~? !5 () ~:~ •} :5 ::~t t ~;:t f5<:) ::;.~ ~? (; ::.:.:: \· l t ~:.~ ::;! (r ~:~ •:• () :? t (;:::~::5"? :.::; () ,•:'{. l~ .;. ·.~? ::::; ::s o -4 (s -~ ·7 k:3 :1. =:?B~~; ::) ?: .7 ? ~-':? ~::; :::::; ?~ '7 '7 ·:0 ~? .. ::;. ll~;.:: ~J::;.:· :::~ :? é: :::.~ -:· ~? ~:·:; ? 6 ::.:.~ ;, 6 :} :L'}~:;!() 4 ::.:.~ J ~:5 ~--. .:} ~:~} ·4 () {:1 :L .;. f:5 ~::~ 1. :::.> ~~} J. .. :'{. ·.:.:-' :::::; ·:_) -:· :::.:::;.~ -4()()-4 •} é: 1 l':?(?:? ~;.:; :.::~ :.:~; .? \· ~? ;s ::~; :? r? :5 -~· (s ::? :L (_;..' (;.) ~:~: (:~ () J. f~ ·:· C) =:_;:: ~':) (.;. () 1:) .;. ::~) ~-:j J 9':;}..:'{. ::~; ~::; ? {~ v :i. ~-::) 3 /:: f) /:: -:· :.-:~ ~::; J (?•:?~:5 ::5 () ~;5 ~~:~ ... ~==) '? :3 t;:; ..:{. ~:? ·:-~5 l 19::;)~=~ '3:!. 4·4 ,. :_:<;] l{. () 1 () ~-:~:; )' t ~~~ t:;; :.~.: :.:::: l:~. :.=s 6 ~-:t 6 . .:·~ l \? )' -=· .<'{. ~:_:; l (? ):;}(:5 ~·:~ f:J :;:; :::5 '\ (? (:: l{. A ~:.=; J ~-~-~ 9 :i. ~:?(?!:;.) 4 ..tf ;.:.~ :~~~ ~-:·:~ ::? l{. ·.::; 9 1 .;. :~;: SJ PRT.l.l -Target growth -no anticipation of revenue shortfall PFD.B.l -Target growth -shortfall in revenue anticipation - i- - l .... 1 1 io... ..... ..... - I-63 where growth at the targeted rate continues as long as possible. In 1994 the state suddenly realizes thêlt the target rate cannot be sus- tained and a severe down·Hard adjustment in expenditures occurs in that year. Expenditures are $3.250 billion less thau targeted in that year and fall from $6.018 to $3.576 billion. From that point forward, expendi- tures resume their growth but at a much reduced level. In the other case, the collapse is anticipated some1.-rhat by a decline in the current account surplus and the balance in the general fund, so that there is a some-what smoother transition to the period of lower revenues. Expendi- ture groHth falls off for a feH years in a gradual manner and then re- sumes increasing, but it never regains the target level. In both of these cases, the more moderate rate of increase in ex- penditures also has a moderating influence on the increase in aggregêl·te economie activity 1.-rhich operates throughout the simulation period. This makes the target level of expenditures defined in per capita terms easier to reach. The reduction in the rate of groNth of expenditures in these simu- lations causes a reduction in real state expenditures per capita from the base case previously analyzed (Table 1.16). A comparison of the base case Nith the case in which the doi4D·turn is anticipated indicates that the latter peaks at a level about $180 less than the former. From that time forward, the relationship between the tHo is not predictable because of the ivay in which the tvm are responding to necessary euts in I-54- Table I.l6 Real Per Capita State Expenditures in Three Simulations J C)'_?'/ l :)'.?f; :t ·~~.)} !:;) :1. ::_;> ~::; 0 l ~:;:1 [::; :L :t~~;) ~:j ::.:.~ . t l?i3~_:::: :L ·:;.:· ;~~ ~:{- J ~:_)f:;:_:5 :L ~:_;::B.:-:·:. :L ~:_?P)' 1':;->e:::5 -·-· ··:-! .!. :t 1) ·:.~.:. () 1 ':? ~:_;.:: :L :L (.:;= ·:? ::.:.~ :t ·:.:}(_:.:.3 t ')9 . .:-:;. :1_ ~:_;,;. (_;.:: :_:_:.; J (?•:)() :f. (?·:~} ·.? 1 r:;.::s.;~J . l ~;:tl?;;) F' F~ F .,. ~5 -.~ 1 l l :::5 (:r (-'.? :~:} J ::.? :~~ () -:· ::? :L ~~:: '.? ::.? \• .{;, J ::::) ~:.=: :::~; ·:· 6 :? :t -4 ~:~~ :.::;; ·:· D =~} l ~:_; 0 () ·:· :::~; .-:·~- J. :_:_:_;::::)/~ .;. l -~ !:;· , ... ! .·-' .·i ··:-· .i.dD ... ·;,.;.···)· .. ::: l {-} ;.:.~ '.? ~-~? '? :i.{)/:.6 <· i; :f.{,fJ:L~-4 J 6 () -r.::'t ~ ~:? '? ·l .L :!. :·:~~ .;_~} .;;'~} ·:· 1;? <;.:· :1. ~;:: ') 0 {· :L ~::.~ :f. .L :.:.: :::.: ·:· l~. J "!. ·f ..... ~ ··:: -;. :.-) :; :!. () ll-.3 .;-·~.! :.:~: :L :L () () {• f: (, J () :.::; f5 .;. 1 ·<t 1 :r. ::? c~ ·:· -4 :.::~ :L 0 :::; 9 {• ~:.~~ ::=s t:L:::::~-.;.~.():3 F~ F. )) -~ ~:i ,.. :t F>F;~T .:· :t. ~l t 1185.25 1185.25 :t. :2 ·.:.:-· l:;} .;. :.:~ :1. ~::~ ·:.:-· ~::.:: v :2 1282.35 1282.35 1265.61 1265.61 1358.48 1358.48 1447.27 1447.27 1427.93 1427.92 1418.23 1418.23 1425.39 1425.38 :!.448.33 :!.448.35 1468.23 1468.22 1490.01 1490.01 l~::.r:t()-:.f5:L :t~=_:;:t()-: . 1497.01 1537.09 1389.44 1561.97 1254.58 1587.55 1146.:!.5 1605.79 1077.05 1023.05 1038.16 846.97 1000.62 811.646 96:!..413 815.383 929.007 829.628 902.506 844.007 PRF.S.l -Historical growth patterns (constant $) PFD.8.l -Target growth -shortfall in revenues anticipated (constant $) PRT.l.l -Target growth -no anticipation of revenue shortfall (constant $) -4 )1 "î yJ J u ..... ..... ·- L - ,_ ..... i - ...... - L - - I-65 expenditures. The fall in state expenditures per capita in the case of the precipitous reduction of state expenditures is more severe . The fiscal position of the case in Hhich the down·turn is anticipated is relatively healthy. The level of the permanent fund is the same as in the base case. The general furid is positive in all periods and, in addition, there is a large amount of money which is neither in the genel'al or permanent fund but Hhich is available to pay for future cash shortages ï-Jhich the state may incur (Table 1:.17). This bas been built up rapidly in the early 1980s and is ohly beginning to be drawn doHU in 1998. To- gether Hith the general fund balance, this account is larger than the permanent fund until almost the end of the projection period. Given a strict target approach to expenditure growth, it becomes incumbent upon policy makers to consider hoH to treat the large amounts of money which will be accumulating outside of the permanent fund in the 1980s. The sums make those in the permanent fund seem relatively small by comparison . The case of targeted growth where the downturn in revenues is anti- cipated and adjusted exhibi ts differen·t behavior from the case Hhere growth in expenditures continues blindly until a massive cutback is re- quired. The differences between the anticipated downturn and the abrupt dmmturn are presented for certain variables in Table I .18. The dif- ference in population is a clear reflection of the different expenditure patterns. Population expands more rapidly Hhere the dm·mturn is not anticipated, but then is abruptly lmrer after the readjustment of I-66 Table I.l7 Position of State Funds in Case of Targeted Growth With Anticipation of Downturn F:' F:· }5 (:1 L. CJ F. I: (:·,!... P r::· ~::; tJ Ft I~ L. :f. (;_;··;':? l ~~} ~::; B l';)")'l:? :J. 9 ~:~ () l. (?~3 J :1. ~:,'E:? :L ~~;: ~] :.:s :t ';.:~ f3 -4 l')B~:.=.i :L ::? ~;~ (; 1 <):::~? t ~._;;\ E~ ~:~ 1 ·:_;; :::j ~:r~ :!. 9?() :!. '?') :L :L .:_;:~ ~~) 2 l (;}::_;}:.':) :t ~;.> (? .-.t:;. :L ~? (_~_:: ~5 :t ~;.) (,;.:· {:':1 ll:?l~))' J e:p~:,;~;::~ t ~?(p•:.;;r ~.::~ -!· ·4 {~; ::.~:~ (· .. ~-~ :t r:::: ~:5 ·:· :.:.:; () :::) :~:.~ '.? '\ .-:l (/ ;;2 l;. b ::? -:· ~:_:; .:::, (~ 6 t {• (:':, :j ~-:_:; :!. ::? {) ~:! -:-~J ::;_:~ () !~} é! .;. ~? '? :.:;} () () ~-:~: "" .. ::} . .:-'} :J !;:J (: ~~.:1 -~ :::=, _.;·~-() ~) ·_:? .:· ~f. ~~;-~ l~} ::.:_:: ~?-4 \~ :::) ::~; .-;'J -4 (::. :::.~ -:-() :::~; 4 t:~:~ () .-:'{. .;-·_:.:-: -4 / ;_~~ ~:5 v ·:;-'? . ..:"~} ;;::: :? {? .;. :2 :t 4C.J;L/ ,,3:l. -4 ~) ~~} :~~ -:-.-:·:;. ~~s () !_:_) (:} -:-(·::r 9 ~~sl J. () ~ n;? ~:_:; :t :.:.:; 16 ~· l{. 1 ~::.i () 0 :.:5 ~-·:;) l l;. :;::: (-:·:~ =:;;= ·:· :L \:) !~5 ~? () ·:· 0 fj l ·4 (; :!. ·:· :3 "? ~} :.=.:_; .·:~;. ·.? ... )' ~:~; :::.~ :;3{;1.,.6?? :1. :f. ?'? ·=· :~:;~::_; :i. :5 :::~: ~:.:; .;. :3 ~~5 t (;.. /:_; (,;.:· -~ ::s :::.~ 1 t:; (:: ~) ·=· ;;?. ::::; ~? 0 E: ~? -:· ::~ :~.:.:~ ~? :~:.: ~:~) :':~~ :.· t;? /:z :~:.:: :::;; ::.=.; :5 ·) () :i. :~) (.) ·;::· {:·) -:· l ~7 :~? ~.:} :? () ·=-~~~ .::~ ~? -.. :·~. ? ~5 -:. cS (:= :::.~ () 4 () -~· ")' ~~_:; :t '/ :3 ~3 -:· ~:_:_; l{ . 1 ~5 ::.~ ~::: ·:· (. ~=? :1. :3'.'5:::> ., ,;:;.·;.:-· :L :1. .l;. ;::5 -;· ~~) ~} 9 ::.~~ ·;? ·:· ~:~} () ~:5 ~~-: ;.~~ :~~ v /) .-:·:~ :_:5 ::.:} ~~:.~ ~.:.~ ·=· ~·:~; :::~ "/ ·.:.:·· ~2 ::~~ -:· :::) :? ~=) PFBAL -Permanent fund balance (million $) GFBAL -General fund balance (million $) PFSUPBL -Supplemental fund balance (million $) {\ · .... · ·} Oo .... i.,) •!• ().;. 0 .;. () ... l;. () J ~· ~? :::::; :z \ ()Cr 1 v .::·:· ;;;:, :t 6 /:: :1. ,; .. (? :·:~ ::~.~ ~~~ ? ~.::_; .;. ~:5 ~:5 ::.:,:~ ::? ·.:.:-· :5 -:· E: ~:.:.; ::? :~~~ '.? ::.~.~ .:· ;::~ ~:) :::.~ ~~~ ? :.::.i ·~ ::::i :.::; :~.~ ~:.~ '? ~.=) .;. f:~ ::.~~ :::.:: ::? '.? ~::; ·:t ::3 ~.=.; :? ::? '.? :5 -:· f~ :.:s ~:.~ :? ·.? ~~) ~.. B ~:_:_; ~;.=~ :: :~ ~? : :_:,; .. ~ ~~) !::i ~-~ :? '? ~~) ·> F~ :.:.:; ~~~ ::.~.~ ·.>' :_:_:; •!• f5 ~~.) ::.~~ :::.~ '_? :_:5 .... f:j :s ::_:: 0 f3 ,s .;. ·:/ .::·:;. :1. ·:_;:· J )' ~ t:~ J r ! ;..... L i.- .... .... - L - - - - 1....0 .... I-67 Table I.l8 Differences Between Targeted Growth Without Foresight and With Anticipation of Downturn (Measured as the Difference From the No Foresight Case) :t 9}'7 :f. J ::;:~ ~:? ~.? 11:;.}::;;() ~f. f) f:"f :t :f. ;:;;=~:::::? :1. ~~~~ r~ ;:=; J ()' ;:::~ l~. :1. ·:;.:'f3~5 :t (_;.:~B;:S J. ·:) ;:'3~? 19 ·J CrC)C• .L .-· ~ .. : •·• :L :i. ')i;:·:l. ·f (.' .1. :" ~.:. ·::.:: ~? ~~~; :;. ~) :;) /~. :l. (::-:::":.:.; :t ~::;:~:)6 :I. <?·:.~))' J. 9·:;:: f5 t (/S'? r::nF> CJF' ··-·tt:·> <) •' "'"() ,. () ·} J(,'_? ··-· () ~ ···· -f~ {) -~ 1 ~;; E~ () ~ ····./}()(}\·Of~ () -:· {) () t .... :."? () (~ -:-'() () .;~~ 0 ., ()0:~~ .... :L i"l•f ·=· ç. 3. C1 ,. OO:? '-··ll ~"?~~/ -:-/f:~ 0 \· () ~I. '""' 3. ::) .::~ ~? .;. {;~'; ·~~) ',-'.}-..:./·'f "'"• :i. :.:5'?'.? ·:· ')'f::; <> -~ .... J ? ~-? ~? ~ /{. :.:~~ .... ·.) :-<) s) :~:.:: '"" ::.~~ -~\ :~.:.;: :.:~ ·=· l{. ·.:.--· .... ü ,;. () <> J .... :? :_::_;:.-::;;li v <'~~ :;~ ····0 ., ..... ··. ··-.. : ... ::: /:·:.,;.:;. 5,-·: :.:-.; -:· t:· .i .... --J '.;;r 3 4 ·t J. .. .-:~; .~2 .<. ·:· ·.:=_; [~ ~.-:·-: .... :L /~. 9 ~? -:-~? :,5 ::_:_~ ~7 .;. l ·.? ./' :L J. rp "/ -:· () :~:_:: ···, .•'\ _;, :!. ;:::; .... ~L ~:.~~ 0 () ·=· . ."::;. ~~:; l :.:·~ -;. ·-.:.: -~/ /i. :L () ~:_;::r :.::; ·} ~:-~ :l. :L :;:_~ .· :~~~ ::.? (; ·. --·~ ~3 E <:.) {· :~·:; ~:~.~ ~;) 1 :~::~ -: ::j ~:; t< ••• {~:, ;,:~. ~) •!' ~:_:_; :::)' ::)' .... :L ·.::: v ~) .5 ~::~ .... 4 :::~ ~::~) ;\ r:; f5 l{. .... t ~;.) ~-:!. :.::; ~:5 ..... .:·f ;~~ ~~; -=· f:; )~ ~:? .... :!. c, ~-,:_;.:. ::? .-::~. -:":;. ~-"-~ .3 v c; E= --~, POP -Population change (thousands) F' r:· J.:-; tiL. ,, \} ~ .(~ ·--· <\:• r~~-< () {• ~:? ::; 3 À~~ :t n .;. ·7 r:: ~~} ~? ~;5 () -~ 0 t i:j t () ;~:~ {~1 v :::_; ;_:_:; :f. ~.:.: ~~~ .3 ·( :::5 :::J :i .-.:. -~:\ _:~ ... J ,s ·: .i. .·• .: .~ (.) •i .t .{;- J fS :;-~ ~:: -:. () :L :? ~-:·{. -4 ·_:? ·=· ;? ~:j ~~·_;: /. ::;.; () ·.· ~:~ f3 :::.~~ ~~~; '.)' :r. ~· ~2 :~? () 3 (: {• ::s') :!. C .(:;. E~ .,. .-:}. ~::; ~-·-l~ . .lf ~~~ v 0 ~;~: <:.~~ ., .. ::? ~? 7 ~::; -Jo f~i {:: .... ;~~ ~~~~ >·' :~~! -~ f:f ~::; .... ;? 3. ~.J ::? ! .. {~ :f. ···· :1 9 !.:.:; t$ .:· ·~? tS . ... :t ~;s -4 J. ·:· :::;; :.:! .... J ('~! :::.:: =) ~ ? ::~: .... :t ~::i ::.~: ~:=~ •' J l GFBAL -General fund balance change (million $) PFBAL -Permanent fund balance change (million $) E99SRPC -Per capita expenditure change (constant $) 1:~ S) ·::> ~:;:; F: F' f~ () ·~ ()() :f. ~~. • ... \ l'•. ~"':1 \.! ~ .. ~i •.,} .-::. () ·} () () :L () ~ () () ::.~ () 0:< ()() -4 ···~().;. ()().2 "··0 ~· ()()~:~ () ·:· 00~~ _,. () .;. () J. () ~-() J \~:t ""··()y (ftJiS () ., 0():3 () ·=· () () ·:? .{:. () ~.. () t~ ::. t ·;~~ ::? ~-~5 :? ,;-::. :.:~~ ~::~ _) .;-:~} )' -4 ~:~-;_ <j) -:· ( .. ·:'1 :L .... !:5 ·4· <;· () () .,;'}. . ... t ~:;,'-:t ... 1 ::;> J .... :i. ;::? ~=-{ ·:< ')' ~? :.:~; "" J../~ 6 \• ()::~ .... '} 9 ·:· :.:~: '.? ~J .... :5 ~:s 1 .,;·} '~? 9 I-68, expenditures. It appeal'S to be gradually appr:oaching the level of popu- lat ion in the anticipation case as ·the simulation ends. The general fund balance must be combined with the permanent fund balance which now includes some supplementary contributions ii"/-arder to obtain an idea of which expenditure pattern gives the state a larger balance at the end of the period. The two strategies give almost identical results in early years;10 but after about 1990, the case with the abrupt drop is clearly second best in terrns of funds left in reserve for any kind of financial emergency. Finally, the pattern regarding real state expendi-tures per capi ta shows neither case to be clearly superior. For a few years i'lhen state spending is being gradually reduced in the one case, expenditures per capita increase relatively in the other case. Hhen the massive cutback cornes, hüï-rever, the situations are rapidly reversed. In the extremely long run, the differences appear to be mitigating. These tVJo simulations, VIith growth targeted so that the increase in state expenditures folloVJs a path of unitary income elasticity, are in- teres·ting in identifying the rather severe constraints upon the continued expansion of ·the public sector existing in the long run. Since at the end of the simulation period, there VIas sorne money still available for spending in ·the state treasury, i t is interesting to look at the case 10 . . d. ff . d d. Tt.1ere are mlnor l · ·erences lntroduce by the fact that the lf- ferent fund mix in the t:1w cases resul t:s in sligh"cly differing overall earnings rates on government inves-t:ment:s. : 1 ..... f 1 \-1 ..... ._ - • 1 i ..... - ._ 1.... î....o .... 1 i- 1.... i..... ..... ..... .....~ - I-59 of a slightly more rapid growth than unitary elasticity. To accommodate this, a simulation was performed in which state expenditures grew at a unitary income elasticity rate plus l percent (independently set). This analysis was applied to the base case where the impending revenue short- fall was anticipated and thus somewhat smoothed out • The most striking implication of the examination of this case in relation to the unitary income elasticity case is that the cumulative effect of a small increment to the growth rate has a very substantial effect after a feH years. In the long run, the level of aggregate acti- vity in these tv;ro cases is nearly identical Hi th both recording a popula- tion in 1998 of approximately 897 thousand (Table 1.19). In the interim) the case Hith the l percent increment to state expenditure groHth has a slightly higher level of population Hhich at one point exceeds 21 thousand. Comparison of real per ca pi ta state expendi·tures shows clearly the more rapid groHth rate in the l percent increment case until the time Hhen prudence requires that expenditure levels be eut back in bath cases. Then the high groHth case is eut back more rapidly than the other and in later years, per capita expenditures lag those of the sloHer growth case. This indicates less of a need for continuous cutbacks in the lat·ter case. Interestingly, after ten years of growth at a rate of l percent higher than the base case, total state expenditures have risen to 12 percent higher in the rapid growth case. The.target increase has been compounded by other factors--primarily population grow~ch . :L (? '.? :::; :t -=;;r '/ :J J ("/".?\;~" :t~?r::o t \;::E~ :t :J. \? ~3 ::.~~ 1 9~:~:::::; :L 9;J.4 :t ~:}e:.:_=_; l (_?f) (:~ J. (;; c~~ ·_:) ~~-:~) d ~:~ :t ~;:!:::::{) 1 9 ::~;· () :f. :~~) 9 :L :L s}~::.:·? :t ::;.:~ :;) :·,:; 1 (?•:?.·:~, :L \_~.:. {) :_:5 :i. ~~:·:? (:1 J. ~.:.i :::} ·;i l t)::;.!;3 :t :;.;<) ~:_;,:: I-70 Table I.l9 Differences Betveen Grea te~ 'l'han Uni tary Incarne Elasticity Gro\'Jth Case and Unitary Incarne Elasticity Growth Case (Measured as the Difference From The Unitary r:~ CJF' ····O . ., .... ()' ~- o $ ~:s ~:5 (:·:. :L .;. -4é::::; 2 ;. )' :~.~ ::5 l{. ~ ~3 ~:.:.~ 1 (; .... l ::::;~_;} D o;• ;,~~ ,•:1 :L l () ·} :? ~-.:~ :? l3 ... ::/::~9 :L ·.:.:-= ·:· ~:~;::~:; :::_:~ l -~ ~~:: ;;:~ :2 0 ·:· ·4 ::s -~:;. ·.? ;-~::J ~:_:; :L Elasticity Case) E~ ·:;1 t) ~:-~ F;~ i~) C~ !:::::?(.:.:::;:~ F> F. r·{ Pi L. () •) () 0 t () .;. () <> ::? /),.:~.ea :t4-:.:3J~? ::.~~:;::; -:· 4 z_;." :.:~; l{. ·~ :~.:: ~,; .;'} l~ ;.:; -:-~:~; )3 ~~; ~~;j (::: ~-() ;:;:~ ~:.~ . ' ...... ., (·::: {~ ·i ;;·:: ~ :: ~·-~-~ ~-? ~:? ~-? l~/ s~: ~:5 ::3 ·:· .-:·;._ (~' ~~i s_:. <? ,._ F: -~? ./\ ;s .-:-i . .;-:S \) .--:1. .... -<~ /1. ·.• ? ~=; ~-:) o .. " !._) .;. {? ~ ~? :::_:: :3 ::.:.~ ..:'f {· -·~ J 3 .-:'~ /; ~-() ')~ "? >J ::~; •} ·.? ~.) :.::_; :L () l1 ~· :::~ ..:~ . .::·, -~ ..... .;, .; ··:.· .•' .f. ····;· .f. v .~ ... J () l t3 :_:_~~ ;:. :;; () -4 ~;_:~ ::::~ ~~' .;; ts ;_:_:: :1. :3o·.:y ·l :L lE () {· ü ~· -() -:· " !~} ·:· (),. 0-:· ..... {~ () :L -~ ':? :_3 :~~~ .. ,. ~.:; () l{. >:· :L :::) ~5 .... (:) l~. () ~-() f5 .E~ .... :t ~? ~54 .;. () :i. .... :î. ::2 :_:_:_; /~ ·;> () :L :::::; ::_;.:< () -:-() :L · :L ~? :.:s l~: .:. () :~. ::) :r. ·.? 1 .·:·~ ~? :L . .. .. :r. ~-:~ ;_::_ï /~ -;. .... :? ~-:~: ~ ~:=:; ::? D .... J ::.~~ ~::_; i} -:- -0.934 -100.6 -309.976 -1254. -1.537 -91.267 -296.193 -1254. 0.465 ·65.755 -214.2/2 -1254. 1.426 S2.SO~ -176.092 -1253.99 1.116 -50.772 -184.772 -1495.49 0.322 -52.445 -211,32 -1746.58 -0.407 -53.542 -238.721 -1977.06 -0.799 -53.172 -261.465 1.23 -0.676 -49.841 -269.824 -j917.78 POP -Population change (thousands) E99SRPC -Per capita expenditure change (constant $) E99S -Expenditure change (million $) PFBAL -Permanent fund balance change (million $) ·"{ '1 J i- I-71 ·~ ~· The final general fund balances in both cases are nearly identical, but this is not true of other fund balances. The more rapid growth case -exhausts any balances that were saved for a financial problem by the end of the simulation period, and the state is left with zero balances except -for the nearly $3 billion in the permanent fund. This is in contrast .... to the $2 billion available for emergencies in_ the base case, in addition to the $3 billion in the permanent fund in -that case • ..... A small increase in the rate of exp en di ture grow-th can th us have a t-quite substantial impact on the-state fiscal balance of the state in L the long run. Earlier, it was shown what the impact of a significant increase in petroleum revenues would be on the economy in the case of a state spending program that was not targeted to demand growth. Huch -of the increase in revenues was devoured by population increase when the state tried to take advantage of the money. ..... To see Hhat Hould be the case if the increase in revenues were in- stead used to extend further into the future the day at which state expenditures would need to be reduced from their target level, a final simulation uas done using the unitary elasticity target. The only dif-..... ference in this case was that as in an earlier simulation, petroleum ..... revenues Here increased by 25 percent in 1983 and for every succeeding year. There are tHo primary impacts of this change. The first is that 1.-the state need not fall back from its target growth rate in 1994. It - - I-72 can continue its program for an additional three years until 1997 (Table 1.20). Thus, the "day of reck:oning" is indeed extended a con- siderable distance into the future by a combination of increased reve- nues and conservative expenditures. Unfortunately, Hhen the required reduction in expenditures comes, it is more than twice as severe .. In the base case, expenditures must be reduced from target by $3.250 billion while in the expanded revenue case, the one time reduction required is $6.666 billion, a mere three years later. This underscores the importance of anticipation of downturn in revenues in order to help smooth out economie fluctuations caused by massive swings in the level of state expenditure, I-t also raises the possibili ty of more sophisticated methods for' both anticipating revenue "bustsu and adjusting to them. The final section of this part of the study investigates that idea. 1.... i.... - - r- -- """"' ~ ._ - ..... """"' i.... ~ ,_ -----------------~----~----------~------~~------~----.. ~--._--~~~~--------------~~ .. ~~-------~~---~-~,~----~ I-73 Table I.20 Targeted State Exrenditures in Cases of Different Levels of Petroleum Revenues ;}'?)' -:p ~? ~~3 1?)'.?):;.:. J ':?ü() :L ')t:; :t :l.(?D~~~ :t ~;.:· u ~-~·~; J r·,/{:)l{. :t ':) ~::s ~::; ·~ i"~ i -~ / .i. '?C:C$ J r:;./f:i ~? :L ':?~::5 B l ::;) fj ~:;) J f)(?O :i.')(/:i. :t (? '?' ::.:_:~ 1<:.)9:3 . :t 9':.i.l} :t ·:,;}=:p:.::; :t •:) (~.:= {:) l r:;!r:;.::~? :t (.::-=::;n l ~;) ':? ·::} PRT.l.l -Targeted growth (Million $} PRT.1.1 PRT.1.2 1099.65 1099.65 1271.17 1271.17 1 ~:~ fj :=.:.; y ~~~ :t :s :5 0 .;-::::: {::. :f. f1 ::) ~:;> .:. :.:) ~=j ~? () (: ::? -: ~~~ J ;~~ J é LJ ~ ~_;.) ~? ::) () '.? ·> ;,:? :·~~ :~:.:~ ~\ () ;J ·~· (:-:~ ::.:.~ ·.? ::S :::.~ -~· J :t ::~; () ·4 {:·:· ·} ? :3 :.::; ::) :? ')' .;. (_) ~:_:_; ::~; )' (s ;? -~ '? ..:-f ~? :L F~ ·=-.<:;. ~:) -4 '.? :::~~ :: .. ~) -:· ;_? ::.~~ :.:5 :·~~ ::~ ·7 -:· ::.:_~ ·:S -::':: () l E:! ... ~~} '::.! ~3 ~:5 ')' {:·:. ~ J ::::) :.5 () ~~:~ :~:~ y ~:~ '.? ~::~ Jl~. -4 -;-?\ :::~: .3 l§ !:5 (; -:· l -=-~'; ::~; ~:~ ü t~ ,., ~Y' (;·, ·4 .-:~. :.:.~ :2 \• ::j ~:::: :i. -:· ~~.~ J ~:ï ~::; o -~ r~ ,:s J t:: :.::> ·:;~ \\ ~:~; ~-=~ ~.::~ () l> ~? ·:· ::.~ t ~~-~ 1 (:·~ .·:'{. ·:· ~;? :2 ~:~: () / ~· ~:~~ :?; ~:-~:: :s 0 ü v ,~; :::.~ ::_:.; ·=~~~ :::.~ ·:· J t 3' (} . .:'} ~~:1. + ::? :::~; ::~; 3 ~:.:-' ·.7 .;. ~;.:-:.::; ?~ ~:.:-' é :~:.:: ·:· :,:; .-:·.t. :~~~ t ~=~ i· l{. ·~:) -<~ ;? :::~ (_;) ·:· ~2 :~:: ::5 3 :.·J ~7 -:-~~~ \~~; /OJU,.?'.:.> /:: ~3 :::~~; 1 .;. l ::? t~ ;.~~ ·4 -;-() ;.~~ f) 0 ::.:_:~ : .. :.~ ·:· ]. {:) :::~ ~::; ~=:~ :? ~\ ~::_; :·:::; :~:_;~ r; E: :t ~ /;. ?: :~:~ ~~~ ~=j ~] ·r :.} ~_:_:: · ·. PRT.l.2 -Targeted growth with additional revenues I-74- E. Targets Hhich Take ~che Supply of Revenues into Account '1 ~ The simulation experiments which have been reported thus far have - included consideration of the long-rQn availability of revenues only vel''Y generally, if at all. The first series was predicated on the as- sumption that revenues \vould be spent more or less when they became available. The second series ignored the short-run level of revenues available for the state to spend and assumed that policy makers would attempt to hit a target rate of expenditure growth. When the target was no longer feasible, a fairly arbitrary downward adjustment in ex- penditure growth and expectations occurred. Reexamining that series of simulations, i t becomes clear th at ·there exist a variety of groHth patterns of state expenditures (and throucb linkages, the total economy) Hhich will result in the state 1 s finances as well as the private economy being in essentially equivalent positions after a number of years. Recognizing this fact, the question arises whether there is one path of growth, for example betHeen the years 1977 and 1999, which among those paths that reach an equivalent point in 1999~ which is to be preferred. For example, there are many grovrth paths which will just eliminate the general fund balance in the year 1999. Some subset of those paths will reach 1999 with essentially the same popula- tion, employment, and personal income. The question is--among that set is one to be preferred above all others? One path, for example, would ~ "*' i-1 - 1...... ..... - - .\ ,_ - l- - - ...... I-75 be that of targeting expendi ture grmvth as long as possible and then backing off.ll In this section, three simulations are compared which assume dif- ferent types of response by the state government to the recognized long- term pattern of state revenues. The initial case is similar to the target growth rate case introduced in the previous section. As before, expenditures are targeted to grow according to the rule of unitary elasticity of income. In this case, the growth continues as long as possible and then a sudden downward adjustment is necessary in expendi- tures. The adjustment results in a negative general fund balance which exceeds $2 billion in 1999 (Table 1.21). The negative balance is not increasing very fast by that time though, îndicating the finances of the state are beginning to stabilize at this lower level. Over a five- year period, an alternative source of revenues might be found to eliminate this deficit. ll It is not possible to sustain a target growth rate which results in a constant percentage of expenditures being financed by permanent fund earnings. Such a result is possible in the short run but not the long run, if increments to the permanent fund base decline as projected in this paper. To provide a constant percentage of expenditures, the following equality Hould need to hold betHeen the growth rate of the permanent fund and the growth rate of state expenditures (assuming desired expenditure groHth followed the unitary income elasticity rule): armual increase in permanent fund base = annual rate of population in- crease + annual rate of priee increase + annual rate of personal income per capita. I-76 Table 1.21 'rargeted Growth Wi th Maximum Use of Supplemental Fund li:?·.:?/ J ·:.~.:~ ·.~? B :f. '~i) '? r;;) :~ -:_;?fj() :L ·:?k:~ J :t :;) ;::~ :~~ :L \_?;]:3 :L ;") 3 . .:-:;. l {_;J ~:~:.:_:_; t·:):J5 ., i"':l'':"'.l J. '.':/ C• / l ');;:;~:5 ·~ t""! F"t ,'""t J. ;.·· ~::) ';-' :L ~~.! !:~.: () J !~) =;.:r :l. l ·~)(?::? 1-.:?~?:.s :t ~? :::.:. . .:-:;. :t f.:.) ~? ~.:5 l ()::.:)/:j •l .... , { .. ; ···.: J. '/ ",Y • .-· i. ::?s:.f; :1. (?(?(? C·) r:· JJ {:·j L. :',';")'().,.oc J ·4 {:·) ~;_ ... ::.:; .-:'{. /;. ·4 -:~~ J .;. :::_; ..:'} :3 -. .;":~ ==·~ :L .;. ~:,=_; ,:·~~ ~~:.~ _ -·-l ·;.:-· :L ~ ~:_:; l{. :? . .:-:;. ~:~ :t -:-~:s -4 t li ~:_;.:: :L + ~:5 /~ :t :_=.:.;o :1. ·=-~:=_;./} ~:=.::!. :1. ·=· ~=-~;·<· ~::·_; :~:_:: :1. .;. ::_:; :.~~ '·? :=5:::.~ :1. ;.. :_:.=.;:·:::;a :_::_; .-<;. :~. .;. :_:s :_.s F; ~::; ./;. :L -:· ~-=_:.; :::;:; )' :_;_:.; .. :-:;. :1. -:-:_:_:_; :;;~; ..:"{. ::_:; .-:-:~ t -:· ~_:_:_; ::? ~~~-; ~_:_:,; .. t":} :i' ·:· ~_:_;_! :t ~? ::~; :~:-~ E: {· :::) ::::) . ... ·:_;.:: D l -:· ::.~· :.5 ~.? .... 1 ~.5 1) :i. \• ... , 1 ::::: ~:~ 0 .; .. -:-:;. "" ~:_:: () ·_:,:. 1 J v 0 f~ .... ~:? ::? ·:·:; () -:· ;~:~ 3' .... :~:-~ /;. {:~: (; .;. ') ~.:.:: F> F' ~:) tJ f· r:-: L. 0-:· () ·=· \?0 -:-'/:3::::} .-:"::. :!. f~ {· )' ~~3 () ·.?:?;o -~ () J c :1. o~:::;,f> -:· :_:_:;::s :i. ::S ~::.:~ ~~; -:-~? ·.:? ::.:_:~ <~ :2 r:_? -:-;J ?; ::::)·:·::; 1:3 ·:-()'.:.:-' .-:':~ :L l~. ? -:· ~:5 ·:S /('",1, .. "1":-· -·· /r •·i-/ .. ;: .•. ) ·~ C.t··-o;· .-:·~-·:;} ;;-::: (;! -=· :;.~ /~ /~ :::~ .. :-~ ·;:f ·:· () :::_; .-:·:;. :::·> :L ::? ·:· l~ .·:·.;. :::::;3::?--:·.;. <· :.::> :1. :3 :.::s :·:\ .,. ;::;; ~::_:~ ,._ l,,) .iJ- () -~- () ~- () y () -:- () ~ () ~- GFBAL -General fund balance (million $) pr:·~:~tJFJ ,._ 'i,.) .;. (),. >:? () ~ :? :::) :3 :.5 ~.:_:: 1::$ ·=· () ~.:5 {:~ ~-~) 1 :L .;. ::.:.~ ::;.~ .:_~.! ::s :;s (:·) -;. ::=.;:.5::::: -=· ·/:L:.=.:_; ;J () .l;. -:: :.=.;_; l· k:3bF: -:· :?:::;. · t:~ ~? s) ·:· :? <? ~/ ~~5 ·7 ~::_; ~· '?' )' tS ?4:.":) ., t 03 () ·=- 0 ·:· () y () ·:· .···~ \} .;. () .;. (), 0.:- () -:· ()y ().;. PFSUPBL -Supplemental fund balance (million $) PFSUP -Additions to supplemental fund (million $) w"'PFSUP -Withdrawals from supplemental fund (million $) t·.J ft r:· ~::; tJ F' () .;. 0-:· () .;. ,., 1.,_) .;. o.,. {.} -:· " ;,.} ·:· l' 1..} .;. 0 .;. () ·> () ·:• 0 ·~ •i .; ;", 1 1'"r .i. J. ::' -:· (;);:::< !:5 :::~ /~, .,, ~:) l C:)fi~:~ .;. :j_ 4 t :!. .(~. ·:? () ·=· .l} f:!. l t~ :::::; :3 -:-E5 ~:-~ \) ..;. (j .;. 0-:. 0-:-, .. t.i ·:- () .;. EXPFPER -Permanent and supplemental fund contribution rate (%) E: >CF> F:· F:' 1::: F: ()_ .:• () ,."+ (]. -\< l:}::) .·:·~- (j ·=-~:j 2 ~:!. () .,. :~? ~.::,; ::.:_:: () -~ ::? l} i:~ () ... ':.:) 0 {;';. :t •'; J :':) :~. l ~ l ~5 :::.:: t-( t)::?:?~ <> .;-f:;;a::;.~ <> -:· ~.:5 ~-~:_; r5 0 ·=· :?:.:.:,; 0 .;-::_:~:.:::_; () ..... ;_:,~ ~:.:; () -; :~:.~: ~:5 () -~ ~? ~.:s () -:· ;? ~:.:; () ·> ::.:.~ ~=~; () -:· ::.~ :_:_:_; () •} ~.:_:: :.:=_; () -:-::?:5 () .;. ::.~~ !:s , il :.~1 lilliiit lili;il ...... L.. ...... - - ...... !..... ..... - 1.... ..... - ..... I-77 This U."'1itary elasticity case differs from those done previously in the assumption that the general fund balance is kept to a minimum level necessary to maintain short-term fiscal solvency. Everything over and above that amount, net of what is deposited into the permanent fund, goes into a·fund which may be, and indeed is in all simulations, draHn dmm Hhen revenues iri excess of current receipts are required. Assu1·ning that the contributions to this fund are derived from the same base of royalties and bonuses as the permanent fund, the combined contribution rate to the permanent fund and this interim fund caD be calculated. It is simply the amount which is left over from revenues in any year after expenditures and after maintenance of the level of the general fund. Since a contribution rate to the pel'manent fund of 25 percent is assumed, this co~~ined contribution rate cannot fall below 25 percent. For a period of 14 years, this interim fund is in existence. During its first ten years, from 1979 to 1989, contributions are being made into the fund, and its balance is increasing. During the next four years, the increas- ing needs of the state drive the balance to zero. During its existence, this fund is much larger than the permanent fund and thus potentially much more important in the short run.as an instrument of state policy. In 1988 when it reaches its peak level of $4.967 billion, the permanent fund contains $2.081--approximately 40 per- cent as much. The fund is, in a sense, like the investment fund estab- lished after the receipt of the Prudhoe Bay bonus sale revenues. The funds may not be immediately necessary but will be in the long run . I-78 The pattern by which the fund rises strongly and s·teadily for ten years and then falls precipitously is indicative of the fact that to maintain a target expenditure level early, those funds will not be needed; but when they become necessary, their existence_and availability are critical. vlhen the ir sustaining power is rapidly depleted, state expendi tures fall J:>apidly. In contrast to this base case are two simulations which explicitly take into account the cyclical nature of state revenues during all time periods. In each of these cases, there is a lower targeted growth rate. ·Expenditures in real terms per capita should not decline. Thus, expendi- ture increases are linked directly ·to both increases in population and increases in priees. Expenditure increases are not linked to changes in personal income levels. Rather they are tied into changes in state revenue prospects in terms of petroleum revenues. In one case, expenditures are programed to rise faster when the level in the permànent fu.nd balance is rising faster. This expenditure growth responds to a measure of how rapidly the state is accumulating revenues. In the other simulation, expendi- tures rise more rapidly when the level of expected future petroleum- related revenues increases. Since non-petroleum-related revenue growth follows the growth of state personal income in a fairly smooth manner, it is not necessary to include that component of revenue. It is the petroleum revenues Hhere the greater future uncertainty lies and, thus, / s / _) l u ~ J l ~ ~ 1 1 l 1 f\·f, » 1 1 1 i 1 f r i f ·,~ ~ 1 1 . . i'·· 1 t • J 1 l ~· 1 ~ f 1 IIi ~ 1 '- - 1....1 ._ - 1 f...; ..... ,_ - - ..... ..... ..... I-79 changes in the rate of expenditure growth should respond to changes ln expectations regarding this highly variable component of income. To show Hhy one only need consider the variability in petroleum in come, reference is made to Table I. 22, where the relationship bett-reen state non-petroleum revenues and Alaska personal income is shown. The ratio of taxes to personal income has remained fairly constant since statehood ~ falling near 13-14 percent in most years. In a crude vJay, it could be said that this is the underlying long-run constraint on state expenditures. Hithout direct petroleum revenues, they must re- main no greater than 14 percent of personal income. Petroleum revenues let the 14 percent constraint be ignored, but only as long as petroleum revenues remain. Hhen they disappear, the underlying relationship. between revenues and personal income resurfaces and reasserts itself. Thus, changes in the rate of expenditure growth can be made in relation to changes in expected or received petroleum revenues because of the underlying consistent growth of other revenues . It is interesting to note in Table I.22 that the constant ratio between revenues and personal income implies unitary incarne elasticity of non-petroleum state revenues. Net of petroleum revenues or sorne other large exogenous revenue source, the state is not approaching a position where state revenues represent the equivalent of 20 .percent of personal income. Recall from Table 1.3 that state expenditures approach that percentage. The economy is not "taking off" in the I-80 Table I. 22 Non Pe·troleu;·n Related Revenues And Alaskan Personal Incarne Alaska Alaska Non Pet:roleum Personal Related Revenues 1 Incarne Ratio -(million $) (million $) JE~ .. :: .. n tl. 1961 69.86 651 . 10.7 1962 93.21 679 13.7 1963 80.77 710 11.4 1964 119.22 797 15.0 1965 137.46 864 15.9 1966 131.45 934 14.1 1967 150.87 1042 14.5 1968 140.51 1126 12.5 1969 162.63 1266 12.8 1970 182.95 1443 12.7 1971 225.33 1575 14.3 1972 248.48 1739 14.3 1973 290.83 2004 14.5 1974 311.95 2402 13.0 1975 444.07 3324 13.4 1976 581.51 3810 15.3 -~- Average 13.6 l ;;~ Total revenues minus general fund interest (primarily from Prudhoe Bay lease saleJ proceeds) production, property, and reserves tax, leases, bonuses, royalties, andU federal shared royalties. ' - - .... 'i...,. 1 .... !..... j •l..,. - - ~ i....i L ...... .... .... .... ..... L. ..... I-81 sense of automatically channeling a larger perceritage of incarne into state revenues as its size increases. Lin:king the growth in real expenditures per capita in the state to a long-run measure of ''non-recilrrent11 revenues, rather than personal in- come growth, produces someïvhat different total expenditure growth pat- terns from the base case. Table I.23 contrasts state expenditures in the base case of uni tary in come elastici-ty of exp en di tures wi th the two modified expenditure strategies. In the case where expenditures are linked to expected future revenues ( a·ctually the present value of the expected revenues over a ten-year period), growth in early years exceeds the base case because large future revenues are anticipated. As the revenues are actually received and the production in the field declines, so do expectations of further revenues and thus, expenditure growth. As the growth rate falls, total expenditures lag the base case. Eventually, they recover to end the simulation period at a level al1nost identical with the base case. In the other simulation where the option was to increase expendit~re growth only 1vhen revenues are received, the pattern is just the opposite • In early years, expenditure grmvth is slow as the level of revenues channeled into the permanent fund is low. Lat er 1vi th a large balance in the permanent fund, it is possible to make larger expenditures over the preceding years. This policy, however, can only be applied until I-82 Table I.23 State Expenditures in Three Modified Target Cases :t =:;.::'?'.? :!. ·:_;.:: .?{:j :1. ~:~} ')l (_:.). :1. j:_;) :::3 () 1 ·;:=;:::; :L :L ~:?E;::.:_:: J ::.:.:·::;:::.':) t .:;.::n.-::;. :!. ':) :::; ~~:_; :r. -=:~a<:i :t (/ r:: ·_:? :t 9 f:J ;;::; :t l:pE;:~;.J :!. ::;.:· <_;.:C() :!. ~~) ·:~;: :t :L'?(?~~-~ ·r C:C•'".::' .1 •• • ... · •• l :t ~;.::\)l{. J ·:;·::?::_:.; :!. (,;:: '7,) {. l')(?'? l '??H 1 ~? ~_;_:· s) PRT.2.1 -Smooth growth (Million $) er:~·r .:, ~:;:: ., J P F.: T -:· ~? -~ :::.~ 1 () ':.;) (_) .;. {:~~ :.:5 J. () ·:? ~;:: \ .. l:< :::_; l ::.? ·.? l .;. 1 ~:? :L ::~:: ~? :L ~-:L ·;? t :_:;; ~3 ~-~s .;. :.~~ t .::f () (! ~ ::.:.~ ~-::~ :L :.:.:_; :~:1 () ;;. f: :;-;~ :1. :.:5 -.7 '? . .;. ·~! I;. :t U 3 ~.) -~ :::~; E) . :t f~ :::::: )~ .;. () ~3 ::? () {;: )' .;. ::.? t :::? 0 (':· ·;? ~ :.-:~: !~.=_; ~:;.~ :L ::·:·:: ./;. -:· t;) ;_~~ :::.~ :::~ () ·:a (~~) -4 ;_:_:~ :::·; ü ·.:.:-= ·:· :? :.":} :~:_:: ..:-:;. ::~; ~:::~ -:- ;_::· ~.--,; ~:. ;:,:; ~ .. (, :2 ::-:> {:'; '? i• ~:.:= ~_:_:_; ::.:_:: ·7 ~s ~-!." .;. 1 :t :::_~ ·:_;.:: ::~: -4 .. \ ~_:_; e :::} () ./~. é ··:· ·_:? :::::; 3 ~,:_~ :1' ~:-~ •} ·.:.:: ·;.:-· ~:s :.~~ )' ? .;, ,:_) :.:s ::~) ::.:; J :_::; -: ::_~.:: () :.::; '.? (, ::.:_:~ ·:· ~:} ::~:~ c~ .-:·:;. (:~ -:· ·:.:: . /;. ::? :L :3 .;. l~ ~~? i~ ~.:.:~ :r (:·~, -:· :? l:; . l{. '.)' :::::: (? .;; ::? :;~ ./:. ::-:·} 1 {? -:-.-:'{. ~-::, ~::_; :·::~ :::~; "? -:-::} :f} :,:,:_; {\ \·:~-:.-_.; ~-i{. :? ·:·::$ Cl 1 ;3 -:. <) =:.) :_:_:; :_:_:_; -;"~~ ·.:.:-: -:-;;::; n :_::_f :L :~? :l. .;. () ~.:5 .:{. ·.? :~; u -:· :::~: 6 /i;.?Oü., :::5:3 4 :L l;. ,:·:·:· ·:r l{. t :::;:::5:·::):.:=) ~-:_:_:_;u :::_~ 9 l~ :_?; ·:· l{. )' ~-:~ ~] ·.? ,;;) \• . ·:? ~-!~ () ·.:.:: ;J -:t ~:.:-' -4 l~. J ::-::~ t) + ~) l~. ·=·{. :J. ,:_) :L ., :.~:; :i. ..:"{. ~5 "?' () ~-'.? :::=:; ..:'{. lt. ~~5 {)_ .;. 0 :::;5 PRT.2.2 -Growth linked to expected revenues PRT.2.4 -Growth linked to present fund balance r~ F( ·r ·} :~~ .+ 4 :L () ~:.:; t) ·=-,;; ~:_:,; 1 ::.:~ ·.? :t . .;; :t )~ :!. ~~ {:":: () .:--4 . .rf :t. .f1 ?.:"::. ,. :=s 1 J t:':· '? ~:_:_; ·~ ~5 ~:? :t ~3 ~:~i \:? (• f?) 200:!.,6? ~~ :~~ () "? -~ :::; ~:_; ~~-~ l~. Ei t:·:: v ;_:.~ ·;7 ::_~:: f~ ~-:~. () -=· "7 ~:_:,; :.-:~; ::.:.~ ,:=_) .l~. ~ ;.:_:: ':? ::~; ·.:.:-· (~ ..r:~~ -:· l~. {;: i~ :3 ..:"~ . ."~{-.: /; ::.:.:~ ·'f =: .. ~:: ·:.? f~ .; :.-:~; 6 ~::_; )' 1 () ,;. () :·::~: 6 .-::!: {} ~? -:· :t :·~) :_:_:,; J .. :·{. ~;~; .;, () .:r{. 4:!. ::;:; .<'{.. ;;:::~.~ ~:~: f; ~::j :~? ·:· (:~ ~3 ~~ t:5 =:;,:: ~:j ~· ~.:.~ :.:s ·40!5() .... ::5"? .-::1. :.:=:; () () ... ~~:; /.) ·4 (':; :.?-; :::.~ ·-:· 9 l .-..J,.; - I-83 L the saved revenues are depleted. Expendi tu,Y)es fall rapidly and finally approach the long-run growth of the other tHo cases. ~ The relative movements of aggregate economie variables in the three cases have comparable patterns as rapid expenditure growth stimulates l!.oii rapid economie expansion and more moderate expenditure growth causes lower rates of increase in population, employment, and personal incarne ~ (Table 1.24). By 1999, however, all three cases are essentially back on the same growth track in terms of employment with less than l per- cent difference among them. 1 : 1 i 1 ' !.... Fer capita state expenditures measured in constant dollars, because of the parallel movements of total state expenditures and population, also have patterns similar to the patterns of total expenditures (Table 1.25). Each of the special cases has one time period when per capita real expenditures exceed the base case comparable year and k.-one period when expenditures per capita lag the base case. When expen- ditures are tied to expected revenues, the 11 bulge" occurs early and -when tied to received revenues, it occurs later. One variable displays a somevrhat different pattern from those pre- ~ sented thus far. Total state revenues per capita in constant dollars falls relative to the base case when expenditure growth is linked to i-expected revenues (Table 1.26). It returns on track in the l990s but never èxceeds the base case. In the case where growth is linked to -revenues received, there is a period through 1987 when per capita ,_ - I-84 Table I.24 Employment. Levels in Three. Hodified Target Cases (Thousand) FF;;T" 2., J. PPT, 2 .,. :~:: r~ F~ ·r -~-~_:;~ -~ .-=-:;. . :1. !;.?·.?~? :L l)'?fj t ·:? ~:? (? :t(?;Jo :L'?:;::: :L :!. ')t:3::? J :·) ~:3 :3 1 ::?~Jl{. :L ~.:.) D :_:.~; l ::_~} E(:t :L'PU/ l'·?E:::~ J =:_;.JE;'~.:· :L ~:;;~(?(1 :!. ·:;.:-·:;; :L :t .:_;) ':;) ~~~ :t ~~;r (;.:: ~-:::: :t ::;; ·~) i;. :i. ~) ') ~.:5 :t {? ~:.~_:. ,:) :t s~ ::? ·./ :t <)9;~:5 :1.?')':) PRT.2.l -Smooth growth J ;~~ "? ·:· /;. ~=~ ~? l ~;.; ;? ·:· () ~.:.:: (_;.:: ::?() :t v 31 {; :::.:~ ::.:,:: 0 ·:· ·.:? l ::? ::.:_:: :3 ::? .;. ·~;,:: ~? ~;i ::.:.~ ~=~ ::~ -~ ~.-:~; ·4· :.:.:; ::? ~3 (:~ ·;-.·:lJ. :5 :::.~ -4 :·:·:: .;. ~3 l~. <S :::~ ~~-:; ~-::} -:· () ')' ~.:.:~ {J ::::~ .;. :::·) ~:? :::::; ::?. :? .{~ ~ () ~:_:; ~~·; ~-~-=: ') () .;. ::? () J ~·::) () (: -:. ~3 -:·::t ~:~ :.:~~ :.~~ :_:_:; .;. :~:.~ :5 ('::~ ~-:~; .-:~;. :5 y {:·~ () :·:=:; :·:~; (:: ·;? -:-f5 lf ::.; ::~:: 1;; ~-:~ ·:· () ~5 .{; :::::~ fi 0 v -=? :::) :.3.(·:) =:? -:-.-:'} :~.~ ~-:·:·~ :::~: )' 3 -:· (? ..:':~ {:·) :::::<.) :L .;. .:;;: J {) l:;.:!. =~::: ·i" ;_:_::·:.:.> 4 ./}~5 :L -:-,.;:}:.:) () :l. f$ '? ~· --~·:!. ~3 ".? :J. ~:) :~:.: ~ () ~;.~ (? :;~ () ::? y 0 ~:·::: f::; ::.? ::.:.:: :i. .;. (: ~:5 ~~:.~ ~.:.:~ :3 ::.:_:: ·:. :::·, E3 ~:.~ ::!~ :::} ·:· :~. ~:.~ ~~~ :·~;; E~ ~ ~? ~::.~ :::;: ::? .-:'{. )' ~-() :L /;. ~:.~ ~:_:_; ·;.:.: ~· (. ;_::.! '.? ::.:: /~ ;:::: ·:· l;. ·l; ::) :? Ej () ·:· ..;'::. )' i:j :~~ 1;) ::::;; -=· (:·) :!. .:::, :::~ () ::::; ·:· (:. .li. :::~ ~~.:.:~ ..::~. .;. :.:5 B :3 ~-:) ..:'~. :t. ·:· ·.:.:.r :~:.:: ~-s 3 :_;_:_; •) ·:· :::~ (l f) :::~; ~::~ () .; / ~.-:=) ~:.~) :::(: :::·:: 1:) •} :J () ~~- :3 {::. ~~": ~· )~ ~.:.:; :3 ·;? :.::.ï •!> l~. ·4 :.:.:; ~3 9 :::.~ .;. [i ~::; ..:'~. :i-<':') ·> :3 ~;5 -_~) l~ .·:·:;. :.~;.~ .;. f:: :L :::::; PRT.2.2 -Growth linked to expected revenues PRT. 2 .• 4 -Growth linked to r>resent balance 1 E: ·.:.: .. \· li. n ·.:.:.: l ·:_? ;.:.:· \· () :~~:~ ·:_~} :~? () () ~ :·::) (;~\ :_:_:.; ::~:: :t ·.:.:-' -) 9 ::-:~ ;~:~ ;?)')' ·= :!. :!. .i~ ~.:.:: ·::.:~ (~ \· ;.~~~ 1 ·-:1 , ...... ,. ....... . : .. :·: ,j 0 y t:: ~::) .j , .. , ...... , .-:: . .:':-:/ ·:· (.:.:. ;_:,~ (_;:r :~~-~ ~5 :!. {· ::,;.:. ::.:= ~:.~ .;:~ ~.:.:_; .;. ~5 ~:5 /;. ::.? :::~ :!. "' '.? () -~~!- :·:=~ () () ·=· i:;. ~:_:_; E~ ::~; ::? J v ·:.;:· .:;:~ :;:~ :.i::l:;.:.:;J .;. t e·7 :.:~; '.? () -:· :l. 1 l :?: ~) /.) '" J (; ~:5 :·::~ ~? 0 ·:-l~ (:"; f; ::::::.:_:_;:5 •} ();?·.:.:-· ~-:~; (;t () {• ~;_:,; :3 :.3 :.:::; ·.? . .r:;. ·=· )" () .(~ ~-:~~ 1 :;) ~=.:_; .;. :L H f:5 .lf ;? () •} .. ::;. (; ~·:::; ./;. ~:.:_; :L .;. ::.:.~ :::::; :i. ~ 1.1..; ~ :.... . 1 ~ ..... - ~ ·i-l - ..... - I-85 Table I.25 Real Per Capita State Expenditures in Three Modified Target Cases ":L ·:? )~ ·,? ;t ~~~.:· ·.:? :::; ·: C•":.:c: .i. ... ... .~ J ':?co J_::)~3:L :I. ~;};J:? :L '~;,; ~~:~ ~ '5 :L ~:_:}E; .. :·:;. :1. ·:_) ::::: ~5 1 ·:;)n{::. t 9.U:? •1 (',t"1,""t .;. ::~ c:; G! J \_~!i::::() }. ··./ ·.i '.,.-' :L ~:?·:;:= J :L (_;_>()::.? :L (_}':/:.-:::; :L ~~~;· .:_;.; A- :!. •:) .;_} ~.) J ~~;.:: S·1 (~~ :~. ';} ':_~) :~? t·:;.:r ')E~ :t. r:;>·)~:) r~ F~ ·r .;. :::? :.· :t. J J :::5:5 ·:· ?~5 l ~:-~ :? ·~? ~-:? J ::? ;;:~ :::_:~ .;. :·::) ~:~~ 1 ::? ·S :.:5 -:-5 I :L ::·:~ ~:_:; n -:--4 ~3 J '.? '-.~:.:~ ·.:.:-' :L -4 ::~.~ 7 \• •) ::.:_:~ :i. /it :I. ;::;: ·} ~_:_:::::::; J.·<} :::.:: ::s •} :.::::~:::: :! . ..::; .. /;. F: -:· ~3 :_:_:.; t . .<~. {::. n .;. ~:.::: ~:.? :L l~ ~:;) 0 ·: () :L • <o .......... . 1 ~-.) :L u ~--~:;; :.,. .. : J ~:5 ~? ·:_:,.· .;. () ':;.! J :.:.'J.:"::> :L :L :.:5 ;3 ·.? .;. ~.:.-~·-- .~. :~·:· <> ~:_:_; <· '.'/ ·:;: :?. :.:=) j ~:J ~ /;. :~.:? :L () B t -:· ~:=; :·::( (_;:· -4 :!. ·:· -4 () :·:) ~J ~::5 ::::: -;. ~:_:.: :.:.:~ :.=5 :::: <~) /~ ... :.:.:.; ~:.:-· H ;::~ ::.=.~ /~ ... (:: (? ::::~ PRT.2.l -Smooth growth (constant $) F F~ ·r -=· ::.~~ \· ~::_:: J 1 r~ ~5 ·=· :::.:~ :.=s :L 2 )" 1:? {• ~.~:~ 1 ::? .:_;.:· ~l •J-;_:_:; (~ :L ::? t:; :.':) ·:· 9 :L :::::~ ~_:_:_; ')' .:. :L .::~. J l{, /~. ~:? .:. C) '/ l .. ::} .;S J ~· () ~:=:: :l. .(;. '7 ::.:; -~· () ::~; :L ··=·{-·:) {) -:· f:;: :·:~; :i :_::_; :!. ü <: {; :t :L ~.::_; ::.:_:~:!. .;. :? l :,:.:.; ~? ~::~ -;-..:'.~ .. ::;. J :.:5 ) t:;.:· -:· '.? ~:; ·j_ :5 ?~ ~~~ ·:· .-:-:;. 1] :L :.=.:; ~J ~? {• ~~~ r::: :L :_:_:_; ::::~ :~:-~ .;. J J :.:5 ::.:_:: 4 .;. (:) ~:~.:· 1 ::_:_:: ·_:Y ::.:.~ -=· r5 r~ 1 ()")'~J \· ~?7 !:? ~·::. ~3 ... ~;~ )l / t? () ·.? -=· .{:: () .-:·:;. n? o ~· (;: ~~:~~.:.: F~ .t+ :,:_:,; ~· 0·0 ::? F> r;.: T ~ ::;.~ ·: ....:~. t 1 ;;:j ~=s ~ ;.~~ -!:5 :L ::.:.~ ;? {? ~-;.:.~ :t .<.1. -i-(s~_:_:; :t:~?:i_C/::r0-4 ·J •''\ l "'} .·Jo .L •• ::.c; / .;. "'·1· :i. ~?:: . .:-~~ ::.~ .;-:?i ~~? :!. 3 :s /~. v (? :::~ l ~·:;} ~:~ :;:: q ~:_:,; ·.:.:-: :t .-:·~. :~? :? i• ~~~~ ~=·} J../~ ~:~ ':? 0:· () ~:? :f. ~5 ~5 1 v ·;! ~? :f. {s l ~5 .:-:;~:? J l; .? 1 -:· :?(:~~ ., "? .-·! • .; ;::·r:: J. / ... ·.: J. V -. .. L::~ :L ? ;_:_:; ::::~ -:· 4 ~? J. )" ;~3 ::? -} ~;~ ?; t /~. ;_:.:: ~s v .-:} :t. :L :t i~. ·7 :; ~5 ~:~ :L {,) l !.:.;; ~ :.? .-:'{. t)~ :.~:_; :~~ ,:. ;.~ ·./ ~) j_ ?: ~· "? :? i:~ f3 ~=~ '.? -=· J ~J ~·;;r f~ {_. ~:5 -~ '? ~5 ')! PRT.2.2 -Growth linked to expected revenues (constant $) PRT.2.4 -Growth linked to present fund balance (constant $) ---------------------------------------------------------------------~----""1·~, I-86 Table I.26 Real Per Capita State Revenues in Three Modified Target Cases :L ~::.1~:.:::? :L (? '.? ~:~~ :l. \) '? ~_) :r. ·:_;.> ;~::~ () :J. ')[::!. :i. (? ~] ::~.=~ :i. 1?~:~~3 :L ::;:-;:~::.4 J ~.?E~~5 :t':) ~3 <) ~l. ·::->;J ·.:? ·! {'],'''''": ,L '7 C) ~) :L f? ~~~; {) :L •,?<? () J. ·)~.;_:. :L :L 9''?:2 J (_? ~) ~·:::; t (?•:? l:~ J ~;;. ~.;,:. :.=5 J ~;;e·:_? ::-::1 l ;;??'.? -~ Ç} <:) ::~:' 1 ~.:.:· ·:.:) ·~:;. r· ç:~ T ·) ::~.~ ·=· :L l -~-~ J B -:-:::~; ::_:; l l ~:_:_; (:. ~.. ;.~:: :3 :t -4· ::.:.~ e \· ~~:; :!. ~::.; <_;.:! ·_:} {. ~? :t (; ~:_:_; 0 {• ::~:~ 6 :L ·.:? ;:·:':! /.;. -:· ~:? ::"{. J. [; ::·:":, :.:5 ·:· () :3 20() l ,:. t () Fl h: T -=· ::.::. ·\· ::.~ J ~.:.:~ l E5 -=· ~3 :_:_:_; :1. :!. :·::~ ~:) .;. ::.:.~ :·:~; :1. l~ ;;.~ -~·{. ·:· ·:_;) B :L ~:_:,; ~:~} ~:.~~ ,:. ..:":} -~-:~ :t {:1 -<1· s~ \.. B :_~:.ï ·J .. 1 .·· ··;.-•! , •. , .L / C)-.:' -:· .1. ·;-- :!.G5;? .,. :.:s:;:: 1 (;)?:? i :.',;;? F'h~T ... ::? ~ 4 t2:LU,.?:'5 l :i. :.:5 (1 .... ::.~.~ 3 .J -4-::;~; :3 .;. :~.~~ t l .~) :!. :~:: ·:· :·:~; "? :t /:::::s::~:: .;. :? :1. :t D :L. ::~~ v ~3 2_:_:.; J ::;) 1 ~~:; .;-:·:s i.S :.? 0 ~:.=,; l -:-l ·:.:) 2016.69 :i.J8j.23 205:3.4 195:3.25 1922.75 1985.32 1791, 1756.06 1800.64 1612.9? 1580.55 1605.44 1448.29 1419.93 1426.31 1306.72 1283.47 12?2.51 1183.72 1166i 1139.29 10/7.93 1066.36 :1.025.48 982.702 977.624 990.797 946.939 940.932 927.215 901.851 895.827 880.14 858.16 858.549 849i586 830.623 834i654 829.295 815.06 819.333 815.738 806.629 809.753 807.082 PRT.2.1 -Smooth grmvth (constant $) PRT.2.2 -Growth linked to expected revenues (constant $) PRT.2.4 -Growth linked to present fund balance (constant $) ?; ,. .... li- - Lw.. l- ~ L ~ - .... ..... I-87 revenues exceed the base case. Th en for five years, ·the reverse is true before they return to essentially track the base case. It appears to be the case that overall per capita state revenues are maximized in these particular examples when growth occurs after revenues are received, rather than in anticipation of those revenues. They are minimized when gro>·<th follows movemen·ts of anticipated revenues. Targeting growth to personal income increases provides the middle ground. The return on a dollar investment by the state in terms strictly of tax revenue is thus maximized by investment in a fund which earns a fixed return, rather than ·through an investment seeking to provide tax revenues. This is be- cause of the underlying average ratio of revenues to personal incarne of 13.5 percent which represents an average return to the state from a dollar of personal income created. A dollar invested in a fund such as the permanent fund might, by contrast, earn 7 percent annually in perpetuity. How is the state to choose among these three types of growth paths? Each is superior to the others in at least one respect. The base case in ï-;hich grm.Jth is targeted to demand variables only provides for steadily rising public expenditures and incorporates a rationale Hhich can be easily understood. It suffers from a need for a severe downHard adjust- ment of expenditures unless neH revenue sources appear. This severe discontinuity is this method's largest problem, although all suffer from it LO sorne degree . I-88 It is more difficult ta choose among the other two cases. The case t·rith expenditures linked to anticipated revenues offers the dual advan- tages of more rapid economie growth in earlier years and larger real per capita levels of s·tate expendi tures. The other case offers lower growth of the economy in the pX'esent, al though more rapid in ·the future, and ..... J. L is the case which generates the largest amount of revenue per capi·ta. Viewed from this perspective, the decision regarding the' aggregate spending level for the state rests upon a tradeoff be·tween increased revenues in the long run from slower spending rates and the attendant future benefits derivable from these revenues, and increased benefits in the immediate present from increases in state spending and resulting economie growth. Among these present benefits will not, in general, be the generation of larger state revenues. The immediate benefits are in the forD of necessary expendi tures by the s·tate and the general ad- vantages of a larger, as opposed ta a smaller, economy. There are, of course, a large number of growth paths of which these three are only examples. They do illustrate the basic choice which the state faces and the tradeoff implicit in that choice. The establishment of the permanent fund was the beginning ofthe recognition that the tradeoff exists. The next step is to explicitly analyze those tradeoffs facing the state sa that choices of expenditure levels can be made v-ïith full understanding of their long-term implications. J _LL. ..... PART II IMPACT OF ALTERNATIVE USES OF PERMANENT FUND EARNINGS ..... A. Introduction ..... An important policy question surrounding the permanent fund concerns the disposition of earnings generated by the fund. The Constitutional ..... amendment creating the fund provides that all earnings be returned to 1-the general fund to finance state expenditures unless the legislature directs otherwise. It is this option which is assumed in the economie -simulations done for the other components of this report. i-In this section, the analysis concentrates upon the economie im- pacts of different proposals which have been suggested for alternative uses of permanent fund earnings. These four are the Alaska Inc. proposal to distribute earnings to individuals who have passed sorne Alaska resi- dency test, the suggestion that income be reinvested in the fund itself, and two less formal suggestions that personal incarne taxes be reducèd or that state expenditures be increased by the amount of the earnings . ._ A fifth alternative had been suggested for analysis but was not -included because of the feeling that the probable sensitivity of the resul ts to neces.sarily speculative assumptions would not make the anal y- sis particularly valuable. This was the suggestion to use the earnings in either market rate or below market rate loan programs. The impact of this sugg~stion, if one were to assume market rate loans and competi- ...... tive capital markets, would be negligible in aggregate economie terms. li.ai II-2 As the assumptions regarding the loan rate or the competitiveness of the capital market are altered to allow subsidized loans or the possibility of imperfect information or some other impediment to the free flow of capital, then a positive economie impact could be generated by the eco- nomy, and this would be reflected in the madel. The impact would be a direct function of the type of activity, rate of subsidization, and strength of response of that particular economie sector to loan incen- tives. Any assumptions regarding these matters would be highly specula- tive and, thus, this particular proposal was not analyzed in arder ta eliminate the possibility of presenting misleading results. Of the proposals analyzed, the Alaska Inc. idea has received the most attention in the public forum. The particular form of this idea analyzed here is that of the Governor as embodied in HB 525 -SB 384 (Tenth Legislature). The bill would require that at least half of the earnings of the fund which were transferred ta the general fund be distributed each year as Alaska Inc. share payments beginning in 1981. Persans who had been residents of the state for a period of five years would be eligible to receive a share payment; and every fifth year there- after, a persan who had continued in residency in Alaska would be eligible to receive an additional share. This analysis assumes all fund earnings 'i ai are transferred ta the general fund and, of that total, 50 percent is distributed as Alaska Inc. w ' i L 1 ..... 1 ' L 1 L ..... ..... - ...... ~. - - ! - ..... II-3 At this tirne, there is a legal question as to the constitutionality of such an income distribution program which would exclude a large per- centage of the population. There are other legal and administrative questions, answers to which must be assumed in order to do the analysis of the impact of Alaska Inc. on the state economy. It can reasonably be assumed that·the program would be structured in such a way to avoid the necessity of paying state personal income tax on the proceeds. How- ever, it is less obvious that federal personal income taxes could be avoided. In this analysis, it is assumed that a.method is developed which results in the payments not being liable for federal personal in- come taxes to maximize the potential economie impact on the state through the change in pers<:mal income resulting. Administratively, it is assumed that Alaska Inc. payments enter the personal income stream after the payment of federal and state taxes and are not a form o~ special credit on the state in come tax •. The suggestion to reinvest fund earnings back into the permanent fund is motivated by a desire to increase the future earnings potential of the fund. Thus, saving in early years would lead to the generatiqn of additional revenue in a later period. To compare the impact of this suggestion to that of the Alaska Inc. proposal it is assumed that the portion of permanent. fund earnings which would have otherwise gone into the Alaska Inc. program is instead reinvested in the fund.· Thus, 50 per- cent of fund earnings are reinvested and 50 percent are transferred to the general fund • II-4 In the case where the personal incarne tax is reduced by the earn- ings of the permanent fund the proportion of the fund earnings allocated to this program is the exact amount which was distributed as Alaska Inc. payments in the first instance. The reduction in taxes is on the basis of an average reduction for the average taxpayer. In the final alternative examined, the amount of state spending is increased by the amount which would have been distributed as Alaska ! ' Inc. shares in the first case. This has the primary effect of raising the level of expenditures above the predetermined target expenditure rate in early simulation years or of reducing the amount by which expen- ditures are curtailed below the target rate in later years. All the alternatives analyzed in this portion of the study build upon the same base case, which is one selected from the_cases generated in Part I of the study. A description of the basic assumptions under- lying this base case follows. i..,j .... 'r i L... 1...... 1 ..... ..... - ..... - - II-5 B; Base Case The base case~ which is used to analyze alternative uses of permanent fund earnings, is a simulation of the economy which incorporates a formula approach to the growth of state government expenditures. Under this formula, stateexpenditures. grow at a rate which maintains a constant. ratio between per capita real state expenditures and per capita real personal income. This does not involve the imposition of a constraint upon growth·until 1990. At that time, growth expectations are gradually revis.ed downward in an attempt to adjust to the long-run revenue con- straints imposed on the state. The other bas.ic assumption concerning the base case which is im- _portant is the growth of the permanent fund. In this base case, the basic contribution rate to the permanent fund is 25 percent, but now additional monies are placed in the fund as they are found to be excess to the normal requirements of the general fund. In this way, they are able to earn the 7 percent return available on the permanent fund rather than the 6 percent average return on the general fund. The supplemental contributions to the fund are not 11 locked in" permanently to the fund and may be withdrawn in periods of deficit on current account in the state treasury. The reason for this assumption is that it allows the permanent fund to build up a large balance in early years which, in turn, generates a II-6 substantial amount of revenue. This revenue~ in turn, becomes the direct cause of the impacts associated with redirecting the fund earnings into different programs. Aggregate indicators of economie activity in the base case are de- picted in Table II.l and reflect a pattern of strong growth. Population increases to 683 thousand by 1990 and to 952 tb.ousand by the end of the simulation period in 1999. Employment growth reflects the same basic trend, except that ~n the early 1990s, the rate of increase slows to almost a standstill for several years. This is an indication of the readjustment occurring during this period in expectation of state reve- nue reductions. Cutbacks in state employment are necessary to balance the state budget, and this reduces overall employment growth. Personal income growth seems less affected by the government slowdown in the early 1990s. It shows an almost ten-fold increase over the period of simulation. The required reduction in state spending in the 1990s is shown in Table II.2. State expenditure growth follows the formula until 1990 and then curtailments from the desired growth path occUX'. Between 1990 and 1997, expenditUX'es dip significantly in total amount. They are, in ef- fect, waiting for revenue growth to catch up. At this time, petroleum revenues are declining, however, and total revenues are actually declin- ing. Only in 1997 are revenues higher than the level attained in 1986. Each yèar, the target growth rate is reduced and, yet, each year state spending must adjust downward to compensate for insufficient revenues. - ~' ! 1 w 1 - II-7 Table II.l Base Case Aggregate .. Variables :l9"77" 1 <;>"?8 :t {?ï'J9 :t 98() l <"fi:5~.~ i ~Jf.j:.-5 :1. (j.ii3·4 lrJ8:5 POP :3 ~} i3 ~>~ ~=5 () 2 -4t:)8 v:.;; 1'7 4:~~!:) ~ !5~52 -4~:)~7 v ~j 1 :l . -4 Ei -1· + ~~=! :t lf -4 ~~} ~) ~ -;. ~.~ lf ':Y 5()8 ~-:399 ~5 ~~:.~ ~) ~ !:.=; ~::j -~::; -4 (:) y ~~ :1. :~; ~:t ll f~ ·<--4 ~:5 . ~=j ·:;> :·~) \·· ~3 if (:·) ~-~ :t ~ :~ () ~3 . . l 8 :i* {• ··4 8 "7 ~:) ~-~ t? ::~ y ;! :t ~} , .. ) () () •) ~:: \j) lt ()~!j~5 ·J-()6 ~:. 2 () ~ ;'~ 1. '·"l ·4 !:;~ <·~ r; v f.) 232.927 5505.91 233.346 5771.65 236.416 6163.83 243.345 6725.12 253.068 7437.71 263.693 8241~99 276.057 9183.67 ·;,:; (;J 0 Il' ::.~ 0. :t :t () ::! ~=~ ::; v ~~: () <~i ~ B ~1ï ~.~ l :f. ~5 '-? 7~ -ï~ ~:l ----~ ~~--iSf?~(y~~ -~-~-~~~"'~~~ ---~ç§;l·<--:fS:J~--~~-32 :f -~ ()~~~:3-~~f-~~-8-S.T()--~-~i~ ~-~---. . t 9 ~:y :t ·? () Ci ·=-ff.:t 1 3 ::.~ {s v :t :.?:: ~:-~ :t ::~; :.:; f3 ::.~ ~.. :;s :t <Ji s) :::~ l993 l SJ~-; .. :l :t C/ <;> ~.:; t (j) ~;) (., :t ·:?~t ~? :t ~) ~:;r fj POP -Population (thousand} EM99 -Employment (thousand} PI -Personal income {million $) :? i ~=-~v-s~ .. ~ .. -}~~9 ~ ()();:5 }'l~:i:2 Y ()() r~) E~ :!. -4 ~ ~:) ::} ~:; ~35:~ o) (:)~::1-~~ 8'?7 ., 79? ~:} .·~· l~ v () .tf ~;t :t t.~ ~:;.) () :3 ~ E5 ::} ::5 t;t .) ~? ':? s;: :t E.~ t.:~ ;3 ·=.~~ ~ t~ ::) '7 '? ~ ? ~5 .:) :~~ () li ~::; l ·> :~ ~5 '7 \;_J ·~ () ~'J ~.~ :3 () lf :t ,. ~3 4· ~-~ lof -~ 6 :? ~~ :~ ~:=; \j~ :3 ~~) i- ll::5\~) ? 0-4 :~~ . ::.~ 9 ~)()9 ·> 6 1 l \ II-8 Table II.2 Base Case State Revenue &_ ExRenditure Variables :1.977 19:7 ::$ l ::-;:?(? l 9~:~() :L9(3j_ :!.?f:i2 :t ::;.r8:3 ll=?f5l~ t ~;:oE;~_:5 :i. 9f:J{5 :1. ~;;: ~:3 :7 l (?~:::t:f 19B? :i. ~?(?\) 1 Sj9 :f. j~ ~:;) '? ::~! :f. ~;)92) :1.994 :f. ':? :~;= ~:5 19'~)~5 1. ~J(? :'? l '-)JC;?E~ 1. 9 ·:;;<t !~~ ~~~ ~? ~:; , F~ S:' S> E) 1099.65 1130.36 1271.17 1148.8 1385.2 1538.81 1550.86 1943.59 1839.37 2229.13 2067.2 2512.21 2164.87 2814.78 2307.17 3240.62 2508.56 3531.36 2762.07 3713.25 3046.78 3692.58 3377.94 3624.77 3762.6? 3570.7 4061.85 3536.82 4004.61 3488.56 3795.62 3428.84 3669.65 3404.99 :::} 6 :';/ (~! ~-:·~~ ~:~ ~:) -4· :.:; () 7 ~? .q. 3842.31 3561.77 4010.37 3711.14 4197.45 .3914.45 4451.29 4184~93 4791.29 4542.83 E99S -Total State expenditure (million $) R99S -Total State revenues (million $) ~3r.~t...JS o. () ·l- 0 ·> ()., () •' i)-) ()v " • .. } * ().;:. ,··l \.• .-:- ()-:- (>+ () {• )55.933 486.024 474.706 317.237 ~:~ :r. ::::; + s.:-:;.~ ~~ :J. ~-?{;v l'?~~l ~~ () -~~-} ~· 5 7~ ~;! :~2-4 v :;~jl :f. ;~ () ~~-f .•} :3 fj ·4 1. ~:5 ~=5 ·> 9 ::$ •:y't SAVS -Expenditure cuts below target rate of expenditures {million $} ~ j - II-9 ~ Because the state has anticipated its revenue problems and begun 1 i reducing éxpenditure ·levels before it completely eliminates its fund -balances, at the end of the simulation period there remains a positive balance in the general fund (Table II.3). In the interim, it had grown - tobe in excess of $3 billion; but by 1999, it has essentially hit "rock bottom11 at a level of $722 million. ..... The permanent fund has actually built up a substantial supplemental account in this case over and above the amount accumulated by the 25 per- cent contribution of bonus and royalty receipts. The inclusion of the supplemental account brings the balance rapidly to the $3 billion level ii.... in 1985 and over $5 billion by 1995. The supplemental balance is all accumulated by 1986, at which time it is approximately $2.276 billion. This fund level remains constant until 1998, when the first drawdowns occur to fund deficits on current account which cannot be paid out of general fund balances. The rule used in this case in specifying what - amount of the current account surplus would go to the general fund and what would go to the permanent fund supplement was simply that 75 per- cent of excess revenues in excess of 120 percent of expenditures would 1- be transferred to the supplemental fund. This alloHs the general fund ;.... balance to build up in the 1980s. When expenditure levels exceed reve- nues, the general fund balance is drawn doHU to a loH level before the supplemental permanent fund is opened for spendi:ng on current programs • ...... :t <_;;:.? -;~ :t f7t ·~:·l8 . :!.979 :l (? i:~ () :t r7'EJ 1 :t 9 ~:5 ~:.~ :t s) f:3 :.-~~ l (?f:~-·~~ l t:;):::5~::.; 1. 9E~(:J l ~':::~ '? :t (?!~:::::5. :t '? f::~ {_:) :!.990 l <?(? :i. J. -:_:).:?:2 l !:;.::{;;~~:) :t <?·~}""i :i. ::?~?~::_; :Î. C) e:;.} {~ :t s:;) ~? ;? l Ç):~>f3 :i. r/ ~?(? II-10 Table II.3 Base Case State Fund Variables r3 !;;· :B 1~ t_ FJF. ~BPtL. ~:; ?' () (· () :::i :J. ~:: -:--4 lf 6 t {• ~::s "? 7' <~~ :~~ ~-il 547~732 185.56 861.622 327.492 1177.55 482.56 1535.35 661.655 1669.32 1268.8 1869.23 2096.97 2089.32 ~003.44 2293.96 3869.3 2855.01 4097.12 ~:~ () ~? (:·~ -~. :t ·:;-· !.f :::.~ ~~.:: i.~ v :.;:~-~) . F 1-~:i U j~' .t.l L. ()-} o~ ,, \} .:- ()-) o. o. 4 () t {• \? :~; :~~~ :t 001 ·> é6 :l (Jé·l * ~;.):3 ::.:.~ :~~ :? ~.:; ·> ~=5 ::.:; ::~ :::_::. ï" ~5 ·} ~:~ ;_:; ::l:~ .::.:; !~)· ·=-~ f~ ~:5 2920.22. 4462.03 2275.85 2475.66 4604.7 2275.85 2040.77 4725.97 2275.85 1738.54 4829.21 2275.85 1528.68 4917.31 2275.85 1353.é7 4992.4 2275.85 1148.99 5056.69 2275.85 927.995 5110.82 2275.85 722.345 5156.41 2275.85 722.337. 5005.91 2086.94 722.328 4869.16 1917.8 GFBAL -General fund balance (million $) PFBAL -Permanent fund balance {million $) PFSUPBL -Permanent fund balance in excess of 25% (million $) i - II-11 - '-Two components of state revenues are of'interest for> purposes of comparisons with later cases (Table II.4). The personal income tax re--mains an important source of state revenues. As petroleum revenues decline over time, this regains its role as the largest tax revenue ._ generator in the Alaskan tax structure. Permanent fund earnings increase rapidly as the permanent fund balance is built. up in the early 1980s. After this time of rapid grow~h, the rate of increase declines and a plateau near $350 million is reachèd in about 1995. Future fund with- drawals will drive the total earnings down rapidly after 1999. ~ Three indicators of average per capita well-being are presented in Table II.5. Real per capita disposable income increases over the simula- ,._ tion period at a fairly constant rate. Real state expenditures per capita increase according to the target formula until 1989 and then fall signi- ficantly over the next ten years, until they are below the level of the ~..,; initial simulation year. Real per capita state revenues reach a peak in 1985 of $2,007 and then they also begin a steady decline. By 1991 ~...,. they are below the 1977 level, and the fall continues until the simula- tion ends. At that time, real per capita expenditures are about one-third -less than at the beginning of the simulation. This reflects the continu- """" ing decline in the importance of oil revenues. '- - i 1 ~ ·1 ' 1 t i i 1 l î r 1 1 \ II-12 Table II.4 Base Case Components.of .state Revenues :t 9:?7 19/'B :t t.l::?9 :!.{?HO :!. S'B:L l ;:.:.:: F~ ~.:.~ :1. 9i:J:~:; l :;.:~ 8 .-:".} l <;;: ~:~ ~::; l }it~~:~; 1 (~~~~ ~~ t t~fjf$ l S!~:~:.? 1. (?90 1. '=?9 :l. :t. Ç)<;>:~ l99~) l r)·cl·<~ 1 s:·~} ~:; l (;)l.;) é :1.99'/ l ~;;.}s) t3 l <;>tp~J RTIS -Personal income tax (million $) IPFl -Permanent fund earnings f~·r I ~3 I ~?i::·l 12()~/.f~/~:) o'v :1.17.077 0.168 139.925 4.368 1'?2.252 12.989 207.617 22.924 221.933 33.779 231.03 46.316 254.682 88.816 284.217 146.788 322.313 210.241 366.23 2'?0.851 418.676 2B6.798 483.3 300.603 546~04 312.342 590.936 322.329 618.586 330.818 656.3 338.044 722.41 344.212 809.468 349.468 911.348 353.968 1033.65 357.757 1182.1 360.948 1370.62 350.414 ..... - - ..... i..... - II-13 Table II.S Base Case Real Per Capita Economie Variables "Î (~~ ~·? '"? ·.L. :~· .l / :t. ~.-i"?~3 . 1. ==? ·;;-t~j 1. ~?8() [r_IF~F:lli f.::(ï~ïst:;~FrC ;28<ï:? .... :?;~> ":l.l8~j ~ 2~:.) 2997.94 1279.2 3104.74 1282.35 3293.58. 1265.61 R çl ryS r:;~ F~' l~ 1218.35 1156.06 1424.55 1586~11 1981 3345.17 1358.48 1646.34 -·~J-~ --·-:r~~l~r;.;~~~-~~~---·-._o_----~·-·-~3~;-(r/·'"-/;/-r· -·-·l.~::ri{.:~7 -.; 2·7--~· ---r·J~=;·rr ~--e-~s ~ ---.--~--~- ~ ~ ..... ...... ~1 l <_i f:5:?) l ~;·~:5-4 ~~n~ ~7CJ 1986 1987 1988 .1989 :r. ~;> ~;. <J- t ~.~C) 1_ 1 rl<?::~ :t ,,, 9 :·:}. :t s~ ~:.:~·..cf . 1 s:u;y!::; 1 r;l~)."!l) 1. ·:;,s>·? .l <;>(Jfj 1 ~~· ~/(;" ~=~ ~~ ~1 :~:: v () :5 . :~} ::} ~:;.:r :-} '\' ~:=.; :~-4:7() {< ::):i. ·:rr.:· tl•") !." ... ;.,..J ; ~-·v t;.) ~~ ,s :.:.~ \-:} {> 3"?l()v~~)' :~ ~J () l:;r ·~ () i/.i :;}f~:?!5 •} J:::5 ~) [~ 8 <;> -~ ~~ :·:~; ::) 8 f;) lf, ~ _? ~~~ ~~-s) ::s .4 {\ <)· :::; ·4 () () {~ ·> '7 -4()~>-~~ (o t;l lf1El~~~~~5l ~4 ~~~ ~? l:~} -t• () :_;J :4:J~3:;~ ~ 1 .. 4~49.<} y i34· 1427.93 1418.23 1425.39 1448.33 t ·4~{:)f:~ -:· 2~5 :1. 4-(.~i() ... 01 l~::i:i.O .,B:t ~r ~·'!: r't .. ~, ··\ ·E ,; .. ~-r .,. .. / ..:· \; .J. l~:~~Sé->r!)l l '"/ ~~;; ~~ ~ () :·5 :~ () () {~) v !5 ~:5 :!. 94? ·> :1 . 1779.44 1598.89 1433.72 1303.5:!. :1.389.44 1210.39 1254.58 1133.34 1146.15 1063.49 1077.05 1005.34 1038.16 962.36 1000.62 925.958 961.413 896.593 929.007 873.417 902.506 855.706 1 DIRPA -Real per capita disposable personal income (constant $) E99SRPC -Real per capita State expenditures (constant $) -. R99SRPC -Real per capita State revenues (constant $) i - - 1 1 • 1 1 II-14 C. The Economie Impact of Alaska Inc. Payments In o~der to analyze the impact on the economy of Alaska Inc., a model simulation was done in which the only change from the base case desc~ibed above was to allow 50 pe~cent of pe~manent fund earnings to be transferred to Alaskans eligible under the Alaska Inc. program. The specifie assumptions and their rationale for their inco~poration into the model are described in detail in Appendix D. The impacts which are traced through the model derive from the effect the program has on the level of disposable pe~sonal income. The increase in this component of income generates an inc~ease in the de- mand fo~ goods and services by Alaskans which, in turn, generates addi- tional income and with it, employment. It is assumed that for the indi- vidual, the change in income is marginal and thus does not affect his overall patte~n of consumption. It is furthe~ assumed that the Alaska Inc. p~ogram does not have a di~ect impact on migration to the state. Table II.6 shows the basic calculation of the money which would be annually dist~ibuted as Alaska Inc. shares, given the economie assump- tions of the base case. The total ea~nings of the pe~manent fund, as- sumed to be 7 percent, are placed in two separate accounts. One-half of the p~oceeds are paid into the gene~al fund, and the other half are paid out as Alaska Inc. payments. In the first yea~ of the program, 1981, the money available for the program is quite small, amounting to just over $11 million. In subsequent years, the total grows rapidly, approaching - ,, L L. 1 ,_ ~ [ L - i- ' 1 l. ..... ..... - - II-15 Table II.6 Determinants of Total "Alaska Inc." Payments :L ~-;r '?~? l':;~v:/Ei 1. l:;} ;-; ::? . 1 ~.i ~=5 () l9~3l :t 9::*~!. 1983 1984 1985 1986 ' 1 ~j} i:5 '? t ~? f~~;~ :I. ·S; f:~ t:;} "•:t {y·::~~). :t99:l. :L l":j'J ~~) ~-~: :t (?~} ::) 19'~.).{~ 19'}~5 :t ~;J ~;~ l~ l {j_JS-1~"? :t s)~')f:j :i. ~.l<j!9 F:F~Bt1L. ;:2.,.4 é;2 ~tl l ~:5~1 v ~56 :3 ~:: :7 y .<.~~ ::;:\ ~~~ Ll f:5 ;.~:. + ~:i é ~~-; l; l ~ é: ~) ~5 :t ;.:!. ·4 :~ v t 1. ~-~ () :::.~ ::?:: ~ :f. 9 :2 !3 .·:·:~ (ï + ~s :t · ~~~; :5 1:.1 ~-~ -:~ :~~ {~) :3 t~ ~:.~ (J (' l l?) ·4 () J. :? •i :j''? .. :f 1. ~=~ ~:.:_; -? () <:) ~432'? ·) ·::;.:·_/ if -4 l{. s) ·:t <) 4 ·4 ~:s :.;5 ~: ~.. 2 ·;.:-= .r.{. è) .{.:;~() v ] 8 . .{~. )' J ~::; ~ ·4 "7 4 ~::t ~=$ ~; ~ () -~~ l{-4·4·4 J.r j_ 6 .·:'i ?) ::.~ 1 v -4· t .(l ::::: t 2 ~ . .:; 6 ~:~ :t :::~ () ·~ :~~ '? IPF:l () \} 0 ... 1.!.:;8 ·4 ... :3é)f:5 t ::.=: + s> i3 9 ~~ :~~ ·> ~~~ :2 l} ~3:3 ~ ·;:;·?~~ 4.5.,:316 86.948 141~623 199.452 251.465 > ~~ <:·) :? -:· ·41. :1 ;,:.~ f.: 1 ·:· :2 :t ~3 ·Al._ Ifi~C o~ ()·v ,, :..; y. o. 11.462 16.89 23.158 43.474 '?0.,8:t2 '~.i Sï .. ~ ;7 :~~ l; :t:.=!5 + ~7 :3~:}· :t :! .3 -:-7 () ,-:) :t'~·() o}'é()S~ 292.~56 146.478 302.943 151.472 :·5 :t :J. ·~ l~ 3 ;.=~ :L ~5 ~7_$ -=· ::; :t (~> ::S :t t1 -:· ét ~5 ~) :L !5:~ -~ ~):~~' ::) :2 l{. i· t~ ~:-~ t.~ :L l:"; ~~ -> 4 1. :·:} ~1 :·::; () * () {3 :~: J. t}5 ~ (},4 :t :.::; 2 () <Jo ,~1 ::~ :::.~ l 6 0 ~· l{. ~=' ~::·) :3ll {-()':?:r. 1t-i~) ~{:;4~~ ~=)();2 ~ 4t?t:J :r. ~51-~ 2-4'? 2 f"i .t,.. {-f:5 :7 :;.~ 1·4'"7 <}l)-2)~:; PFBAL -Permanent fund balance (million $) IPFl -Permanent fund earnings transferred to general fund {million $) ALINC -Permanent fund ea~nings allocated to Alaska Inc. payments· (million $) II-16 $100 million in 1986. From that point onward, the rate of increase slows untîl the peak year of 1995 is reached, a-t which point available Alaska Inc. funds in that year are $165 million. After that time, the amount available in any year gradually declines. Determination of the value of a share of Alaska Inc. requires prior ca.lculation of not only the total amount of money available to fund the program but also the number of individuals eligible under the progpam and the number of individuals eligible for multiple shares. In Table IL 7, the calculation of the number of individuals eligible is presented. In 1980 when the first calculation for distribution is made, the number of individuals eligible is approximately 146 thousand. Over time, this eligibility group increases steadily until it has more than doubled by the year 2000. During the first five years of the program, the number of permanent fund shares is equal to the number of individuals eligible. In 1985 the first group of individuals will become eligible for receipt of one additional share of Alaska Inc., based upon ten years of residence since 1974. Thus, between 1984 and 1985, the number of shares jumps from 163 thousand to 270 thousand, while the increase in the previous year had been 7 thousand. Table II.8 indicates for 1985 and later years the number of persons eligible for multipl~ shares. In 1990, for example, the first group becomes eligible to receive three shares. ,, .- II-17 Table II. 7 Basic Elements of Alaska Inc. Payment Determination ELIGIBLE SHARES ALINCSH 121.1.30 121.13 0 123.077 123.077 0 131.243 131.243 0 145.607 145.607 0 156.340 156.340 73.31 151.845 151.845 111.23 155.830 155.83 148.61 162.827 162.827 266.99 175.927 270.134 402.51 186.950 288.101 346.14 191.759 290.002 433.55 197.455 298.276 . 448.26 205.170 310.518 452.82 214.741 387.977. 445.81 225.234 409.981 369.46 236.932 422.956 368.16 249.485 440.821 361.43 262.714 461.896 351.62 270.605 518.723 342.89 270.875 533.037 301.06 279.754 550.291 282.66 287.120 569.127 265.75 296.864 592.376 248.88 308.688 ELIGIBL -Nurober of eligible individuals (thousand) SHARES -Number of shares payable based upon 1ength of residence of eligible individuals (thousand) ALINCSH -Size of individual share payment {$} II-18 Table II.8 Estimate of Individuals Eligible for Multiple Shares of Alaska Inc. ELIG2 - l ~))''? 1 r...:;~tlCr 1'9~:$:t .:L 5)t5.~; :t 9 ~=5 "7 l :;!~:;'~~ l (?~?:':~ :L t?(?-4 Individuals eligible ELIG3 -Individuals eligible ELIG4 -Individuals eligible ELIG5 -Individuals eligible for for for for EL.IG2 2 3 4 5 s=· ~t v ~-~ {) ? :t()·:t.+l~~Jl t~} f5 ·;-:::: .l~ :3 l ()() ~ ~=~~2 :L :t o::; ,, ?4B l ~;) EJ ~ 9 ~;:1 {; :f. 4 ~~; -r ~:.r :::.~ !5 l ~5 ~: ·:· ~-~=: 9 li () ~ ü. () {" ~s :l. {· 9 !::; ? <:) :·~; ~ ~) 8 ::) li <:; -:· l~ ~-5 ~=l :? 1. -~ ~_:; ~3 :?.~ )'li+ ~~f$1. ~7 i3 i:• ;~~ -4 ~5 t:~ () -;· :5 (~; ;' ~3 ::~: * ~~1 :t ~s shares (thousand) shares {thousand) shares (thousand) shares (thousand) () ~ ~3 7 J} ~=5 ~~) ~? -4 (J •} :t ~:5 ét :3r:t + ()():f. ~.;l () y {) :~~ -4 4 :t ~ t~ ::.~ ::;~ ELIG!5 o. o~ -(),; 0 ·> 0 ·> o. (). 0.) ().;. () ·> () (' . () :,. () {" () -~ 0 •> ne. - II-19 The number of shares which must be paid out obviously affects the monetary value of each share. This is reflected in the long-term patterns of individual share monètary value. ·The .share value in the initial year of payment in 1981 is $73. This increases rapidly over the next five years to over $400. Then the value bumps slightly down as individuals become available for two shares. It grows again until 1989, when eligi- bility increases overtake the growth of the base of the permanent fund itself. Henceforth, the value of a sharè declines continuously. In the last simulation year, it is less than $250. The impact on aggregate economie activity of an Alaska Inc. program of the magnitude outlined above is shown in Table II.9. The multiplier effect of the increase in disposable income from the share distribution is immediately obvious. In the first year of the program, total personal income increases by a multiple of the increase in disposable income as- sociated with the original share payment. The increase in personal in- come is associated with a rise in both employment and population. This effect can be traced as far as 1989, when the impact from the base case reaches its absolute peak in positive terms. At that time, personal income is 5 percent larger than the base case at $12.2 billion; while employment exceeds the base case by 10.5 thousand, or 3 percent. After that, the.positive impact rapidly is transformed into a negative impact because of the state expenditure cutbacks. In the Alaska lnc. case the cutback must be more severe than in the base case because of both a 'l 1 ! • II-20 Table II.9 Aggregate Economie Effect of Alaska Inc. Program (Measured as Differences From Base Case) , . 19?7 1 (1"7~3 1. ~·:?S1 l ~i8() l r:;t$1 :t ·:;:32 :t ~~:;33 l {?;3.l~. :t s~::;~:s 1 1:;~:3 \:} l S."t3 ~? l (_;.) ~=~ ::1 l <)[{9 1 (?f) () :t s> ·:;:r t -~ t'! !'''! ... , .f~ -;·· ·;--r:.: :L '){/:3~ l t)'} l} :t ~;} ~~~} ~;_:; l (;>c) <S l (?{?~? l9:)t~ l';!<?';> POP -Population (thousand) EM99 -Employment {thousand) PI -Personal incarne {million $) '· F'f)f· ~··() ·} ~··· () y --·() '} () ~- 0. /'::.';?; l -~ ~5;~;3 ;? .; .. l{.A;{-.4 .tf i· ::~ ~:;) ;::, ï' + ::~~ () ~:) t().;.f.~ttf :t . .:f ~-'? :::) 7~ l7 {• :~'<?~:) J.O. 4lt4 (:5 y ;;_~ ::~~ (:) ()o;.~]:? () 0:· é:5 ::2 ~ ,:; ~:3 {:.: ::5 ·=-,:) E3 :::.~ ::) If .-:·~ ·,::; t ::.~ -:-A· l ;7 :L y .• t;i. :=:: :.:s () ·:0 (?9é) _()~~31 -~-- Et·'i·:_;)? o. () ~.:- --0. () .... 0 ... ~=.){;~:=; :t~1.()l :L \> ~~J .{~. ;.? ;;.! ·~ ~=~ {s t:;; ·4 -:-.;:} ~? ~~ '? •) () .·tf :2 9.366 10.082 '10.549 2.229 ~ ~~" -~.7~~ .... ··:>. •')•':) ~••• V hOoo\u .... (), .;. ()() l :i. ~ :!. ~:'; :L :t ·:· :~~ ~5 :5 () •!-:"l ;.;_~ (~\ i~) ·;· :·:}. ~-:~ 4~ () •} :t~3l t) ~ 2'? t:~ t=:·I --0 ~ 003 ··-() ·> () () ~3 () v () () !7J () ·} ():tl, ~~-?-:-~5é)6 !:.=;o .... :::5:?!:r· ;:'6 f ~>fjf5 142.004 244.746 373.211 514.082 616.098 636.125 ~~ :3 ::} ·} E5 (~) ·7 ·:--4 .<{. ~ 9 ;;:) ~5 .. ~. l !7ï ~ :? ~~:t 112.105 187.109 190.961 160.211 126.25:3 114.383 l :1.6 .,793 •-" "'- .... 1 l- - .... ~ 1- L L l- \ - J II-21 large:t:' population and a lowe:t:' average level of state revenues resulting from the loss in pe:t:'manent fund earnings income. After this downward shift, there is a return to a positive impact in all aggregate indicators in the final years of the simulation. The values a:t:'e not very different from the base case and are mov~ng closer to the base case in all three indicators. The overall pattern indicates a short-run, positive economie impact of Alaska Inc. but one which is not lasting. In the long run, the impact gene:r>ated in the short run is eliminated and the economy returns to its o:t:'iginal g:t:'owth pa th. By 1999 the Alaska Inc. distribu·tion is becoming . an insignificant portion of the total economy. It represents less than one-half of one percent of personal income and less than 3 percent of state revenues. Thus, the decision between distributing it as Alaska Inc. payments or using it to increase J:levenues to the general fund is becoming less and less importan·t. Table II.lü :t:'eflects what is happening to' the state current a:ccount over the simulation period because of Alaska Inc. payments. Initially, the levels of both revenues and expenditures rise, although expenditure growth is much more rapid than that of X'evenues. This is because of two factors. First, the Alaska Inc. shares are not directly taxable, and so any additional tax :t:'eceipts must be generated by secondary income effects associated with population and income g:t:'o>v:th •. Second, the slight increase in revenues J:leflects the aver_age noTI[-petroleum revenue generating capa city 1 :l (? .. ?"? 1 9 ::;;;::s :!.??9 :f. 9":]() t':~f$t 1.9Ei2 l (?E~ ~~:; :19:3-4 l ~;1 t5:.::; 1 ~:y~:~ tJ 1. 9i:J"? l f;:~f3~3 ll7,} i::5~:;l 19 ::_:>() :tl:?<? :L :!.'?92 l {9 ~;>:?} :i. ~;J(j.ï . .;f 1 Si 9~5 t =:?~~.)li l'~J!?;'~ II-22 Table II.lO State Fiscal Impact of Alaska Inc. Program (Measured as Difference From Base Case) r:::~;)<? ~:; o. f) ~ (),. 0 •} ()()t;~} o ~ oo·;> iJ•· + :3 ~i !:.:; t ·.~'i \• {~': :;.; l ~~i;S-}SJ:.? ·4 ~;; ~ ::.~ ~:5 ~~ B4v:f.13 :f. ~~ '? {• ~:~ '? :·:} J. :? -4 -? ::~ ::_:; ·4 :f. ~53 <· ··1 ;:; :!. -165.614 -373.798 -360.318 ~286.747 .... ~~: ~~j ~~~ ~ !:~ -4 :::~ .... ;.:.~ !5 t5 f ·4 :3 9 ····~2}~~.!5 v .i"}"?"? ... ~ :~~ f! ~? -:. t~) :::.:~ ? .... ~~=~ ~=i (? ~ t~ ~5 ~5 r:;~ ~) ~:;:; ~=) (),. .... o 1 .---·()v0()l () <· . () ~ 8é!-4 ~~ -~ ·;73:?. ~s ·} ·ztl~5 !:) ~ 2t~? lf _t1~~J l3vl~7{-4 ·l f:., ~ :t :·:~4- :1.6.,:::;:r. ::/ ~· :~~ !5li ····~=) l ~ l f:j~~ •·· B 0 <· :L :i. :t ··-fj ):.1 ·i ::z (:·) 25 .... :? ;.~~ \• :?> :~ -4 ··-~):? ~ E~:3~} .... ;::;3.,. 4:1. .... ~:.:;·?y() t t1 ··-tS ;:: ~ :t :t ····6-4 ~ :;.~1·? t~ f~[ t"} ~::1 ()v (),. () {· () <- 0-:- () .;o .. , '.l. ()+ () •:0 _() {> () + o. 54.437 316.923 50.041 -i15.827 -. -··li ~:;. i• ::;~ ~? ::5 ···~ :~ 4· v !,;$ l) f:5 -~:":) ~ l ~:~:.?; ····9. 876 ··~:;:.ï'J v l"?'~~ ··~ ~~ E$ v !j> () -4 -:t. \~~j s) fj .l ~i::;'~;t-. . ... ~2 t5 ~:~ ·:· -l; () ~5 .... {:)1 y ::~;?:f. · .~:-Lt-2~.:. Ei:~;-.~ ···-~· -~· E99S -State expenditures {willion $) R99S -State revenues {million $) SAVS -Expenditure cuts below target rate of expenditures {million $) ·-.-~"....,.·'"'' ._, .·:., j L b.- i L - ..... !..... "'- :..... 1 llo.. 1.....1 1.... - "'- "'- - L II-23 of the state which is much less than the average per capita revenue generated during this time. (Total permanent fund earnings are counted as revenues, so this series does not reflect the revenue loss of the Alaska Inc. payments themselves, which otherwise would have gone into the general fund.) Expenditure growth is more rapid than.revenue growth also because of the formula by which expenditures are targeted to grow. As long as possible, it automatically grows with population and personal income. When the state financial crunch finally occurs in 1990 the impacts of both expenditures and revenues become negative and remain so through the end of the simulation period. State expenditures stabilize at a level which is permanently lower thau the base case, contributing to the lack of positive impact in the aggregate variables. As the positive impact of Alaska Inc. on revenues is not pronounced, neither is the nega- tive impact. The reduction of expenditures from the target level is greater in the Alaska Inc. case in the early years of the fiscal crunch, but later any difference from the base case becomes almost negligible. · Looking at Table II.ll provides a picture of the long-run impact of Alaska Inc. on the position of the general and permanent funds.. The increase in state expenditures required by the population increase bas largely been paid for by drawing down the level of the general fund. At the same time, supplemental balances in the permanent fund do not increase as rapidly as the base case. The drawdown reaches a peak ~· ~ 1 . . ~ ' ~f ' ~ '.1 a ,l î j ~ ~ 1 Î 1 J ,, ; 1 ·~ ;~ 1 1 1 ~ M~.· ~ ~ ~ ~ ~ ·~ 1 1i ~ ~ ·~ 1 .. ~ l ~}~ï)~ :t r;~7fj l (?"?~~-~ :f. \;:ri:~() tt.?E}:t tl.?~~;~~: l ·~~' F~ :?) 1 (;>E~·4 1 ~;; E~ ~=:.; :t ~? ~=~ ~~; l ':.:.:· E~ ;7 l (.:.i ~=J i:5 i 9f3'} :J. ::?~:;!() •! o''\t'\•j .1. 7 '1 "' j C)q·') •• • J' ..... :t s)!;;J:_:::; l "?~?-4 :t <;>9:5 :l ·:_;;.:;,;,;} J. 9'1:;~·.? :i. ~~.>9}.3 l (?JJ!~~i. II-24 Table II.ll State Fund Impact of Alaska Inc. Program (Measured as Difference From Base Case) (3 F. E: {:tL~ , F'FB,:~L o~ .... () •} ····0;;.()()1 .... () .;. () () .::) --··:t() <· 61.:~~ ··-::=> :3 .;. ~s f3 ~::; .... 42 ., 2Bl .... ;5} \• (?"?<~ -84.761 -125\696 -352.259 .~ .. (:, ;? (j_! •} (; ::~;. ~~5 ··-ijj () ~~j .:· 6 ~:_:; ' .... ·:? ..:"{. ~;.~ ~ :t ~~} ~:~\ ()v () ~ o~ ... ~ . \..r {" ,/'•, \l {o ();. .... ~:.~ (, ·} {:) E5 ~3 .... '.? ~:~: v ~:~ :? ~:.:; ""1~5·4.,:!.28 ·~·· :~.~ ·7 {:, .... s=-~:~ -4 ..... ;,:~ ): \:) .:-·:,;~ :;~; z.-t .. _ :~~ ~? ~:~.. ·=· f/ :~; -4 .... ~.~ 7 (s ... <;.:~ :·:s -4 .... :~;~ ~:;.t {~"t -=· !;? ~~) ·4 F: ~:: E~ tJ F' Ei L. o.·. () ~ ().;. ,., \} ~ .. t~) ·=· () ·:· .... :~~ é) ·> t:~ ~j f:j -·· )' :;:) of ? :·l ~:=j -154.128 -276.934 ·-· 2 -l (=~ (<. ·:? ~·::) .·:"i .... :~ '7 t) i• Çt ~:) lf -276.934 -276.934 ···· t5 4 :.~) v 4 l ~::~ ···· ::.~ ·7 <S ~ ~J :3 .(:~ · .... ~~~ '? (~ .:· a:? ~; ;~-~ -767.192 -276.934 -276.934 -743.351 -276.934 -276.934 -739.742 -276.934 ·-276.934 ~535.062 -471.656 -471.654 -314.066 -666.664 -666.658 -108.419 -835.004 -834.998 -108.416 -793.445 -793.439 -:l08.428 -748.895 -748.887 GFBAL -General fund balance (million $) PFBAL -Permanent fund balance (million $) PFSUPBL -Permanent fund balance in excess of 25% contribution rate (million $) : 'l lll!ii II-25 -(beyond the base case) in 1990 of $1.22 billion. After the reduction in the level of state activity in 1990, the relative drawdown is moderated. ~ However, by 1990 the drawdown is still $850 million below the base case. L Details of the impact on state revenues is shown in Table 1I.l2. Personal income tax receipts rise moderately as the level of aggregate -economie activity increases. The rise is smaller than would be the case if Alaska Inc. payments were taxable. ~fu en the economy returns essentially to its original growth path in the late l990s, the level of total per- sonal income is approximately the base case level, but the level of per- sonal income taxes is slightly lower because of the Alaska Inc. exception i.... from liability. ·, ..... In comparison to the moderate rise in the personal income tax in 1-early years, the general fund revenues provided by the permanent fund decline sharply and continuously until nearly the end of th~ simulation L period. The negative impact of this revenue source is most pronounced in 1998 when it is about $210 million. Later, the revenues lost from r ' ~ this source would be of less and less relative importance. Finally, the impact of Alaska Inc. on three real per capita variables ~ is shown in Table 11.13. Real per capita disposable personal income in- creases because of Alaska Inc. The impact increases until 1987 and then -over the long rup, declines slowly towards the base case. Real per capita state expenditures, because total expenditures rise according to a formula, - - i.... II-26 'l'able II .12 Revenue Impact of Alaska Inc •. Program {Measured as Difference From Base Case) l ;~>-l:;; l9:;'(i :r. (?'?;=? :t S'~:j() l ~~~3l •f t"'ll"''t.'''t .J. 7 ~:; ..... : :t 9 fJ :·~) l ~;>~::~-+ 1985 1986 1987 1988 :t 9 [j 1:t 1. ::;:% s=~ () :t 1::) ·~;· :t. :r. ·:? ~:.~j ~2 1 ~;..:~::l :?r :1.994 :~.·:;,1•:-:J!j ~:~·rI ~3 ··-0" ()., ·-·() "} '-.} .00 0 {o 4 j_ ''? 1. ""' ~=} ~:~~ 8 ::_~ i-~:~~5(S :3 + ~=5é) ::l <· (:{ i,.~·) ;:;.) :i.:l.:?Bü 1. /7 ... ·4l) ~=:r ~~ ~-~ V ~Î () )r :~~ .l;. ~-'7 ~5 :? :···, ·••ff":'•l 0;./;.J.r. ····l ~::; ~ ?::ç~) ··~ l f~ {-l}~5tj ····t~~{s:?l .. -:t ·:0 \~3 9 é) ..... () ~ (5 f~ :.~~ i:( I f:'J::· o. o. 0+ o. -11.462 -16.89 -23.158 -·· ·4 ~5 •} :.:~ ·4 ::~: ono '? ~5 0~0 9 '? (:; ··-l :J.() ~ ~i:f.~:5 n•o :t •4 ~:; i' .:t. t ~=~ -n l ~52t; ~ ()(?::! -159.994 -165.864 ··-l ·.?· =~) ~ E~ !5 ~? -175.101 -178.715 -181.798 -184.427 1996 -2.916 -193.492 -· ---~'--~·-:0;>~;r--:;:---'-~-~---~--------.. ::~~r~-::T{f:l ~----=-::~-<f:~~-:. ~~:r. =~~~ ~·-~ --· 1998 ~5.892 -209.699 l ~;l~!} r~J -5.348 -202.977 RTIS -Personal income tax {million $) RIPF -General fund income from permanent fund (million $) i - ..... L... L- ir- ._ ~ ~ II-27 Table II.l3 Impact on Per Capita Variables of Alaska, Inc. Program (Measured as Difference From Base Case)· J..CJ'.?7 1 ~}~7~3 1. ~;} :.? '~~~ J. 9~J() :t~;)fjj_ 1 !?Ci:~· 1 9D:.:-J l ~;t (~~ . .q 1 ·~} ::3 ~:=; ' :t (?E~~s l :::.:fB'? J. 9f1E~ :t 1~.} ~=~ ~:;} l 9':r~ () ·j •":l r·> ·! .•. ï· ')' .t. l (?';:l;;~ :t ~?s)::r l ;;_; ~~::; .-:'~. :t s~~;, :;s :t Si(?l:_t 1 '}~:;? t s:· ~;:(ti l S.)9::? :0 I F~P{-! E99SRPC R99SRPC () ·=-() () :~.~ () ·=· ()() é <LOCH o.oo:t 0.002 0.001 -··() ... ~.001 o. ····(){.(i()l o·~-\)()2 ····t:)-s-<J<J:t ll •} ~_:ïl:}4 :t ~::~ .;. l .q. t:§ ::.:.~ :t ·=-::) '? f:~· ~:~: é ·:· :.7 ·4 ··l ~:; ~7-~ 0:· ::~; f~ )' ·.?:r.~t3é= f.3::? ? é :7t:l . :.~ .. , f:~ {> ':? ·4 {:) ·4 {> '.? :.-~:: ~==~ .... ~.:.~ •} 9 ~~ :.?:: . () ~ ::~3~:J ~-~ ~ ::) !5 ·4 () -:-:?"/9" :~~ ~ ~5 3 :::) 6.821 12~152 19.59 ~~.=; ~-~::j ~~ :~~~ 10.512 -so;594 -9.53 -128.66 4.239 -118.384 19.884 -93.545 ::?. ~) ~ :~;:~ :L ~"l ;?. ";l v ;,~ 5 ·4 19.727 17.008 4~ ~~~ L~o~L~ l-"-'1 \• é";:-;:~~5 ·····?~;j~:39 .... ;:J ~:) ·:-() ::~~ r:S .... ~'}:~~v ·-~ lJ ;'! ~~ / :;) ::; ··--(s t ... {;) 1 l:} ~ ... ~_:; l~ ... "? 1. ::s -2.914 -5.~44 -9.517 -·· :t ~] .;. ~=s ~=5 ::) ·-· ::) () ·} :t (;.:· ~) ····lfl ~ f~<tfl· -... 4~? ~ :74-4 .... !5 l .::· ·4 :? :? -48.052 -29.087 -26.B25 ····:~~fj ~ 8t :t ..... ::~{5? ~) l ~5 .... :~:: :~.'"~ ~:=; 6 {3 ' -19.52 -17.423 -15.984 .... :1. .-:{ .• ~)12 .... l~:: ·~ .c"+?t DIRPA -Per capita real disposable income (constant $} E99SRPC -Per capita real state expenditures (constant $) ~ R99SRPC -Per capita real state revenues (constant $) .... l .l 1 1 II-28 remain at the same level as in the base case until the state downwa~d fiscal adjustment. F~om that time fo~a~d) real per capita state ex- penditures are significantly less than in the base case because of higher population and lower incarne. Real per capita state ~evenues actually decline in eve~y year after the commencement of the Alaska Inc. program. At the individual level~ there has thus been a tradeoff favoring pres- ent consumption in the private sector over future state spending in the public sector. 1 J ...... - ..... i- - .... i- i 1 1 ..... ..... ;...., - II-29 D. The Impact of Alternative Proposais for the ·r)l::sE_osii:ion _of_~er!Il_él.nent Fund. Earnings In contrast to the case in which one-half of permanent fund earn- ings were distributed as shares of Alaska Inc., a simulation was done in which that money was redirected back into the permanent fund. This simulation will be referred to as the reinvestment case thr'oughout the discussion in this section. Table II.l4 shows the basic variables affecting this case. Because of reinvestment of 50 percent of earnings, the permanent fund grows to a rouch higher balance in this case. This results in an increase in the long run of both the level of earnings transferred to the general fund and the level of earnings reinvested into the permanent fund. On the other hand, the level of revenues in the short run could be expected to fall relative to the base case. A second contrast simulation was done in which the level of the personal income tax was reduced by the same amount in aggregate as dis- ·posable personal incomes were increased by Alaska Inc. in the aggregate. This policy would affect economie growth in two subtly different ways from the Alaska Inc. case. First, the tax·cut would be liable for the federal personal income tax which would tend to reduce somewhat the mul- tiplier effect which this addition to disposable personal income would have. Second, it would have a slightly different impact upon the inyen- tive to migrate between Alaska and other states. Since the increase,in ·n-3o Table II.l4 Permanent Fund Totals With 50% Earnings Reinvestment :t ~:;;: '7'? 19?~:5 :1_ Cj?? ~:~} i_C)(~() 1. ~~:31. l ~;:. f:5~.~ :t f/~3~3 1 1. (? ~:~~:s j_ ~~:> ~3 <~; 1 {:'.i'f-::"? :t {?f31:5 t ~:;.}E5~:J 1. ~? S·) () t y~;) l li}(,;):~~ 1 t? :~} ~-:~; :1 ~;~~~~~ ·4 l \;} ::? ~:~;. ·tt._;)\/{; t i7'< ~;> '? l ~? ·;~ ~:j :J. r:)t:;t•;y r:~ :~~ ~-.lf {) :;~ y lt :t E: ~5 <-:_:;; (:> :5:~~? -~ 4-9:~ ·4 t;; -4 {-f.}~.~: ~-~ (~;f ·:;) () M;. .. :f () :7 l ~:~ 0 :.:~v ?~;} ;,:~ :t l~ ::~ ~ (;; l :.:~ () {~~ (? (• ~.:.~ ~~ ~; é} ~::: ·) li ,·!f ·4 ::~ ~;-~ ~=5 ~~ \) ~::i ·4lJ :::r ~J ~ {::r '? ~:1 () ()S~ + () ~? ~:5 :2:; ::~~· ·7 !~ () Ei ~~; (.) ~) .-:-:~ + ::? S.i :5 '9 :;:s ~::.i .;. :? 5 :::: ;;.: ~3 :t ·=· () (.f't ~~} ~5-~~ 4 ·=· ~-:~ :? é)f} 1 (~)v.;? :L 6908.14 7019.42 7146.77 7293.72 PFBAL -Permanent fund balance (million $) IF~F IF·F·t=:~F· 0 {> ()-:- 0.168 o. 4.368 o. 12.989 o. 11.462 11.462 17.291 17.291 24.164 24.164 45.633 45.633 75.026 75.026 t ():? ~ .4:~~:;.~ _j_ (j;'! v ·4:.2:;.~ 138.685 138.685 151.513 151.513 163.718 163.718 175.318 175.J18 186~448 . 186.448 197.218 197.218. 207.734 207.734 218.088 218.088 228.349 228.349 238.592 238.592 241.785 241.785 245.68 245.68 250.137 250.137 IPF -Earnings from permanent fund transferred to general fund (million $) IPFPF -Earnings retained in permanent fund (million $) L.. L.. ..... .... 1 i- ~ ~· i ._ ...... ..... - - II-31 disposable pe:Psonal income associated with the ta:x. reduction would be available to anyone who ea:Pned income in Alaska, the:Pe would be a slight incentive to migr>ate to Alaska or not to migrate out of Alaska. This would be the result of the slight inc:Pease in th~ Peal disposable pe:P- sonal income in Alaska ~elative to the :Pest of the United States, which has been sho'tm to have a causal relationship to the migr>ation rate be- tween Alaska and the rest of the United States • This alternative will be refe:Pred to as the ta:x. reduction case in the vemainder of this section. The taxes which would actually be col- lected unde:P such a plan, in both fiscal year and calendar year totals~ are shawn in Table 11.15. One final case e:x.amined in this section is the alternative oftak- ing the money which would have gone towards the Alaska Inc. program and spending it upon an increase in government e:x.penditures. The increase in e:x.penditures is sp:Pead among all programs, operating and capital, in accordance with the e:x.isting proportion that each program gets of the budget. The impact of this alternative will operate very much like the Alaska Inc. program itself in that the or>iginal expenditure will lead to an increase in personal income which is.a multiple of the original increase. This can only be obtained at the cost of a substantial reduc- tion in revenues for the gene:Pal fund • There are two primary differences betweeri these cases. First, in the expenditu:r>e case, the original expenditure level does not, as Alaska Inc. II-32 Table II.l5 Personal Income Tax Receipts.Under Tax Reduction Plan t=\ ·r I ~=~ f;~ 1· I t1 f~ :i. s.-:·.?? :J. ~;; ~=~ ~=~ : :l ~;) :J:=t 1. (?i:!\) :t 9~:31 :t \,!i ~:~ ~~~ :t ~)Ei3 l t:? 0~ ,.:"~ l ÇJi:j~:.; :1.9Hli ll:1i3"7 l':?E~::3 ~· l ~:? <=~ ·:~.) ---· ----,.~-~-~J -l~ -~;.-~.>"() -·· -~ ~'.- :!.99:1. 1992 . 1993 1994 1995 1996 .1997 1998 :tl;)(?(? RTIS -Fiscal year receipts (million $) RTISC -Calendar year receipts (million $) 120.479 107.467 :1.17,.0"?7 :t ::~; 9 -) r; ~;.~ ~:5 l. /"] :~~ y :~~ ~:; ~:~ 2():3 -~ ();~9 ~.~ 0 i} -t< lt() ~3 ~~ 1. 2> ~ 3t~A· 226.079 235.202 249.406 270.517· :3 () ~;;1 ~ 3 :~:~ ~3 ::~~ ::t () ... () é~ {.) 1-::!9 ~ ~~o:;;l j_ ~5::~ ~ -45~~ 1. <j.i ~:; + ~) ~3 ~:; .... •j •' ... , .•• , 1 JI,..;:, ... L -:.: .. ,. .. .:.: .t • . ~: <;~ 75 · ~ :? -:.?; (s 222.408 230.714 240.867 260.185 ;;:~ i:S ::} v !::; é· :t ::) -~t l v 8 ~:=; t~ -4()~:) ~ {5 "?ï• ,:.-:t ~~;;;;.>--. ~ ·-~4 ~2 ;;t-; €5 t) (;f ~ ·-' -·· --~ ---~-· -· 'f :.:) ~~ v {:) t ;;~ -~4 ::=> f> ~ ::j :1 ~=s 451.353 467.358 493.272 525.986 562.664. 608.969 648.646 698.737 749.996 814.708 875.332 951.867 1028.31 1124.8 1222.8 1346.52 1 1 1 L II-33 does, totally find its way into Alaskan incomes. Sorne of the original expenditure will go for items other than wages and salaries and a pro- portion of these items will be purchased outside Alaska. All the Alaskan L increase will be taxable also. Second, as in the tax reduction case, any increase in disposable personal income per capita relative to the rest of the United States will have sorne impact on the level of migration to the state. L- This case will be referred to as the high spending case in the rest .... of this section. Table II.l6 shows the modified value taken in this simulation by the variable which indicates differences from the target growth rate of state expenditures. Its negative value in early years ..... reflects the increment to spending coming out of permanent fund earnings • These three alternative uses of a portion of permanent fund earn- ings will be discussed in the remainder of this section in relation to the alternative of Alaska Inc. Thus, all tables indicate differences from the Alaska Inc. case rather than from the first case discussed in l- this part of the study which represented returning 100 percent of per- manent fund earnings to the general fund. Beginning with the aggregate economie impacts of the three alterna--tives, Table 11.17 shows the employment differences from the Alaska Inc. b.. case. Employment is down consistently in the reinvestment case as money is, in this instance, being saved rather than distributed to individuals • ._ - II-34 Table II.l6 Change in Expenditures Under Increased Expenditure Case ' l ·:?~:}:? l ;;;1 ·?~:3 l9··.:?t:;; 19~::1() J_:~.) ~~=::!. :t·:~~Ej:2 , l 9 ~=~ ~?} :!. èfB·4 1. 9::3~5 :I ... ?D6 l9~:~'7 1 t.?~;;~:J l s):J ~~) J ~}îj () 1 ?'?:!. :t ·:?(?:;~ :!.993 1.994 :t s.~ ~~~ ~::; l9(l6 1 (?::;:~:? l ':?~;lt~ l (.~.i(? ~? (Million $) ~:; t.=·, 1.,) ~:) () <· (). () ·~ o. .... J_ :1.. lJ..!:)2 ··~ llj {-f] ~;;: .... :::.~ ::) \.. :t ~:.;_; ~=5 ....... :f:3 v -4~:;/i ··-· ~:=' () •) f3 ~:.:; :3 .... 9~9 <:· t5:t ~:s ···· l ~~:~ ~5 i~ E:: ::;j ~~~ .... 1 ::) :·:s -~ fj (:i :i. !:5 :;) f5 ~ ::5 ~6 :~~ ~'f ·4 ~:; (• :t \j ·:.i l{. ~.;5 ;? ~-:? )' ~~:; -~-:L ~:i ~_:.:; v f~; '? é· () ::.:_:: .;--4 i~$ ~:~} :.:} ~5 ?~ -;.. :~> .7 é. l ~~ !{. v l't 2 ~:.:: 189.65 193.089 173.45 162.578 i- L 1 l.... L - ..... ._ \ 1 ..... - [ - i l... - II-35 Table II.l7 Employment Impact of Various Permanent Fund Earnings Uses (Thousand) {Measured as Difference From Alaska Inc. Case) F:' f* .. IJ i~ :;; ,. ~~~ ..... F:1::·r1 ~::~+.:s .. ~ , :f .. 9'?:7 l '7'~'78 t {;> :7 ~~~ 1 r:;>f:~() 1. ':?81. :l98::~ :t t).)t~:3 •r r'!tr\ ,1'' J. "l f.i ·~t 1·~)~=5~:; :f.\.;'8.!> l ~~t~)l 1988 EH ()v o~ (),:. . () t ·-0 * !~_;lj5 ·-1.,. 102 ···~ 1 * f.J·4 ~;; ·-2 ~:-;.=367 -4.771 -7.041 -9.367 EF~ () ~ ··-0 ~ o. --ü • -··0,. :1.69 ()v():3é ()v .~)~5-4 :l ~ :t <?:2 2 v :?;; \") J:{. ·4 >} t-:.~3/' 8v~?!:56 :l !:5 •} ~~; 8 ~.) 1989 1990 1991 1992 ·-l ()v f.j~]:;,~ ···~ 1. () ~ !5-4t5 " 7-:tl:~~~:.) 1993 1994 1995 1996 .. 1997 1998 :1.9'';19 .... -l + ()~.;~.rt -~;v:~.~~; -5 {. t:~ ::~ i:j ·--6 <--/ ~~ ~=3 .... "7· + l ~::.i f~~ ·-~ j? {~ ;.~ ~) ::! ·-·6? ~39!:) --·(:} {• 6(:; 7 ... 6.~50:t -6 v !:-i2f5 PFD.7.2-Reinvestment of 50% earnings PFD.7.3-Increased government spending PFD.7.5-Reduce personal incarne tax .... ~:} ·) () ·4 ~:) ····!5 -~.à() tl 1 ..... ~ :7 v :1. :~;,~ <_;J 2 •. 932 -2.363 -4.517 -4.581 -3.99 ~3.333 -~~ + ()();;! PFD, 7.,:::j .... EH () •} (),;. {}.;.. () .:- -·-()v 0()~3 --0. :l :l. :1. -~ () y j_ <.t ;? ····0 ·~ 2f.5::?. .~(J \e ·4l,.S~?. -0-> :?::.:~:2 --· 0 ? S' t~ ;.~ "··l.:-:t~;):t ()? ~~:3:3 t.,~j:!.~'.:i . 2., :!.0:1. l i-:7~~:.:) l v ~5 ~~:: '7' :t ? él ~.:.~ l} :!..:. G83 2.152 2.285 2.487 2.764 II-36 The negative values continue because the savings continues throughout the simulation period. In the case of increased spending, the impact is initially smaller, but it quickly rises sharply to a peak of over 15 thousand. The explanation for this surprisingly large increase lies in the nature of the state expenditure function assumed. Year-to-year_ growth in expenditures is a function of population, priee, and income change calculated on the base from the previous year. There is a built-in rrratchet effect11 on government spending such that increases in the previous year become part of the base for calculating the increase in the present year. In later years, the impact is reversed as the higher expenditure growth catches up with the state and cutbacks must be more severe. In the tax reduction case, the initial impact is almost identical to the Alaska Inc. case. The influence of the federal ·taxation of the in come -increase is somewhat stronger than the impact on migration, so the net effect is slightly slower growth. This pattern is reversed later as a positive impact appears. It is attributable to a higher population ' level than in the Alaska Inc. case which leaos to high state spending and, thus, private employment. This is reflected in the pattern of Table II.l8 where the differences in population from the Alaska Inc. case are shown. The only instance of a divergence from the pattern of employment is that population growth occurs consistently in the tax reduction case somewhat independently of - ..... - i.... ..... ._ ..... 1.... II-37 Table II.l8 Po.eulation Impact of Variou;; Permanent Fund Earnings Uses (Thousand) (Measured as Difference From Alaska Inc. Case) F>F')) v? ... ~~-.... EJ~ F'F"[f v :l-} :3 .. _ c:: ~:;~ :t ~Y''.ï'"l ·1 ~~~/~1 :t ,;p:.ï~') :l. 9[:3() l ~:;.J ::5 :f. l '?~3:2 l9t~:.3 19D4 . 1. (? ~:5 !7.; 19t5::S :L ~;i~3 ;7 :1. ·:_~.!f~[j :1. ,:?E~'=i-j 1990 :1.991 1992 1993 :l. ~;j~} -4 'lt:f~J~:5 19'=?6 l ~:?:.:.>?. :t fJ {j} fJ l !:yc;(? o~ () ·> () ·:~ ....... \} + ••u() ~ :?5:3 ·-:1. ,.562 hO. :2 ~-·4 :·::) '? .... -4 v ;~~ f~ ~:.t .... :7 ... :t ~:;) =:·; ·-· :t ()v ~:~l-4 .... :t .. :~.y~?:::§\? .... :r. ;? v "/(?l{. . -18.446 -:1.4.623 -12.524 -13~2()8 .... :t -4 y -4 '? ~:.~ .... :!. ~). :i. 9 ·-· l ~:.) .;-.l~ --4-li ····1.:5 ,.l :J. ·~l -·J..-:f + t56~) ··-1 .. i{. io l ~) :t ····llf ~-~3~~:.3 PFD.7.2-Reinvestment of 50% earnings PFD.7.3-Increased government spending PFD.7.5-Reduce personal incGme tax o., () ·l-· () ~- " . •••• ~ .. } ? .... () 0:• :~~ ::~ ~::; ()vO;~l~ tj ... :?~)3- 1 ··~h"'' ..... .;. ;r··· •• ::\ ::~ ~ 5~3t~ ? or~~:;::.~ :t ::~ ~ l,f:s:~ ~~ :·:) v ï' ~.;.i ~! 15.01 2.146 -1.802 13.847 ==? i-:;.~3..:'~ ~~ (• :3~55 .... j_ -~·:t().-=t -1.959 • n~A -Lo00~ -1.615 -1.553 F1 F'It ~ ;~'-} !.:; .. ,. Ef~ o. ()y 0 ·> o • -· () ·~ () () '?' . -0.019 0.029 0.111 0.208 0.352 0.606 0.981 :::) ~ i} ~==t ::~ 6.32 7.615 7.984 8.456 9.242 10.189 11.085 11.738 12.351 :1.3 .. 0~)8 t 1 ! 1 II-38 the slight decline in ernployment. The differences are small but the cumulative effect is significant~ for by 1999 the impact level is 13 thousand. As mentioned above~ this is partially attributable to the fact that migration into the state is a function of not only em- ployment availability but also the real personal incarne differentiai hetween Alaska and the rest of the United States. In the reinvestment alternative, personal incarne generated bas fallen as expected (Table II.l9). The largest difference is, surpris- ingly, in 1989 after which tirne the difference declines markedly for a ten-year period. The reason is that sorne of the initial savings has later become available as expenditures to buoy up the declining level of governrnent expenditures. A large portion of the increase in government spending in the second case does not find its way initially into Alaska personal in- come. It leaks out of the Alaskan economy immediately. The effect of growth in state expenditures quickly overcomes this leakage effect how- ever, so that personal ~ncome rises significantly. When the state suffers its financial squeeze, it is felt particularly acutely in this case be- cause the earlier expansion more rapidly depleted revenues. Personal income in the tax reduction case does not rise as much as it did under the Alaska Inc. assumptions. The federal government tàkes a large part of the initial increase. At the end of the simulation l .J :...... ..... i... 1 - L ...... L - .... II-39 Table II.l9 Personal Incarne Impact of Various Permanent Fund Earnings Uses_ {Million $) (Measured as Difference From Alaska Inc. Case) 1 s;'t:?:;-; l S"~;~~3 l ~7' ?~;; :!.980 FF:O ,. 7. 2._ Ef;: o. 0 <· o. o .. . . ... ..... 1.983 ---. . =2; ;~;; :1. l) 8 . 4 ···· 7 K ,:-·?:c - l (;)~j: l :Î. r:;};3~~~ :r. ::?::J~~ l9fié l ·:;iiJï: l J~!.)f.~f3 1. '71 B'? l ~}ji() t ~;j=:? 1 l ~)·:;>;;.~ 1 (?s>:3 ~! ;~'t ~·""i .·1 J. '7 ·;: ~ l ~1<?~5 1 s:~9.:::l :t. \;..Î~;'7 l :;) ~?i:~ l {!(?tl -141.898 -244.656 -373.309 -514.105 -616.895 -6j6.109 ~ ... ·4 f:! ~:~; ~· ·.? ;,~~ ::s .... -4 () ~7j .:-~:: -4lt ··~· ... f ··i-, i} , ( /' ~:~; . ·:~1 ~:) ···~ ~:~ :~:~ 1. ·:· t~ .{{--4 -571.059 -598.66 -594.168 .... !::; =:; ~i v ~:5 :3 :::; -606.582 -629.309 PFD.7.2-Reinvestment of 50% earnings PFD.7.3-Increased government spending PFD.7.5-Reduce personal income tax F* f"l) ~ ::s -> :3-- EF~ 0.003 0.003 -0~005 -0.016 -15.039 -13.23 ~o;~~t- f.~ 'Jo() l~fJ ~~; 1.~· v é:t ~;: ~::.i :l. ~:;~3 " () ~7 ~:~()l ?3:?~5 (~) :~, () ":· ~=; :::! 261~223 -258.031 -402.68 294;594 :? !5 v '? :::~ (!) -251.645 -407.52 -423.066 -388.949 -349.664 -323.984 F'F·rr ->· :·? .z. !:).-: · ER '()-> 0 ,, o. 0,.. OOh:f.l ~ 6)6•4 . ··-:~~() ~ /'38 .. :~ ~:f~:5 '",}-"-3 ~) 9: --~!:=;.4 -~ ~402 ·-·90. 04:~; -131.836 -172.547 -194.543 .... :f. :?>~) 0 ~ .. ~ ~.=; :;= ~) !::; ~~\ ~~~'t -41.855 -62.664 -74;535 -66.891 -47.629 -19.352 ~~~ ~ 7():7 28.2B:I. t,~=.:; •} 8·4 II-4-0 period, the situation is reversed because the effect of the increased level of employment has finally surpassed the federal income tax lea~ age effect. Turning next to an examination of state expenditures and revenues, Table II. 20 shows that the reduced population growth in· the reinvestment case has obviated the necessity for expenditures to grow as rapidly as before. In addition, in later years when the expenditure level is being eut back, the higher level of earnings generated by the permanent fund allows expenditures to occur at a higher level. In the higher spending case, expenditures are higher in each period because of not only the as- sumption of the simulation but also because of the higher population level. When personal income taxes are reduced, state expenditures are initially lower and subsequen·tly higher than in the Alaska Inc. case. The initial slower growth is the result of slower growth in personal income. Eventually, the effect of population becomes more important and expenditures rise to accommodate the increase in demand reflected in the larger population. Total state revenues fall by a very small amount initially as the economy slows dOï-in in the reinvestment case (Table II. 21). This is re- couped later, however, when revenues greatly exceed those generated under the Alaska Inc. alternative. When state expenditures are increased, the impact on state revenues is initially almost identical to the Alaska Inc. case. Beginning in 1989, it becomes apparent that any revenue increases - -- 1 ' ~ - ! - - i- ,_ - ..... . ._ ·- II-41 Table II.20 State Expenditures Impact of Various Permanent Fund Earnings Uses (Million $) (Measured as Difference From Alaska Inc. Case) r::~t=I) v'? T ~:~~-· r.:l i=~· I) (· ::.., ~ ~) ... ~ · :1. 1:;~-:?:? l ~~:..":?8 :t ~~ :?<f :1.980 :1.9B:i. l c;~t5:2 j pn••v . '/. C).,..") :1. 9f~-4 :t. J~:..\ f3 ~s l ~;~~3ér :i.9ü7 1988 1989 1990 1991 1992 1993 1994 •r--gr ~7.J 1996 1997 :t ';>~~jE~ :!. l;!•:;t9 [f: " \}? fL .... "' o. () .:- " i.,..J v .... 9~~~(ji;) ·-1 "? •} (:; .tt ~3 ·-:;.~ (; ·=-:J if ;;~ ··~49 \-~~-4 ··-;~:: ·4 -~ () :? ;-; ····l~~7;41i? .. -:f. ::r . .;f v :3~!.5 ~·-j_ ~::; 2; ·~ ~-=f 4 -12.619 64.268 54.208 ~n ~n ~7o0C 23v548 32.513 44.508 54.906 64.617 /~2 (o fl32 PFD.7.2-Reinvestment of 50% earnings PFD.7.3-Increased government spending PFD.7.5-Reduce personal income tax f. ..... , :.i·r.. () y 0 ·>. ()y --0.006 l :t + J:~; ::~ ~7 ~~~)? 12:~~ !5() ·>(52)' :t () ::~ -~ ~) E~ ::y 18/' ~ 87é) :.3 :t ~;l .:-c; ~:> :;} ~; l -~"f ~ :;.~ ::;> ~7 772.521 493.087 119.966 -4 ·7 ·2-s:r :·:) {; ~)31. .;. -4()9 :.:)8!::3 v 5:1. l 1. ~).o;f ~ Lf~:)2 1 :! i'\ ... y ··\•'"'t •"' • . (:;') ..;.. ~.:> li,.j .~ ... : l1.:l.4-24 , l_~)~~ y ~=l·? (s l ~5l) ·~ .<:1-4l -•1 ''";.l.!'"') C)"":r.r:. .J. / A'., + l' .,•,,',..l,:.,l PFD ., ? , ;::.; __ _ ER () + () -:-- () ~ () ·=- ()-:- ~··3 i· s\:~!=s .... ;~'v ()SJt.~ ····:L()v·4:t!:) -18.587 -30,519 -44.357 .... ;.? :? ~ f.:c ~~~ ···~ '~.) -:-EJ .·4 '? ·4 ::·l .;. :""1-·4 '? ~5 :? ? ;;: ~=.:; j, 4~.758 29.801 29.807 35.162 39.982 39.867 40.164 -4:~ .;. .q.l;,(? 1 [ ·f j, 1 II-42 Table II.21 State Revenues Imoact of Various Permanent Fund Earnings Uses (Million $) (Measured as Difference From Alaska Inc. Case) 1977 1978 1979 1980 l~~i -l 9i:~;-~ 1 <?~3~5 1 'i ~=5 .. :~. l9f3~::; 1 {:;ftsl~ l(lEP l98B :t(?B.9 1 S!~;}() 1 \.r~l;) l :t <j) ~:) ;.~~ :!.99:::~ 1 9~;;'·4 1995 1996 1997 1998 :!.999 r~ 1::· I) v ·7 v ~! .... 1:~F~ o., o. o. (i .. 1 1.: ·--~(f~ -~3t_).·~~·- ···~ ~:~~ ~ é) :2 .... :Jv·4'?:f. -4.912 -8.378 -12.461 -15.099 ··~1.4.0:1.4 .... :·:) ~ () J:i è) ~{::s ,. !::r 52.896 65.753 70.281 77.25 88.526 l ()-4 1-t~E~ 12 () ~ t~ti:~! :t ~~5 ~ 8~5\l l49.,46;~i PFD.7.2-Reinvestment of 50% earnings PFD.7.3-Increased government spending PFD.7.5-Reduce personal income tax F~ f:~ 1) .) :7 <:• ~::: ••n E:J( (), () . w • ().,001 ··-() (> oo••().;.:t(]:l. .... () v :·:) ~:; )~ () ~ 7~L~~ -1.552 -0.541 2.323 4.885 1. :? ~ ::~; --:1. 1 <· :l 07 .... f5~~) •l' f~3"? -135.527 -106.284 ···· :::~ '? ? .4 ,~,.., s> ··-:t ~~ :::) ·~ ·4 '? ~:~ ··~· :t ~) {s .;. .4 1 .. ~·1: .... :t ~J \;} .;; ~:? ~;J -183.606 -167.33 -153.844 j=>F·I~ ("? ~ ~5 .. _ ER, o., (),, o. () -~ -~5 ·~ -()-4-:J· -··:!.:;<; .Bü6 -19.675 -31.855 -54.677 -81.987 -108.46 -125.016 -·· :f. ::~ r;:} V () :;~ lt -:!.21.057 -120.647 -126.684 -132.837 -135.855 -136.425 ~··~:t3~:~ ~ o:~-4 --:J. ;;~~5 -~ ()[J-4 -119.324 -111.961 . 1 i 1 1 1 . 1 r . 1 1 . 1 ' 1 1 . l 1 . 1 1 .. l - ..... r r r... 1.... .... L 1.... ' ii- ~ ' ' ' 1 - i 1- i.- i.....r - ..... II-43 gener>ated by a higher level of economie activity resulting from more government spending have been swamped by reductions in earnings from the general and permanent funds. In the tax reduction case, the total revenue loss is less than the initial tax reduction (equivalently, the Alaska Inc. payme.nts) because of the gener>ation of other income which, in tuvn, produces state revenues. It is also less, in all but the first fewyears, thau the Alaska Inc. revenue 1oss because the larger popula- tian and personal income levels result in more employment in state govern- ment with its attendant impact on private spending. State spending exceeds the target amount by definition in the in-. ! creased spending case, as indicated by negative values in Table II.22. ., In the reinvestment case, when the financial crunch cames the forced i reduction in the first years is not as severe as in the Alaska Inc. case. The same is true to a lesser degr>ee in the tax reduction case, where lower levels of personal income result in a slightly lower target. The general fund and permanent fund impacts are shawn in Table II.23 and Table II.24. As indicated previously, the permanent fund consists of the sum of the contributions made at the 25 percent rate and supplementary contributions. The basic contributions cannot be withdr>awn; but if the general fund balance is reduced to an arbitrary floor> level, then the supplementary permanent fund contributions can be withdrawn. As expected, the general and permanent funds are much larger >-lhere the reinvestment case is assumed. The permanent fund contains an II-44 Table II.22 Target Spending Reduction Impact of Various Permanent Fund Earnings Uses (Million $) (Heasured as Difference From Alaska Inc. Case) j_ '? '? :-;~ :J. ·::)'?:] j_ ~? :7171 1 ~?ErO :t. •;ilj l :t S' f;J ~~~ :L ::.:; i3 :::; :1. ~:;> :::~ -4 l9i~3:5 :f.S.Jf3/; t (?;::i:? l t''~:;i3 l'?) k:3 f? :!. 9l?() :r. <.:>91. :1. l:yl:?:.:.~ :t ·:;~ J~:;~ ~) J. '·'?~;:: l} :tl? ç:c:~:Ï l ~:> {ï ~:~; l S)9·_:? :t =:; ~:;t {:~ l ~;-r~~~·:;.>- r:~ F"I:t ~ ~:7 ·:· :.:! ..... Er:: {' ,) ~- o ... o~ .0 ~\ () ~~ () ·> (J ·:· Cz ~ Ü+ o,. p v. o. -54.437 -139.566 -15.568 40.821 21.949 .... () ,. ::s::) 4 '"'(~\ ·> :.:t:t? -2.541 6.872 8.069 9.~46 F~F·r1 {< :? .;· :3_ ... ·EFi: () i· () •} () .... o. .... l :f. ~ -46:~~ ····l-5 ~ :::i(? -~ ::.~~ 3 ·~ l !.:i.ti .· ~--4~:.::> ·=· 4fi 6 ···~ ::; () .:. i:$ ::r ::~ ··-~;; (_;! ·:· fl :1. !:) .... :J. ::~~ ~:5 0:• f~ ~3 :7 . ... :f. :~~ :·:) .;. (;j 6 t •4 €:5 ::~: ~ t:;I ~~:~ ~::; ~~ /t ~~ ,.. ~14 ~~~ -· t~ ~;) v ::~t (_;) -514.749 369.548 164.317 21.577• -8.046 -4.342 lf-c.<tï' l c::~ .... l;.9t:) PFD.7.2-Reinvestment of 50% earnings PFD.7.3-Increased government spending PFD.7.5-Reduce personal income tax PF.ü ., 7 ., 5 .. _ ER o. o~ o. ()., o. () .:.· o. () + ()y ().:. " 1.,) v 0 ·> ···~ !,::_; 4 <;· 4 ::) :? -30.543 20.268 ~~ 0~n ,~,J~O 8.666 0.603 () ·~ :::~ ~3 ~:r" 3. 7/'7' l().l-()f) tl {· :t r:~ ·.7 t~ ~ :~ :? :::~; - l- II-i i ...... - - l.. i....i L 1 1· 1 ..... L ..... i ..... / II-4-5 Table II.23 General Fund Balance Im2act of Various Permanent Fund Earnings.Uses (Million $) {Measured as Difference From Alaska Inc. Case) j_ ~~ ~? :? :t ~f?t~ l ~:.;.)'7\~ :t r:;;E~o- :tf~_) E~ t :l 1 ) f:l ~.~ :l. <;! 8:.3 :L t.?~3..::·~ •1 .(ïf"":.~:;- 1. :Y ~::J -...J :t ~?f:::é J. 9t~"? :!. {?t3E5 :t '7.,i3{? :t ~i~;J() l !';/;::; l :t ~) !)! :~: ·~ r't-r~ ··:--J~ -;· 'J' .. :~ :f}·:~t;}.~;. :t ~} r:y ~~j 1 ~J~~~~s :l ~?~!) '? 1 s)~;'s :t 9{?~·}. F~ F=· J) ,.. ·;:} 9 :~:! -· J:~r: () ·} /\ ~.l -:- o. () ·> -~· () ? ~=~ ~=·) ·4 .·::{..). ~?22 ')' v é; -·~} ·4 l ~=: ~ (). J. :.:~ ;~~ () ~ :t (;:~ 1. 3 ;:'} v-lt 1 :;~: l :::.~ ~:} .... ~3 ,::) ~3 ~;-~ ~) t {• ;:; ~;.~ ~~=; ~) ,~) f:; .;. :t ~? :t ::) i3 () ~ ::f if :·:) :~·4l~ + il:;~; ~5 ~2 .:; {· ~;) ::;~ <S 326.543 332.58 140.111 140.111 J40.J.:t3 l-4{) ~.1 t •''4' .-.. -•.l'"'}..'") "~t. t.• <>-J. L.r.·:. FtF'I) ·) :? + :j __ . ~=: f( '' t.} y " t..l.,) ()~.()01 () .... (}(){; () ·=· ~;~ ;2 -···4 ·:0 i3;2 :~ l{. ~;: + l 0 ::.~ ::~ :::) ;5 -:-~5 ~3 :5 :~s J. :;;.~ o:~ :;.~ () i~ (:) l (;.}v ~"~5t1 ... , "' '\ <;;:~ ~:r ~::. l' '"..... {' \..1 --~ -·2lf9 ·:0 ·4-4f3 ··-~::i l) ~.:.:.; :; ~? (~) ::j ·~-(~ :t z:;:t ~ :3 ·4 ? ··~ ;,~ f:j 3 -~ ~~ 4· .l1 -703.852 ~517.838 -486.661 -816.448 -1146.24 -1456.9 i~~· ~ -h/JOo~ ·-· :2 () :,3 8 .;. :L ··4 PFD.7.2-Reinvestment of 50% earnings' PFD.7.3-Increased government spending PFD.7.5-Reduce personal income tax F'F· ... I).i< ·;;-t (. !:; ___ .· F.:r~ ,..., cr "'•ol ~ n • • .;' {>-,., \} v ()v ? A4M o.~~7 13.082 15.571 20.848 ~~~? •} :tl-;~ 4~ () -~ :::; '?8. 1'? :l. 1 ~:; <y; .} ::~:; :t 1. t~ :·5 -~ f:~ '?1 ~;,> 1 :::; ;' ~ ~:5 ~;.~ {s l-4 '? ·=· () ~5 :::;. t:.39.l:i.·4 :L :3 ti 1> if ~:5 ~::~ l :3 "? v .fi:::~ t:~ t .2} ~7 ·} t~ :~ {s l ::~7 ·) t3::~~) .l ~~ ~? ~ "tj :~~ ~:; 1:37.,.829 :t :} :? ·=· ~3 4· :.::~;_ l' 1 _1 II-46 Table II.24 Permanent Fund Balance Impact of Various Permanent Fund Earnings Uses {Million $} {Measured as Difference From Alaska Inc. Case) l ~t-;;.a·? 1.'?,.70. :t ~) ·:? ~:;.) :t ~> ~3 () :L -=? f~ :t :f.C/;3::2 1983 1984 1985 1986 :t 9f~'? j_ <?~:~ ~3 :f.9i~1{? :L 9r}() :1. '7''?:!. l9~;>:~~ l (j-1~;)::) :1. {l ~;; .. ::} 1 1=/(?~5 _:t r;<?t.~ :t 9'17 - :t 9SJ€~~ l (?9f~~) r:~ r~· rJ ·> -.. l {· ~~ .... r.:·r.;· t ••• , ... () <· o,. ().v Or.- :t :t + if ~s :~: ~.~ i;:.{ \0 ï' !5 ~5 é") 1 ~ (S~1::_:: l ::~ () v ·4 ~::: 2l (.i ~ ~:~<t:~!. 3?0.07B ~::; () E~ ~ :? r.:~ ~~ {:: 6 () v ~:.~-· .. :? -4 ~=~ :~.=~ :3 {o (? ~;' :;.~ S' <_:t (? <-:5 .:t ~~ J. t ~==5~~; {' 7~ l} l 3 ;::~ :~~~ ~ <;) ~::; t :5 Si () ~· ;:; :t l E~ () tJ ".-~:~ ~:. ~;~ ::) i. + i3 7' ~! ·4 é:: :3 ·v ~) ~3 269fL,O:!. :~~ <;.J ::) ·4 ~ :3 ~-~ ':t ? :,?:; ;;. . ..:;. 6 F~r:·r) v ~7 ,. 3 .. _ E:R () ~ (L () ~ o. ().,. (i ·~ .... :.3 :::' ~5 {-~?. .t"+ ·4 ···~-4 :1. ;2 ~ ~;ll~ ~::.; .. u ·4 ~j ~:.=~; ~ ~:.; :~ t .... _S> ;:-' ;? ... () ·4 [$ ·-9'7"? ~ ()..:1·8 .... 9"?'7 •} ()-4tj ~·-t")'l ï} -} (/·4 ~:; -977.042 -1338.14 -1330.14 -1801.97 -1998.9 -1804.18 -1609.1? -1440.83 -1293.47 ~1168.89 PFD.7.2-Reinvestment of 50% earnings PFD.7.3-Increased government spending PFD.7.5-Reduce personal income tax PFD. :7 ., :) .•. ER C) ~ o. o. ()_, o. () ·> 7 ·: ··=1li!:5 :?. :~~ ~ ~;~ ~.~:t <? 4\:!.,.:1.02 82.258 8::.:!..258. 82.254 82.254 -82.254 82.254 82.254 82.254. 82.254 ï~~ 8 y r.·., ~5l:.~ f.) <) ~ ~-~ () :::; 61.363 ~.)!:"J y 2::5 ~Sü. 07 f .J i.... - l.... - 1 ..... '- - - - - 1. 1 . ..... i ..... ..... 1- .... II-47 additional $3.173 billion above the Alaska Inc. case by 1999. The gene!'al fund is also larger. The situation is dramatically reve!'sed in the case of increased expenditu!'e levels where, by 1999, the combined totals are $3.207 billion below the Alaska Inc. base. Comparing the tax !'eduction case >:Tith. the Alaska Inc. case indicates a larger combined balance of the two flli!ds fT>om a tax T>eduction. In early yeaT>s, this is the result of relatively lower levels of state expenditures in the tax reduction case. The maintenance of the diffe!'ence essentially throughout the rest of the period must be attributed to slightly higher tax revenues in the tax reduction case and slightly higher shortfalls from the target ex- penditure rate. Looking at particular components of state revenues, it can be seen from Table II.25 that total permanent fund earnings are particularly sensitive to the method of earnings disposition. They increase most rapidly in the case where a portion of the earnings are reinvested. Alternatively, they decrease most rapidly when government spending increases are being fueled by permanent fund earnings. Since the tax reduction case is most similar to that of Alaska Inc., it is not sur~ prising that the permanent fund earnings in the two cases are nearly identical. Regarding personal income taxes, Table II.26 shows that they obvious- ly fall the most in the tax reduction case. What cannot be seen from this comparison is that the difference between the Alaska Inc. and the II-48 Table II. 25 Total Permanent Fund Earnings Impact of Various Permanent Fund Earnings Uses (Million $) (Measured as Difference From Alaska Inc. Case) l ~;! ::; :;: ·1 j:;l"?f5 :tt.;?'?9 ·t {'1 ~·"'\ _.···. J. 'l Ci-: .. ) 1981 1982 1983 1984 J f:;;g.~-:; :t <?f3 ~~·) :J. ~;~ i:~ :~~ :t ~?FJf:~ l (::) :t9~~.:oo 1. 99t 1992 1993 1994 1995 1. ~")(?6 l s;: :~f? l <?(?f;: :t (? ~~j ~?( i=~ F' :o -} 7 -:. ~;~ ·~-~ E~F~ ~) :, o. (), ü+ ()v () ~ ~3()~~~ . ~~ {• () 1 :::; 4.318 8.429 15.392 25.905 35.614 46.219 !:.) ;z ·} (;; /"~ (1 (s <JJ v rp ~::1 2 ::3 ::) ~ () () :;~ (_:} :6 ... ~:$ () t~ :tl :t. • :":>~.:! :!.26.6f6 :t ~:j (~) ~ :{. :·5 l l '? :.~~ v . .tf ~? Ç> :!. f$8 -~ 8t} l ::~~()~~v..:'{-() :t . PFD.7.2-Reinvestment of 50% earnings PFD.7.3-Increased government spending PFD.7.5-Reduce personal incarne tax F>F="I)-=--? ~ 3-- EF.: (! i· o. () ~ .. () ~ o. . () ., o. -26.267 -28.906 -34.015 .... ::S Ej ~-~3 (? :~) ... ~ (::1 ~:~ .... ~~~ '~} :~; • -68.393 -68.393 ~68.393 -93.67 .... ~J~) v t~ "? .... :J. ~?.l) v l3"f5 -·· l :;) ~;' i· ~) ~2 :3 .... :f. ~:~~ ::·:~ ·> ~~ .:.;; ~2 -112.642 -100.858 ····~>c!"" ~::;.4:3 r-:~F·:o o) ·7 v ~s .... . t:F~ o. /' ,, . o. ü. () . o. (). 0 ,, 5:=!3 J L ••v ·' j . ..,\ Ct":) J. :3~~}é7 5 ~ 7~7JE$ 5 v :-;: !::; fJ 5 ~ /"'~)8 ~) .; ·.? ~5 ~=5 ~5" ?~58 !5 ~:?!58 ~; v ~? !:~j f:$ ~;., :?!5Ef 5.758 5.506 4.844 4.295 3.868 ..... - ...... i - 1 l- L L ..... L l.. ..... - L ...... II-49 Table II.26 Personal Income Tax Impact of Various Permanent Fund Earnings Uses (Million $) (Measured as Difference From Alaska Inc. Case) !::· ~:· D ·> ;~t \'i' ::?. ·-· Et=ï: .· F' F"1) -:· :? -:· :::~ ·-· E:F;: · 1 cl:?·? :l ~.)'? t5 i C>'"Jr> ~-11~? 1 '~-} ~=~() 1981 1982 1983 1984 •oc~ L.uJ :t t:Jtf::: 6 1 ~~~;3~1 :1.908 1 s) t{s> :f.990 :1.99]. l '7' '? :~~ l S-' <.=J :·:} 1?94 :f.lJl./~5 :J. 9(?6 :1. 99'?' l9'7'B 1. ~)~;>9 0 ·> ü. o~ ~ ~. -0.419 -1.329 -2.236 -3.858 -·· ·7 {> () ~:S é; ···:!. :l. .'/9:!. ·-l ~?" 4<:)~/ .,_ :.-;.~ ~.? -~ ~;> (; !5 . .... ~~·4 f :'l~)<J -<l7. 7::u; -8.838 _o ~~••JJ~ ..... :r_4 <· !.'5ü :1. ···· :t :.:r v ~:~Sié} ~19.24 -19.279 -19.:L31 -19.804 ····:::::l-> :t~:=;(~ PFD.7.2-Reinvestment of 50% earnings PFD.7.3-Increased government spending PFD.7.5-Reduce personal income tax o. .... (); ()-:. :-.~()~ .... 0.03 0.20:!. :1.. l:l.4 ~~v ï}~~ ~::; ~:-!.:=.i ~:.; 6 :!. :!. • ;;.~ :~ ::.~j-~~567 ~) ~=~ ·> '? (). ;:~l ::~: lf -:-() ·4· ':;.\ : '··-:i. v ~)~~: !::) ·-· :1. ~3 + '? () !:5 ().,f:l4:!. 28.0D1 -2.347 -16.318 -17.289 -14.25'/ -11.20:1. -9.346 PF:O ,, ? , !S ... · Er:: () *" o. o .. o. --5 ·> 00? ·-<L~~,.. as:~ -:t9 ... E~~3~! -32.462 -56.084 -84.695 -113.179 -132.254 -137.991 -139.331 -142.589 ~:1.48;7?'? -154.357 -157.849 -159 .. 939 · -:r.sa.436 -153 •. 109 -147.902 ····1-4:2·-)--46':?- 4 "" . "l '':~j 4 ~ 1 i 1 J II-50 tax reduction cases is less than the tax reduction itself because of secondary income generated. Personal income taxes are less in the . rei.nvestment case because of the relative decline in economie activity. In the increased government spending case, they rise as government spend- ing grows and fall sometime after government spending is forced to decline. Finally, real per capita impacts between the Alaska Inc. proposal and the suggested alternative can be compared. Table II.27 shows that, as expected, real per capita disposable income is less when permanent fund earnings are reinvested than when they are distributed as Alaska Inc. They are less in the two other cases also, but by lesser amounts in early years. The tax reduction case operates like Alaska Inc. to raise disposable income but is less successful beèause of the federal income tax. The negative impact on disposable personal income in the case of government spending is a combination of the direct effect of the Alaska Inc. payments and the sharp decrease in government spending in the early 1990s. Table II.28 shows the impact on real per capita state expenditures of the three alternatives to Alaska Inc. With reinvestment of earnings, the initial impact is negligible and it then becomes positive as spend- ing is made possible by past savings. When increased state spending is the use of the fund earnings, it is indeed possible to cause an increase in real per capita terms, although by the end of the simulation period, the real increase is not rising. Reducing the personal income tax has an effect which is almost identical to that of the Alaska Inc. case. w - ,_ ..... ..... 1 1 '- ,_ ...... ..... i - - ,_ II-51 Table II.27 Real Per Capita Disposable Income Impact of Various Permanent Fund Earnings Uses (Constant $) (Measured as Difference From Alaska Inc. Case) :t ~:::;·? '? :t ç//'8 1 ~?79" , 1 ~~? i3 •:) 1~/f:~l j_ :t"t?f:;:::=) i \;/f3·4· :t -~; !3 ~::; 19f5::S 1 '? t (?~::;{] 1. 9'Ef S."! :l Si(JI () 9~~1 1 t .. 'i, .. , ..... , ·x ·.:" ...:.~ 9~!=?~;:; 1. (.~~ .. 7': l} 1. ~?~;.: !5 :f.S?~;~6 1 ~?~?'? :!. (? ~) ~:~ :t ~!t;J</ F:F:~ :o.'} :; -> ~~-~ -· E~f~: l') ...... * {)., {) ~ f) ~ ·-ll ~ ~-=; .-:~ :3 -16. 83 "• An -~~· ~7 --::s t) ·Jo ·? E~ :·:s .... :.=.:; ~s <j ,:f :t s"; --·?-:L ~ ~:J6E~ '"" ti ~2 v {~ ::·:. ti -~ :;~:l.;; 9 :2~? :~·-l; .-::f ·~ )~ ~~? 2~ ·---:.:)t:3 ~ i3~? ·-~S 0 ·:-Ej ? .~:} ··~· ~-:;~ ::; ,. :::.~ ;,:.~ ,.;1 ··-:·:) :? ~ ï"' ·~} 3 .... -~5 5 v ::s ~~: ~:) . --:3:L ~ :?'? .... ;:~ 4· y ':? . .;t \;1'\ ·-·ll~j ~ ?~?~5 .... 1 .·:{. ~ :~·) ·4 ::_; .... :t :!. • "? PFD.7.2-Reinvestment of 50% earnings PFD.7.3-Increased government spending PFD.7.5-Reduce personal income tax F;F·:o ~ ·7 "} 3~·- E:~R ····()v()():~: .... () ~ () () t:·; () il- ().,()01. ··"*8 •) f..il·4 ··-fj ·~ !5 if ~5 --~ :7 {· t~ () ~) ··-:t :·5 •} 3:? ····1. ::.; ·> ~;ï6 '? ~···l :~: ·Z. 9:2 ~1 -· () ~ :.':) () ~-=~ ~;.~ ~::; {< {s '7' ~:) .... ~)fil {r [~():;~ -~ .. ~:~_:. ;;,~ ... 4--4 ~'5 ""' Sv' :2 -~ () f:j l:} .... i:S ... ::) ::.? ~;> ••.•. l{. '? ~ ~-~ () ::) om )l ~:~ -!-(:_, :3 /.} .... :?:3 -~ ~;> l ~'j -,:; :~: -~ s) EJ ~:~ -~-53~· l ~?~2 ····-4:3 ~ 2::~ .... :.:~t.S -}{S4:!. F1 F[~ ~. 7 v ~:ï ... ~ Ei:;: 0 ·> () ... o. o .. - .0 ~ "'"'' _... ? J .... JCt -0.795 -1..97 -3.38 -5.356 -8.242 -11.5~3 ·-·1.4.883 -9.224 -5.474 n '"' -71070 -·ll; ·) -4 ()'?) ... <:?. (i J;. tJ ~-s 5 -23.546 -25.281 -26.617 -28.488 -29.172 -29.488 . ·i ~ II-52 Table II.28 Real Per Capita State Expenditure Impac~ of Various Permanent Fund Earnings Uses (Constant $) (Measured as Difference From Alaska Inc. Case) FI F. :o ~ .. "? v. ;;_:~ -·- ~=:. F~: F~r-:·r! >;· :/ <-:3 .... :::: ~~( l y)".'?? :1. ~)7f) :L 9)'{? :!. ~:}~3() :J. !j}f] l 1 \}t5:2 l (?t3~·~: :t l ~;} E3 ~~i :l. ~?f.3-:S 1 (?f3:? l9t5fi ·r t' .. ~ !'"i r'''! .l. 7 ~:::· 7 :L ~>J ~:;t: () :Î. (;.:-::_;.:r:r. 1 ;,;.) ~:;-:·~~ t "-]? ·:;: :~:::: 1 ~-?f?-4 l::;)(_?~=:i :1. s:-9l:. 1 ~~-)~~) / t ~=} :~;:: ;] 1 ::} (~") \~;~ () ~ c~ + .~\ t} (0 ().;. ~~~ ~ 9 ::.~ :? .... () -:-~~~-4 .... ::~ ~ :~) l'! ;.~~ .... ~) {-·~:;.: "/ {::~ -~· :=,~ ~ ~_:jlf :3 ····l~ <-[:;;:).4 .... l :~: 1} :L J~; f:i -···t'?~ ~:;t~ .. s ···· ~:s ~ f:J ~~~~ ::s ::) ::) ~ / :? ~~; ~~:i :t ~ 0 :L t3 ·4-·:l,.. ·:3 ()--y :t '1 ~3 ~,:) ~? <· '7 4 ~-:~: :3:,:) ~'" t (/~5 ~.:S ~:) ~ I () B :3;.:~ ~' 7 :]' 1 ~-~5 4 ;::) ::~ () .;, ~=s ~~) -4 PFD.7.2-Reinvestment of 50% earnings PFD.7.3-Increased government spending PFD.7.5-Reduce personal incarne tax .... () f ()() l ~·" () \· () (; :::~ "'·· () -;_()Ci :f. ·-· () ~ () () ::~-~ ;:;;-:--4-4~;;: :i. ·7 -~ ~:s9~1 ~~; () .;. ·:·::: ·4 ':? ~5 ·:~;r. \• :.:s :·; ~_:_:: ':;: :l -;-:s <_;> (_i l :::) t') ~ ?tt '? ~:~ :t · ~~~ 9~ .:-~? :~s -6 ~~~ -4 () -~ 6 ~::: }l J. -4 -4 -~ ::~~ ~:3 ~=s · -4l v ti ::.S ~::_; 24.623 143.513 103.298 ~54-;. :::s:_~}:5 :.~:: ~_:; :-B 0 ~? :.:~ :2 ~ 4-() :t ::) -4~ ·: 0 ~:5 :::::; ~.:) ~::; ~ ~) ;.~~ ~:) ::s 4 -; '? :.:5 ::~ FIF'IJ {• :7 ·:0 ~5 .... E:F~ ()v ~. i't,.J .... ,, i •• } i• l' ·-.} ·: ()~()::57 .... :~ i-!::; :t {::1 ·--4-:-4-4~::5 ···-C) -~ ;.2 ~-:) ti -10.291 -15.542 -20A913 -25.327 .... t 1. -~ t}é~i) :~~.;.~>t:3 -~t {-1 ::) •o.•()t-~?lf~ .... · -4-.. , () :::} ~? ' .... 4. ~ 6,"?;:1 ..... ~:}y 2-l..·::,-4 -·-:3v9:3/ .... .q(-:"5<"/1. --4 + :;::]':::~ ·····-=+ -~ ~3;Z~} (..... - r 1 ..... '-' - - 1..; ..... ..... L II-53 In Table II.29 the changes in real per capita state revenues are shown. The impacts are distinct. Revenues per capita rise when earn- ings are rei.nvested and fall when expenditures are increased, primarily because of the impact of these programs on the general and permanent fund balances. With the reduction in the personal income tax~ the real per capita level of state revenues also declines. 1 j 1 1 l ~ i ~ II-54 Table II.29 Real Per Caoita State Revenue Impact of Various Permanent Fund Earnings Uses (Constant $) (Measured as Difference From Alaska Inc. Case) PFD ~ 7 ~ 2, .. EJZ F~F:·x) v ;7 .v :3~ ... t:: fr~ 1977 1978 1979 1980 198:1. l (?~:~ ~~~ 1CC7 ··•w~ 1984 1985 1986 :t '? E~ ~? l ~if3î3 l9f39 :r~~9(> 199:1. -:1.992 1993 1994 1995 1996 1997 1.99B 1 C}t_)C;t •• "..r .. () ~ .. () + " \J -~ () .... ~;: f.9l 5 -:-71~?:; sj o) t.) :-;r \~· :1. B .,. )' f:· ~.) 30.442 42.28 50.251 52.574 49.726 43.403 ·4!:5 ~ ~~!:=t-4 48.151 48.707 48.318 48.116 ~<{. :7 ~> <j 9 9 --4:7~!5t1 lf ,~) .,. ~:) ~~ 6 -4~) v 0()-4 PFD.7.2-Reinvestment of 50% earnings PFD.7.3-Increased government spending PFD.7.5-Reduce personal income tax -0.001 -0.001 ~ ~ ~ 0.001 0~928 -0.385 .... :~~ .;. :,~:: !::; ~:) .... r:; + 6 ~.:) :~=: ' .... :t '7 •: 1.{. ::.! ~7 -30.758 -48.693 -66.784 -42.061 -·· :~; -4 7 l 4-(;; -39.964 -61.436 ~~ ~· -q~.~o -46.23S -49.193 -45.331 -38.507 -32.208 -26~732 . PFD. 7 ., ;'L. EF: ()., " \} ·l< ., ~.l •i' ()? .... :·:~ v J:) "? ::} -9.359 -12.634 -19.236 -30.406 -41~836 -50.844 ... ~ :::; :?) ·> ~? )~ :.:~ .... ~:5 ~:) y t.? ;;~ !::; .... 5 {~} i· fj ::~:: :;:j -55.93A ~55.023 .~53.814 -··~:il~ E3~)S;' -49~439 -46.019 ~=;~:~~~ -33;377 ~ ~...,; ..... i- l.. - i .... - - - II-55 E. Conclusion The economie impact of changes in the use of the earnings of the permanent fund is significant because of the large size of the fund it- self. Thus as the fund grows more slowly as time passes, the importance of any policy change regarding earnings disposition declines. The most important impact in any case is upon the level of the fund balance itself. Reinvestment of earnings increases the balance signifi- cantly~ while using the earnings to increase state revenues leads to rapid depletion of the general fund and any money which cau be withdrawn from the permanent fund. Alaska Inc. and a personal income tax rebate occupy essentially middle ground in their impact on the fund. This is because they prevent a faster balance buildup but do not increase demand on the fund as did the state expenditure increase case vnder the candi- tians of the 11 ratchet effect" of state spending assumed in this analysis. In terms of aggregate economie impact, all alternatives were sig- nificant. Reinvestment of earnings shifted the pattern of growth toward more rapid future growth, while the opposite was true in the other three cases. They all reflected the fact that an increase in the level of disposable personal incarne would result in overall growth of the economy rouch larger than the original change. The cases in which growth of the economy was accelerated in early years also illustrated the fact that in those cases, the slowdown II-56 necessitated by the financial difficulties projected for the state would also be larger. Finally, the Alaska Tric. program seemed to be more effective in getting additional income into the hands of individuals than a tax re- bate. Because of the provision of multiple shares after every five- year increment in a person's length of residence, the value of an in- dividual share begins to erode in real dollars less thau ten years after the program is instituted. ;j il u • ..... ...... ..... - - - - - i_ t..... ..... i 1 L ..... - - i- - PART III ANALYSIS OF ECONOMIC IMPACT OF PETROCHEMICAL FACILITIES AND FISH HATCHERIES ON THE ALASKAN ECONOMY A. Introduction Portions of the permanent fund may.be invested in new ventures in the Alaskan economy, particularly in natural resource related areas. Such investments may be done for a variety of reasons which all generally fall into the category of broad economie benefits for the Alaskan economy. Objectives most often suggested are diversification of the economy, the creation of jobs, and the generation of additional tax revenues for state and local government. In this analysis two particular types of facility are examined to determine their impact on the state economy. Emphasis is placed upon the impact on the overall growth of the aggregate economy, the regional components of gro1·1th, and the fiscal impact of the construction and operation of the facilities . The first alternative is a petrochemical complex. The facility in- corporated into the simulation is patterned after, but does not correspond exactly to, the final proposals presented to the Royalty Oil and Gas Board for the construction of Alaskan refineries for the refining of Alaska's share of the production from Prudhoe Bay. This refinery would be lo- cated on the Kenai peninsula and would utilize 150,000 barrels of oil per day. Construction would begin in 1979 and operations would start III-2 in 1985. Employment during the construction phase would peak at an annual average of 2,550, while 460 would be employed during the opera- tions phase. The value of the refinery for tax purposes would be $1.5 billion. (A more detailed description of the assumptions can be found in Appendix E.) The second alternative is a series of 30 fish hatcheries located in various parts of the state. The Southeast and Southwest of Alaska each receive eight hatcheries, the Southcentral area receives six, and the Interior part of the state receives eight hatcheries, of which two are located in the vicinity of Fairbanks. These private, non-profit hatch- eries are built over a four-year period at a cost of from $2 to $4 mil- lion each. Two construction seasons and 30 construction workers are required for each. Operating employment is eight full-time equivalent employees for each hatchery. Fish begin to return two years after operations commence. The hatcheries generate increased economie acti- vity in both the fishing and the manufacturing (processing) industries. Both the petrochemical facility and the fish hatchery program are assumed to be economically viable operations. Thus, there are no implicit or explicit subsidies to either from the state. In particular, the re- finery purchases royalty oil from the state at the same priee as the best alternative which is available to the state. The fish hatchery program does not receive an operating subsidy from the state. ""'·~· . ~~·'•' .. ~ J ~ i ...... III-3 ..... ..... This assumption carries over to the form of financial participation by the permanent fund in these projects. At this time the legislature has not determined either what types of projects in which the permanent r ' 1- fund might invest or what form that participation might take, such as the purchase of bonds or an actual ownership position. Neither has the ...... phrase "income producing" been defined. For these reasons, it is not possible to specify either the form of investment or the earnings which might accrue to the permanent fund .:from participation in the financing of either of these types of projects. Therefore, a neutral assumption is made regarding the impact on the fund itself of financial participa- ...... tion in these projects. It is assumed that whatever form the investment may take, it does not change the average rate of earnings of the fund • .... This assumption of neutral impact serves two purposes. First, it allows the analysis to isolate those fiscal impacts which occur through changes in the economie activity of the state from the fiscal impact of -a change in the permanent fund and its earnings potential. Second, it -allows the reader, if so inclined, to easily substitute his own assump- tions concerning the impact on the fund of these participation programs. -Any different assumption regarding fiscal impact would be additive to that impact presented in the results. Thus, for example, either a rate ..... of earnings greater than or less than the average for the fund coulà i -be accommodated. - - i- i 1 ' ! 1 ~ 1 1 1 ! 1 1 1 1 1 i 1 l ! 1 1 ! 1 1 ' ,. 1 ! i III-4 Use of this assumption also eliminates the necessity of scaling the two projects so that permanent fund participation is equal in each. This would clearly be impossible in the present case because of the huge difference in the capital requirements, and total resources demanded, by the two projects. The refinery costs $1.5 billion and the 30 fish hatcheries, at most, $ .12 billion. To increase the number of hatch- eries to make the total capital requirements of the program equivalent to that of the refinery Hould require more than 360 fish hatcheries, an impossibly large number. Because of this, it is not possible to directly compare the two projects in the sense of general economie return to the state from in- vestment of a certain dollar amount. In the sense of scale, this is a ,W comparison of 11 apples and oranges 11 which is not completely valid. The projects do offer an interesting contrast, however, in the fact that the refinery is an extremely capital intensive facility, while the series of fish hatcheries is much more labor intensive. As a result, the con- figuration of impact in the two cases should be quite different. In assessing the results of this impact analysis, it is important to bear in mind that the validity of the results for the projects is only as robust as the validity of the underlying assumptions which went into the model. In sorne instances, there may be a difference of opinion regarding the level of a variable in the assumptions, and the results might be sensitive to that variability. For example, the capital-labor ' .j ;.J ._ ....... - ~ ,_ - - 1 1 ..... - ,_ '- ..... - .... ,_ III-5 ratio in petrochemicals manufacture is not the same for each facility. It is dependent upon such factors as the relative cost of inputs, the types of feedstock employed, and the mix of products produced. With this in mind, it follows that the impact analyses of these facilities should be interpreted not as the analysis of specifie projects but of types of projects with the mixture of characteristics as outlined in the discussion of assumptions. The comparison then is between a capi- tal intensive project built on one site and a number of labor intensive facilities scattered around the state. III-6 B. Base Case The impacts are measured from a base simulation described in Part I of this study. In the base case, state expenditures grow at a rate which maintains a constant ratio between per capita real personal incarne and per capita real state expenditures. There is no constraint on this growth imposed by a lack of revenues until beyond 1990. Since these simulations go no further than that, the impending fiscal crUJ.îch is ignored here. Aggregate economie growth is strong between 1977 and 1990 in this base case (Table "III. 1). By 1990, population is 688 thousand and employ- ment has increased nearly 75 percent from its present level to over 325 thousand. Personal income has increased nearly three times to $13.1 billion. Up to 1990, the fiscal condition of the state appears healthy, as described by the variables in Table III.2. Expenditure growth is strong and steady as increases track growth in real per capita personal income. Througb most of the 1980s, revenue growth more than keeps pace and growth of both the permanent fund and the supplemental fund keep pace. The supplemental fund is the depository of all state revenues in excess of current needs which are not 11 locked up 11 into the permanent fund. They are set aside during peak revenue years to be used in times of revenue shortfalls on current account. ~ l ~ lUi ...... - - - -· ._ - ..... - - ..... - - III-7 Table III.l Base Case Aggregat~ Economie Indicators 1 ~~ .. :?~? 1. 9/''fs 1.9'?9 l ~.?~;!() 1 '?~J 1 l i;:~ ::~ :~~. :l.9ü3 1'"if::j.·~ t'~.) ~:;:5 1. 9f:~é) :t ::.~~ ~:j :? t !:;; E5 ~~~ :L <? ~=~ (} l \? I~."J() POP -Population (thousand) EM99 -Employment (thousand) r~ Dr' 2! Sr't fS ~ ~S () :~~ .·:·f () t:: ·> ::) :L :? [~f"·i';:t9 l .. ,., . .. • !. 187.487 3292.21 192.029 3600.29 425.551 201.316 4055.06 457.817 220.719 4869.61 484.215 232.928 5505.92 ·4· ;=if !5 .;. ::.:.~ ~5 !::t () ;:3 i• ,T4 () ~·:) ~:; ~~~ ~.) -~ ~:.; l; !5 .,q.l) v ~~ ::.~ ~~~ ~::; lj ~:~ y .. ::} ~:.:; ~::; t:;.) ::s -~ ::~ :·::~ :? ,:) ~:.=~ t \• ;~:.~ () :::.~ 233.345 5771.67 236.415 6163.91 243.346 . 6725.23 253.07 7437.8 263.693 8241.89 276.056 9183.64 :? s) (J ·!-. ~::.~ ç~ 1 :t () ~~~ fi ~5 ~ 653.134 '306.862 11599.8 {) fi ::::: ~ l{. () :? :3 :~~ ~=s ·=· 2 ~:; {:; l ~;) :t :t 1 ~ ::=; PI -Personal Income {million $} ··'' L... ·t~ . a.-..-.................................................................................................... __________________________ ~ië ~ ~ :tt::.)·?;? 1 ~):?::3 1 (;:1 "?~;' :t t:;.> ~:5 () :t fJt~~ :t 1982 1983 1984 1985 1 ~}8() 1987 1988 1989 1990 III-8 Table III.2 Base Case Fiscal Indicators E99S . R99S PFBAL PFSUPBL 1099.65 1130.36 2.4 o. 1271.17 1148.96 62.4 o. 1385.2 1543.19 276.293 90.733 1550.86 1957.76 746.281 418.789 1839.38 2234.44 1212.58 730.018 2067.21 2520.95 1748.2 1086.55 2164.9 2827.61 2492.13 1625.27 2307.23 3255.6 3525~13 2429.83 2508.6 3549.28 4659.57 3318.07 2762.11 3734.52 5741.3 4147.86 3046.73 3717.27 6544.9 4723.64 3377.95 3656.71 6985.21 4966.74 3762.7 3606.98 7033.23 4847.05 4218.49 3586.25 6641.29 4312.44 E99S -State Expenditures {million $) R99S -State Revenues (million $) PFBAL -Permanent Fund and Supplementary Fund Balance (million $) PFSUPBL -Supplementary Fund Balance (million $) ~:] - iiliili t f } ~ , - - .... !<... - ..... - - ..... - III-9 Warning signs are~ nonetheless~ beginning to appear. The level of total revenues peaks in 1986 and begins to inch downward from that point in time. Shortly thereafter in 1988, the level of accrued revenues in the supplementary fund reaches a peak at $4.966 billion an.d subsequently begins a decline • These trends are mirrored in movèments of the indicators of average per ca.pita economie activity shawn in Table III.3. Real per capita dis- posable personal incarne shows fairly steady growth throughout the period of analysis, reflecting aggregate economie activity. Likewise, real state expenditures per capita increase according to a smooth pattern. Only real per capita state revenues show a period of growth and then after 1985~ a sharp decline from the peak of $2,016 to $1,306 in 1990. This is a drop to below the level of a decade earlier when, in 1980, it was $1,597. In addition, in 1989, for the first time since the beginning of production from Prudhoe Bay, revenues fall short of expenditures. The pattern of local finances is a healthy one because of bath the strong level of state expenditures and revenues from local sources (Table III.4). Local revenues and expenditures are closely tied to the level of state expenditures through a variety of programs. Since state expenditures grow throughout the simulation period, so also do local expenditures and revenues. Increases in the local property tax base contribute an important local source of revenues. III-10 Table III.3 Base Case Per Capita Economie Indicators :1.':?77 l9"7~:5 tl Cl .. ?C! .i~ -·· ./ t,f' :t 7' E5Ce l9ti :t l t::} :;:$ ;t~ l s~) ~3 :?~ 1':?~3·4 l ·:; .. \::::::.:; :t':;.) rJé~ J. !:;;=}J"? l :?t;~f=~ :t 9 t~~;.! :t s::~:;.:·<> :o I ~:~: r::· t1 E:: ~:? ·;;~ ~:; r~ Fl c; 2897.39 1185.25 2997.95 1279.2 3104~74 1282.35 3293.58 1265.61 3345.17 1358.48 3307.63. 1447.27 3331.98 1427.92 3393.46 1418.23 3470.27 1425.38 3542.59 1448.35 3626.01 1468.22 3710.28 1490.01 3806.07 1510.82 3899.71 1537.09 DIRPA -Per Capita Real Income (constant $) F~ 9 ~=> ~::; F< ~::~ [; :t :~! :t f:~ v :·5 ~!5 :t l !5 {:.l v ~:.:: ~) :t -4 ~:.~ ~3 v ::S 1. :.::; ;::} ·;? v {;~ :::; 1650.26 1764.94 1865.03 2001.19 2016.69 l ~?~5ES v ;~~5 l ~;t ~~;) :i. v :3 :.:1 :tl) :i. :~~~-vs~? :t' -4 ·4 ~:~ ·:· ~! {_;.\ l ~~ 0 ::~) ·:· ~? ~~~ E99SRPC -Per Capita Real State Expenditures (constant $) R99SRPC -Per Capita Real State Revenues {constant $) .. J "1 ----------------------------------~--~--------------------------~--~~~~--~~-d----~~--~.~~~--~--~ 1...... ...... - - ...... ~ !....~ ~ - ._ - - III-11 Table IIJ..4 Base Case Local Government Indicators E::~:,)9L . F;~~l'3}L. E~ 9 ~:> L. J=:: F~ (; i={ ';) ~:> L. F\ r::~ (; :ts-~'1·?· . j_ ~-> '? f:3 j_ (?'?~.:; l ~~~ii:;:() 1 <;.;;31 l9B::.~ :tt.?t53 :L(?;34 l i._? f~ ~:.:j :f. -:;.:;:3(:) :1.(?8'7 l ()f.~::::; l ':?E:;<_;>- l ~.!9() ::.:; ~:;' ~7 {-() }' !::3 ~; ~3 ~:; ·~ \) (s :·;; ô.ft:Lv:î.é:l. ~~1 :·~ :t .;_ ~:5 ~:.=.i <.? Çti::···:;:. 'Ï ''?ll \J: ..,.; ""'·· ..... t.. ~ J t:;> ~4 ~) ;,. l) E5 ~7 .;: "') ·: J::· i ~·') J. t..• oh ~.) .} >lo ;,"oo l :t ()() 't }j)' :Î.;.~1.() ~ ér9 l :;) :::2 .f{. -=· <.:.:-. \ 1 -\·1· .:S () v -4 :2 l{:)1?v'.5 1 ··;-; t~i ·:;; -~-.l!.-:2 ;2~ 0 :t .-:-:;. -!· l ~~~ E99L -Local Expenditure (million $) R99L -Local Revenues (million $) :.:) i} :·:} * -;/~1 ::.~ {;. ~5 ~:; () ~ ~:-~ :f. ~ .. ;~ 6():5;; :L :·5:2 fS =:v ;~; ~-:t l{. t) B 0 ~:~~ -~ t~ ~~> ·7 t:~ ~) ~:; v 9 :~.~ ~~· <;) / ~:=.i ·:' !5 :.:~ ,~·) J.O:SS>v-7:?:~ t:L8é.~~) :i. ~3 () ~:~ ·:· l ~~~ :f. ·4 ~.5 :~: ·:0 ~:~ é) 1. (:.1 ~~ ~':) ·> ::~: ~=t l) i~. ~::) ~ 5 ~=; ':? ~) f:~ f:3 ~> -ll; :=.) !5 9 :·f) v. ~:.i ~.) ~~~ ~:.=.r t; .. ~J .? -=· :? -·~} )' l; :.~ ~;) ~-3 :? '? 664.885 669.553 676.692 687.908 694.73 703.775 ~? l ::) •} 4 '?f:$ 1822.jy--~j~~~~i 2060.59 733.883 E99LRPC -Per Capita Real Expenditures (constant $) R99LRPC -Per Capita Real Revenues (constant $) ~5 ~3 (~)· i-() ::; ::) ~:r ~:;; 3 ~· iS ~~\ 7 558.347 565.654 592.983 629.348 ~:)-4~~ ~ l}~~:j l) 5 ? v ::j ~5 ;;;: (:;~?.<"{.v 1..ê:t6 6B~~;.-=?3:!. 71 () 0 .... 1. ~):.3 :71 \~'-; ~· ()5); / ~:) :t ·:· (; ~3 '7 ~:}~;50·-=· f~lt5 1 1 1 j ~ 1 1 i 1 1 Î 1 m [1 ,j ~ ~ Î ;. 1 ~ i , ~ 1 i ~ ~ l ~ if ~~ ~ ;>: ~ t III-12 This steady growth is reflected also in the per capita measures of revenues and expenditures. As long as state transfers grow from year to year, the level of local services is able to expand. J ----------~--~--~----------------~~~.~~~------------------------------~~~~--~--------~~----._ ... ~~--_.~~ ~ .... ..... ..... ..... ~ .... - ._ - - ..... ..... III-13 C. Aggregate Economie Impacts Upon this basic simulation of the economy the two projects described above are overlain and impacts measured. The pattern of aggregate eco- nomie impact differs considerably between the two cases. Looking first at the impact of the petrochemical facility (Table III.5), a definite 11 mini,-boom" period can be observed in the early 1980s in con- trast ta the base case, coming essentially at the end of the peak as- sociated with the construction of the Prudhoe Bay gas pipeline. The boom is evidenced by an employment increase which peaks at over 13 thou- sand in 1983. This is associated with a population impact of over 24 thousand which peaks in the following year. After the labor intensive construction phase of the facility, the employment and population differences decline until the late 1980s. Then they appear to stabilize back to the growth rates in the base case which in 1990 result in levels 5 thousand and 15 thousand above the base case, respectively. From that point forward, equal growth rates between the two cases would result in an ever widening margin in terms of employ- ment and population between the two cases. This large construction proj- ect, coupled with a small permanent labor force, has put the whole economy on a somewhat higher growth path. Increases in wages and salaries, and with it personal incarne, follow the same pattern as the increases in employment. In the peak employment i: ~ ! i i ,; j 1 .~ 1 ~ i 1 ~ ~ l ~ ~ ~ i ~ l 1 ,, ~ ~ ~ ~ ~ ~ ~ it ~~ ~ a· (~ ~ ~ ~ ' t 1 ~ ~ ~ 1 a ~ i ~ i 1 i 1 1 ' f ! ! J ~ III-14 Table III.5 Aggregate Economie Impact of Petrochemical Facility (Measured as Differences From the Base Case) f:~ CJ F) :r. _s; ~:J ;";f ' ·r r·.···."l.t'""J J.. ·x .f c; 19~?~:) :l.'~·)ÜÜ :t f?E~l :t•)D:~~ :t ~~~\ G :;) 1 ::~;: ~:~ .tt :( ~.:. t~ ~:.:.; ·f ~=~ .. _q .. ~:. _ ... ~ ,.,.· ..... :t ~:.::r5·7 1. ~? Ej f3 1. ~:) ;:.~ ::;) :L '1'S'0 POP -Population (thousand) {\ ··.J· •;> '\ \,;. 0.;. ~~37\ .. -:f ...• ? i{. ::~~ l2 v ~)t=;if~ l ::3 ~ ::;~ :t ::~~ ~~ ~ '? ~9 ·?. :~ 4 .;. -4 ~:~ {:; J.t3+1~;1 l ~::! .C· ~:;:3 14.811 14.557 14.665 :L ~.! -:· 0 ~:§ ;::~ PI -Personal Income (million $) WS99 -Wages and Salaries (million $) EN99 -Employrnent (thousand) PI <""-,._:; .;. .r._ ~ ..... ~ 5.867 134.059 77L ~c~ J,~oJu~ 4 :7 ::_;> ~ {!> :2 ~) ~.5 ~::~ 1 -~ l :?:; :? :=.~; :::; () ·i :~2 :3 2?4.:!.2:!.. ;.~~ l () ·lo ~) :3 ·4 :t ~:;t~5 «t 9 j, ;.~()-4 ""2é~<S :~.? :~~ t.1 ·~ 1 6 ~~~j() ·! ()f~6 l:JS:~}~;1 o., 0 v. ~:; {> 1 ()J~:; :tl:.7~t~;!l ::} ~: <?' .) ::; ~5 Ei ..:'} ::.:! () v () ~:~ .-::~. f3 ~:~ v l -l :~~ -4{-r~~j ... 4:5;7 ::::: l{. () .;. $\ é"-: :t :t f5~S ~:o :? 11. :L ::? ~2 -:, ·? f~ c; l~3()w·4?~) ;~~ () () it :~ ~:::; ::;:: :s () ~ ~:·' () ~~:; E:f··1~:JS> () ê- ./"•, l.J v 0.181 3.546 9.142 12.001 :t ~~; .;. ~1 ~5 2 13.014 7.005 4.955 4.304 ·4 -:· ~! ..:::} ~=$ ,·:·:;. v l} fj 4· 4 .j {;) l~f~ .J - i 1.... .... \... .... ..... - ~ 1.... - - - III-15 year of 1983, the level o:f employment is 5.7 percent above the base case, while the level of wages and salaries is 8.9 percent above the base. Thus~ the employment generated by this facility adds significantly more to personal incarne than the average employment for the state. The pattern for the fish hatchery program does not contain a "bulge11 because there is no massive construction phase (Table III.6). Growth of all indicators in relation to the base case is incrementai. Employ- ment increases come gradually and fall behind the refinery case in early years. After both facilities are operating, however, the two cases show long-run growth above the base case which is almost equal . Because of the incrementai nature of the growth, the level of popula- tion has not increased by as large an amoun~ relative to employment . Growth in wages and salaries and personal income shows the same smooth pattern of increase over the base case. In early years, this growth turns out to be less than in the refinery case, but by the late l980s, the impact on both of these variables is substantially larger from fisheries enhancement than from the refinery. Part of the reason behind this is the fact that the fisheries enhancement program leads directly to increases in economie activity in two other sectors of the economy. First, the increased level of the fishery increases the value of the fish taken by Alaskan fishermen. This is assumed to lead directly to increases in incomes in this sector ,~i111111U$liiioid ~~ ~ ~ (; ! g a • 1î ;! ~ '~ ~ i i l 1 ~ 1 1 ~ j 1 ~ 1 ~ 1 ~ 1 à t' ,1 ~ 1 ~ rl ,, ~ l J 1 ~ 1! ~ 1 ~ 1 • ~ 1 ~ N 1 j ~ ·~ ~ 'l i;t ~ J t 1 j ~ ~ 1 III-16 Table III.6 Ag~regate Economie Impact of Fisheries Enhancement (Measured as Differences From the Base Case) l J:;J·7)' t(?"?t3 I s:·7\::> l ~:;· :::; () :t ~;) f51 l'JD:::2 :t ~) f3:.:) :t ~?f3A~ t s:·s~; lf~;~~~ <·S t ~.?~::i ::,:; l ~:;; !3 ~:5 l. (i>B9 1:~:., l:;j () r~c)Ft ()-:- o. 0 -:· '7~~~5 :t ·=· ~;l J :2 ~-:~ .;; () -4 ·4 ',:·f {t ~7 ;;,~ ~~ ~~:; .. ;. t :.:5 ~;) ~=.:; ·> ~~:: ;,~ {;·, l:t .. ~l··:t:l :"? .. ~ ::;:~ ::~~ •:_;.\ ~=~ ~-:~~ ::? '? t:t -~ ::.~ ~;) l l () .;, :::.~ ~-=~ (~~ :tl.:· A· j, :? POP -Population {thousand} , .. }'\" r· .l. (),, ''· \1 o} ~:.~ ~.-:~ ·~ ~=; ·::} Ç;} ~!.) .•:'t ·;< ~;.; ~3 ~:;~ () y ;:: :3 t:j 125.672 114.348 107.805 ll~;:.:.l4·l t :} ·4 f :t :·:~ /' .2()!5 ~ {) 4 ~;; ::~~ :3 t::} ~-:;;~ l' ~::; ~~ ? ~::~ ·> :t ~~: ~3 ::) :2 lf ,. ~/ :·:~ f3 PI -Personal Income (million $) WS99 -Wages & Salaries (million $) EM99 -Employment (thousand) t;.~ ~3 \l'?) O.:. ,, l~l ~ 20.486 47.984 70.238 -1 -; n. ~ 4L .tv" 1. 00 ·> :i. ::J4 (.:} ·4 ~ !:) ü ~~ t ~~~ ·4 ~ ':~.} ;;_~ ::.~ :( ~5 :~ ·~ ~.:) () :~.i t ;:5 t ·!· ~i~ ;? ~=s :~:f. J. ... t?-4:t ::.:.~. ·4 ::? ... l .-:"} !:5 :2 ~3 ti i> () ~:3 ~:~~ E~f>lO:?C) ()v ()-> () ~ ~s ~~; l ·~ ~~ () ::~~ 1.} <;.:ro{~:~ ;2 ~ i:~ ~3.-:t :~? i· :?.5 :;~v 5() ~.) . ;.?. '}if"?? ~s ·~ ~:;:31 ·4 -~ () () ~::: ..cl v ··4 :~·} ·4 ·=· S' ? :? ~5 ·=· ~::ï :.:) ~;; - - - ..... '" ~ :.... ..... ;;_ - - ~...... - L : .... - III-17 without an associated increase in employment because of the limited entry laws which effectively limit the number of fishermen working in Alaskan waters. The increased catch, in turn, leads to increased fish processing and is reflected in an increase in the levels of employment and value added in the fish processing industry in the state. The inclusion of these economie 11 links11 in the analysis of the fish hatchery case highlights the complicated nature of the assumption neces- sary to carry out this analysis. It is assumed that the fish which the hatcheries produce are all caught by Alaskans and that their incomes are spent in Alaska. Thus, there is no leakage of this income outside the state economy at the time of the initial transaction to the fishermen from the buyers of the fish. In reality, some of this income to fishermen would not go to Alaskan fishermen and to measure the importance of this assumption, a special case simulation was doue in which none of the increase in in- cornes was received by Alaskans. There was, in this special case, no increase in the fishing sector of the economy from the point of view of Alaskans. Comparing total wages and salaries in the fish hatchery case, including increases in fishermen's incomes, with the case of no increase in fishermen's incomes indicated there is a substantial im- pact on the wage and salary level as a result of including these incarnes. The total loss is several times the assumed increase in income to the fishermen directly. III...;l8 This is because of the employment and resulting wages and salaries generated in other sectors of the economy because of the demand created by the se incomes. The increase in wages and salaries to the sta-te as a who le from ei th er proj ect ~ assuming no increase in :fishermen' s in- cornes, is approximately the same by 1990. There are other assumptions which could be changed and which would also change the results of the aggregate analysis. It is assumed that the refinery construction work is carried out by Alaskans who will spend their incomes in Alaska. The ~xperience of the construction of the Alyeska pipeline has indicated that this might not be valid. Some in- come would leak out of the state in this case, and the impact on wages and salaries would be reduced accordingly. .. ..... ' 1 ..... ..... - ..... - r 1 - 1 l 1 1.- .._ - - t - - - III-19 D. Regional Economie Impacts The economie impact of these two projects can be analyzed on a regional basis also. Here the patterns should also differ because of the concentration of the refinery in the Southcentral part of the state, while the fish hatchery program directly affects most regions of the state. The regional impact on employment, population, and personal income of the refinery case is shown in Tables III.7, III.B, and III.9. The regions are indicated by Figure III.l. Construction and operating employment are concentrated in the Southcentral region on the Kenai peninsula and in Anchorage. The aggregate growth of the economy as a result of this p~oject affects all regions, but the largest impacts are concentrated in tho se two regions. During construction . the Kenai pen- insula has the largest relative impact but after that most of the growth is centered upon Anchorage. This is the result of two causes. First, a portion of the operating employment for the refinery is assumed to reside in Anchorage, as well 1 as the operational headquarters staff. Second, Anchorage is the commer- cial and service center of the state and, thus, a large percentage of any secondary employment growth would be centered in Anchorage. In fact, in this case, 80 percent of the growth in 1990 has occurred in the Anchorage area. ...,.J.,i IL (, ~-~-·'""'"'-"'--"'~-«.·7-;.. '""~'"v~-''"'"'-"'~·--~-.. _,",~~·--=-~·-""'"<M"""""'~~•O--~P-J>-~-"Wo"'""_.,..,.,_._,,,_;.'*"""-""--"""'"'''•'"'*·-~•""""~,_,.,,-,.:ti-r."-<CJ)I/!Ia;oi>~~-~,.~,...;~-~~...l"-'~~~·~--,...~"'''":;,";;!o.-.f:;.1.;'~~1~~-'---·"'""-V"'""""""'~'~"'""""""~'"''~~~·"' Table III. 7 Regional Employment Impacts of Petrochemical Facility (Measured as Differences From the Base Case) :!. _(? '? )'~ :!.97B :t <;>"?S' :!.'?BO Er'19?F::L .... o ~ o~ () ,. 0 ~ 00~5 E t·'l '7' 9l:ç :::.: "' ,, . () ,~ ····().;. .... () -,1. ()()/.} (Thousands) Ft··19'?!\3 ("·, " . {', . .... v .... o., 00:1. .... ()~():!.'? :!.?81 0.081-0.024 0.137 --1. 91:~2 --~ ., __ -· ---~ ------·---------()~-\\ -~~~~~r9·----·-·----· () v <Y~i<.~ ---·--(i~~--~:.!j~~~ (?- 1983 0.324 1984 0.362 1985 0.319 1986 O.:!.B 1987 0.128 10nn ~~cc 0.112 1989 0.112 1990 0.121 EM99Rl -Northwest EM99R2 -Southwest EM99R3 -Southeast EM99R4 -Southcentral EM99R5 -Anchorage EM99R6 -Interior EM99R7 -Fairbanks 0.135 0.154 0.141 0.075 0.05 0,042 0.041 0.044 0 ·~ (; ·:y ~~:; 0 ·i'?f:~2 0.717 n.7~t w•~•0 0.246 0.201 o.:ton () >!• l \/ :~~-~ r::: r··I (;~ 9 t:ç .4 · o. Ov 'î \ ... () 1 9(?;:) r::: l'1 Si ~:p F< ~:j () <· o. o.:l.7D :.:.~ ~ ·4 ')' :~~ ·4 .) :f. i:5 '7 ·4 ·:-:·::) '7 4 .. , 4 ~ ::) t:~ ~=~:; . . -""' ~··--~?;~·::.~ () i ... -f (• ~5 ::.~~ ? ? ~ () ~:; -4 ::.~ v ~:5 ::} é E~ ~ l ~::.; :::·~ ().,.?33 4.41:) o ~ ~:s ~~~ ~!.:; :·~ ~ 4l, ~.~ 0.447 0.421 0.414 0.42 ~·:s ~ :r. (? 9 ·:3 ~ ~:.~ '? ·4 :·:) v !::; :3 ~? :·:) ~ (? ~~~ ·4 E:: f-i 9 9 Fi: f.l o~ Oc- o,. () ~ ()()<? 0 t ().<fé ~ ·o -~~ ~5 (,~ · 0 (·:!. :l. ::) 0.13 0.12 0.065 0.045 0.038 0.037 0.039 E~··i99f('? ()v o. () {' 0():3 0 ~ 0fj~:5 0 ·:0 ~:.::9-4 ()v l{ .. f{.~;j () ·:· ~5 !:5 ~·:~; 0 ·> ~=5 (j/ ~;5 0 v ·4(?t.':> () ·} :~~ '? ::) O.:I.B<? () ... l \~:1 Ov:J.~.:S:':) 0 ~ l !:;::;~ H H H 1 1\) 0 r~ r~· f. 9?;? l <?'?'~;:: :1. 9'?9 :1. (?f:~() :1.9:J:I. J C)fJ::::~ J 9:::5:.:) l9f:~~4 :1. ():3~5 :1. (/î:),~) :f. <?::;~·.? 1 9~:5~] :f. 9t3(? :1.990 POPRl -Northwest POPR2 -Southwest POPR3 -southeast POPR4 -Southcentral POPRS -Anchorage POPR6 -Interior POPR7 -Fairbanks r-,-.. ~-~ [----~., Table III.8 Regional Population Impact of Petrochemical Facilit;t (Measured as Differences From the Base Case) (Thousands) F'CJPF:l POF'F(2 F' DF'F( 3 f'DPF:4 F'DPF:!!5 PDPF:6 () ,. () -:-0 ·> () ,. ()., Ov () ~ 0-:· o. () ·:-{', " . of .... () ·:· () () ~;.~ ····() \~ 00~5 .. ~. () ~ 0 :L Ë~ .... (). 0:1. () \· ~;.~ i:5 ::s .... o ,, 00:!. .... 0~()-4 ····0-;.o:::J:!. .... () ~\ ~~~7<? :l .• 4:1. :,J.,C:i.6 ····0 f ()::.~r5 0 \\ ()i:5 t .... () (• ()9-4 .... () .;. ;.~~ ~:~ (~) ~ ~:s !.=.=j .-:-t é. 70:1. ()<.()()9 0 t,• 4ï"-':;:) 0. ()/.:1. () ~. ::s ~;} ::.:" .;!; ... '?4:1. :l. 0 ,, 44D () v :t () ::.~ 0 .:· ô'=?l~-0 ·} lf~B 0 ·l-f:~·.?:? ·?v :I.G4 :f. ;.:.~ {> ~:~ -4 0. :I.B:I. 0· v :J:Y~ l () ... :::.~ 9 '.? :L ·=· ~:;; \) l} 4 v ~J() ::) :1. ~:). ü63 0.241:) () -:· 9()~3 0 \o ..:'} ~:~ l{. :t {> 9 ::.~f:J :!. • 907 :1.:1..:!./ (). 3J:::; 0 v é:':)if ()v 4 :l. :1. l ., ::.'i3~? :1. .,6(:):!. :1.0.07:3 () ~ ;,:.~ 4 (_i 0 o} !:5:::;; (:, () ~ :::5 ? :~~ . :J. ? ::) :::; :f. -} ::5 :;~;::.~ ':Y v ~:~ () ~;.) (). ::::::!. 2 () ... ..tf ~:j ~·:~ 0.346 :1. v 209 :1 .• 4!'5:1. s.) v ~:;r ~:.~ .~.~ () \• l <p :·:) 0 ·> 46\:l () ~· ~:) ~.::: ~::j 1..:!.?3 :L v :·5(1 :L0.2Eli3 0. :LDJ. 044,~)'.? () v ~:) () f:i :!. • 0'5:3 :1.. 33B :t o v ~:po~;) 0.1.'?!'5 r··-···-_- F:tcJr::~ r~? ()., ,._ 1\) t ····0 -~ ()()~~·) .... () f () ~:.:,; 9 H 0 y 14{) H H () v ·4 ( .. ~) ~·:) 1 l'V 0 * ~:~3::~; l-' :1.. 0'?:!. '! 4 ...... • t v .\ .. ;i '\:} l ,. J/)4 "1 " .. , •• V !vl .. :';l () v(? !:5 ()"f39:t 0 v î:::..:l4 Table III.9 Regional Personal Income Impact of Petrochemical Facilitz (Measured as Differences From the Base Case) (Million $) F:: I Fi: :L PIF;2 PIF::::'î F' I F\:4 PI Fi:~:'; PIF:6 PIF~'? :t ·:?·?:? 0 .. \ () ~-o,. o. o. .(). () ·} t 9:?c () f .... () ·=- •'\ 1../ • 0 -~ o. .... (). () ~ :1. ()'/(? () ~ ()B () 1-() ~:~·) ::~~ () "' :i. <.i ~:) o~:t~?f5 4 f ~:5.<{..·:·::. o,. :!.é:!. () ~· ~:) ~:.~ E~ :1.9(;)0 :1. ·:--4l~ ::; :L ~ ::~~ ~:) ~=.=j :·:~: -} ~:s <? :::.~ :3B ~ 04:;) ? ~:) -> '? ·4 ~:5 ;:'i. ·4·4? ~:) v ~5 :~~ f3 :1. (?f:l:l. :.:5 ~ ~=~ ~:$ 'l l~ f .<{.4 ~:; ·:t4v:?c:)i/ :l. ~:~~ ..:'{. \• :·J ~!5 i:5 . l ·4 !.} t ::.~ ~=~ ~:.~ :1. :~::'" ·4::s ::.~ ..:l v .;;~\ (; (:) :L l:_:.)s~:.~ :f. ~:.~ {· :·:~:? ? B ~· :L () :·!) :::) 0 ~ ~~~ <;.J lf :f. ?t~ ~ 0El·4 . ~.~~ :r. :.:~ •} ·4 ~:_:; :1. <?v f~~.) ~.: ::.~ 9 ·~ l~. ~:) <_;:: H H l9E:::=> :l. :5 v ·.? ~:.:~ B :1.0.0'?:!. ::~; :? ~-9 ::_:> f$ :I.Biil.,.G:!.:I. ~.:.! ~=s ~:.:: .. , t ~-i :t 0 v 9~:~B :·::) ~:_:; ·=-~·::) '.? H 1 :L9B4 ·! t!, c· "'1 ·''i :L () ·> ·4 ::;~ ·4() * ::s:s :f. :::.~ é ~ :.;) :::) ·4 ~:.~ t:~ ~i f ~:_:; l .'{. :1.().,.404 ~':) ~·=) {• :t é ·4 tv .1.{.,. 1' 1t ...... · .. tv l 9 ~:~ ~:.=.; :l. :::.=~ ~ l' ~:.~ :t ? •}:":)>Jé '''•'."", '"'t'",f"V \:~-'·.i ·=· / \~) .. :j :·:~ ::=> ~ ~~~ '? s) l !=.:; B ~ 6 ~~-1 t:~ t:~ \· ~:s f:j ;.:.~ ~.:.~ 4 v [5 (,:; :L :1. 9f:~ét i:j ~· ~:) ·4 ~:=j . ·4 + t:~ ~? :t :t ~;;z •i ~:.~ '? ( .. ::~~ Ï 1 -:-·4 é C) 1 ::~o ~ :r. <):~~ ·4.;. ~:.)().',:;.$ :1.6.,3·4:!. :L "'?~:~-;;-! {;') •;• r:;> :t ~;5 .({. v () :? ~:,~ · :1.:'.:; ,. o·:;;6 ~:.~ ;.;> ~ () ? ~s 1 ::.:.~ l> ~ ~5 ·4 :·:} :;) ~ B {;) ~:) :1. :·:)v :3.<{.4 :!. '? ~:~ E~ é v ~=~ ~-~ ~=$ :·:S·v <?B9 :t ·4 v :L ·4 ~~~ :~~ l:· v. '.? .-!'{. ... <:. :1. ~':) !5 \-(? :t ~=> ~::;; v B ::?. :·:~ :L ~;.~ ~ E5 0 :? :f. ()~:~9 '"J. _.;"1"'::~ . .:. 1 ~ 'i' ..... !.,} ·4 >:· ::.::{::~3 :!.4. <::.G:I. ~.~~ES v ·4 9 :t ~:5 ::~ ~ ~:} ::s 4 ·4v()():l. :t:3~::s;'~:L" :f. '?-'';?() ~7$ \• ~::; l> ::.~ .. ::~ ~ '? :::5 1~) :1. ,;) .,. :!. l). :~.· :·:) () ~ ? ~::j (:-; :1. DO,. é2:1. ·4 \o 4~:59 :f.lt~;~llé PIRl -Northwest PIR2 -Southwest PIR3 -Southeast PIR4 -Southcentral PIR5 -Anchorage PIR6 -Interior PIR7 -Fairbanks 1.- ._ i - - .... ~ - t 1...... 1...... ._ ~...... ~ ; - III-23 Figure III.l. Alaska Regional Definitions for Impact Analysis A l ls 1 1 '" ,..., l l ID 1 i JE i ! ~ ; . i- i 1 ! 1 ,_ f l ! .... ,_ :, . ~ ·-·-~ ........... .................. ___ .. _ ........... __ ... ____ ..,._ ... _ ..... _ .. - '=" .. ! ! i -·- ' A ~ i~J,o•~p>P- ':l 4 o 7 . . e g ------·-·ro-------· · Northwest . 1 Southwest 2 l. r; Int.erior 6 p ... , \ Fairbanks . ·~"-l . 4. ~-\ ~outncentral ,._~-:MO~}."='!: . \ r·---' "q_~-. --~ \~ __ s outheast '[;J~l;., ,...... /c..&.:, fief?. ~-. -~. . 3 '[)1; \ • (5"2'~3. -):t.:--\ ~ -.......~-xr"·~ t) ' . "'-\c~ ·<.\,_ -/2 ... : _,_ '-~ -·· 1 ~. ~:V't~;----~,_ \ ,-.;;; --:· '"' ~~ ''-\~! _,-., -~. e;;:;~ ,,.;::> -?,-1:2 ~c•c.~ . =••c<s ~~. J/ • "' "'" ''~'··;0.1 ."-\ _.) ~~-. :=GiiO-:.=::::. ... V'3 . ( ' ",, 1 _,_ r -'-) i .<l' j; \ P li <;::.' South>1esc ,parc ol • :' ·\ li ~ ._.dl~ 1 il 1 ! cft • .. o 0 .. 'S?~rP n 1 ' ; 1 Ar i ! sl 4: 1 J l 1 1 1 ti ' 6 7 . _8 ·-----------~--------l_Q__i III-,24 The concentration of population growth is also pronounced but not as rouch as is employment. Over 70 percent of the population increase in 1990 has occurred in the Anchorage region, followed by the Southcentral area .and the Southeast. Smaller population increases occur elsewhere with the general growth of the economy and state expenditures. Even during the peak construction years~ the population impact is largest in Anchorage. Personal incarne grows in all regions as a result of.the refiriery construction and operation. lncrements over the base level are most pronounced during construction phase in the early 1980s when no region feels les.s than a $10 million impact. These fall off in later years to less than $5 million in the cases of the Southwest and Interior regions of the state. The cycle of increases and decline is most pronounced in the Southcentral region where personal income at the peak has increased by $188 million. Two years later, that has declined to $33 million. Further drops follow. Better insulated from this cyclical phenomenon is Anchorage, which experiences a $290 million increase in the peak year which falls only to $130 million two years later. Not only is the per- centage decline less, but the upward part of the cycle comes upon a much larger base of activity. Regional economie indicators for the fish hatcheries case are pre- sented in Tables III.lO, III.ll, and III.l2. The regional employment impact is much more evenly divided among the regions of the state. r [ r·~~ .r :1. s;·.:.:···.:? J ')'?B :Î.r:P'?'? lt?f~() J ~:_;.:~ ~:~ :!. l {,;.:' ~::5 ::.~ :1. 9C:3 1984 1985 1986 :1.987 1988 :i. (.):JI:? :1??0 EM99Rl -Northwest EM99R2 -Southwest EM99R3 -Southeast r EM99R4 -Southcentral EM99R5 -Anchorage EM99R6 -Interior EM99R7 -Fairbanks r r f Table III .10 Regional Employment Impacts of Fish Hatcheries (? ~~) F~ :L " ····l .. .J ·=- o,. 0 {· () () :~:.~ 0 .;. ().'L-4 () ·~ • ........ :! .~.;. () .;. 0 ~::.i ~:.~ 0 -~ () f:~ 0 ·:· () :.i' '.? 0 \\ ():::5 :t 0 ~· :L 12 0 .;. :L ::~; )' () ·:· :!. é :L () ·:· :t ~:~ 6 () {• ;,~~ :1. ::~~ (Measured as Differences Frbm the Base Case) E ivi <;.; () F~ ::.:.~ 0 -~ ()'" () + 0 (,;.:: ~5 () ~~ J :::$ :1. () ~ ~-~-~ () ~:5 () ·> l~ :J. '~} 0 \• ·4 :1. ~? 0 ·} . .:·:}é'?' () ,.. 6-4E: ()v .:S9'7 () .;. ·y l1. (~~ () ~ )' ~.;.) '? 0 ... D ~:_:,; :L () .. ,9lJ. (Thousands) E::r··J9~=? 0 t{ (),. 0 {• :1.():? ()v~~~;~ :f. 0 v ::.~ ~:5 () •} l} i:~ :::l 0 ~~ l:;. ~:.:; 9 () 1.> :;~: ':? ~.:.~ 0.., 4l)\~) () ~\ !.=5 ::.~ t:~ () ~ ~;.) '? ::~~ 0.60:;:) () \· érl{. :f. .. , •' '''i•' U"\:l/.1. E: t--1 ~:.:>9.F;~ 4 o~ " f,..J v () ~ :1. :t ~::.; 0.231 0.279 0.415 0,402 0.429 0.482 0.526 {) 1::· .(. ''l .. l' -} .. ..11,,}\.) () .;. ~::i z:p 4 () {-/) ;,:.~ :;~; 0 ~ é ~::; ;:~~ J::: f\·f ':.~.) I,? F< ~:; () ~ o. () ~ :i. ~=5 () v· ~~~ f:5 :;) 0.637 0.997 1.033 0,916 :tv 0/l~ :1.. 3Ufl :1..666 1.950 2.295 2.679 -----"--"---------- f r c r·i ·::.> C) F( .:<) o. o. 0.039 0.091 0.145 0.207 0.:158 0.079 0,081 0.092 0.101 0.109 0.118 () ~ :i. :~:-~ (; r--r Ei"l':.:-'9F;;7 , .. 1,) .;. o., ().,04:? 0-}:t~:~l () . "?':) 1 ..,, ••• ..,,} t ••• ~J 0.::::\06 o~:~?l? ()v:L4lf 0. :1.41.:· o.> :LOB () \• ~~~~ :t. '? 0 ·;. ~:.~ 4 :::.~ () ~ ::.:.~ é ~:.=; (),.20/ H H H 1 t:\.) Ul ~ ,....,~"'~~:"*"*"'""-~~"'~w~'iK•f1!:'.V,:J''"*'"":;\">.•:;,",-,·..èi~;::>.~:;..~>;~"""·'Z~<'-:;~~7-~-'i~"f..0?>/'[o.;,\S.-%".~~,;t~.~~~ .... :;;_-;;;,.,_;:_:-~~ .. ;;,.;...~;;,;;;:;..: •. .:-,.;;....~,.,_.,~"'~~~W .... ~..;..;..~~.....,,~~f;~4....:~~~.&i~*}vM··iî&4~·~-J.:.'<:;~~i.':.it::di:.;~,:~~.i<.îû,.'~ik~,;:'#.J,.:~,· Table III.ll Re~ional Population Impacts of Fish Hatcheries :1. 0:) )''? :t <?~~~t::; :L (?'?1:? :i. :l.(}ü:i. l ::?:J::~: t 9:::5:3 1 () :::~l~. t ~?B~:_:; :1. <_;iB;:":r :t 9~:~7 .l 1:? f) ~:~ :L ?fS9 :!.990 POPRl -Northwest POPR2 -So~thwest POPR3 -So~theast F'DF~F~ :t. Ov () ~ ····0. 003 o 0:· o::.~ :r. .o \• ... , ..... 0 ~ ()?~=.5 0 ~ t ~?~:~/ () ·~ :L )'<_:} 0 {-:1. ~:~ :i. () \• :~:.! :.:.=_t 0 .;. ~:~ 0 '? 0 ,,3-::i:!. () ., 4 :i. 3 0\\ -4/J:::j POPR4 -So~thcentral POPRS -Anchorage POPR6 -Interior POPR7 -Fairbanks (Meas~red as Differences From the Base Case) FI {J FI F~ :~:-~ () <· o. () •) :L ·4 l.i () •) :~:; () ~? () ~· ::~ él () ~\ f:S 0 -~ 9 ~~.~ ;5 :1. <· :!.!.:'i(. t ~ ;,::.; (;r jl 1.649 :1..732 1.818. :L * 9 (> {:; ~:.~ ~ 003 (Tho~sands) F' Cl f' F( 3 0-:- 0<- 0. :1.09 '() -;· ;,:.~ é l~. () +.:::;6'? 0.6.:-:)6 0.753 0.'?43 0.878 o~998 1.095 :1..179 l ~ :? ~::.i ::~ :!. ,, 3:1.':) ;::} CJ FI F;~ .l~ ().;. o. . 0' :1. ~50 L .•. () v ~':) 4 '? 0.43ü 0 ~-·:::\9~:?. ()+?'?f..) 0 -~ ·:? :f. ~:.~ :1. .,()())' :1. ~ o~::5(.i 1->:Lé~:=i t .;. ;,:::::.~(? :1. ~· :? ~:~ ~=·' l \~ :,:5.4~:~ Fu P r::!5 o. o. 0.208 0.568 1.054 l'~ 64:? :J. ·i ~:~ !:)9 :t \' .?E~f:J ::.~ v () (t ? ;.:.:.,l)?3 3.291 3.926. 4.638 !:S ·l-·4 ~~~ é PCJPF:6 o. l', . ,, y 0 v ()·4(~"; (),. :1.:!.7 0-:-:t~:?s> () •} ::.~ r;/ ~;.) 0 <· :?.i~17 0 ~· :l. "'/:::.~ 0. :J. /:1. 0.:1.94 () ~ ::.:.~ :l. 3 o.:;~3 () <-~.~ .(~· :;' 0} ;,~~é::) F'DPF::? 0\'- (),. 0.061. o.;. ,., (;) o \· ~::; ~=s ~:) 0 ~· !:5 :~~ f; 0 ~ ~·~\9)' () v ~~~? ~=j ()y:.~~?J 0 v ~·1 ~:;,; 6 (),, 426 0.4DG () v !:5 -4 ~3' o -:· !;.:j<?~=s --·~----- H H H 1 t'V 0) r f :J.r:;.>?)' :I. 9?~;) :1.979 :l. (?üü :1.?(;):1. :1. ~?~:52 :1.9(:l3 :1.90·4 :t ~>-' i:s ~::; :1.9:::~é. :J. r:?t::~? :1.9üD :l.i?B9 :!. 9?0. ,....._ .. . -·-~---· .U.!!i-~· PIRl -Northwest PIR2 -Southwest PIR3 -Southeast PIR4 -Southcentral PIR5 -Anchorage PIR6 -Interior PIR7 -Fairbanks l r r r· r~--r ---r ~~ Table III .12 Regional Personal Income Impacts of Fish Hatcheries (Measured as Differences From the Base Case) (Million $) PI!:(:!. F' I r:~ :~:.~ F' IF~:?:: F'IF(4 F' IF( ~'i PIF;:6 PIF:/ o. () ·=· () v (),. ' () ·} o. Ov " 1,) •} .... o v o. () \< () ... .... ()-> () ·> () .;-:.:) 4 ::~·: :·:~ .:-<;t f> B ,•:':}.,()34 l~t ~ :?> }' <:'; r::· c~ "."' '''J \,,J.;. '.ol1,,) / ::~ {• () :·:} ~::j l ~ 9·40 ()' ·:· ::] ~:=jE5 ~ï (• <? fJ {:5 E5 ·;< ::.~ ~~} ::.~ ~:5 v ~:5 () l :!. :::s., G6:!. ;jl ~~ ~;5 ;~~ 9 ")' ., 6 ::.~ ~~~ lv li:::.~ \_i ... ~·:::: f~} !;5 :1. () v fi :3 ~'5 :l. :1. <· :1. 3~'5 :.:.~2., BO :1. :1. :l. v 29 :!.:.:5. :!. 7-4 :~~ {• ~:~ :::.~ :f. ~? ~ ~~J{_;i :t ::~~()•* 4~;5é :!.?.634 ~·:~ ~=s v :t ::) ~~: :1.3,.G2:1. :t ::.~ \\ fi~ l 4 :·:) {· ~=) :~~ ~:) :1. {? ·> ::~' ::~ ~=.=j :!. ~:j v '? ~~~~ ::.~ :1.6.003 :·5 ~:~ ~ ~.ï ~=s :·5 G.034 9 \} ~:_)(?:3 H :,;) v :t. ~!5 ~:,:.~ ·4 .;. 0 :;:5 ~~) :f. '? .;.,•:~;-4:? . :!. ? v :J. ;~l::~~ ··x .. ··y~ .. ~ :1..7:1.(:) '? v·:;;~::.~ ~;J H ... J C) o) .. :; \}\,, H :·:~; <· ~.? f:5 !::; ::) ~::i ~ :t :.J 9 :::.~.4-> :1. '? ~.:.~ () f ~:J .;:~ ~i 4 < "~!::' (.!. ~~~ * :f. ~:) ::5 9 <} :~:: t:~ l> 1 {J {• 1 .,.}· i N ~~; ·=-:·:s <='~ (:·) ~·:) iJ .;. {:;, :::I !::.; :~:.~ B ~-!::; () ~·f; :.:.~ ::~ ~ s=~ ::~ ·4 (:) ~:.~ ~-~:) :t ~:.~ ::.~ {· $.;~ ~1; 4 . 1. :.~~ + :~~=: 6 ~=' .....:) é'; ~ ~~) ..:f ::.~ ·r -4 6 :·:5 2 v ·4 ~:_:; ;~~ :~~ <S ~ t:5 ~;} ~=~ ? ~=~ -> ~-:) ~:5 ~:~ ~3 ·=-~5 J:;) ~5 :t. ·4 ~ ~;~ é :·:) ~=$ v !:5 ~~:. !::.1 l~·l! \• (,_ ::.~ ~;5 :::) é .;. ..:'{ . ..:':~ '.? :::.~ (ji .;. (~'J ~:$ :::~ 96~:?D:!. -<'t ~ ~':) l; (? :l.?véé:L :J.0.466 : ~.:5 l ~· :~~ ::;; 4 4 () 1 (;> ~:_:; ~:5 ~':) ::~; v ::.~ ;:.~ :_:s . :1. :J. '?,. t:~:::::!:~ ;::;. :1.94 ~.::: () ... .-::J i,? ;,:.~ :f. :~~ {> ? :J. :I. ~ ~:_:_; 6 * t'f S' i_p ·4 !:,:,; •i ~~~ ·4 ::~') é (o ? :~~~ f.:t :l. 4::=:; v·?~:.~3 6. :1.9 ~~~::> ~ ~s4 :1. ~~.~~~~-~~~~==~~--~~~--.-~---=-=~------------- '~1 1 ,, 1 l t ~l i 1 ~ 1 1 ~ 1 1 J t 1 ~ ~ 1 l j j ~ ,, ~ ' l ~ J ! ~ 1 'l 1 ,j ~ '~ l 1 ~ ~ i ~ î t '~ ~ '~ ~ ~ ! i 'i III-28 Rather than 80 percent of the employment increase as in the refinery case, the Anchorage area noYT accounts for 48 percent of the increase in 1990. In 1985, its percentage is much less--36 percent. This reflects the assumption that there are no primary employment additions allocated to Anchorage in the fish hatchery assumptions. Employment growth in Anchorage results from increased demands for goods and services and increased state government on a statewide basis. Outside Anchorage, the majority of the growth occurs in the South- west, Southeast, and Southcentral regions of the state. Their relative positions are just reversed from the refinery case as now the Southwest growth is second only to Anchorage. As before, population growth patterns follow those of employment. Anchorage again leads the growth in spite of the absence of direct em- ployment assumed to occur there. The Southwest is second, fo1lowed by the Southeast and Southcentral. Smaller increases occur in the Fair-u .banks, NorthHest, and Interior regions. Personal income increases occur in each region, although here sorne amount of cyclical activity is observed to occur, particularly in the Interior and Fairbanks regions. The reason for this is that fish hatchery construction and operation takes place in these regions, but the fish are caught and processed in the coastal areas of the state. After con- struction of these interior hatcheries, construction income declines -- L L i 1 l- t l - L L - L ..... - i.... !~ ..... - ,--..........w III-29 and is not immediately replaced by fishery and manufacturing incarne increases. In this sense, the hatcheries in those regions result in patterns of incarne change similar to the refinery. Fairbanks eventually recovers its incarne level because of its position as a service and corn- mercial center for the Interior. The Interior region, however, does not within the period examined return to a position where the impact on in- come exceeds the base case by as much as it did in 1982. III-3Q E. State Fiscal Impacts 1 r~· ;~ ~. Under both projects state expenditures must increase to accommodate the incT•eases in population. Sin ce changes in the level of state expen- ditures are related to changes in the level of population rather than the level itself, the pattern of Table III.l3 is the result. Expendi- ture increases occur rapidly in the refinery case since population growth occurs rapidly in the 1980s. Later it slows considerably and expendi- ture grO'I-Ith slows in a reflection of this. In the case of the fish hatcheries, the growth follows a steady pattern, since the growth in population is occurring steadily over the period. As a result, even though population is higher at the end of the period in the refinery case, the expenditure impact is larger in the fish hatchery case. In later years, they would tend to converge. The impact on state revenues is shawn in Table III.l4. Total im- pact is more pronounced in the case of the refinery project, particu- larly during the construction phase. The peak impact occurs in 1984 at $46 million. This is the combined effect of the primary generation of personal and corporate income taxes and the business tax, as well as the secondary generation of revenues resulting from aggregate economie growth. The increase in the fish hatchery example is much less cyclical as revenues grow slowly but steadily throughout the period. By 1990 the ..... L III-31 ..... Table III.l3 _Impact on State Expenditures of Hypothetical Projects ._ (Measured as Differences From the Bas.e Case) - ..... ._ ;_ .._ - l (;)'?'? 1 ':?:?~j :t ~:; :? 9 :J. ~;;.) t; () :t s:~E~l :t·~:~ (j ~~ :t ~:? ~3 ~J l ';?~::~·4 l (?t~~-;.! :t ~t ~=:~ l; :L ~)tJ/ l ~;) ~j ~:; t ~?~:i ~) l S}::Y•() '-PTR.RG2 -Petrochemicals PRT.RG4 -Fisheries Enhancement ~ (Million $) F' i:;~ ·r ? F~ (;; :::~ .... t:::i=;~ 1'•, • .... i -~ () {• () ~· :t{-:~1·.:? :.:~ () ·:· () :L :7 1;:: () ;;. ~::_:: ·4 :t ·:::.~-1 ~ 9 '? ~.:s :i. .·:"{. :~~ .... (;_; :f. ~~~ :t :~; :;; + ~-~=.:; ti ·.:? {s ·1-:::-} ·.:? ~:~ ~::;~.::.i ,;. ::::):."52 ·4 ~:~ .;. 4 l} ..:'~. ·4 fj + () ~::: ;,:.~ ~.:.:; ~:-~ + !::; ~=s ~:~:: F' 1:z ·r ·:· f( C·J -4 ~--~ J:~F~ () ~ ()v (),. ~::; ·=· ~::; :~:~ :t :t ~:; ~--4 ·4-:L ~:~ () -~ 1 fJ )~ :·~:; ~:; v . .:{. :5 ~) ' ~-:~; f:~ ·;-l.~ ~) ~::; -4 ::~; -; t.\ () :::.~ !5 :~;! -~ lï () ·~.l '.? :::~: -~ ~6 :::.~ tf '7 + ::.~ !5 ~:; :t 0 :L v ·4 t:~; ~:;1 1 l ·~? ·=· :t :5 {:·; 1 ! '1 i 1 i 1 i l l 1 ! i l 1 f ! ~ ~ 1 r III-32 Table III.14 Impact on State Revenues 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 '1989 1990 PRT.RG2 -Petrochemicals PRT.RG4 -Fisheries Enhancement PRT.RG2 ER o. o. o. 4.141 18.892 37.547 45.509 45.82 30.556 27.838 25.49 27.63 30.739 33.856 PRT.RG4 ER o. o. 0.844 3.35 5.953 9.229 12.335 12.297 14.676 18.884 21.47 23.598 25.518 27.341 ·~ ~ .::j - .J J ·i lillil i t' .J.~ - III-33 - impact levels are nearly equivalent, although the total impact over the whole period has been rouch larger for the refinery case. Table III.lS confirms that the composition of the state revenue impact has differed considerably in the tHo examples. Personal income tax increases represent more than tHo-thirds of the total revenue in-..... ! crease for the fish hatchery case while less than 25 percent in the .L. petrochemical example. Two factors account for this difference. First, a large component of the increase in the refinery case takes the form -of corporate income taxes. Second, there has been a substantial increase in incomes to fishermen in the hatchery case, and these increases are -taxed at higher marginal tax rates. This explains the large difference in personal income tax returns in the tHo cases in spite of a small difference in employment impact betHeen them. Referring back to Table III,.2, one gets an impression of the relative size of the impact on state reve- nues of the additions. Since in 1990 in the base case,.revenues are projected at $3.586 billion; the impact in that year of either would be L less than one percent of total revenues. On the other hand, revenues are falling in the base case and this addition would help to sloH the rate of decline. It would not reverse the direction, however. -The net fiscal impact on state government is represented by the difference betHeen the change in revenues and the change in expenditures -in either case presented in Table III.l6. - - ...... ·' 'j l • i ~ i. 1 l 1 ) i l 1 i 1 j ~ ii ~ 'i J 1 1 •l 1 J i 1 !: III-34 Table III.l5 Impact on State Personal Income Taxes of Hypothetical Projects :L =:;(·?·;.;-' :!. 9')':::5 1 ~?7<?. :L r:_? i~~ () :L ()p:!. :!. o:.:.>n;? :L <_;.:·~J:3 l r:?:::~-4 t9t~~5 :l.9Ü(; J .:;.;n·? 1 '::>f.jF~ t ~:?:::~\? :tf:;:~·:.:)() PRT.RG2 -Petrochemical PRT.RG4 -Fisheries Enhancement F~ F~ .-r .;. i:;~ f:J ::.~ .... E~ f;~ (r.;. () ~- 0.114 2.951 11.154 :L ~=~ ~ :L ::~:; ~:5 -:-~:) ~.:5 .;;) ::::: () ~' l{. :? ~~5 :L :::) .;. t ::,:i ~-~ :.:s \' (:>l-:!. ~=:; .;. ::s ")' ~5 ~-6 :::)Ü (; ·> :.=:;:!. / {· ()::5~J FtF~·r ~· F(f3l} .... J:::F~ " i...) ~ /', \ .... -~ ()v .-:"ffj l~l)'?f:5 ;.~~ <} ~:$ :1. ·4 ...;. ,. lf::.:r·;.? ~5 ·:· '7:7 :t !.::_; -:-~:::·)l~~ 7.841 10.477 12.476 14.667 :1. ·.:? ·:>. :t é,·;~:~ 1 ~:;: -:~ j) :::~ ~~) ~~ " J liilili) l'' III-35 - Table III.l6 Net Fiscal Impact on State Finance of Hypothetical Projects i- (Million $) Fisheries Petrochemica1s Enhancement ~ 1977 o. o. 1978 o. o. 1979 o. .844 1980 2.783 -2.171 ...... 1981 -11.125 -7.488 1982 -52.693 ...,.10.958 1983 -76.466--23.104 1984 -97.093 -26.338 1985 -106.902 -28.926 1986 -48.835 -40.725 1987 -29.842 -52.15 1988 -20.814 -63.657 1989 -17.883 -75.951 1990 1 -18.703 -89.815 ~ - """"' ..... L.. L 1.- ~ ;~ l 4 ~ 1 1 ,, 1 ~ ï 1 Î ~ 1 1 i J l 1 \ ~ f 1 î i 1 Î ! /, ;i .. ~ il ~ j ? l l ' ~ ; î l ~ * l' 1 t ~ ~ • ~ 1 j 1 ! l ; i III-36 In either case~ the net fiscal impact is negative in all but the initial year. Given the structure of state revenues, this is the ex- pected result. The petrochemical facility does poorly in the early years as expenditures must rapidly rise to accommodate the population increase. Later, however, its net impact improves as the income from the facility begins providing larger amounts of tax revenues. In the case of the fish hatchery, the impact on the current acccmnt of the state is negative and cumulative. Here, there is no capital intensive facility in place in later years to mitigate the size of the deficit in earlier years. ,......, - ~ ..... ' - ...... 1 ·L_ i i- l ..... - ..... - ~ - ir- '-' III-37 F. Local Fiscal Impact Expenditures at the local level respond primarily to changes in population and personal income~ as well as to changes in the amount of revenues transferred from the state. Table III.l7 reflects this pat- tern. Local expenditures rise rapidly and then fall in the refinery example and grow slowly but steadily in the fish hatchery case. Local revenues in both examples increase strongly, primarily through the local property tax (Table III.l8). There is a cycle in local reve- nues generated by the refinery and a smooth increase in the case of the fish hatcheries. Direct taxes on the refinery property contribute to the level of the local revenue impact in that case, exceeding revenues in the fish hatchery example. It is interesting that the direct property tax ac- counts for about half of the increment to local revenues in the refinery case. Also interesting is the rapid increase in local revenues in later years in the fish hatchery case, as personal incomes rise • i J i 'Il 1 1 1 • III-38 Table III.l7 Impact on Local Expenditures of Hypothetical Projects .t ':~} '.? ~? l :)~;;:3 J ::;; ~?: ;~~1- :L ;;,\ fj() :f. (?~::::1 l ~? H ;.~.:~ ·r •""':: ... ~ ~~: .L '? <:J •• :~~ ·:t. =~~: f~ .f.} l (?;::;~::; :L 9:J(. :L ::;.::E')' J ::;: f::~ ~:5 1 S);25':~.:r L')\?() PRT.RG2 -Petrochemicals PRT.RG4 -Fisheries Enhancement F F( ·r v ~~;:C·) .2 .... EF~ o. '(', ~.· ~- () .;. J ::·:; .. {{. ~:~ ~-)'{) :t l f1-> ~J() (? :::~~ ·:.1' ·l' t? i~ A· ~:=;:tv ()Of:> !~:; ;_;:) .;. . .:·:. )-~ .({: -4 ~? "·· () ~:~ :::.~ .{1, ~~~; .. :.::; l :: .. ~ :? :·J ~ ·:~:;• ~j l :20 -~ c"::O.S ::~~ C: ·=· C ::-: ~~} ~:.::? \~ ~;;;? 1::; F~~ r .;. 1=;: fJ .-::} .... E~f( () ~- .1''1., : . .; ~- () ·} é. () ~~~: . ~5 ·} .:t :.~ <_;> ~:::. ·=· ::? () :·:~ s) -=· {s ~:~ 1 :L 4-·=· :::> 2' ~5 :t ~:~ ... :;;2~;.r l ~:) ·:· '1 4-.l} . :2 ~::~ -~ ,·:} 5 :.:~;;,:.: ;,-{;i t 5 ::ç[j ·:r t~ 11 /~ /f -~ fj -5. [:5 :_:_:; 1 ·~ E~ :? ..... ,, .... .... [ i i- ,_ .... l- ..... - ...... - 1977 1978 1979 1980 ·, 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 PRT.RG2 PRT.RG' PRT.RG4 III-39 Table III .18 Impact on Local Revenues of Hypothetical Projects PRT.:RG2 PRT.RG' PRT.RG4 ER ER o. o. o. o. o. o. 0.167 o. 0.702 4.133 6.133 2.877 18.025 21.525 5.607 36.204 42.204 9.185 47.197 57.197 13.223 53.275 70.275 15.178 47.39 77.39 19.095 48.761 78.761 26.784 28.78 58.78 33.744 26.683 56.683 40.896 27.592 57.592 48.672 30.272 60.272 57.566 -Petrochemica1s (without property tax) -Petrochemicals {with local property tax} Fisheries enhancement III-40 G. Per Capita Impacts Real per capita variable changes occur in the directions expected by the analysis of the foregoing changes. Per capita disposable per- sonal income rises rapidly in the refinery example with the increase in high paying construction jobs (Table III.l9). Later the trend is re- versed, primarily by a slowdown in the rate of increase in government employment. Disposable personal income gains in the fish hatchery case are not as pronounced but are not eliminated by 1990. The patterns of state expenditures per capita in constant terms reveals an interesting fact about attempting to use a target expenditure growth formula bàsed upon historical growth rates (in this case, the previous two years). From time to time, there will be fluctuations in . . those growth rates which will cause the target to miss on either the high or low side. In theory, all values in Table III.20 should be zero but, particularly in the case of cyclical variation in growth experienced in the refinery case, the target is only approached rather than hit squarely. In both cases, revenues per capita in real terms declined. This was more pronounced in early years for the refinery, but in later years for the fish hatchery. .;.... ..... .... f ..... i- - L - ..... III-41 Table III. 19 Impact on Disposable Personal Income Per Capita of Hypothetical Projects (Measured as Differences From the Base Case) :t.:)"?? 1 '? ~-?f~; J ~? /r:;; 19;3() ·l C=(:~ ·i .!. ..-',..,l ,h :L .:_;::c-:::.~ 1 ·:?E~?: :L =:~.:·E~ l:;. t ::pu:5 ~!. '::.J J. 9E;~? :t :~-=-r5 ft :~. '::.l ~::: ~) :t. ~~;~)0 PRT.RG2 -Petrochemical PRT.RG4 -Fisheries Enhancement (Constant $) F' F~: ·r ~-F c-:::? .... E: F~: o. /"·. '• . ..' ·:- 1 .~ :?:: :~) :? ;?6~6"./1 l:. ü ~ ~:-~; ;J /~. l:~ :t \• l} ~.:5 :L ::·:-; ~:::, -:-~:; ::5 .-:'l ~::; .•:'{. -~-"9 :t ·.:? .... J ;,~~ .;. ~~-":~. :·:::~ JE-=-?'C .... :::.~ 0 -:-~:5 :·:~; ~? .... J <? -;-:::':~ .:::\ ~:} ... :t "? .;. ~:~ :~l .{~ J ~:_:.; ~-'? ~:; ~:~ F> r:~~ -r .,. t:~~ t3 .l~ -·· E:F~ () -:. (J"" ~5 ·> ~:~ ::::; ::.:_:: ~:j -r ~5 ~;: ~:;> :L () .;. ::_:; ~:} :~~~ l <_;; -:-.-:l =:.;.} ~:J ~~-l.J. -:· 9 ::-::~ E: J -4 .y l{.}~5·4 t ~:~_:: ~-::=:: ,:S ::5 l ~::~ '{ :L ::;.~ .tJ :t t:. :-:~s 3 .. -:'f t .-:~~ -} :::::; ~? :::~: t :~:.~ -~ :t () ~:.:: :L () .... ]. :.::) } ·~· \-i ·~ 1 1 1 1 1 1:'. " ' 1 J ~-~ ii ~1 1 ; i 1 ~ ;. ·tt rj 1 1 '1 ~~ Î ~ ~ li j 1'·. 1 1 j 1·~ ; - ~ t Î \li 1 ~~ > III-42 Table III.20 Impact on State Expenditures Per Capita of Hypothetical Projects ·! C)""'J"':.I .t. ,/ ,r' 1 1'7/ï:fj 19-·l~:,:} t ·::.:~ ;J ;~) :i. f):J J :1. ·:;:;g~~:. J r:)E:::::> :t ~:? D ..:-{. :1:9 ;;:~:.:.:_; :t ;:~-:· r~ (:·~ :t <JJ;J? t ~.);J~~j J. r:/ [:~ \? :t SJ:) () PRT.RG2 -Petrochemical PRT.RG4 -Fisheries Enhancement P F~ ·r -:-Ft: (J -~~ .... E:t? Ov () .;. ·-~ () {· {; ~::. ~:5 ··--l ~:-~ v (? :? (:: .... l =:~: ... ~6 l~ \;'; :Lv9l:::.~- ~? ;;-·:;,; :L :::~: :f.? -:· . .:;~ ":: •i .. :: ,.· --~ .. ::•.1. , ... :lee:• ::~ -~ ~? f:3 1 .... :.:s .;. D :=s ~;5 ·---~? -=-o::~~?. .,.,t:? y '~?:t :2 .... (_) .;. ~5 2 :-~-= F'F:T + RG4 .... l' .... :··~ t::.r\ {} ~ 0 {• .... :? ~ t:~ ~6 ·.:.:.r Oon :? v l ~) ~~:: ··-0 <:· :3')j . ··~ ~~ 4 ::.:~ l ;;_~ -4 .;:. .-:·:? '? :~:~ :::; -=-~:_rS!J .... () ... :? ?' ::.~ l .;-l:~ ~:; ~;) l ·} fj ~-~:; /.j. :t <:· !:5 é {:; () ~ (.~.l ~:j -4 () ... :t l :;.~ L. III-43 .... H. Conclusion L.. The petroêhemical and fisheries enhancement projects cannat be - ,._ i 1- l..... - ...... ...... .... - - directly compared to one another because of the large differences in size of the proposals and also because no explicit assumptions were made regarding the method or size of permanent fund financial participation in either project. It is more valid therefore to con- centrate on the comparison of each to a base case simulation. The ,petrochemical facility represents a very capital intensive project while the fisheries enhancement program is labor intensive. Construction of the petrochemical plant leads to a nmini-'boom11 which results in an apparent long run increase in the level of agg:r>e- gate economie activity. The capital intensive nature of the refining process notwithstanding, the employment impact is substantial because the construction phase is relatively labor intensive. Both the "boomn and the long run economie growth are regionally concentrated in the Anchorage and Southcentral areas . Fisheries enhancementresults in growth of the economy which is not accentuated but it is steady and leads to substantial long run increases . Because of the regional dispersion of the hatcheries the impact is not concentrated in any region. Interestingly, however, nearly 50 percent of the growth occurs in Anchorage where there is no primary employment increase. III-44 The refinery provides state tax revenues through the taxation of both business and personal income while the impact of the fisheries enhancement program is primarily in the form of personal tax increases. Revenues generated are significant but less than 1 percent of total state revenues by 1990 in either case. State expenditure growth exceeds revenue growth in each case by a considerable margin because of the target level set for state expenditures on a per capita basis. In both cases local revenues increase substantially. The re- finery pays a substantial property tax but a significant portion of the local revenue increase cornes from secondary increases in property values. The increases in the fish hatcheries case come primarily from secondary increases in property values. L ;..... - ; L r i 1 - ir...i - 1 l. i - ..... i ~ :- PART IV ALASKA CAPITAL MARKETS AND STATE FUNDS A. Introduction The institutional arrangements for investing the permanent fund are as important as the amount and timing of the investment. The effect of the many possible institutional arrangements are not as easy to assess as the timing or amount, since they do not easily lend themselves to modeling. One way to project the impact of the institutional arrange- ments is to examine similar historical events and derive applicable generalities. During the period following the Prudhoe Bay Lease Sale, the state of Alaska had excess funds which it invested in three ways-- investment in Federal and Corporate Securities by the Bank of America, investment directly in loan programs by the state, and placement of funds in time certificates of deposit in banks· in Alaska. Although the goals of these programs were different than those of the permanent fund, examining these programs may provide insights into the effects of these institutional arrangements. This chapter will review one of those pro- grams, the placement of approximately $100 million of the North Slope Lease Bonus in Alaska banks between 1969 and 1971; it is hoped·that the insights gained from this exercise will be helpful in determining the best arrangements for investing the permanent fund. The review of this strategy will identify the intentions and goals of the policy makers, the strategies pursued, and the impact of those IV-.2 1 1 strategies. This program can only be examined in relation to the events 1 of that period, including the other investment programs operated from 1 surpluses of the state general fund. The strategies followed and the resulting impact will be examined for the period 1969 through 1973, the period from the first placement until just prior to the construc- tion of the trans-Alaska pipeline. There are three important problems 1vhich limit the analysis of the effects of these strategies. First, this period was one of change for Alaska associated with the discovery of oil at Prudhoe Bay-, the anticipation of its development, and the construction of a pipeline to carry it south. This makes it difficult to isolate the portion of the growth in the state's economy which re- sulted from the placement of $100 million in the state's banking system. Secondly, the early 1970 1 s was a period of extreme fluctuation in the national money markets; this affects our ability to consider past rela- tionships normal and analyze impacts a~ changes from them. Thirdly, only tentative conclusions can be drawn, because data concerning the banking system during this period is limited. To the extent they cau be defined, the analysis of the impacts of this policy will be done in terms of its equity, efficiency, and growth effects. The program can be considered efficient if, given the goals established by the policy· makers, the placement of these funds was the best way to achieve them. The income redistribution resulting from this policy describes the equity effect. Windfall profits for banks ~ L. ' ._ ._ l. ! . L i - r... - i ~ IV-3 and changes in the cost of borrowing money are possible income redis- tribution effects which will be analyzed. Questions about the effect of this policy on growth revolve around the question of whether this money got from the banks into the state economy • _,._ ~---- ! 1 1 1 1 1 1 ' ! i 1 ! 1 i i f 1 J IV-4 B. The Setting: The Alaskan Financia1 Sector The discovery of oil at Prudhoe Bay and the expectation of its production and the construction of a pipeline to carry the oil south were responsible for the healthy growth of the Alaska economy during the period after 1970. Table IV.l shows the growth of population and employment during the period 1968-1973. In most developing economies, particularly those experiencing rapid growth, the demand for capital quickly outpaces the supply produced by the local economy. Alaska, during this period, was no exception; the growth during the late sixties acce:htuated a capital shortage which bad always been a factor in the Alaskan financial sector. In theory, regional capital shortages should not exist, since capital is a mobile resource which should flow to the area where it earns its greatest return. Interest rates in a region where capital is in short supply would rise and attract capital until the shortage was eliminated. Real world imperfections prevent this from happening. Institutional restrictions, such as usury laws, prevent interest rates from rising·to their proper levels. Alaska, prior to 1969, bad a usury law which set a ceiling for interest rates of 8 per- cent. Risk also restricts the free flow of capital. Risk increases with distance from the source of capital, since less is known of places farther away. For both of these reasons, Alaska was not attracting the needed capital during this period. Editorials in the business press point to the difficulty of borrowing which reflected a capital shortage.1 1 Editorial Opinion, Alaska Construction and Oil, September 1969, p. 6, and August 1969, p. 6. J .. . .ill ~------~---~·.........._, l. 1 L... l 1 i t- ; 1 L i j ....... ~. i.... L i....l ..... ~ L ..... w ...... IV-5 Table IV.l Growth of Population and Employment 1968-1973 Percent 2 Percent Employment1 . GrOV·tth Population Growth 1968 112,423 284,880 1969 118,917 5.78 294,560 3.40 1970 123,892 4.18 302,361 2.65 1971 127,660 3.04 312,930 3.50 1972 130,693 2.38 324,800 3.79 1973 137,305 5.06 330,600 1.02 1 statistical Quarterly, Alaska Department ·of Labor, various issues. 2current Population Estimates, Alaska Department of Labor, 1968-1973 • The usury laws which prevented local rates from rising to the required level were hlamed .for the capital shortage prohlem; Alaskan investment traditionally needed to pay l-2 percent above Seattle rates to make . h ' 'l 2 ~nvestments wort wnl e. A period of tight money in the national money markets and interest rates which were inflexible upward prevented the needed flow of capital • There is little documentation of this capital shortage, although the importance of the secondary mortgage markets and outside partici- pation in large projects is recognized throughout the hanking industry. 2 rrHome Building the Tight Money Loosens,11 Alaska Construction and Oil, July 1969, p. 32 • i '~ Î 1 1 1 ~ i !, f IV-6 One report which attempted to document this situation was The Residential Mortgage Market in Alaska~ a report done by the Federal Housing Admin- istration in 1963.3 This report documented the importance of outside capital to the Alaskan mortgage market in the earlysixties. Because of the importance of outside funds for investment~ changes in outside money markets had tremendous impacts on capital availability in Alaska. The tight money period which existed in outside money markets in 1969- 1970 would logically have been extended into a tight money market in Alaska. The banking industry in the period preceding the Prudhoe Bay lease sale has been described by Gene Erion.4 By examining the in- sured commercial banks in Alaska during the period 1960-1966, Erion concluded, "The comparing of insured commercial banks in Alaska with insured commercial banks in the rest of Region 13 and in the United States as a whole, for the years 1960-1966, leads to the following conclusions: (l) Rates of earnings on loans and discounts were higher, and rates of interest paid on time deposits were lower, in Alaska. The higher rates on loans and discounts could not be attributed to higher priees (costs) in Alaska; nor, entirely~ to greater riskiness of loans. (2) Profit rates on sales--current operating revenues--were lower in Alaska. Profit rates on capital invested >Vere higher, but only because of the lower equity of owners in Alaska banks. 3Federal Housing Administration, The Residential Mortgage Market in Alaska, 1963. , · 4Gene Erion, 11 Insured Commercial Banks in Alaska, 1960-1966,11 in Studies on Alaska Regional Inflation, Federal Field Committee for Development Planning in Alaska, 1969. '~~ ';l' - r L 1 ~ ..... ~ .... ~ i- IV-7 (3) As measured by net incarne per employee, assets per employee, and assets per bank office, Alaska banks Here relatively inefficient. (4) Assets per bank, however, were greater in Alaska. Alaska banks chose to serve Alaska's relatively sparse population by branching; there- by the proliferation of even smaller, weaker, and more inefficient unit banks was avoided. (5) Assets per bank office and per bank employee, as well as the ratios of demand and time deposits to personal incarne, indicate that the scale of operation of Alaska banks was relatively smaller~ with the distinct possibility that economies of large-scale operation were thereby precluded, and that some of the relative inefficiency of Alaska banks resul ted therefrom. (6) The ratios of demand and time deposits ta personal income indicate that Alaska banks got a disproportionatEùy.small share of the domestic market for bank services, indicating that more aggres~ive competition, including priee (rate) ~~m~~!i~~~~t:i!~~ ~=;~a~:dat~a:g!:r!:~k=~~;,e 5 Prior to the lease sale in 1969, the banking system consi~ted of eleven commercial banks with assets of $462,084,733 and two mutual savings banks with assets of $39,524,623.6 There were also three savings and loan associations with assets totaling $66,000,000.7 The banking sector during this period was highly concentrated with two banks having over 50 percent of the total assets of the commercial and mutual savings 8 banks • 5 Erion, urnsured Commercial Banks,11 pp. 69-71. 6Alaska Bank Statement of Condition, June 30, 1969. 7The Alaska Economy, State of Alaska Department of Commerce and Economie Development, 1977, Table 18, p. 31. 8Alaska Bank Statement of Condition, June 30, 1969. 1 ! ' IV-8 C. Policy Goals In September 1969, the State.' s Investment Committee which con- s.is.ted of the Commissioners of Revenue, Commerce, and Administration determined the state should place $100 million in deposits in Alaskan banks. One general goal for this program can be defined from public statements. made at the time; the goal of the program was to stimillate the state's economy by increas.ing the capital available within the economy. Through the placement of these funds, the state could at~ tempt to ease the capital shortage which was much discussed at the time. Criticism of the decision centered on the fact that these funds in Alaskan banks would earn léss than other North Slope lease funds invested by the Bank of America. The Investment Committee explained its rationale for this move was to provide money to the banks which they could use to stimulate general economie activity through loans.9 The goal of using the money to stimulate the economy of the state by providing rouch needed capital was emphasized by public statements of officials. Governor Keith Miller stated at the time that the deposit of funds in state banks would meet the long-standing need for capital within the state.1 ° Commissioner of Revenue, George Morrison, stated that placing the money in local banks would provide what bankers said was mu ch needed capital to expand credit wi thin the sta-te .11 The se 9Anchorage Times., October 29, 1969. 10 11 Governor Tells. Plans for Lease Revenues.,11 Alaska Indus.try, October 1969, p. 98. 11Anchorage Times, December 3, 1969. ~ - L L L 1 1 l. L l - ! l. ~ - - - IV-9 statements were also supported by members of the Egan administration. Director of Banking, J. K. Robertson, stated that the funds were de- posited to be employed in the state's economy.12 The actions of the legislature and administrations during this time period define implicit goals for the entire North Slope Lease Fund which seem to agree with the stated goals for this particular program. The implicit goal was to improve the present Alaskan situation or quality of life through expenditures. Actions during the period illustrate this goal; the state budget increased 32 percent in Fiscal Year 1970 and 77 percent in Fiscal Year 1971 to provide for the increased programs and services made available to Alaskans.13 Laurence Eppenbach, Deputy Co~~issioner) Treasury Division, in the Egan Administration, pointed out that one of the major benefits of the oil lease bonus was the increase in state spending which provided sound underpinnings for state economie growth.14 Changes made by the legislature to the possible uses of the state's surplus revenue in 1970 also supported this general goal of spending to increase the current welfare of the state. The legislature expanded investment alternatives from only government securities and time certificates to allow the state to invest in mortgages and loans. 1211 Commercial Bank Deposits to Triple in Coming Decade,11 Alaska Construction and Oil, January 1971, pp. 37-38. l 311 What Happened to the $900 Million,11 Memo to Governor Hammond from 1. C. Eppenbach, December 27, 1974, p. 1. 1411Alaska 1 s Treasury: A One Customer Bank with 325,000 Shareholders,u Alaska Construction and Oil, May 1973, p. 29. ~ l' ,, 1 ~ IV-10 Chapter 206 SLA 1970 which defined these changes also specified an investment preference for loans and mortgages.15 The concept of a permanent fund using parts of the lease funds, although suggested dur-. . ing this time period, was never adopted. One reason savings was not a primary consideration was the expectation of the rapid completion of the pipeline~ and the beginning of the flow of oil royalties to the state.l6 The goal of stimulating the Alaskan economy through the placement of deposits in Alaskan banks fits within this general context of using the North Slope lease funds to improve the current Alaskan situation. lS;'Legislature Roundup, 11 Alaska Construction and Oil Report, August 1970, p. 33. 1611 What Happened to the $900 Million, 11 Merno to Governor Hamrnond from L. C. Eppenbach, December 27, 1974, p. 1. - - ..... L. ' i. io.... IV-11 D. Placement of the Funds The decision to place approximately $100 million in time deposits in Alaskan banks was originally made shortly before the North Slope lease sale in September 1969. This decision was.made by the state 1 s lnvestment Committee which consisted of the Commissioners of Revenue, Commerce~ and Administration.17 The money was originally scheduled for three placements in September and October 1969 and January 1970.18 The first placement of $50 million in short-term certificates of de- posit took place shortly after the lease sale in September. The other placements did not take place as scheduled but were postponed. The last placement occurred in June 1971. A total of $102 million was placed in Alaskan banks in certificates of deposit with terms ranging from one to fourteen years. Funds were deposited after nego- tiations, which determined that a competitive rate of 6.25 percent would be paid. Funds were disbursed in relation to the distribution of total deposits in the banking system.l9 There were two major criticisms of this fiscal strategy. First, the strategy was criticized because the state was not earning the maxi- mum amount possible on these funds. The certificates of deposit were issued at 6.25 percent interest, while state funds invested by the Bank 17 . Anchorage T1mes~ October 29, 1969. 18Anchorage Times, December 3, 1969. 19Anchorage Times, December 3, 1969. IV-12 of America were earning approximately 8 percent~ State officials re- sponded that the money loaned into the economy, generating economie activity would produce revenues in income taxes equal to another 1 per- cent in interest.20 This strategy also supported the goal of using the funds for the immediate benefit of Alaskans and not as a savings account. The second criticism of the program was responsible for the delay in the second and third disbursements of the money. Criticism of the way the banks were using these funds caused the state to investigate the use of the funds before issuing the next scheduled disbursements. The criticism suggested that banks might only have been investing these state deposits in Federal securities which did the state's economy little good; reasons for this included collateral requirements for state de- . 21 Th . . . d h . • h h poslts. ese crltlclsms cause t e state to lnvestlgate ow t e first $50 million was being used. These investigations showed the majority of banks were able to use the funds and the second disburse- ment was made.22 The banks also criticized the length of term of the deposits, stating that this prevented the use of the funds for loans. As a result of this criticism, the state extended the terms of the first set of deposits just prior to the final disbursement in June 1971. Table IV.2 shows the terms and amounts of certificates of deposit from the North Slope lease bonus for Fiscal Years 1969-1972. 20 . Anchorage Tlmes, October 29, 1969. 21Anchorage Times, September 25, 1969. 22An~horage Times, December 3, 1969. - ' ..... r i t ..... ..... b- i .... ' - î- ~ L ..... t L Ji.., ···; IV-13 Table IV. 2 North Slope Lease Funds in Alaska Banks Amount as of June 30 in Thousands of Dollars Date Issued 1970 1971 1972 1973 (1 year term) 12-69 $22,350 2-70 380 3-70 1,665 6-70 605 12-70 $ 2,250 3-71 1,665 6-71 655 (1/2 year) 12-71 $ 2,905 3-72 1,665 12-72 $ 2,905 3-72 1,665 (5 year term) 26,4301 9-69 50,000 26,430 26,430 12-70 43,460 44,010 44,010 6-71 550 (4 years) (10 year term) 6-71 5, 358 5, 358 5,358 (11 year term) 6-71 5,458 5,458 5,458 (12 year term) 6-71 5,458 5,458 5,458 (13 year term) 6-71 5,358 5,358 5, 358 (14 year term) 6-71 5, 358 5,358 5, 35?. TOTAL $75,000 $102,000 $102,000 $102,000 1 state Investment Portfolio in 1971 had approximately $20,000,000 in three year certificates this year only. Based on ether Portfolios, this amount was added to the five year certificates. SOURCE: State Investment Portfilios, Departmep.t of Revenue, 1970-1973. ,-., ' ·,_.' IV-14 E. · Other 1?rograms The impact of the passage of Chapter 206 SLA 1970 was to broaden the investment possibilities of the state. Chapter 206 allowed the state to invest surplus funds in~ (l) direct obligations of the United States; (2) obligations of agencies and instrumentalities of the United States; (3) notes issued by Farmer's Home Administration; (4) bank certificates of deposit which are secured as to the payment of principal and interest in accordance with Alaska law; (5) corporate obligations of prime or equivalent quality, as rated by a nationallyrecognized rating organization; (6) other securities, including corporate securities; (7) Federal Housing Administration mortgages; (8) Federal Veterans Administration mortgages; (9) loans made under the provisions of AS 03.10; (10) conventional residential mortgages if the originating financial institution retains at least 25 percent of the mortgage; (11) other secured loans, if the originating financial institu- tion retains at least 33 l/3 percent of the mortgage. The investment programs which resulted from this act fit into two major groups, the investments handled by the Bank of America and those handled by the Treasury. The major differences involved the terms and liquidity of these investments. The Bank of America emphasized highly liquid, short-term investments, and the Treasury emphasized long-term invest- ments related to growth in the state. These Treasury loan programs i- 1 1. .... ..... i i ._ .i.... L. ·. f .... 1 ..... i-· f L. - ' (.... i ._ ...... - IV-15 were run with surplus general funds and are not the same as the invest- ments made from specifie funds such as Teacher's Retirement fund . Table IV.3 shows the change in these investments during the period of interest. The loan programs were included in the investment program run hy Treasury. The Bank Loan Incentive Program was begun in 1970 to huy loans from financial institutions in Alaska.. All loans had to be secured and have Alaska residents as mort~agors.23 This program was suspended in 1972. One reason for the suspension was the necessity to remain liquid. Since funds. were heing drawn down quite rapidly, it was felt the direct loan programs provided ample loans.24 As Table IV.3 shows, the direct loan programs expanded throughout this period • The Bank of America investments 11ere made wi th the idea that the principal would be spent, so liquidity was important. Because of this, highest yielding investments were ignored; investments were made mostly in short-term, highly liquid assets, such as U.S. Government Securities.25 23 . f f . State Investment Portfollo, State o Alaska Department o Admln- istration, June 30, 1971, p. 4. 2411 Revenue News," Alaska Department of Revenue, February 16, 1971, and conversation with Richard Alexander, Alaska Department of Revenue, November 28, 1977. 25 "Revenue News," Alaska Department of Revenue, May 24, 1972. IV-16 Table IV.3 State General Fund Loan Programs 1970 Bank of America $852,569,655 Veterans Loans Bank Loan Incentive Pro gram Agricultural Loans Municipal Loans Small Business Loans Alaska Housing Finance Corporation Amount as of June 30 1971 1972 $772,928,476 $665,002,400 1,587,000 9,703,800 3,977,600 3,464,500 709,900 6,833,300 6,213,900 1973 $504,566,000 16,315,200 2,765,300 843,000 1Lt,367 ,500 1,546,800 7,318,200 Source: State Investment Portfolio, Department of Revenue, 1970-1973. 'l ..J - l- 1.... ....... - - L ' - L \.,\ - L L - IV-17 F. The Impact of the Bank Placement Program The impact of the pro~~am will be analyzed in relation to the goal of providing capital and stimulation to the state's economy. The program's impact will be examined in terms of its effects on growth, equity) and efficiency. Two sources of data willbe used to examine these effects. First, a time series of Alaskan banking statistics pro- duced by the Department of Commerce and Economie Development will be used. The data series provides information on deposits, assets, and loans for all Alaskan banks. The second source of information are the Federal Deposit Insurance Corporation Call Reports and Income State- ments of Insured Commercial Banks. These provide detailed data on a portion of the banking system, insured commercial banks. Commercial banks are unique among financial institutions, because their liabilities include demand deposits, and their lending and investing activities are diversified along the~r whole range of possibilities. Because of this, commercial banks are assumed to typify the economy's financial sector. This is particularly true in Alaska where Commercial banks are more in- volved in the mortgage market than is typical outside. Commercial banks are the major type of financial institution in Alaska which held 92 per- cent of the assets in 1969, and they were major participants in the placement program holding approximately 90 percent of the certificates by 1972.26 The F.D.I.C. information can only be used to provide insight into the effects of this program, since it provided only partial coverage of the Alaskan banking system. 26Alaska Department of Revenue, 11 Alaska Banks Statement of Condition,n June 1969, and Alaska Department of Administration, State of Alaska: State Investment Portfolio, 1972. IV-18 F.l. Growth Impact Table IV.4 describes the change in sorne measures of economie activity during the period 1968-1973. Although this table shows a general upward trend in all of the variables, it is hard to see a consistent relation between banking activity and any variab~e. Even if a relationship could be seen, it ï~uld be impossible to judge the direction of causation. The banking system, through its loan activity, ma::r encourage growth; but at the same time, growth of the economy would have positive effects on the banking system through increasing its deposits. An indication of the growth impact of this program can be determined by examining the loans made by the banking system. The ultimate impact on the economy depends on the effectiveness of the use of the loan funds, but the impact of the banking system on the economy can be judged by the proportion of its deposits it gets back into the economy in the form of loans. Constraints placed on the bank's ability to loan money, such as reserve requirements set by the Federal Reserve Bank and the distribution of deposits between demand and time deposits, will prevent banks from loaning all of i ts deposi ts. Investment of deposi ts in other types o.f assets will also reduce the amount of loans made. Examination of the ratios of loans to deposits and changes in loans to changes in deposits shows that initially fewer loans were made out of these deposits than usual. The relationship between loans and deposits is shown in Tables IV.5 and IV.6. Table IV.5 shows the change which ~~ ~ - i.... - ...... ~ ...... i i. i - r 1 L.. ..... IV-19 Table. IV .. 4 Economie Growth 1 % Construction! % Value 2 of Total % EmEloyment Change EmEloyment Change Construction Chan&a (millions of $) 1968 . 112~423 5,998 1969 118,917 5.78 6,653 10.92 193 1970 123,892 4.18 6,894 3.62 238 23.32 1971 127,660 3.04 7,445 7.99 259 8.82 1972 130,693 2.38 7,893 6.02 373 44.02 1973 137,305 5.06 7,837 -.-71• 421 12:87 Housing2 . % 3-"% Tot;:ü3 % Total Units Change DeEosits Cha~·g~-l .. oans Change (thousands (millions (millions of units) of $) of $) 1968. 1.2 481.8. ·302. 2 1969 " 1.5 25.0 585.6 22.78 345.0 14.16 1970 1971 1972 1973 1.7 13.33 699.6 26.54 409.3 18.64 1.8 5.88 808.6 19.54 497.0 21.43 2.4 33.3 934.i 17.57 608.5 22.43" . 1.7" -29.0 999.9 . . 5.69 765.3 25.77 • 1A1aska Department of Labor, Statistical Quarterly,_ various issues. 2u.s. Department of Commerce, Statistical Quarterly, 1974 • 3Alaska Department of Commerce and Economie Deve1opment, Mid-Year Per-l forrnance Report, 1977, Tables 17 and 18. 1.... "· """':~ .. IV-20 Table IV.5 Ratio of nNew" Loans to New Deposits (Millions of Dollars) (1) (2) (3) Change in Change in Change in Ratio Ratio Loans & Discounts · Total Deposi ts Time Deposits (1)/(2) (1) 1 (3) 1967 15.9 40.9 44.3 . 39 • 36 1968 18.2 6.4 6.9 2.84 2.64 1969 40.8 101.8 61.4 .40 .66 1970 45.3 106.0 84.0 .43 .54 1971 64.7 85.0 61.7 .76 1.05 1972 75.5 96.5 68.1 .78 1.11 1973 64.8 59.8 29.1 1.08 2.23 1974 107.0 213.9 65.9 .50 1.62 1975 161.1 278.9 124.3 .58 1.30 1976 148.0 155.0 123.1 .95 1.20 Average .87 1.27 SOURCE: Table 17, The Alaska Economy: Mid Year Performance Report 1977, Alaska Department of Commerce and Economie Development, 1977. ..... w ~ l- ._ ~ l """' 1 ' ...... ~ - ,_ IV-21 Table IV.6 Loan to Deposit Ratio (Millions of Dollars) (1) (2) (3) Total Total Total Ratio Ratio Loans and Discounts Deposits Time Deposits (1)/(2) (1)/(3) 1967 232.0 423.4 224.3 • 55 1.03 1968 250.2 429.8 231.2 .58 1.08 1969 291.0 531.6 292.6 .55 .99 1970 336.3 637.6 376.6 .53 . 89 l97l 401.0 727.6 438.3 .55 .91 1972 476.5 824.1 506.4 .58 .94 1973 541.3 883.9 535.5 .61 1.01 1974 648. 3. 1~097.8 601.4 . 59 1.08 1975 809.4 1,376.7 725.7 .59 1.12 1976 957.4 1,531. 7 848.8 .63 1.13 Average .58 1.02 SOURCE: Table 17, The Alaska Economy: Mid Year Performance Report 1977~ Alaska Department of Commerce and Economie Development, 1977. 'I f 1 'e 1 1 t i 1 f i i f t IV-22 occurred in the ratio of changes in loans to changes in deposits.27 The change in loans and discounts is a proxy for new loans made which also may be affected as loans are paid off or sold in the secondary market. Table lV.6 shows the changes during the period in the ratio of Total Loans and Discounts ta Deposits. During the period in which the state deposited the,$100 million, 1969-1971, these ratios allfell below the average for the ten-year period. This indicates that during this period, although loans,were increasing~ they were not increasing as fast as de- posits.· In 1969 and 1970, less than half the new deposits reached the 0 economy through the creation of "new" loans, \'l"hile an average $. 87 was loaned out of every dollar deposited. Although the initial impact was minimal, Table IV.6 indicates that more of the state's deposits may have eventually reached the economy. Beginning in 1972, the ratio of Loans and Discounts ta Total Deposits began ta increase toward the average. This indicates that loans were increasing at a rate greater than deposits, which may have resulted from the shifting of sorne state deposits ta loans from ether assets. More insight into what happened might be obtained by examining how the banks invested their funds during this period. Table IV.7 shows the distribution of the assets held by insured commercial banks during this period. 27 ~ Tables IV.5 and IV.6 do not include information on savings and loans, but this is not important since §avings and ioans did not parti- cipate in the deposit placement program. See bank listings in State Investment Portfolio, Department of Administration. IV-23 Table IV.? Distribution of Assets of Commercial Banks 1969-1973 ...... Cash and U.S. Government ·other Loans and Other ··Balances --Obligations Securities Discounts Assets -1968 11.6% 15.2% 18~ 8% 50.3% 4.1% 1969 13.4% 18.3% 15.6% 48.9% 3.8% 1970 13.5% 17.3% 18.0% 47.2% 4.0% - 1971 14.0% 16.1% 17.6% 48.4% 4.0% 1972 12.0% 13.1% 19.2% 51.3% 4.3% 1973 11.9% 11.7% 16.1% 55.6% 4.7%· ~ Source~ Federal Deposit Insurance Corporation, FDIC Call Reports, 1968-73. - During the initial years of the placement, there was a shift in the asset distribution of insurèd commercial banks. Banks shifted their assets from loans and_discounts into U.S. government obligations. This shift partially explains the reduction in loan to deposit ratios shown previously. These data allow us to infer that a greater than usual ~ proportion of deposits made during the time period in which the initial placement of North Slope funds took place was invested in U.S. government ' obligations. This action, because it reduced the funds which went into 1 .1 loans, reduced the initial impact of the banks on the economy. The data in Table IV.? indicates that this shift was a short-run shift in portfolio balances. Beginning in 1971, banks began to shift their as- sets back toward the pre-1969 distribution. - - IV-24 There are. three factors which may explain the actions of the banks; the size of the original deposits, the term of the deposits, and the fact that they were state deposits. First, the state's deposits were so large in relation to deposits of the banking system that it caused major changes in the banking system. The state's deposit of $75 million of the North Slope funds in state banks in 1969 was over a 30 percent increase in time deposits in the banking system as of December 1969. The North Slope deposits 1vere over 27 percent of the total time deposits in the banking system in 1970. This massive change in the structure of the banking system may have taken time to adjust to. Because this large increase in deposits was not generated by economie activity, it may also have taken sorne time to generate loan opportunities. The return on U.S. securities provided a floor for interest rates, the banking system could have held these state funds in U.S. obligations while waiting for the economy to absorb them through loans. Tables IV.5 and IV.6 show that a more normal relation between loans and deposits exists beginning in 1971 after bankers were allowed time to adjust to the tremendous changes which had taken place. The second factor which could explain the poor showing of the banking industry in providing loans from the North Slope deposits is the term of the original deposits .. The main criticism of the original placement by the banking industry was that they were short term. The original placement in 1969 and 1970 was in one and five-year certificates .... ...... i- 1 f - .... 1 1- f ~ L L ~ .... L i ..... L, - - ~-.// IV-25 of deposit, which the bankers claimed was too short a time period to invest.28 Because of these complaints, the state lengthened the term on these deposits in 1971. This is the period when the ratio of loans and discounts to deposits began to rise. The shortness of term argu- ment revolves around the concept of "hot money."29 The state's money was considered 11 hot money 11 because there was no guaranteed replacement for it at the end of its term. Banks can use private deposits, which a:r>e short-term, to make long-term investments because they know deposits will continue to grow and they can account for the turnover. The banks had no reason to believe state deposits would be replaced at the end of their term, so they were reluctant to issue loans based on them. This argument may provide an explanation for the lack of investment in long- term loans~ but it doesn 1 t explain why short-term loans were not made. Lack of short-term loans may have resulted because of the massive in- ·-' ' ·~ 1 crease in funds~which may have taken sorne time for the demand for this type of loan to reach these levels. No risk U.S. Treasury bills may have been a profitable alternative to holding risky short-term loans. The most important reason for the limited use of the state deposits to make loans could simply be that they were state deposits. Until 1971 when the state allowed conventional loans to be used as collateral for state deposits, the state required that its deposits be collateralized 28 Alaska Department of Revenue, "Revenue News, 11 May 3, 1971. 29 rnterview with Bob Sullivan, November 29, 1977. IV-26 lOO percent with obligations of the U.S. Government.30 This tneant that, legally, loans could only be made from state deposits to the extent that banks were already holding U.S. Government obligations which were not collateral for other deposits. This could explain not only the limited loans made from these deposits, but also the movement of bank assets into U.S. securities. The liberalization of the collateral requirement coïncides with the increase of the ratios of loans to deposits. During the period of the initial placement of the North Slope lease funds in Alaskan banks, we can observe a reduction in the rate at which deposits were converted into loans and a movement of bank assets into federal securities. These actions limited the impact of the state's deposit on the economy in the short run. As can be seen from Tables IV.5 and IV.6, the long-run trend, after the factors mentioned above were taken care of, was to more normal creation of loans from deposits. This may mean that the initial limited economie impact of the deposit resulted not from unconstrained policies of the banks, but from the institutional constraints which directed the bank's policies. F.2. The Equity Impact Three types of equity effects which all involve the redistribution of incarne can be discussed. First, the data on insured commercial banks 30 J. K. Robertson, 11 Commercial Bank Deposits to Triple in CC?ming Decade." Alaska Construction and Oil Report, January 1971, pp. 37-38. :Î ; l li;lil 1 il - 1 c( - b. ~; l.... - l.... ~· L .... ! '- L - l- IV-27 can be examined to determine the effect on the profits of the banking industry of this placement of state deposits. Secondly, the impact of these deposits on the cost of borrowing can be examined to see if the. cost of borrowing was significantly reduced by the placement of state funds. Thirdly, the opportunity cost of this policy of making deposits can be examined. Tables IV.8, IV.9, and IV.lO provide the information required to deduce tentative answers to these questions about the equity impacts of the policy. Table IV.8 Interest and Fees Earned on Loans as a Percentage of Loans Alaska Insured U.S. Insured Commercial Banks Commercial Banks 1969 8.18% 7.17% 1970 8.95% 7.65% 1971 8.89% 6. 98% 1972 8.45% 6.54% 1973 8.43% 7.62% Average 8.6% 7.2% 1960-66 Averagel 8.6% 6.0% 1 G. Erion. 11 Insured Commercial Banks in Alaska, 1960-66 11 in Studies on Alaska Regional Inflation, Federal Field Committee, 1969. Source: Federal Deposit Insurance Corporation, FDIC Call Report and In- come Statements. IV-28 Table IV.9 · Interest Paid on Time Deposits as a Percentage of Total Time Deposits Alaska u.s. 1969 3. 77 3.19 1970 4.54 4.95 1971 4.98 4.43 1972 4.85 4.38 1973 5.39 4.29 Average 4.71 4.25 1960-66 Aver.agel 2. 71 3.19 1 G. Erion. 11 Insured Commercial Banks in Alaska, 1960-6611 in Studies on Alaska Régional Inflation, Federal Field Committee, 1969. Source: Federal Deposit Insurance Corporation, FDIC Call Report and Income Statements. Table IV .10 Net Income Before Taxes as a Percentage of Current Operating Revenues Alaska u.s. 1969 17.01 21.85 1970 15.75 20.53 1971 15.87 18.46 1972 13.23 18.02 1973 13.90 16.42 Average 15.15 19.06 1960-66 Averagel 16.3 24.4 1 G. Erion. "Insured Commercial Banks in Alaska, 1960-6611 in Studies on Alaska Regional Inflation, Federal Field Committee, 1969. Source: Federal Deposit Insurance Corporation, FDIC Call Report and Income Statements. ..... L ...... f L - ·- L - !..... .... ~ - L... r L .._ ...... IV-29 These tables provide proxies for the real variables, profits and înterest rates. Because these are only proxies, they can only be used to infer general trends. For instance, the proxies for interest rates in Table IV.8 actually show earnings on the total loan portfolio which varies with the age and type of loans held. These tables show that neither borrowers nor lenders made any real gains during this period. Banks' earnings on loans, although they initially went up during 1970 and 1971, showed no overall increase from the period 1960-66. This two-year increase may have resulted from the temporary increase in the usury law which went into effect in 1970.31 These figures do show a benefit to borrowers in that the average rate paid on loans did not increase as was the general trend in the United States. The insured commercial banks in.Alaska also experienced a fall in 11 profits" as shown in Table IV.9. This fall in the profit rate reflected a general trend throughout the United States. Alaskan banks did not absorb quite the fall in profit rates experienced by U.S. banks in general; the profit rate of Alaska banks was 79 percent of the U.S. profit rate during the period 1969-73, compared to only 67 percent during the period 1960-66. With the limited information available, it is impossible to deter- mine whether or rtot the banks earned a profit on the state's deposits 31 11 Legislative Roundup," Alaska Construction and Oil Report, August 1970; p. 3 • 1' IV-30 which was greater than> equal to, or less than their average rate of earnings. Greater earnings on the state's deposits could have been one reason profits of Alaskan banks did not fall as much as bank profits in the U.S. The reduction in profit rates may have been due in part to the increase in the interest paid by banks during the period for time deposits. The average interest paid during 1969-1973 was greater than that paid in the United States, which reversed the earlier relationship. Examination of data on insured commercial banks shows neither increases in profits or reductions in loan costs which can be attributed to the placement of North Slope lease funds in Alaska banks. The opportunity cost of this program i~ the state's lost income which resulted from investing in this program. The opportunity cost would be equal to the income the state could have earned by investing the money minus the 6.25 percent they earned by placing the money in Alaska banks. The most obvious alternative for the state would have been to invest these funds like the rest of the North Slope surplus funds. From the time of the North Slope lease sale to December 1973, the state earned a compound annual rate of return on the investment ac- count of 7.5 percent.32 The 6.25 percent earned on the certificates Til of deposits in Alaska banks by the state was 1.25 percent less than the .1 J state could have earned if it would have invested in a manner similar 32 Alaska Department of Revenue, 11 Revenue News Annual Supplement,11 1971+, p. 19. w w. L - i.... ~ ~ - L - - IV-31 to the remainder of the investment account. Consideration of the income generated both to the bank and through the investment of loaned funds would increase the return from this placement allowing it to compare more favorably wi th the return on the remainder of the Investment Account .• """""""YJ __ """".l 1" "L ""'"1 __ IV-32 F.3. The Efficiency Impact The efficiency of the program can be examined by determining whether this approach was the best way to reach the goals set. The goal which seemed to be set for this program was to generally stimulate the economy by expanding capital available to the economy. The analysis of the program's growth impact showed that this.was probably not the best way to get capital into the economy. Direct loan programs are a better approach for meeting this goal. Banks, because of reserve or collateral requirements, cannot invest the entire amount of funds in the economy. Banks also are profit oriented, so they will adjust their portfolios to maximize profits; these portfolio adjustments may not provide the loans desired by the policy makers. For example, placing a fixed amount in the banking system to stimulate investment in housing will not be as effective as directly providing funds for mortgages, such as through Alaska Housing Finance Corporation (AHFC), since the mortgage market may not be the most profitable way for the banks to invest the entire 1 amount of the deposit. Interpreting the goal of stimulating the economy more broadly, the placement of the funds in the banking system may have been the best approach to achieving this goal. The financial sector is important for economie development; a well-functioning capital market provides for the efficient flow of capital to various sectors in the economy. Be- cause of this, one aspect of the goal of stimulating the economy may rr :r a ".t • 1 WJh. l ! - !... ..... L... i (,... - L ~ - ..... IV-33 have been to expand and improve the local banking sector. To the extent that this was a goal) placing the funds in the Alaska banks may have been a good approach to economie stimulation. As Erion pointed out, the scale of banking in Alaska was smaller than nationa1ly, allowing the possibility of large-scale economies to be captured through expan- sion.33 The deposit of state North Slope lease funds allowed the ex- pansion of the banking system. To the extent these large-scale economies were achieved, the approach was efficient in meeting these broader goals. 33 Gene Erion. "Insured Commercial Banks in Alaska, 1960-1966,11 p. 71. .... L .. _! ·-" IV-34 G. Conclusions The lessons learned from this program which are directly applicable to the permanent fund are limited because of the differences in the goals of the programs. The state deposit program was not intended as a savings program. It was not even intended to maximize income as were the invest- ments made by the Bank of America Hith North Slope lease funds, but it was intended to achieve the specifie policy goal of stimulating the state economy. Two lessons which are valuable concern the use of the banking system to achieve specifie goals and the importance of a co- ordinated state program. First, the banking system offers an important quality which should be considered when designing programs which use it; it is a profit maximizing system. Because of this, it offers efficiency, but at the same time, it may not direct investments to those areas considered im- portant by program managers. Bankers will invest funds where they will earn the greatest return, not necessarily in the socially important areas. The tradeoffs between gain in efficiency of investments and the loss of control should he weighed when designing programs which use the banking system. Secondly, the experience of the state deposit program showed that coordination of ail aspects of state government affecting a program is important. To a certain extent, the failure of this program to provide -r, ')Wttrr i -J 1.1 l ~. .... 1 L l L. t.... - i .... L ._ IV-35 loan funds to the economy was a result of a lack of coordination. The high collateral requirements, usury limits, and short-terrn nature of the deposits all needed more examination. Another aspect which should have been examined more fully was the amount placed in banks. Sorne attempt shouldbe made to provide an estimate of capital needs hefore a similar program is attempted. This willhe particularly important as other state programs increase the state's participation in supplying the needed. capital to the state economy. 1 t 1 1 1 1 L i L... Appendices ' i '- ..... - - t L... L. L - L i: ~ ..... L L L ..... b- L ..... APPENDIX A GROWTH IN STATE AND LOCAL GOVERNMENT EXPENDITURES IN ALASKA -A~I~ Theo~y of Public Expenditu~e Growth Ea~ly discussions of the dete~mination of the level of public expen-· ditu~es concent~ated on a p~oposition known as "Wagner 1 s Law.11 This p~oposition boldly stated that the scale of state activity would in- c~ease. The~e is little doubt that this has been t~ue, but the mo~e inte~esting questions a~e whethe~ the share of government activity as a po~tion of total economie activity has been inc~easing, and what _specifie facto~s account fo~ growth in the government sector. The first section of this appendix looks at that second question, while the first is taken up in "the follmving section. The A las kan experience is looked at in the final pa~t of this appendix. Richard Musg~ave bas categorized the determinants of public expen- ditu~es and developed sorne hypotheses on the effect of these variables ove~ time.l He identifies one group as non-economie factors and the othe~ as economie. The non-economie a~e technological, demographie, and social • The economie are incarnes, productivity, and p~ices. Technological change alte~s the composition of potential public and p~ivate goods f~om which people will choose the goods they most desire. 1 Much of this discussion is taken from Richard Musgrave, Fiscal ·systems (New Haven and London: Yale University P~ess, 1969) . 1 1 ! 1 l .1 ~ ~ 1 ,J ~ § ~ ~ -~ :~ ~ ~ l j ~ ~ 1 i ~ '1 ~· ! ~ ! i ~ ~ A-2 The impact of technological change upon this mix can be dramatic. The outstanding example of this in the tvrentieth century has been the auto- mobile. This private good has generated a demand for public goods in the form of highways which have, in turn, generated a different mix of both public and private goods that has essentially transformed the en- -vironment. Technological change can begin in the public sector and create complimentary or "spin-off" demands in the private sector. The federal space program is an example of this phenomenon. From these two examples, it is clear that it is impossible to generalize regarding the impact of technological change on the growth of demand for public goods. Demographie considerations involve not only the level of population but also its composition and geographie distribution. Some goods are purely 11 public11 such that the quantity required and, thus, the cost is independent of the number of consumers. Each state has only one governor. But for most public expenditures, the total cost of the service is not independent of the number of consumers. In large states, governors have large staffs. Both economies and diseconomies of scale may be the result of in- creases in population density. Obviously, a young population requires a larger number of schools and a mature population more facilities for the aged. For this reason, expenditures can increase more or less rapidly than population. ..... i L- .... ..... !..- - ~ f ..... i L h....; i.... il. ..... L - ~ .._ - A-3 Social factors play an important role in the determination of the environment in which budgetary decisions are made. Cultural values and social philosophy affect the extent to which demand is directed toward public goods, as well as the public role in redistribution of incarne and wealth. Changes in political direction may change the perceived best mix between public and private goods as different components of the electorate with different preferences become more or less powerful. War and social disturbance may have a significant permanent impact on the trend in public expenditure growth. This may be the result of either . a reassessment of social values or a shift in taxpayers' feelings about the maximum tolerable level of taxation. The latter idea is based on the notion that the level of expenditures is generally constrained by the availability of revenues rather than the opposite hypothesis that the desired expenditure level determines revenues. Turning to economie considerations, the level of personal incarne is the most important economie consideration in the determina·tion of public expenditure levels. A rneaningful discussion of this relation- ship must separately treat four categories of public expenditures: capital formation, consumption, redistribution, and merit wants. Generally as an econorny matures, the ratio of total capital forma- tion to gross national product tends to r.ise. Thus, if the ratio of public to private capital formation remains constant as an economy de- velops, public expenditures on capital formation would increase more ' : 1 1 1 1 ! 1 1 ! 1 ~ ~ ~ 1 a & ~ ~ l ~ ~ " ~ ~ ~ ~ ~ ~ ~ 1 ~ • 1 ~ 1 ,1 t 1 j > ~ } i 1 1 ! 1 1 J ' 1 1 l î i f A-4- rapidly than total income. This latter ratio is subject to variation however~ and two distinct periods in the development of an economy have · been identified when the public to private ra·tio of capital formation may tend toward more public capital formation. The first would be in the early stages of economie development when the creation of social overhead capital, ox> infrastructure, is a necessary prerequisite for private eco- nomic development. In a later stage of development, the consumption of private goods which require complementary public goods may become more important. Highways are the most often indicated example. Urban con- centration and the complexities of industrialization may also require large public capital formation programs. The problem with this explanation is that it may be historically accurate, but it does not explain present conditions very adequately. Higbways are as much basic infrastructure as they are complementary public goods to automobiles. Is growth of highway expenditures the re- sult of the former or latter requirement? This indicates that economie . theory with respect to public capital formation does not offer any well- defined hypotheses regarding the role of personal income as a determinant of its growth. With respect to public consumption goods, the question of its growth in relation to personal income is usually put in·terms of the income ela.sticity of demand for these goods. If the elasticity exceeds unity, public consumption grows as a percentage of personal income. Musgrave 1- r 1 A-5 -- ' L suggests that as a consequence of Engel 1 s law, the share. of the budge·t i going towards public expenditures might increase with increasing incarne. i.- Engel's laH states that the share of consumer outlays going into private -expenditures on the basic needs for food, shelter, and clothing declines as incarne rises. On the other hand, he points out that there are certain public functions which must be regarded as basic necessities also, such r L as public protection, Hhich would also behave according to Engel's law. As in the area of public capital formation, the ideas about public consumption goods are not theory but speculation, since they discuss po- tential public consumption as incarnes rise but are unable to provide real insight into the public private ratio. Government expenditures which attempt to affect the distribution of incarne may be a declining percentage of incarne or might even be declining absolutely as income rises according to speculations by Musgrave. The choice is dependent upon the objective of the distributional adjustment, and implicit in his notion is a minimum level of incarne for all. It seems that a stronger argument can be made for the notion of i.... rising percentage of incarne going into public expenditures for incarne redistribution as incarnes rise because of a switch from private to public welfare programs. Rising incarnes and economie complexity increase the ability of people to insure themselves against economie risk while, at the same time, probably raising the level of economie risk itself. Where 1- - i- l 1 ! 1 ~ ! i ! 1 Î 1 ! ' ' l 1 l i i ! i ! . l A-6 formerly the extended family and the farm provided this insurance, social security largely performs that function in our society. Merit wants are those government expenditures which do not fall into the traditional economie framework of being either private goods, such that the level of consumption by one individual does not affect the ability of others to consume that same good, or private goods. Rather, they are government expenditures based upon the notion that it is so- cially proper to consume sorne things and not others. The decision- making group is assumed to be capable of judgment superior to the indi- vidual and the result is subsidized milk for school children and pro- hibitive taxes on liquor. Musgrave relates merit wants closely to expenditures for income re- distribution and hypothesizes that~ as a result, they may be a declining percentage of expenditures as incomes rise. But even if the definition of merit wants is limited to necessities, changing perceptions of neces- sities could make this component.of consumption increase as personal in- come expands. In sum, the economie theory which attempts to determine whether public expenditures are a superior good, taking a rising percentage of the total budget as incomes rise, is founded upon little more than 'l speculation. Upon reflection, this is not an unexpected result because j of the large variety of goods and services typically provided by a govern- ment. Among them would be superior, inferior, and Giffen goods (consumption 1 .li- li- L 1.... 1.... r L r l' 1 1.- L 1.... ~ ;.,..; ~ A-7 declines absolutely when income rises) and the public expenditures would be sorne weighted average of all these different types of goods, of lvhich sorne are necessities and sorne lu..xuries. In a sense, it is perhaps en- couraging to come to this indeterminate conclusion, rather than the opposite, that there is an inexorable relationship between rising in- cornes and public expenditures which predestines that an ever increasing percentage of economie output be channeled through the public sector •. Turning next to the question of productivity, there is an argument that productivity gains in the production of those goods supplied by the public sector lag behind productivity gains in the private sector. This thesis was put forward by Baumol 2 wher~ he points to the obvious poten- tial differences in productivity increases in labor used in a typical manufacturing process, and used in the production of a symphony. Whether this lagging productivity increase concept is valid for the public sector in general depends upon the particular mix of public sector goods relative to those in the private sector. Examples of functions in which labor productivity increases are minimal in the public sector, such as education, occur in the private sector also in service industries, such as restaurants. And many public expenditures are in areas where labor productivity increases are potentially as rapid as in the private sector. Highway maintenance is one example and construction activity, in general, another. 2 ~ülliam Baumol, ''Macroeconomies of Unbalanced Growth: The Anatomy of Urban Crises,11 American Economie Review, Vol. LVII, No. 3 (June 1967), pp. 415-426. .......u " ~ 1 " 1 ] 1 1 ' i 1 t 1 ft l ~ ~ ~ ~ ! ! 1 ~ I 1 A-8 The existence of such a differentiai in productivity increases is thus an empirical question, just as is the size of the income elasticity of public expenditures. The difficulty which arises in attempting to make an empirical measurement of productivity is that the product of many public sector activities is difficult to measure independently of the inputs in terms of man hours. Sorne a·ttempts have, however, been made. \ The gross product deflator of the Department of Commerce, a ratio u:sed to obtain comparability among priees of outputs in different time periods, has historically grown more rapidly for state and local government expen- ditures than for the average of all products of the economy. This tends to suppor-t the hypothesis that productivity is rising more slowly in government than in the economy generally. If this is the case, there would be a tendency over time, other things being equal, for the cost of public expenditures to rise relative to private expenditures and the share of personal income directed into public expenditures to rise. This would be the case as long as labor markets are relatively unconstrained so that wage increases due to pro- ductivity gains would be reflected in wage increases in those industries where productivity gains are not possible. This introduces a final element, priee elasticity of demand, into the consideration of elements determining the growth rate of public ex- penditures relative to private in an expanding economy. To the extent that productivity increases in the public sector fall behind those in the private economy, the relative priee of public goods will tend to ·'""" A-9 rise. Other things being equal, the higher priee for the product will cause a decline in demand. This factor would tend to offset increasing ...... public sector expenditures resulting from both income and productivity effects. Little speculation has been done on the priee elasticity of - public goods because of both the difficulty in identification of the -priee for a particular product, and of identifying the product itself. From the point of view of the consumer, the individual taxpayer, the 1... existence of a behavioral relationship between the cost of a public service in terms of taxes and the amount consumed is difficult to trace. In sum~ there are three economie considerations operating on the growth of public expenditures: income growth, productivity increases, i-and priee effects. In a static political and social atmosphere, there is no a priori reason to expect that the public sector needs to grow relatively faster than output in general. In a ;wrld of changing expecta- tions and political alliances, economie considerations may be of secondary importance. To examine the actual trends in this century in government spending in the United States is the topic of the next section. - - 1- '- l 1 1 1 ~ 1 ~ ~ 1 ~ ~ 1 2 i 1 l t 1 ~ t ! 1 ~ ~ i , 1 • 1 ~ i î l l 1 1 1 ! ~ ! w } t j i l ~ j A-10 A.II. Historical Public Expenditure Patterns.in the U.S. A cursory analysis of total government spending in this century reveals that government expenditures have accounted for an increasing percentage of gross national product (GNP) over time. Government ex-" penditures at all levels increased from 7.1 percent of GNP in 1890 to 33.2 percent in 1963.3 The largest component of this growth bas been the military budget which increased from 1.4 percent to 10.6 percent of GNP. Musgrave attributes a substantial portion of the rise in the civilian budget of from 5.0 percent to 18.3 percent of GNP. to the growth in social services. Of these, transfer payments grew from .1 percent to 7.0 percent of total GNP. Capital outlays fluctuated over this period between 20 per- cent and 30 percent of total public expenditures with rio obse:r:vâble pattern. The income elasticity of public expenditures over this same period averaged greater than one with the period after 1929 having a higher elasticity than the average. For the category of civilian expenditures, the elasticities were lower than for total expenditures. The pre-1929 elasticity was calculated at 1.7 and the post-1929 elasticity at 2.4 for civilian expenditures. Table A.l provides an analysis of more recent data for just state and local government exp en di ture growth as i t relates to the grm:rt:h of 3 Musgrave, op. cit., p. 94. ,-_IÎ) ~ liiliÎ r r r r f r~---· r----r 1 r --~ r~ -_--[- TABLE A.l PATTERNS IN STATE & LOCAL GOVERNMENT EXPENDITURES TOTAL U.S. State & Real State & Local State & Local Personal Personal Real State & Local Im"Qlicit Priee Implicit Priee Gov't. Local Gov't. Gov't. Real In come In come Sharo of Gov't. Personnl Rcsit..lent Deflator State Doflator Gross Expenditure Expenditures Expenditures Per Per Statc & E:.-~pe1-:.ditures In come Population & Local Gov't. National Product ns Perccntage Pcr Capita Per Capita Capita Capita Local Year (!üllion $) (!1illion $) (Million) 1958 ~ 100 1958 = 100 of Income ($) ($) ($) w Govc:rnmc~r± ------ l930 8432 77015 123.077 38.7 49.3 .10 6b.50 170 625.74 1:160 .13 :?35 8550 60405 127.250 37.0 112.5 .14 67.19 180 474.69 1110 .16 19~~0 S319 78285 132.594 3'1. 3 lf3. 9 .11 70.28 189 590.41 l3l10 .13 r 1 q~t5 9018 171113 140.468 1+8. 6 59.7 .05 64.19 130 1218.16 2040 .06 f-' f-' l95G 22342 227619 152.271 70.8 80.2 .09 145.72 200 1494.82 1860 .10 .:. ~55 32663 310889 165.031 87.5 90.9 .10 196.84 220 1873.60 2060 .10 1~150 LIC::f:.36 Li00953 180.671 105.9 103.3 .12 274.73 250 2219.24 211+0 .11 l9G5 73656 53S083 191+. 303 123.2 110.9 .13 379.07 300 2753.85 2480 .12 1970 l37212 803290 2011.Sn 164.6 135.2 .16 645.33 390 3945.28 2910 .13 :'?7S 2l4536 12'~9673 213.540 218.0 185.9 .17 100lf.66 460 5852.17 31!10 .14 Anr:.ual G~~(it,.:th Rate 796 6% 1% 49<> 3% -6% 2% 5% 2% So~rce: u. s. ·Dept. of Commerce, Office of Business Economies, purvel of Current Business, various issues. U, s. Dept. of Commerce, Bureau of Census, Current Population Reports, various issues, A-12 personal income in the United States. Generally, state and local govern- ment expenditures are best analyzed together because of the variation from s·tate to state in the jurisdictional division of functions. Between 1930 and 1975, total state. and local government expenditures increased from $8 billion to $215 billion, an annual rate of growth of 7 percent. Over the same period, personal income increased at an annual rate of 6 per~ cent. As a result of this differential growth, state and local government expenditures increased as a percentage of personal income from 10 percent to 17 percent bet1·reen 1930 and 1975. The actual increase in the ratio occurred in the last 20 years after 1955, at which time the ra-tio was still at 10 percent. Much of the rapid increase since that time must be attributed to transfer programs from the federal government to state and local governments. ·Table A.l includes t.he implicit priee deflators for state and local government and for GNP for the same period. The priee deflator for state and local government increased over the period àt an annual 4 percent rate, while the GNP deflator increased 3 percent annually, reflecting more rapid productivity increases in the economy in general than in those goods provided by state and local governments. If state and local government expenditures and p8rsonal income are converted to real figures using these deflators, the pattern of growth is somewhat different. Both real personal income per capita and real state and local government expenditures per capita increase at an annual l.... ~..,. - ..... L L 1- ..... L L. ' ;..... L A-13 rate of. 2 percent. This is equivalent to a proportionate increase in the real value of output of state and local government expenditures over the period.4 A classic study doue in the 1950s analyzed the growth of state and local government expenditures in the United States during the first half of the 20th century and interstate variations in growth rates.5 Fabricant concluded from his analysis that differences among states in per capita expenditures in various categories of expenditures declined over time but were not eliminated. Every state expanded nearly all of its functions in terms of nominal expenditures but the more backward states, in 1903, increased expenditures more rapidly over the period. In addition, he found tha·t a majori ty of the variation among the states in expenditure levels could be explained by three factors: income, il..!i...il 4 Dividing government expenditures and personal income by this priee deflator involves a simplification in each case, although the resulting biases are compensating. A small component of state and local government expenditures is transfers which are not a component of the priee deflator for state and local government since it does not appear in GNP. Since transfers would have a "real indexn closer to the total of GNP, the growth of the deflator may have a slight upward bias. The priee deflator for GNP 5 however, contains capital expenditure elements not reflected in expenditures out of personal incarne. Personal income is more commonly deflated by the consumer priee index or the deflator for consumer expenditure goods. This index grew less rapidly than the GNP deflator, so the bias from using the GNP deflator is in the same direction as that resulting from the transfer component of state and local government expenditures. 5 Solomon Fabricant, The Trend of Goverriment Activity in the United States Since 1900 (NeN York: National Bureau of Economie Research, 1952). l'' ·"' A-14 urbanization, and d?nsity. The elasticity of incorne coefficient for the period was calculated to be .9, holding other factors constant. This implies that state and local government expenditures would increase as income rises, but at a somewhat slower rate. Urbanization was also found to be positively correlated with expenditures, while density was inversely ,rela·ted. A shortcoming of this type of statistical analysis is that there is often high correlation arnong the explanatory variables, for exarnple, in- come and urbanization. As a result, it is difficult to identify the net contributions of the explanatory variables separately from one another Hi th confidence, and important variables not includèd but correlated i-TÎ th included variables (such as education level which is often correlated Hith income) can also result in incorrect conclusions. This reduces the applicability of the results to specifie situations such as an analysis of Alaskan expenditures. This cursory revie>v has showu that there has been a significant growth in government expenditures as a percentage of GNP over this cen- tury. State and local government taken together, however, have grown much more slowly than the federal government and in real terms, deflated to account for inflation, the percentage of output accounted for by state and local government has remained fairly constant since the l930s. - i ..... i- i L ~ - i' 1 L l.- 1 1..... ,_ 1 1 'Ll,.l A-15 A.III. Alaska Historical Public Expenditure Patterns The historie pattern of Alaska state government operating expendi- tures is detailed in Table A.2. Total expenditures have increased from $37 million in fisèal year 1960 to an estimated $893 million in 1977. This represents an annua1 growth rate since statehood of 21 percent. The increase from year to year has been calcu1ated, as we11 as the per- centage increase over the previous year. Examination of this percentage increase from year to year indicates the existence of severa1 distinct periods of expenditure growth which show great variation. In 1964 expen- ditures were 2 percent higher than the previous year~ whi1e in 1971 they Here 59 percent higher than in 1970. Short1y after statehood, expenditure growth was rapid because a need was felt to develop social overhead capital as a prerequisite to private economie deve1opment. The source of funds for these expendi- tures \-Jas the federal transi tiona1 grants provided to get the new state on its feet. Unfortunately, a large portion of the transitional grants was spent on programs previously funded by the federal government before statehood. The transitional grants were available for only a few years and alternative revenue sources did not develop to replace the gap left when those grants were spent. As a result, tax increases in the ear1y 1960s were necessary to keep the level of state expenditures growing from year to year.6 6 George W. Rogers, The Future of Alaska (Hash. D.C.: Resources for the Future, 1962), pp. 180-220. ~-~- Table A.2. State of Alaska Operating Expenditures by Furiction 1963-1976 (Million $) ~NCTION Education Social Services. Health Natura1 Resources Public Protection Y EAR _ __ '---~·-~ §~~--_____! !L_ ____ % $ % $ % $ % 1960 1961 1962 1963 33.0 41.1 7.4 9.2 5.8 7.2 6.5 ·8.1 1.1 1.4 1964 31.3 38.1 8.0 9.7 6.2 7.6 6.2 7.6 .8 1.0 1965 35.6 40.3 8.6 9.7 6.6 7.5 6.1 6.9 1.4 1.6 1966 39.9 39.7 9.1 9.1 7.0 7.0 7.4 7.4 1.7 1.7 1967 !;5. 6 40.1 9.9 8.7 7.6 6.7 8.5 7.5 1.9 1.7 ~ 1908 52.0 40.2 11.4 8.8 8.6 6.2 9.5 7.3 2.3 1.8 1 1-' 1969 63.4 41.7 14.5 ~ !hQ. 5.3 lCl. 7 l:.Q .h§_ u 0\ 1970 84.9 42-:7 19.8 10.0 10.9 5.5 15.5 7.8 3.0 1.5 1971 118.0 37 .!; 39.6 12.6 13.5 4.3 19.5 6.2 5.0 1.6 1972 155.3 L;2 .4 44.9 12.3 13.3 3.6 24.0 6.5 6.1 1.7 1973 175.7 41.7 53.7 12.7 22.7 5.4 23.3 5.5 7.0 1.7 1974 193.8 40.1 61.5 12.8 27.6 5.7 27.6 5.7 9.4 1.9 1975 228.7 38.3 65.0 10.9 34.6 5.8 36.2 6.1 13.8 2.3 1976 328.7 !;2. 2 89.4 11.5 44.4 5.7 48.6 6.2 18.1 2.3 1977 Estimate 373.5 41.8 97.5 10.9 52.0 5.8 58.0 6.5 20.3 2.3 Annùal Grm>'th Rates Overa11 Growth rate 19% 20% 17% 17% 23% Since Prudhoe 1969-1976 25% 27% 26% 24% 29% Before Prudhoe 12% 12% 6% 9% 15% Source: State of Alaska, ~et Docmnent, various issues •. Figures adjusted after 1962 for compatibility over time. r ,--.. r r-r--r·~~~ r~· r r~ . r··· r··· r ~-·-· .Table A.2. continued State of Alaska Operating Expenditures by Function 1963-1976 (Million $) -..........."" FUNCTION Administrative Increase Over ~""""·-...... , ... of Justice Developroent Transportation General Governroent Total Previous Year YEAR +, -., $ % $ % $ % $ % -·-$-. $ % 1960 - --- -- --36.6 1961 - -------51.4 14.3 38.5 1962 --------63.2 11.8 23.0 1963 5.3 6.6 .4 .5 13.4 16.7 4.8 6.0 80.3 17.1 27 .o 1964 6.7 8.2 • 7 .9 17 .o 20.7 5.2 6.3 82.1 1.8 2.2 1965 7.0 7.9 .7 .8 17.9 20.3 5.6 6.3 SEL!~ 6.3 7.6 ~ 1 1966 7.5 7.5 .9 .9 19.5 19.4 7.5 7.5 100.5 12.1 13.7 f-' 1967 9.0 7.9 1.2 1.1 21.3 13.8 8.6 7.6 11.3.6 13.1 13.0 --l 1963 9.7 7.5 1.3 1.0 25.3 19.6 9.9 7.7 129.3 15.7 13.8 1969 12.1 8.0 1.1 . 7 29.7 19.5 12.6 8.3 152.1 22.8 17.6 1970 14.6 7.3 1.7 -:9 '36.1 18.1 18.1 9.T l99.0 46.9 30.8 1971 21.4 6.8 15.0 4.8 44.4 1lr .1 39.3 12.4 315.8 116.8 58.7 1972 26.2 7.1 17.0 4.6 56.5 15.4 23.3 6.4 366.5. 50.7 16.1 1973 29.1 6.9 20.0 4.7 62.8 14.9 27.7 6.6 421.8 55.3 15.1 1974 35.0 7.3 21.7 4.5 70.4 14.6 35.3 7.3 lf82. 3 60.5 14.3 1975 47.5 7.9 40.5 6.8 90.8 15.2 40.0 6.7 597.6 115.3 23.9 1976 59.5 7.6 37.0 4.8 101.8 13 .• 1 51.1+ 6.6 778.9 181.3 30.3 1977 Estimate 69.3 7.8 43.1 4.8 122.3 13.7 56.7 6.4 892.6 113.7 14.4 Annua1 Growth Rates Overall Gro,.,th Rate 20% ltO% 17% 19% 21% (1960 t·o 1977) Since Prudhoe 1969-19ï6 24% 58% !9% 21% 25% Before l'ntdhoe · 15% 18% 14% 17% 17% (1960 tc 1969) 11% (1963 tc 1~69) A-18 In the lat-ter 1960s, there >fere significant increases in the level of federal grants-in-aid, particularly in the area of transportation, and this allowed the annual growth rate to increase to over 13 percent until the bonus lease sale at Prudhoe Bay in late 1969. Since that time, the change from year to year has been erratic, going from a high of 59 percent in 1970 to a low of 14-percent in 1974. If any pattern is discernible in the aggregate figures, it is that ex- penditure level increases have been higher when revenues, expectation of revenues, or population increase is high. The average annual growth rate in expenditures since the Prudhoe Bay lease sale has been 25 per- cent, v.rhile the average for the period since statehood and before the sale was 17 percent. Table A.2 also presents a functional breakdown of state expenditures from 1963 onward. The most striking observation from this breakdown is the fact that the percentage of the state budget going to each of the nine functional categories has remained fairly stable over the historie period in spite of the rapid growth rate of total expenditures. The education budget, for example, has fluctuated between 37 percent and 42 percent of the total with no observable trend, either before or after the Prudhoe Bay lease sale. Since the education budget· makes up such a large percentage of the total, one could argue that it, to a large extent, determines the growth - ...... A-19 rate for total expenditures but the same pattern applies generally with minor variation. Before 1969~ the health and natural resource budgets ...... grew considerably slovrer than the average; while public protection, ad- ,, ' .... ministration of justice, development, transportation, and general gov- ernment increased their shares. Since 1969, the percentage increases ._ have come in the areas of social services, health, and development. f ,, 1-The social services budget jumped relatively in the early 1970s but has declined in recent years. The health budget, in contrast, lest out relatively in the early 1970s but has been increasing its.share recently. The development budget has shovrn the largest increase, mainly becàuse of the advent of municipal revenue sharing in the early 1970s. The trans- portation portion of the budget was at a maximum in the early and mid- 1960s and has been on the decline ever since. This reflects the large reliance of this portion of the budget on federal grants-in-aid. General government increased dramatically in the years immediately following 1969 as a result of the advent of new programs. In later years, as these programs matured, they moved into the other functional categories and general governmental share of the total returned to its previous level. This functional expenditure analysis indicates that the growth in 1-state government expenditures has occurred in all categories. In addi- tian, the functional growth since 1969 has not been particularly biased ~ with respect to any categories except toward local transfers in the - A-20 development budget and ai..Jay from transportation. Thus, any ubacklog of fel-t needs 11 at the time of the Prudhoe Bay lease sale seems to have been either a generalized feeling, or else 11 felt needs" in some functional areas have been balanced by ncompensating growth" in other areas. Table A.3 shows the relationship between total state government operating expenditures and those accounted for out of the general fund. There appears to have been no pattern of change over time in the ratio of general fund to total expenditures. Also included is a calculation of the percentage of total state operating expenditures accounted for by federal grants. The period immediately after statehood was when federal grant budget contributions were the highest percentage; Since that time, there has been a consistent decline in the percentage of expenditures fina~ced by federal transfers. In contrast to 29 percent in the peak year of 1951, in 1976 the percentage was 11 percent. A more detailed analysis of total state operating expenditures is provided in Table A.4. Since 1961, total operating expenditures in- creased approximately 20 percent annually. Netting out an annual popu- lation increase of nearly 4 percent reduces the rate of increase in expenditures per capita to 15.5 percent. If the real per capita expenditure figure for Alaska is deflated by the Anchorage Consumer priee index, the real expenditure growth rate per capita becomes 11 percent. This is a rate of groHth more than ~~ t i.- -L - i 1..... ii- l i..... :.... ~ ' ..... - t.... Year 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 A-21 TABLE A.3 ALASKA STATE GOVERNMENT ANALYSIS OF BUDGET COMPOSITION General Fund as State Operating a Percentage E:xpenditures of Total 36.6 70 51.4 71 63.2 7l 83.3 76 116.2 70 98.9 75 109.9 75 123.3 74 144.9 73 177.5 74 226.1 72 332.8 78 377.3 75 435.3 71 496.3 73 613.3 74 Federal Grants as Percentage of Total. 26 29 27 19 20 17 21 21 21 21 21 14 18 16 17 15 778.9 73 11 Source: State of Alaska, Budget Document, various issues. IL.I ~~ .. l. 2. 3 .. 4. 5. ~· o. 7. fl. 9. ,' > •'"'~,..._-,.,...,.,.,_,,,,,.,.._...,;..,._\<'<',;:_.,._,__,.,, .. ,..,_,.-""'>-<&..-.'-<""''<•"" ",_,,_,,._...,. ... AM-.;J<,_,~._.,,H, ~·····,, '>'~'"'>'"'--<~t>......-.. .,...,~~.T..p-~"""""'Y•""-•,_..,.._. ... """"~'<-........,....,.__,.~-~.w~--. T~ble A.2 t-L~J? model thr:.1 1974 then State of Alaska estimates 1960 from U, s. Census. Colu~n 2/Column 1 u. s. Dcpt. of Laber, Bureau of Laber Statisties. colu.•1m 3/Column 4 Persor,al income taken from u. s. Department: of Commerce, Bureau of Economie Analysis., deflated by Anchorage consumer priee inde:<. ~t,;.p modcl .. Colu:nn S/Colun1n 7. u. S. DE!pt. of Commerce, l3urea1l· of Economie Analysis. ...... ·~ ;..... i ii... - i L l t 1.... !( 1· L. i 1.... L 1 L. ~ 1 A-23 2.5 times faster than the growth in real personal incarne per capita over the same period which Has 4 percent. As noted previously~ the consumer priee index probably underestimates the increase in the cost of delivery of public goods and services because productivi ty gains. in those areas do not occur as rapidly as in -the pri- vate sector. Comparison of the implicit priee deflator for state and local government with that for personal consumption expenditures over the same period tends to support that contention. The priee deflator for personal consumption expenditures, a close proxy for the consumer priee index, increased at an annual rate of 4 percent, while the priee deflator for state and local government grew at a 6 percent rate. De- flation of state operating expenditures per capita by the implicit priee deflator for state and local government Hould result in a calculated growth rate in real expenditures per capita closer to 9 percent. This is only slightly more than twice the rate of growth of real incarne per capita. As a percentage of incarne per capita, state expenditures have shOim an interesting pattern. In the period before 1970, there Has groHth from 8 percent to 12 percent of incarne in the form of state expenditures in a fairly steady fashion. In the tvvo years between 1969 and 1971, the ratio increased 67 percent -to 20 percent. Since 1971, the percent- age has hovered at 20 percent. A-24 Table A.5 compares Alaska state and local government expenditures with national averages. Examination of the ratio of total per capita expenditures in Alaska and the U. S. shows that Alaskan expenditures have indeed grown relatively more rapidly than the national average; but during the period from 1963 to the present, the increase has not been large. In 1965 the ratio was 2.4 and in 1974 the ratio bad increased to 2.66. The ratio differs significantly among the functional categories. In the largest identified category, education, the ratio has increased significantly consistent with overall growth. This has not been the pattern in the other categories, however. The ratio of highway expendi- tures in Alaska is about 3.5 times the national average and was that way in 1963 also. In the interim, it was as high as 6 times. Public welfare exp en di tures had a ratio of be-tween 66 and 81 percent of the national average until 1971 when they jumped to 1.05 percent. Since that time, they have remained close to the national average. Health and hospital expenditures have shown a random variation around and closè to the na- tional average. The largest ratio in recent years has been in the un~ identified category, where in 1974 it was 3.85. This category has sho11n almost continuous grm-1th sin ce 1963. Table A.6 shows that the ratio of combined state and local expendi- tures to personal income in Alaska relative to the U.S. average increased substantially since 1963, In that year, the ratio was 1.67 and by 1974 l )' 1 1 1 .·~J [' -~ A-25 - i-. Table A.S Direct General Ex02~diture of :.... State & Local Governments Alaska and 'l'he u. S. Average i.... ($ Per Capital Health Public and All Year Total Education High1·1ays ~'l'el fare Hgspitals Other 1----- 1963 Alaska 670 210 210 23 32 195 u.s. 344 127 59 29 25 103 1 Ratio (1. 95) (1. 65) (3.56) (. 79) (1. 28) (1. B9) :.... 1964 Alaska L u.s. Ratio 1965 Alaska 928 24 7 326 26 29 298 u.s. 386 149 63 32 27 113 Ratio (2. 4 a J (1. 65) (5 .17) (. 81) (1.07) (2. 63) 1966 Alaska 923 276 273 27 23 319 u.s. 423 170 65 35 30 123 Ratio (2 .13) (1.62) ( 4. 20) (. 77) {. 9 3} (2 .59) L. . 1967 Alaska 1191 309 440 35 32 374 u.s. 472 192 70 42 34 135 Ratio (2. 52) (1.60) (6.28) (. 83) {.94) (2. 77) -. 1968 Alaska 1203 31~ 345 35 36 467 u.s. 512 206 72 49 38 147 Ratio (2. 34) (1.54) (4. 79) (. 71) (. 94) (3.17} 1969 Alaska 1216 390 247 40 42 497 u.s. 578 2 34 76 60 42 166 Ratio (2 .10) (1.66) (3.25} (. 66) (1. 0) (2.99) i 1970 Alaska 1350 439 254 51 40 566 -u.s. 259 81 72 48 186 646 Ratio (2. 08} (1. 69) (3.13) (. 70) (. 83) (3.04) 1971 Alaska 1828 643 326 93 63 702 u.s. 731 288 88 88 54 212 Ratio (2. 50) (2.23) (3.70} (1.05) {1.16) (3.31) 1972 Alaska 2147 728 389 105 62 863 -u.s. 801 312 91 101 62 236 Ratio (2. 68) (2. 33) (4. 27) (1. 03) (1.00) (3.65) 1973 Alaska 2376 867 384 122 63 940 u.s. 863 332 89 112 66 264 Ratio (2. 75) (2. 61) ( 4 • 31} (1.09) (. 95) (3.55) 1974 Alaska 2501 B2'7 345 120 74 1135 u.s. 940 359 94 117 75 294 i-Ratio (2.66) (2.30) (3.67) (1.03) (. 99) (3. 86) Source: U. S. Del)t of Cornmerce, Bureau of Cens us, Statistical ..... Abstrac"t:_r various issues . ~ - -! l 1 l l i 1 j 1 l f A-26 'l'ABLE A.6 DIRECT GENERi\L EXPENPITURE OF STATE & LOCAL GOVERl'<HEN'rS ALASKfl. &"'D THE U. S. AVERAGE ($ PER $1000 OF PERSONAL INCOHE) All Local General Total Education Year Expendi. Education __Qrüy~-Highv1ays 1963 Alaska 236 74 54 74 u.s. 141 52 41 24 Ratio (1. 6 7} (1. 42) (1.32) (3.08) 1964 Alaska u.s. Ratio 1965 Alaska 301 80 57 106 u.s. 152 59 45 24 Ratio (1.98) (1. 35) (1.26) <4 .4lr 1966 Alaska 294 88 54 87 u.s. 155 62 47 23 Ratio (1. 89) (1.41) (1.14) (3.78) 1967 Alaska u.s. Ratio 1968 Alaska 327 86 61 94 u.s. 163 65 46 23 Ratio (2. 00) (1. 32) (1. 32} (4.08) 1969 Alaska 302 97 63 61 u.s. 171 69 49 23 Ratio (1. 76) (1. 4 0) (1. 34) (2.65) 1970 Alaska 324 105 79 61 u.s. 176 71 50 22 Ratio (1. 84) (1. 4 7) (1.58) (2.77) 1971 Alaska u.s. Ratio 1972 Alaska u.s. 417 142 -75 178 69 -2o Ratio (2. 34} (2.06) -(3.75) 1973 Alaska 400 150 -60 u.s. 170 70 -20 Ratio (2. 35) (2.14) -(3.00) 1974 Alaska 363 120 -50 u.s. 172 66 -17 Ratio (2.11) (1. 82) ·-(2.94) Source: U.S. Dept of Dept of Com;nerce, Bureau of Census, Abstract, various insues. Hea1th i Public & Nelfare Hosp. 8 11 12 10 (. 6 7) (1.10} 8 9 12 . 10 (. 66) (. 90) l 8 9 1 12 11 (. 66} (. 81) 1 1 1 l 9 9 ! 1 15 12 t (. 60) (.75) 1 J l 1 10 10 ! 1 18 12 1 (.55) (. 33) ! 1 12 10 i 20 13 (.60) (. 76) 20 12 23 14 (. 8 7) {.86) 20 10 20 10 ( 1. 00) ( 1. 00} 18 11 21 14 {. 86) (. 79} Statistica1 ----- 1 - ~;.... l.. [ i - - 1 ._ ~.....; ..... .... - - w.........~ l J·: 1 J;, L '! J i Ji 1 j, *~.,œ*.d !.,·i! "· A-27 it bad increased to 2.ll. Interestingly, in 1968 it was already 2., which reflects not only the fact that the U.S. average expenditure level as a percentage of personal income was increasingrapidly over the period but also that the very rapid growth in Alaska in state government expenditure~; as a function of income bas been partially offset by an apparent slm.t growth in e:xpenditures at the local level. Expenditures in all indicated categories, with the exception of highways, appear to be more income elastic over the period 1963 to 1974 than the U.S. average. For highways, one can identify a decline over time nationally in expenditures as a percentage of income, while for Alaska no trend is identifiable in the signifîcant year-to-year fluctuations. For total education, there seems to have been a significant increase in the Alaska margin in the early 1970s with Alaska now spending twice the national average on education Hhen adjusted for personal income. In contrast, public welfare and health and hospital expenditures are considerably less than the national average, although public Helfare e:xpenditures have increased substantially since the early 1970s . To summarize these patterns of growth, a few general conclusions can be stated. First, the majority of the rapid growth in government in. this century appears to have been generated by increases in two areas of federal expenditures--military and transfer programs. Over the last 40 years, state and local government bas increased more rapidly than personal income. This bas resulted in a larger share for state and A-28 local government but when corrected for productivity growth~ governments' share appear fairly constant. State expenditures in Alaska have grown rapidly since statehood by all measures. At the same time, expenditures have been rapidly increasing in other states so the Alaska differentiai, though rising, has not in-· creased as much as might have been expected. There has been no average period of growth since statehood but rather several distinct periods of very different growth rates basically determined by revenues available and population and income increases. In spite of this growth, Alaska spends no more per capita in sorne functional categories of expenditures than the national average. œ ·~ ~ ~ ·~,< l' &.: i ii 1 l 1 !.• ' v ~ ~ l l ~ ~ !' f i ~ ~ t i 1l 1 1 1 1 j ' .! 1 -1 1 l 1 1 l 1...1 i ' 1· 1 ! ..... il..., - f ' """' ..... ..... L.; L - L... l.w APPENDIX B MODIFICATIONS TO MAP ECONOMETRie MODEL FOR ANALYSIS OF PER}MNENT FUND ',~ B.I. Aècommodations to Simulate to 1999 Two modifications were necessary to allow the madel to simulate to the year 1999. The first involved extending the exogenous data series from their previously final year of 1990 for an additional nine years. Most data series were trended from 1990 to 1999, but those which involved the petroleum sector were consistent with the assumptions used to develop the variable values for earlier years. These are discussed in more de- tail in Appendix C • The second change involved simplification of the model in several respects to allow the computer to rapidly identify a solution to the madel at minimum cast. These simplifications significantly reduced the necessary computer time for each simulation at virtually no cost in terms of validity of the madel results for the purposes of permanent fund analysis. The simplifications involved the substitution of a lagged indepen- dent variable for its simultaneous value in five equations. The equations were then reestimated using the lagged relationship. This reduced the madel simultaneity and allowed rapid solution. The equations involved determine the number of Alaska taxpayers, Alaska tax deductions, and Alaska personal exemptions, as well as Federal personal incarne tax re- ceipts and the gross product deflator in the construction sector. ! 1 ~ ~ 1 1 1 ~ ~ ~ l 3 i 1 ~ i.! ~ i ~ ~ ,, ·~ ~ .1t ~ ~ ~ ~ l1 i B-2 Extension of the simulation period for the madel beyond 1990 intro- duces a potential problem in terms of the symmetry of response of vari- ables to changes in independent variables affecting them. In sorne simu- lations, there are substantial reductions in state spending necessi,tated by the depletion of state fund balances. It is assumed that responses of variables such as state government employment in such periods of re- duced economie activity are symmetrical with those in periods of economie · growth. One might expect sorne "ratchet effect11 preventing a downside response identical to the upside; but for the purposes of this exercise, the symmetry assumption will not limit the value of the simulations as long as it is recognized. B.II. Treatment of Permanent Fund Each year there is a basic permanent fund contribution (RPF~Ü) based upon petroleum revenues available for contributions (RP7S) and the con- tributions percentage (PFPER). RPFSl == PFPER*RP7S Interest (IPFl) is earned each year on the balance in the permanent fund carried forward from the previous year (PFBAL(-1)). The interest can remain in the permanent fund (IPFPF) or be transferred out (IPF). A por- tion of this latter amount may become Alaska Inc. payments (ALINC). Any transfers not channeled into Alaska Inc. go into the general fund (RIPF). IPFl == IF PFBAL(-1) GT 0 TREN PFBAL(-l)*RORPF ELSE IPF IPF == PART*IPFl _________ .....,.. ____________ ...;..._w.. ________________ .__ ......... _ .... _...,....,..._ ............... ~-..... -"""''......w~!!!l.l i.l[!:t~ lllillk\ r- r ..... ~~ t L L L i 1.....; ..... ~ - B-3 IPFPF == (1-PART)*IPFl RIPF == IF YR GT 1980 THEN (1-ALINCPR) * IPF1 ELSE 0 ALINC = IF YR GT 1980 THEN ALINCPR*IPF ELSE 0 After the 1evel of state expenditures has been determined, a de- cision is made whether to make an additional contribution ta the perman- ent fund (PFSUP) or ta make a permanent fund withdrawal (WPFSUP) in arder to keep the balance in the general fund (GFBAL) at a desired level. PFSUPl == IF CRACT*RGF99Sl GT E99S-ECPS AND YR GT 1977 THEN A*PORTION*(RGF.99Sl-(E99S-ECPS))+B*(RGF99Sl-(E99S-ECPS)- GFCUSH) ELSE 0 PFSUP == IF PFSUP1 LT 0 THEN 0 ELSE PFSUPl PFDRAIN == IF DRAIN*(E99S-ECPS-RGF99Sl) GT PFSUPBL(-1) THEN PFSUPBL(-1) ELSE DRAIN*(E99S-ECPS-RGF99Sl) WPFSUPl == IF PFSUPBL(-1) GT 0 AND GFBAL(-1) LT 0.25*(E99S(-l)-· ECPS(-1)) THEN PFDRAIN ELSE 0 WPFSUP == IF WPFSUPl LT 0 THEN 0 ELSE WPFSUPl Permanent fund supplements can take several forms which are not limited by those depicted in the equation which determines PFSUPl. There the supplement can take the form of either a portion of the dif- ference between general fund revenues and general fund expenditures (RGF99Sl-ECPS) which is the surplus on current account or the difference between the surplus on current account and an incrementai cushion amount to be retained in the general fund (GFCUSH). A permanent fund withdrawal (WPFSUP) into the general fund would occur if there were a deficit on current account and if there were not 1 i 1 ~ 1 ~ ! ~ 1 I 1 ~ i ~ t l î 1 J B-4 sufficient funds in the general fund to cover the deficit and at the same time retain sufficient general fund balances for normal operations. Permanent fund withdrawals for operating expenditures can only occur from supplemental balances previously deposited, but not from basic contributions. Thus there are three permanent fund balances at any time. There is first the balance in the fund from the basic per- centage payment (PFlBAL). The second component consists of the amount of accumulated interest and any net supplemental payments to the fund (PFSUPBL). The sum of these two is the total in the permanent fund at any time (PFBAL). The change in the balance from year to year is also calculated (PFBALCH). PFlBAL = IF YR EQ 1977 THEN 2.4 ELSE PFlBAL(-l)+RPFSl PFSUPBL = PFSUPBL(-l)+PFSUP-WPFSUP+IPFPF PFBAL = IF YR EQ 1977 THEN 2.4 ELSE PFBAL(-l)+RPFS-WPFSUP PFBALCH == PFBAL-PFBAL(-1) This method of handling the permanent fund has two intèrpretations. The first would be that supplemental permanent fund contributions would not be subject to the same limitations on withdrawal as the basic per- centage contribution. Alternatively, this treatment is equivalent to putting funds in excess of current needs in an account where, because the funds will not be immediately called upon, they can earn a somewhat higher return than those remaining in the general fund. J r ' i !.... i- 1.... .._ :..... l, i' !1 - L t-. """"' b...; L - - ,.........., i ii: .,..u i'dtw r_th:1 B-5 General fund revenues are calculated a second time, after account- ing for any supplementary additions to the permanent fund or with- drawals from the permanent fund to equate revenues and expenditures (RGF99S). Finally, the general fund balance is calculated (GFBAL) as well as the year-to-year change in the general fund balance (GFBALCH) • RGF99S ; R99S-RPFS-RSFS+WPFSUP-RRDF-ALINC GFBAL = GFBAL(-l)+RGF99S~E99S+ECPS GFBALCH == GFBAL-GFBAL(-1) The total permanent fund contribution is calculated (RPFS) as is the present value of future petroleum related revenues (PVRP9S) which may serve as an indicator of the future revenue expectations of the state. Future revenues a.re deflated by one plus the social discount rate (SDR). RPFS == RPFSl+PFSUP+IPFPF PVRP9S == (RP8S(l)+RPBS(l))/SDR+(RP8S(2)+RPBS(2))/SD~**2+ (RP8S(3)+RPBS(3))/SDR**3+(RP8S(4)+RPBS(4))/SDR**4+ (RP8S(5)+RPBS(5))/SDR**5+(RP8S(6)+RPBS(6))/SDR**6+ (RPBS(7)+RP8S(7))/SDR**7+(RP8S(8)+RPBS(8))/SDR**8+ (RP8S (9)+RPBS (9)) /SDR**9+(RP8S (lO)+RPBS (lü)) /SDR'I'c*lO · Alaska Inc. payments (ALINC) become an added component of personal income that is not taxed at the federal or state levels. Disposable personal income per capita is a factor determining net migration to the state, but Alaska Inc. payments are not included in a component . of disposable personal income for this purpose, just as native claims payments are excluded because new migrants could not be recipients of monetary benefits under either of these income transfer plans. 1 l i il 1 ~ 1 1 l 1 ~ 1 ~ .~ l ~ ~ 1 ~ ~ J y ·~ ~ t 1 ·j :j ~ ~ tl a ·~ l y ·.! ,1 ,J ~ ~ l~ B-6 B.III. Treatment of State Expenditures State expenditures are modeled in three different ways correspond- ing to three basic notions about the process by which budgetary deci- sions are reached. B.III.a. Growth of Expenditures as a Function of Available Revenues and Historical Determinants In this formulation, growth of state operating expenditures by functional category is a function of both a demand variable--personal income per capita--and a series of supply variables which include not only the present level of state government revenues, but also the level of balances available for spending in the general fund. A typical equa- tion would be as follows: LOG(EEDSl/POP(-1)) = EX1A+EX1B*LOG(RGF99Sl-RFDSN-EXDSS+PTTRANS* RTPL)*PBDUM+EX1C*LOG(RGF99Sl-RFDSN-EXDSS)+ (EXlB+EXlC)*MYOPIA*LOG(GFBALl(-l)+EXSUM)+ EXlD*lOG(PI/POP) In this equation, education expenditures per capita are a function of state revenues net of federal transfers and debt service, personal in- come per capita, and the general fund balance. The relationship be- tween revenues and expenditures changes after the Prudhoe Bay leas.e sale. In the capital expenditure sector, the real per capita growth rate (GRCEXP) is set exogenously for each of four categories of capital expenditures--general fund highway expenditures (GFCPHl), bond-funded highway expenditures (ECPSHYl), general fund non-highway expenditures (GFCPNHl), and bond-funded non-highway expenditures (ECPSNHl). J i w '- 1.- :..... ,, i - ._ L. i-o j·, 1- - L L ..... - ..... B-7 GFCPHl = IF YR LT 1979 THEN GFCAPHX ELSE GFCAPHY(-l)*(POP(-1)/ POP(-2)-l+RPI(-1)/RPI(-2)+GRCEXP)-CSAV2*SAVS ECPSHYl = GFCPt-.tU = IF YR LT 1979 THEN ECPSHYX ELSE ECPSHY(-l)*(POP(-1)/ POP (-2)-l+RPI ( -'1) /RPI (-2)+GRCEXP) -CSAV3)~SAVS IF YR LT 1979 THEN GFCPNHX ELSE GFCPNHY(-l)*(POP(-1)/ POP(-2)-l+RPI(-l)/RPI(-2)+GRCEXP)-CSAV4*SAVS ECPSNHl = IF YR LT 1979 THEN ECPSNHX ELSE ECPSNHY(-l)*(POP(-1)/ POP(-2)-l+RPI(-l)/RPI(-2)+GRCEXP)-CSAV5*SAVS In this formulation of the expenditure equations, as in those following, allowance is made for the possibility that desired expendi- tures exceed available state resources so that cutbacks from desired spending levels must be employed (SAVSl). In all formulations of the expenditure equations, the cutback in spending is a function of a short·- fall in revenues on current account in the previous fiscal year (E99S(-1)- ECPS(-l)-RGF99Sl) if the shortfall cannot be accommodated by a general fund balance. SAVSl = IF GFBAL(-1) LT GFBAL(-2) OR GFBAL(-1) LT 0.25*(E99S(-1)- ECPS(-l)) THEN SAVX-TAXCHPC*TT*QREVQ+ADJ*(E99S(-l)-ECPS(-l)- RGF99Sl(-l))*(l+(E99S(-l)-ECPS(-l)-RGF99Sl(-1))/ RGF99Sl(-l))**l.l ELSE SAVX-TAXCHPC*TT*QREVQ Any cutback which must be incurred is spread among all functional operat- ing expenditure categories and capital expenditure categories through the parameters CSAVl-5. (This equation also provides the capability of analyzing the impact of a change in the personal income tax rate which is not compensated for by a reduction in state expenditures.) ''1"1 f 1 1 ! ' ' 1 1 i i 1 4 ~ 1 j ~ 1 1 ~ 1 1 i i -~ ;,~ '1 'J ~ ~ 1 ~ ~ i i ~ ~ ~ ~ ~ ·l: ~ 11 ~ i :;-; ; B-8 { B.III.b. Growth of Expenditures Determined by Demartd In this approach~ the growth rate of total state operating expen- ditures is linked to indicators of demand and represents setting state expenditure growth at some target level. EXOPS = IF YR LT 1979 THEN EXOPSX ELSE EXOPS(-l)*(POP(-1)/ . POP(-2)+RPI(-l)/RPI(-2)-l+GREXS+C*(PIRPC(-l)/ PIRPC(-2)-1))-CSAVl*SAVS In this equation~ if GREXS is set to zero and C to o~e, growth in operat- ing expenditures will be unitary elastic with respect to real per capita personal income. Total operating expenditures is then allocated among functions on the basis of the historie ratio. Capital expenditures are determined in the same fashion. B.III.c. Growth of Expenditures Jointly Determined by Targeted Expenditure Levels and Revenue Availability In this framework, expenditure behavior is determined by an ex- ogenously set target rate as before and also by the availability or expecta.tion of revenues from petroleum. For exampleJ> any increases in real state operating expenditures per capita would be based on a function of future expected petroleum revenues _if D were to take a value different from zero. EXOPS = IF YR LT 1979 .THEN EXOPSX ELSE EXOPS(~l)*(POP(-1)/ POP(-2)+RPI(-l)/RPI(-2)-l+GREXS+C*(PIRPC(-l)/PIRPC(-2) -l))~CSAVl*SAVS+CSAVl*(D*PVRP9S(-l)+E*PFBAL(-l)) A similar functional form would govern the growth of capital expenditures. 1 ' " 1 1 1 w ..... !..... ..... l..o [; - - !....; - i.- 1 ..... I!IJ! b'jli! !. '!, L..,.J[JI;'~UU B-9 B.IV. Renewable Resources Development Fund The renewable resources development fund (RRDF) receives 5 per- cent of those petroleum revenues annually which are eligible for the permanent fund (RP7S). Within the year, those funds allocated to the renewable resources development fund, but not expended; are transferred into the renewable resources permanent fund .(RRPF). This fund is al- lowed to grow to a level of $250 million before contributions to the renewable resource development fund are terminated. RRDF = IF RRPF(-1) LT 250 AND YR GT 1978 THEN RP7S*0~05 ELSE 0 RRPF = RRPF(-l)+O.S*PJRDF It is arbitrarily assumed that 50 percent of the renewable resource development fund is expended annually and 50 percent placed in the renewable resources permanent fund. The natural resources permanent fund generates interest earnings of 7 percent annually (RRRPF) which, together with the 50 percent of the devèlopment fund, constitutes total expenditures (EXRRDF). The level of expenditures of the development fund and permanent fund earnings (EXRRDF9) are assumed to generate employment in the .agriculture, forestry, and fishery sector of the economy (EMA9T) at the rate of one permanent employee per $100,000 of capital invest- ment. This increases Alaskan personal income through an increase in wages and salaries paid in that sector (WSA9). B-10 RRRPF = RRPF(-1)*0.07 EXRRDF = 0.5*RRDF+RRRPF EXRRDF9 = EXRRDF9(-l)+EXRRDF EMA9T = IF YR LT 1976 THEN EMA9 ELSE EMA9+0.0l*EXRRDF9 WSA9 == EMA9T*WRA9/1000 '~ J B.V. Guide to Variables Used in Analysis Name B.V.a. Policy Parameters Default Value1 A ADJ ALINCPR B c CRACT CSAVl-5 1 .95 0 0 1 .8 . 8 -.14 -.03 .06 -.08 Definition (if = 1) allows a bonus payment into the permanent fund which is a portion of the current year budget surplus (used with PORTION). The percentage by which excess spending on current state account in previous years is compensated for in state spending in the current year. _ -_ Percentage of the component of permanent fund interest not reinvested in fund which is distributed as Alaska Inc. payments. (if = 1) allows a bonus payment into the permanent fund which is the total of the current year budget surplus net of a cushion (GFCUSH) which remains. in the general fund. Income elasticity of public goods. Ratio of expenditures to current account revenues which must be reached before permanent fund supplements are considered . Percentages which distribute any required , ·'J cutback in state spending among the current· :l and capital accounts. • 1As used in the madel version called PERFUND. l. ( i L. ~ ~ ·, - L 1 L ~ - ..... Name Default Valuel D 0 DRAIN 1 E 0 GRCEXP 0 GREXS 0 Ll 0 L2 0 PORTION .75 ROR .06 RORPF .07 SDR 1.1 1 11,1' B-ll Definition Coefficient on future revenues in e:xpendi- ture equations. Percentage by which excess expenditures on current account are compensated out of permanent fund. Coefficient on permanent fund balance in expenditure equations. Desired growth rate of real per capita state capital expenditures. Desired growth rate of real per capita state current expenditures. Switch channeling exogenous level of Alaska luc. payments (ALINX) into per- sonal tax eut. Switch channeling exogenous level of Alaska luc. payments (ALINX) into state expenditure increase. The percentage of_current year budget sur- plus transferred to thej permanent fu.nd (A must be set = 1) Overall rate of return on general fund. Overall rate of·return on the permanent fund. Rate at which society prefers the capaci- ty to spend on public goods in this year over the capacity in the next year. 1As used in the model version called PERFUND. 1 1. l i 1 . ! i i 1 ~ 1 i 1 i t B-12 B.V .b. Policy Variables Name Definition GFCUSH General fund reserve level increment (B must be set= 1). PART Proportion of total permanent fund interest with- dratro. from permanent fund. PFPER Percent of eligible revenues channeled into the permanent fund. B.V.c. Endogenous Variables (million $ unless noted) Name Definition ALINC Total Alaska Inc. payments. ALINCSH Value of individual Alaska Inc. share (nominal dollars). CRUNCH Savings as a percentage of expenditures (%) . E99LRPC Total real per capita local expenditures (dollars). E99RPC Total real per capita state plus local expendi- tures (dollars). E99S Total state capital and operating expenditures. E99SRPC Total real per capita state expenditures (dollars). ELIGIBL Individuals eligible for Alaska Inc. payments (thousands). ELIGn Individuals eligible for n Alaska Inc. payments (thousands). EMA9T EXOPS EXPFPER Agriculture, forestry, and fishery employment, including employment generated by expenditures of renewable resources development fund. State government total operating expenditures. Permanent fund contribution rate, including supplemental contributions (%). ,~ 1 ~ ~ ~ ._ ~ i - ~ ..... 1 L ~ - ..... - Name EXRRDF GFBAL IPF IPFl IPFPF NONRP9S PERNPR PFBAL PFlBAL PFBALPC (PFBALRPC) PFCON PFSUPBL PFSUP PREVRAT PVRP9S R99LRPC R99RPC B-13 Definition Expenditures out of the renewable resources development fund. General fund balance. Permanent fund irtterest earnings not retained in permanent fund. Total permanent fund interest earnings. Permanent fund interest earnings retained in permanent fund .. General fund expenditures minus petroleum revenues. Non-petroleum revenues as a percentage of total revenues (%). Permanent fund balance. Balance in permanent fund from basic percentage dedications. Permanent fund balance per capita (nominal and real dollars). Permanent fund interest as a percentage of current state expenditures (%). Balance in permanent fund from retained interest and contributions in excess of basic dedic.ation. Contribution to permanent fund from gerieral fund which is in excess of basic percentage contribution. Total petroleum revenues divided by total expenditures (%). Present worth to state of 10 year future stream of petroleum revenues. Total real per capita local revenues (dollars). Real per capita state plus local revenues (dollars). 1 1 ~ ~ 1 1 1 ~ i i "! ~ l ~ 1 ' ~ 1 i l ~ ·~ * 1 ~ .R '1 • ~ ~7 ' ~ ' :1 l 1 J Name R99S R99SRPC REVRAT RGF99S RGF99Sl · RINS RIPF RIPFPC (RIPFRPC) RPFS RPFSl RRDF RRPF RRRPF RTSLRPC SAVS SHARES WPFSUP YDt;"NPC2 B-14 Definition Total state revenues from all sources except Native claims payments. Total real per capita state revenues (dollars). Total revenues divided by total expenditures (%). Generàl fund revenues used to pay current expenses of government operations .• General fund revenues net of percentage determined perr~nent fund contribution, Native claims pay- ments, and Alaska Inc. payments. Interest earnings on general fund. Permanent fund interest paid into general fund. Permanent fund interest per capita (nominal and real dollars). Total permanent fund gross contributions. Percentage determined permanent fund contributions. Renewable resource development fund payments. Renewable resources permanent fund. Earnings from the renewable resources permanent fund. Real per capita state and local transfers (dollars). Reduction in state spending from target level. Total Alaska Inc. shares paid (thousand). Withdrawals from the permanent fund for state capital and operating expenditures. Non-Native disposable income per capita net of Alaska Inc. payments. - ~ ~ L ..... i- li,.. ' 1.- ..... ..... ..... i.... : 11 1 1 1 l lll B-15 B.V.d. Independent Variables Name Definition RP7S Revenues eligible for permanent fund dedication (million $). ~ 1.-i i...... i ....... l - .... r i' 1- L - ..... - APPENDIX C PETROLEUN REVENUE ASSOMPTIONS C.I. Prudhoe Bay Oil Production -Based upon Legislative Affairs model of Prudhoe Bay field development using the agreed upon Management Schedule. Field capacity is 8 billion barrels and pipeline capacity 1.7 million barrels/day at peak . Wellhead Value -From the present to 1985, figures are from Case II, Legislative Affairs Agency, memorandum·of July 14, 1977. This is determined by taking an initial 1978 Royalties - Los Angeles refinery priee of $13.75/barrel and netting back to Prudhoe. The refinery priee escalates at 5 per- cent annually. The Alyeska pipeline tariff is constant over the period at $1+.90. LoVJer-48 transportation charges in 1978 are $1.50. This rises to $2.50 in tHo years and this remains constant. After 1985, the refinery priee continues to increase at a 5 percent rate annually, Hhile all delivery co~ts remain constant. Thus, the wellheaq priee increases at a rate which declines over time from 8 percent to 5 percent annually. Calculated as 12.5 percent of the wellhead value of production. This is reduced for 1978 to maintain consistency with the projections of Legislative Affairs Agency Hhich appear in their memorandum of September 15, 1977. There, the impact on production of the explosion at pump station #8 is calculated. Production Tax -Calculated at 12 percent of the non-royalty portion of the oil (.875). Adjusted downHard in 1978 for the impact of the explosion at pump station #8 . . Corporate Income Tax -To 1985 from Legislative Affairs memorandum of Ju1y 11+, 1977. Subsequent values are author t s estima·te ~ Basis for this decline is a Legislative Affairs memorandum dated June 1, 1976, which indicated total corporate taxes paid on Cook Inlet production between 1956 and 1971+ VIere $2.057 mi1lion. Peak prodùction from Cook Inlet was 70 to 80 million barrels annually • ' ! 1 i i ' 1 C-2 TABLE C.l } 1 Prudhoe Bay Oil Revenues 1 ~ Corporate 1 Production We1lhead Production In come 1 Million Value Royalties Severance Tax Taxes Year Barrels $/Barrel Million $ Hillion $ Hillion $ 1 :t 1974 --0 l ~ 1975 --0 ~ <1 ~ ~ 1976 -0 ~ -~ 1977 --0 ~ ~ 1978 343.2 7.35 202.37 170.87 46.0 .~ 1979 483.6 7.54 455.79 382.86 51.0 !â ~ 1980 547.6 7.76 531.17 446.18 54.0 ~ ·~ 1981 547.6 8.52 583.19 489.88 55.0 ~ ~ 1982 584 9.31 679.63 570.89 56.0 ~ ~ 1983 584 10.45 762.85 640.79 58.0 ., 1984 620.6 11.03 855.65 718.75 59.0 " " il 1985 620.6 ~1.95 927.02 778.7 60.0 ·" .~ ~ 1 ,'$ 1986 589 12.92 951.24 799.04 61.0 ~ j 1987 491.6 13.93 856.0 719.04 39.0 ·~ 1988 391.8 15.00 734.63 617.09 25.0 --·! 1989 307 16.12 618.61 519.63 16.0 'i ~ 1990 240.6 17.30 520.3 437.05 10.0 1 1991 188.4 18.53 436.38 366.56 6.0 :1 ~ ' 1992 147.6 19.83 365.86 307.32 4.0 i 1993 115.8 21.19 306.73 257.65 3.0 1994 90.6 22.62 256.17 215.18 2.0 1995 71.0 24.12 214.07 179.82 1.0 1996 55.6 25.70 178.62 150.04 0 1997 43.6 27.35 149.06 125.21 0 1998 34.2 29.09 124.36 104.46 0 1999 26.8 30.91 103.55 86.98 0 2000 21 32.83 86.18 72.39 0 ··;1 . '1 llliiil ~.., ~..,; ..... ~ - .... ~ C-3 C.II. Prudhoe Bay Gas Production -Department of Revenue estimate through 1985, then author's estimate with 15 percent decline commencing in 1996. Wellhead Value -Constant value of 25Ç/mcf assumed by author. Royalties -Calculated at 12.5 percent of wellhead value. Production Tax -Calculated at 6\:/mcf. Production Billion Year Cubic Feet 1974 - 1975 - 1976 - 1977 2.8 1978 3.9 1979 5.1 1980 5.9 1981 28.0 1982 43.0 1983 777.4 1984 828.6 1985 868.7 1986 870 1987 870 1988 870 1989 870 1990 870 1991 870 . 1992 870 1993 870 1994 870 1995 870 1996 740 1997 629 1998 534 1999 454 2000 386 C-4 TABLE C.2 Prudhoe Bay Gas Revenues Wellhead Value Royalties Million $ Million $ -0 -0 -0 .7 .09 1.0 .13 1.2 .15 1.3 .16 7.0 .88 10.8 1.35 194.4 24.3 207.2 25.9· 217.2 27.2 217.5 27.2 217.5 27.2 217.5 27.2 217.5 27.2 217.5 27.2 217.5 27.2 217.5 27.2 217.5 27.2 217.5 27.2 217.5 27.2 185 23.1 157 19.6 133 16,6 113 14.1 96 12.0 Production Severance ',{;ax Million $ .15 .21 .25 .27 1.47 2,27 40.82 43.51 45,61 45.61 45.61 45.61 45,61 45.61 45.61 45.61 45,61 45,61 45,61 38.85 32,97 27.93 23.73 20 .. 16 J ','j il - ' - L - ,' f' 1 1... ..... i.... ....... - - - C-5 C. III. Cook Inlet Revenues Oil Royalties -Through 1985 from Legislative Affairs Agency memorandum of July 14, 1977. Subsequent figures assume an annual 6 percent decline rate in value of ail. Oil Production Tax -Through 1985 from Legislative Affairs Agency memorandum of July 14, 1977. Subsequent figures author's estimate based upon decline in produc- tivity of average well below taxable r9te in 1989. Gas Royalties -Based upon production estimate ta 1985 from Department of Revenue, Revenue Journal, Vol 1, No. 2, October 1976. Thereafter, declining be- gipning in 1989 by 10 percent annually with cumulative production between 1977 and 2000 of 5, 761 billion cubic feet. 1977 royalties is author's estimate and subsequent years bear same ratio to production . Gas Production Tax-Author's estimate for 1977 and, subsequently, the same ratio ta production. ,_ .., C-6 TABLE C.3 Cook Inlet Revenues Oil Gas Oil Production Gas Production Royalties Taxes Royalties Taxes Year :Hillion $ :Hillion $ :Hillion $ :Hillion $ 1974 ---'--1975 --2.1 1976 39.3 -3.8 1.7 1977 36 -4 2 1978 33.1 16.3 4.4 2.3 1979 31.3 14.4 5.4 2.8 1980 29.5 12.7 6.9 3.6 1981 27.9 10.9 8.3 4.4 1982 26.4 9.1 9.0 4.6 1983 24.6 7.3 9.1 4.7 1984 22.9 5.5 9.3 4~8 1985 21.2 3.7 9.4 4.9 1986 19.9 3 9.4 4.9 1987 18.7 2 9.4 4.9 1988 17.6 1 9.4 4.9 1989 16.5 0 8.5 4.4 1990 15.5 0 7.7 3.9 1991 14.6 0 6,9 3.5 1992 13.7 0 6.2 3.2 1993 12.9 0 5.6 2.9 1994 12.0 0 5.0 2.6 1995 11.4 0 4.5 2.3 1996 10.7 D 4.1 2.1 1997 10.0 0 3.7 1.9 1998 9.4 0 3.3 1.7 1999 8.9 0 3.0 1.5 2000 8.3 0 2.6 1.4 ~ ~ 1 1 1 ~ ~ ·l ! i ~ 1 L l' L ~ i..... - L <~ L 1~1)\, \l!!d.l C-7 C.IV. Miscellaneous Variables Pipeline Property Taxes -Through 1985 from Departrnent of Revenue, Alaska's Oil and Gas Tax Structure, February 1977, page IV, 23, assuming construction of Alcan gas pipeline. Subsequently, taxes decline by 5 percent annually. This is based upon a maximum tax for Alyeska of $168 million and for Alcan of $185 million derived from . Department of Revenue figures. The method State Bonuses - Reserves Tax - Alaska Native Claims Settlement Act Payment Employment - of determination of pipeline value for tàx purposes has not yet been agreed upon. During construction, value is based upon cost of capi- tal in place (construction financing not in- clude,d). Three methods with significantly different revenue implications are being con- sidered for the valuation of pipelines during the operations phase--original cost, income, and market value. A Beaufort Sea lease sale in the fall of 1979 generates $100 million in state revenues in fiscal year 1980. This is assumed to be repaid out of production tax receipts from Prudhoe Bay at a 50 percent rate until the entire $499 million is repaid. Calculated as 2 percent of Prudhoe Bay oil royalties until $500 million is paid. This scenario assumes substantial construction and operating employment associated with the Alcan gas·pipeline. In addition, exploratory petroleum activity occurs in the Gulf of Alaska, Lm-1er Cook Inlet, and Beaufort Sea areas. There are no commercial discoveries. Pipeline Property Taxes Year Million $ 1974 0 1975 6.6 1976 83.4 1977 122 1978 168.3 1979 170.6 1980 193.2 1981 226.7 1982 251.8 1983 257.0 1984 261.4 1985 295.5 1 1986 277.9 1987 260.3 1988 242.7 1989 225.1 1990 207.5 1991 189.9 "1992 172.3 1993 154.7 1994 137.1 1995 119.5 1996 101.9 1997 84.3 1998 66.7 1999 49.1 2000 31.5 ' C-8 Table C.4 Miscellaneous Variables State Reserves Bon uses Tax Million $ Million $ 0 0 0 223.1 0 276 0 (85.44) 0 (191. 43) 100 (222.23) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ANCSA Payments Million $ (50. 4) (72. 8) (84.8) (93.6) (107.2) (84. 3) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ~~ ~,; l' ~ i; --~--------------------~--------------------~--m-~~~~------------------------.---~----------~~~--~~~--.. *-~*-.. ~~~~~--~~'~1·! 1 ~MM4H4W - '- L - L ~ 1.- - '- - - '" 1. ~...... i L.. APPENDIX D METHODOLOGY EMPLOYED IN ADASKA INC. ANALYSIS D.I. Eligibility Calculation of eligibility for the Alaska Inc. program is basedupon House Bill 525 (HB 525) of the first session of the tenth legislature. According to that bill, an "eligible11 resident is anyone who has lived in Alaska for at least a 11 five-year period11 commencing January 1, 1974. A person need not reside in the state continuously over a five-year period but must accrue five years of residence to be eligible. An individual must be at least 18 years of age to be eligible. There is no data available on length of residency in Alaska by which one may directly calculate the number of individuals eligible for an Alaska Inc. program as outlined in HB 525. The 1970 Census provides the only recent reliable information regarding prior place of residence of individuals resident in Alaska in 1970. Table D .l. shoviS the age-sex distribution of persans in Alaska in 1970 who were also resident in Alaska in 1965. For the total population five years of age and over (268,289), 54 percent have been estimated to have been resident in the state in 1965. Of the total civilian population in 1970 (268,957), 54.5 percent were estimated as residents in 1965. Of the 146,594 estimated to be resident in both 1965 and 1970, 94,188 were aged 18 or more in 1970. This results in a ratio to civilian population of 35.0 percent. " ! 1 i !: 1 1 ~ 1 ~ 1 1 ! 1 l' i: 1 l Table D.l. Age-Sex Distribution of 1970 Alaska Residents 5 Years and Above and Estimated 5 Year Residents Sex and Age Group 1970 Population Estimated 1965 Alaska Resident FE MALE Total 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65+ :Vu\ LE Total 5-9 10-ll. 15-19 20-24 25-29 30-34· 35-39 40-44 45-49 . 50-54 55-59 60-64 65+ TOTAL CIVTLIAN NILITARY 121,668 70, 2.39 18,417 10,745 16,288 10,419 12,603 8,180 13,438 4,757 12,591 4,646 10,446 4,842 9,048 4,625 ·7,861 5,496 6,798 4,921 5,312 4,086 3,796 3,142 2,211 1,861 2,889 2,523 146,621 76,423 18,858 10,601 17,348 10,613 13,856 8,082 22,658 4,332 14,637 4,693 12,046 5,505 10,927 5,197 9,853 6,168 8,131 5,854 6,452 5,129 5,083 4,252 2, 946 2,580 3,826 3,500 268,289 146,594 236,864 31,425 D-2 Estimated Percentage Alas}:a Resid~nt .577 .58 .63 .64 .35 .36 .46 .51 .69 .72 • 76 .82 • 84 • 87 .521 .56 .61 .58 .19 .32 .45 .47 .62 .71 .79 .83 • 87 .91 .546 1 . Calculated as the total of 1) same house in 1965, 2) same county and state in 1976, and 3) moved but residence not reported~(movers reporting Alaska moves/ total movers reporting location of move). SOURCE: U.S. Census 1970. iMi ~ ..... D-3 i.... Thus~ if Alaska Inc. payments were to commence with an April 1~ 1970, eligibility, approximately 94~188 individuals would be eligible based upon the fact that they were in the state in both 1965 and 1970 and were L 18 years of age or more. The actual number eligible would differ from the figure because sorne individuals would be eligible in spite of not ...... having been resident in Alaska in both 1965 and 1970~ and sorne would be L ineligible in spite of being resident in Alaska in both 1965 and 1970. This is because the residency need not be continuous. It may reasonably L be assumed that these tvro groups cancel one another out. L The calculated ratio of 35 percent of 1970 population having been 1 1,.. resident in l965.should not be directly applied to the population base in any other year to obtain an estimate of eligible individuals because '~ of potentially unrelated variation in both the numerator and denominator L of the ratio. As will be discussed in more detail in the following sec- tions, the numerator of the ratio is dependent upon the individual deci- ' ..... sions of those people resident in the state in 1965, while the deonomina·tor is a function of the overall growth rate in population over the interval 1985 to 1970. As a result, in spite of an assumption of constancy over time in the migratory response of classes of individuals, the ratio may change over time as a result of a difference in the rate of growth of the population. L This type of variation actually occurred between the period covered -by the 1970 Census and the following five-year period when population i ..... i 1 1 1 1 1 1 ~ 1 1 l l 1 ' g ~ 1 ~ ~ ;; ~ ~ 3 ~ ~ ~ ~ .~ i ~ ~· ~ ·~ ~ ~ lf··· ,• i 1 ~ ~ ~ ·A 1 i 1 ~ ft J ~ D-4 growth was rouch more rapid. The result would be to reduce the ratio if it could be calculated for the interval 1970 to 1975. To correct for this ï'lhen projecting eligibility, the ratio between individuals who reported an Alaska residence in both 1965 and 1970 and the 1965 population can be taken. The weakness of this approach is that it must then be based upon a denominator which is an estimate. This estimate~ the 1965 Alaska civilian population, is 232,192. Using this figure a ratio of 40.6 results. Given this figure and the assumption that the poulation distribu- tion with respect to relevant characteristics is constant, as well as that migratory response patterns are constant over time, one can project Alaska Inc. eligibility based upon the population five years before. The equation is simply: ELIGIBLE INDIVIDUALS = 40.6 ~·: CIVILIAN POPULATION FIVE YBARS PREVIOUS D.II. Total Shares As envisioned by HR 525~ the number of shares of Alaska Inc. would be identical to the number of eligible individuals during the first five years of the program until January l, 1984. At that time, people who had been residents continuously over the preceding ten years would be- come eligible for two shares in Alaska Inc. In later years, more people would become eligible for two shares as they maintained Alaska residence over a ten-year period commencing on January l, 1974. i L L i i f - r ..... L 1 ,, L r .1 i t- l.... i i.- r ._. - L L 1 1...... [ l.... .... - -"·-\ D-5 Every fifth year after January 1, 1984, individuals who had resided in the state for the preceding five years would become eligible for an additional share. In 2000, for example, an individual who had been a continuous resident of Alaska since January 1974 would be eligible to receive five shares of Alaska Inc. In order to determine the number of individuals at any point in time who would be eligible to receive a number of shares larger than one, it would be desirable to have the same kind of information provided by the 1970 Census with respect to 1965 residency, but for longer intervals of 10, 15, 20, and 25 years. Unfortunately, this information is not available and, thus, the only data which can be used to draw inferences about long-run residency is the 1970 Census data summarized in Table D .1. J. To determine what inference is best to make from the availabe in- formation, a simple mathematical madel may be employed. The probability of an individual who lives in Alaska at time t remaining in Alaska at t + 1 year can be hypothesized to be a function of age, sex, and previous length of residence, in addition to a variety of other socioeconomic fac- tors. Table D.l. clearly shows that residency is related to age and sex. One could then divide that population into age, sex, and length of resi- denee categories for analysis purposes. All individuals of age i, sex j, l . . The Alaska sample from the Continuous Work History Sample of the U.S. Department of Commerce was analyzed toward addressing the question, but problems of sample size and data errors cast serious doubt on its reliability and potential value. Eligibility would be rouch lower if the Work History Sample Tapes data were used . ! 1 1 ! 1 • 1. 1 ~· 1 1 i !. 1 1 1 1 D-6 and length of residence k would have a probability P. 'k of remaining l] in. Alaska in t + 1. Consider an individual in the category ijk. The probability in 1965 that he will remain in Alaska to 1966 is P. 'k' By extension, the proba-lJ bility in 1965 that he will be in Alaska in 1967 is p .. l]k ~~ p i+ljj ,k+l D.l which is the probability that he will remain for the interval 1965 to 1966 multiplied by the probability that he will remain from 1966 to 1967. By extension, the probability in 1965 that he will still be in Alaska in 1970 is D:2 ( 65 70 pijk * pi+l,j,k+l * pi+2,j,k+2 * pi+3,j,k+3 * pi+4,j,k+4 ) = pijk If the number of individuals in 1965 with characteristics ijk is nijk' then the number of individuals remaining in 1970 will be nijk •. 65p 70 }• ijk and the number remaining after m years would be 65 m nijk -:~ P ijk Finally, by summing over all population groups, the total number of individuals remaining after m years could be determined. l: I:E n ~·= 6 5Pm ijk ijk ijk D.3 D.4 D.5 1l i •Î liiiiÎ ,----------------------"--..c..J.J..I.-------------------------JI...!, ............... _ _...,. .................. ~·i ~· •. dl ,l'! 1 ''i 1 '\\ ..... l.... w ...... i ..... ,. L ..... ..... D-7 To use this summation equation requires not only that one know the popu- lation distribution (all n .. k) in the base year and all succeeding years 1] . if continuing estimates are desired, but also that all P .. k are known l] and are constant over time and not inf1uenced by other factors which might vary over the period for which the estimates are to be made. Obvious1y, none of the data necessary to solve equation D.5 for a single year is avai1able. However, from Table D.l. it is possible to estimate the percentage of 1970 civi1ian residents who were a1so resi- dents in 1965. This Has calcuated to be 6l.9. From this information, the fol1owing equation can be constructed EL:I:n ijk ijk 65 70 '1: . p ijk = 236 '864 ~·: .619 which equates the number of 1965-1970 residents ca1culated on a 1965 base 1'lith the number ca1cu1ated on the known 1970 base of the 1970 · · · · f' s· I:H n .. k = 232,192, c1v1l1an populat1on over 1ve years. 1nce ijk 1] D.6 the equation can be so1ved. If a .. k is the proportion of the popula-1] tion in category ijk, then the solution is HI: a ijk ijk 65 70 ~·: pijk = .631 Th us, ·.the weighted average of a11 probabi1i ties in the initial year mu1tip1ied by the respective succeeding probabilities for the next four years equa1s .631. D.7 D-8 Now at the initial point in time, there will be represented in the population all subsets ijk and all probabilities Pijk which will result in sorne overall average probability for the first interval from 1965 to 1966. The overall probability for the second interval 1966 to 1967 will not equal the first because not all probabilities Pijk will be repre- sented~ and the percentage distribution of the population will weight the new set of probabilities somewhat differently. One can calculate an average annual probability for the five-year interval~ however~ which is .6311 /5 = .912. This annua1 average probability can be applied over any inteval. It will not be totally accurate because the population against which it is applied is aging and as is shown in Table D.l, the percentage of five-year residents is positively correlated with age beyond the 20-24 year category. Thus, one might reasonably expect average P to increase as age and length of residence increased. Absent actual information on the values of Pijk and their interrelationships one with ariother, the average value must suffice. .. ,:~ .J i -.J - - è ~..,., ...... - - - 1 1.- ~ - L [ - i- L .... ' l.... L "'!J j_i [:!lili'! D-9 For various intervals, the probability at time t used to calculate residents remaining would be interval in years 5 y 10 y 15 y 20 y 25 y probability of residents remaining from the initial grouR .631 .398 .251 .158 .lOO These probabilities are for the total population, rather than that of the population which would be eligible for Alaska Inc. given the age restriction. Since the age groups under thirteen years of age appear to have a higher thau average probability of remaining in Alaska based on Table D.l, sorne bias will be introduced by using the average probability for the total population on a subgroup which eliminates a particular age group. The probabilities are slightly reduced by this, but the bias of the popula- tion aging tends to offset this. This situation cannot be avoided because since there is no age distribution data for 1965, it is impossible to cal- culate the following probability for people under 13 years of age . EZL: 65p 70 ijk ijk for i < 13 D.8 -------------------------------------------------~--'?·. r. D-10 Using this information, the number of individuals eligible for more than one share of Alaska Inc. is calculated based on the following set of equations NUMBER OF INDIVIDUALS ELIGIBLE FOR 2 (3,4,5) SHARES = IF YEAR GT 1984 (1989,1994,1999) THEN ~POPULATION OVER 12 YEARS OF AGE IN YEAR (-10 (-15 ,-20,-25 ). )1 l TOTAL POPULATION IN YEAR (-10 ( -15,-20 ,~25) ) * TOTAL POPULATION IN YEAR (-10 (-15,-20,-25) ) ;'~ .398 (.251,.158,.100). D. III. I1igratory Response Pattern Under the assumption of moderate petroleum development in the state, 25 percent contribution rate to the fund, reinvestment of none of the interest generated and 50 percent of interest paid out as Alaska Inc. dividends, the average annual payment value of Alaska Inc. would average about $200 over the twenty-year period from 1981 to 2000. The aètual value, of course, depends upon all these variables. The rate of petroleum development and associated state revenues is largely beyond state control, but the contribution rate to the fund and the reinvestment rate are subject to legislative approval. Finally, under HB 525, 50 percent is the minimum percentage of earnings transferred from the permanent to the general fund which must be distributed as Alaska Inc. Given this level of control over the annual share value of Alaska w~:, ~ ~· r ~'· f·· ~> t !1 l w, ">, t;': ,. D-', [ f, t t:-, [:';' ~~" ...... 1.... ..... i 1- 1-o 1-o r L - i,_ ~ L. L L.. """" D-ll Inc. by the legislature, it would potentially be possible to use Alaska ' Inc. as an active policy tool . In any event, the level of annual share value is subject to a large degree of variability and much uncertainty from year to year. This is more a function of uncertainty regarding policy than uncertainty re- garding the nmnber of eligible Alaskans, even though the latter can be only roughly estimated. Given these initial parameters~ however, one can aùalyze the poten- tial impact on the Alaskan population of Alaska Inc. share pa)<ments. Since the rate of natural increase would be unaffected, the potential areas of response would be inmigration and outmigration. In this section, only direct impacts are discussed. A direct impact is a migratory re- sponse because of a perceived difference in personal income as a direct result of an Alaska Inc. payment. An indirect response would be a migratory response generated by an increase in employment or personal income as a result of increased spending on goods and services of indi- viduals who have received Alaksa Inc. share payments. The two components of migration are separated because the response of the two to a given change in Alaska Inc. may not be the same. Con si der first inmigration response. The distribu-tion of inmigrants to the state is weighted heavily toward the young. A rational indivi- dual would choose to migrate if the present value of benefits from migra- tion discounted to account for risk, outweighed the present value of the >l ~ ,1 ! i i 1 j l 1 1 Î ' ~ l! l l .;l j i Î ! cl & 1 ·~ ·J i 1 i Î 1 ·f r~ 1 ·~ c~ j l f 1 i i i l ~ { ' 1 1 D-12 costs of migration. This abstracts from periods of "booms, 11 when normal conditions may not prevail, and severe and extended depressions in the lower 1+8 states. For a hypothetical individual who is otherwise indifferent between migrating to Alaska and remaining at a location outside the state, the possibility of becoming eligible for an Alaska Inc. share would theo- retically result in an increase in the perceived benefit stream from a move to Alaska. However, the incremental benefits and the relative increase in income associated with it is quite small. Consider the two situations of an individua1 and a family, bath of which have one incarne earner of 30 years who can look forward to 35 years of productive labor. In 1975, the median income of all unrelated individuals r,.ms $4,882 and of families, $13,719. Over the previous 20- year period, the median family income grew 2 percent annually, while that of unrelated individuals increased 3 percent annually. Applying these growth rates to the median incarnes yields total lifetirne incarnes for these typical incarne earners of $295,000 and $686,000, respectively. Over the sarne period, Alaska Inc. shares, at $200 per share, incre- rnented by one share each five years, would result in total payrnents of $21,000 to the individual and $42,000 to a family of two adults. This is 7 percent of total expected future incarne for the individual and 5 percent for the farnily. j ~ ._ ____ .w,.....,~ ..... J.i....J.,..;.J..-.U.....J...J-.;.,.-->--.U.._L..W-U...I....------------------------..._i-._.,l,ï...., ......... ..., __ .,......,...,....,...._..,,~,, i'!!, ,, ,h \ r~ ,, f ...... i.... ' l' 1 - - j' - - 1 f .._ - D-13 However, it must be recognized that income received in future years has less value in the present than income received in the present. If a 10 percent discoun-t rate is assumed for future income, then the present value of the incomes and the Alaska Inc. shares are as follows: Présent Value of Future Incomes Regular Alaska Inc. In come Ratio Individual 2,462 64,149 3.8% Family 4,924 162,296 '3.0% In present value terms, the Alaska Inc. payment represents a smaller portion of basic income, because payments are deferred until the fifth year of residence and thus have less value than if received in the pre- sent. The ratio is further reduced by several other factors. First, the Alaskan cost of living is much higher than that experienced by the indi- vidual or family with a median income for the U.S. This cost of living adjustment is a necessary component of the calculation used to determine whether a move to Alaska would be a net benefi t to the :individual. If the cost of living in Alaska exceeds that of the lower 48 by 40 percent, then the median income against which to weigh the Alaska Inc. payment must also be increased by that amount. This reduces the ratios for the individual and familyto 2.6 percent and 2.1 percent, respectively. ~ ~ ~ l l i 11 Î ~ 1 :f 1 1,. ~ ~ ~ ~ ~ ~ ~ ~ j i ~ ~ 1 ( t D-14 Second, the ratios must be further reduced to account for the uncertà.inty involved Hhen a person tries to predict how long he will live in a certain location. The previous analysis indicates that about 63 percent of the people in Alaska in 1965 were still in the state in 1970. Of the group remaining, as well as the group which moved, a la~ge number if interviewed in 1965 would not have been able to accurately predict their residence in 1970. Thus, when valuing future Alaska Inc. payments, they should be further discounted by the uncertainty of the flow because of the real possibility that the payment stream will be terminated by a move from J the state. If the Alaska Inc. payments are discounted 50 percent to accourit for this uncertainty, the present values are reduced to $1,231 for the individual and $2,462 to the family, which cor.respond to 1.3 per- cent and 1.1 percent, respectively, of present value of future income. This is equivalent to $100 out of an annual income of $10,000. To further reduce the value of the Alaska Inc. payment to the potential inmigrant, the implications of taxation must be added. Alaska Inc. payments are marginal income and would be taxed at the marginal tax rate, which is higher than the average rate at which total income is taxed. Thus, a reduction of the total basic income and Alaska Inc. income to account for the tax liability on personal income ~wuld further reduce the percentage of lifeti:rne income represented by Alaska Inc. share payment. --------------------------~·~~----------------~~----~~~~~~--~~u-~~- - - f ..... l-- ~ 1.- ...... - f- ' ..... D-15 In summary, based upon this analysis of hypothetical potential inmigrants, it seems unlikely that the existence of Alaska Inc. payments would,other things being equal, have any significant effect on the rate of inmigration into the state. For individuals or families with incarnes well below the median~ the percentage increment which Alaska Inc. could provide would naturally be larger>, but against this must be weighed bath a relatively higher cast of living (higher than lower 48) for lower incarne families because of the relatively higher cast in Alaska of necessities, as well as the larger degree of uncertainty regarding future residence which a lower income individual or family might reasonably be expected to have. With respect to outmigration, the response to Alaksa Inc. shares availability would be somewhat different. To continue the analysis of the two situations considered above, recall that for young persans the additional lifetime income would be marginal because of a large number of factors which discount the apparent Alaska Inc. value. All of those factors--future timing of payments, cast of living differentiai, uricer- tainty, and taxation--would be involved here also but to a different degree. To a new arrivai in Alaska, the present value of an initial Alaska Inc. payment of $200 would be $131 if his rate of time preference Here 10 percent. All subsequent payments also have a reduced present value relative to the present value of a payment perceived by a five-year D-16 resident who is presently receiving Alaska Inc. payments. Therefore, the longer an individual has been in Alaska, the more relatively im- portant as a portion of income Alaska Inc. will become. The importance of uncertainty regarding receipt of the incarne stream from Alaska Inc. would be a function of prior residence length in the state', According to the Cens us, about 37 percent of those in the state in 1965 had departed by 1970, while an estimated 9 percent who were in the state in 1969 had departed in 1970. Since the proba- bility of outmigration probably declines as a function of residency, l'' one could reasonably expect that for new migrants to the state, the probability of ever receiving an Alaska Inc. payment to be less than 60 percent, with probability increasing with residency time. This would operate to reduce the probability of receiving Alaska Inc. shares for life as long as there is sorne propensity to migrate. The taxation factor works to the disadvantage of Alaskans, because the progressive personal tax schedules tend to increase the difference between the average and marginal tax rates. This reduces the increment to disposable income of Alaska Inc. Finally, the higher cost of living in Alaska bas the same effect on the potential outmigrant as the potential inmigrant. However, the median incarne figures for the individual and family somewhat understate the actual incarne situation in Alaska where, in 1976 for the first time in any state, personal income per capita passed the $10,000 mark. For the ~ L.. l. 1 ..... ~ i.... f io..o j_, i l. ; L ~ L ;.....,....l...l 11 IH!d!tlia ; D-17 average Alaskan then, a single share Alaska Inc. payment received today would represent 2 percent of gross income. For the average non-dependent, the percent_age would be correspondingly less. Also, between the pres- ent and 1985, personal income will likely increase, while the Alaska Inc. share would remain constant. It seems that for the average Alaskan, in terms of income and age, the possibility of receiving Alaska Inc. shares would have little effect on a decision to outmigrate because of the small increment to income they would provide. The impact on the decision to migrate would, however, be an increas- ing function of age, length of·residence in the state, and an inverse function of income. For the component of the population in that category, the disincentlve to outmigrate because of the receipt ofAlaska Inc. 1, payments could be substantial. Referring back to Table D.l, however, it is clear that the propensity to outmigrate declines with age and since there is a correlation between age and length of residence in Alaska, there is an implied reduction in the propensity to outmigrate as a function of length of residence. Finally, a reasonable case could be made,in normal times in Alaska, for the propensity to outmigrate being an increasing function of income, although no studies exist which either support or refute this assertion for Alaska. These factors implythat it is precisely in that segment of the population where the impact of Alaska Inc. on income would be the greatest D-18 where the propensity to outmigrate is the weakest. Therefore, the actual impact on individual decisions to outmigrate would be small and any aggregate impact would be quite small. For this reason, any direct impact on outmigration is ignored in this study. To provide a partial example in support of this argument, reference is again made to Table D .1. Looking at the subset of the population 50 years o1d and above, vlhich in 1970 numbered 32,515, the table indicates that 27,073 had been resident in Alaska in 1965. If the ratio of the population 45 and above was equivalent in 1965 and 1970, there were 40,000 people 45 and over in 1965. About 67 percent of these people remained in the state in 1970; 13,527 either left the state or died in the interim. If the crude death rate for this group was 5 percent, then 31,415 of the original group would remain in 1970 as potential outmi- grants. 4,342 actually did outmigrate. If Alaska Inc. share payments affected 10 percent of those decisions, the number of outmigrants in th at group vrou1d have be en reduced by 434 in di viduals who would, by their presence, increase the present population by .1 percent. D.IV. Consumption Response Patterns Alaska Inc. payments constitute an increment to the incomes of those individuals receiving them. It is interesting to investigate the effect of these increments to income on the expenditure patterns of Alaska Inc. recipients. J ~ ~------~--~----~' !' t!!•h!>!' \ i..... .... l '- 1 - ._ r 1 ~ i 1 '- i.- - ._ D-19 The permanent income hypothesis is often used as a model frarnework within which to analyze the consumption and saving behavior of individuals and family groups. In its simplest form, consumption is deterrnined by the following relationship: C = C(Y,YE,A,T,S) Where C = Consumption y = Income in present time period YE = Expected future income A = Assets T = Age of individual s = Sociological characteristics Consumption in this madel depends only partially upon the level of present income. The individual rather tries to maximize the present value of conslli~ption from income over his entire lifètime, and for this reason expected future income of its levelized component "permanent income" is important. For example, a young family may experience net dissaving (marginal propensity to consume greater than one) by incurring debt to purchase durable goods when establishing a home. The rationale for this is an expected future income sufficient to recover the debt plus interest. In the same way, consumption out of assets will vary with age. A retired couple may consume almost exclusively out of assets accumulated during working years. The impact of an increase in income given this model of behavior will be a fu~ction of whether the income increase is perceived as a tran- sitory, occurring once only; or permanent, shifting the income stream D-20 in each future period upward by the amount of change in the initial period. A transitory change would need to be "allocatedu among all future periods to maximize the utility from the consumption resulting from that income. Since a permanent change is perceived to be an income increase in each future period, a large portion of the increase in the initial period could be used for consumption immediately. Empirical studies tend to confirm this hypothesis and they examine the response of different types of expenditures to income gains. Con- sumption can be categorized into durable goods, which are items with a usable lifetime in excess of one year; non-durable goods; and services. Income increases can also be saved in the form of either liquid saving or contractual saving or can lead to dissaving in the form of increased debt. The responses of these different components of household port- folios to income increases may differ considerably. For example, discretionary spending consisting primarily of durable goods and vacation expenditures as well as liquid saving in the form of bank deposits, stocks, and bonds, etc., account for a large portion of the income increases resulting from the federal tax eut in 1964.2 The response of both non-durable and service expenditures was much smaller. The increase in contractual saving including life insurance policies, early mortgage payoffs, etc., was highly correlated with a perception 2 George Katona and Eva Muller.; Consùmér-Résponsé to-Income Incréases. (Wash., D.C.: Brookings, 1968). , ........ - r.... t i: D-21 - of the incarne change as being permanent. Also, the more transitory the income vias perceived to be, the larger the proportion which went into liquid saving relative to discretionary spending. 1 ~ This particular study also found that the impact of the incarne change was dependent upon underlying long-run expectations of total incarne for the individual, and also upon the absolute size of the change in incarne. Thus, a small income increase from one source might be swamped in an individual's perceptions by the normal year-to-year varia- bility in incarne. This implies a threshold level of income change only beyond which the change bas a perceived impact on behavior. r.... Both the model and empirical studies support the notion that liquid saving is not a residual component after an income change bas been allo- L cated to other categories of expenditures and savings. In addition, increases in everyday type expenditures of a non-durable and service nature tend to increase only with a lag . ..... The relationship of this analysis to the Alaska Inc. payments is dependent upon how the payments are perceived by recipients. Given the assumption that the share payment would be in the range of $200 annually, it can be assumed the incarne increase would be perceived as permanent, but small. The perception of size is, of course, dependent upon the form of the payment. A government check would probably be more obviously an increment to incarne than a reduction in taxes at year end. The un- :...... certainty concerning the receipt of future payments because of migrations, """ ~ ~ ~ \01 ·~ -~ri~ ' ' ' .. 1 1 1 1 ~ ! i\1 l l ~ 1 1 ~l '! l 1 1 ~-. ~1 1 j 1 1 ,, i ~ ~ j i i @ ~ ~ J i •' ;{ D-22 change in state policy, or reduced fund earnings would strengthen the perception of the payment as being transitory. From this, it seems likely the impact of incarne increases resulting from Alaska Inc. payments ~rould in the short run be concentrated on in- creases in discretionary spending (consumer durables, housing, vacations) and liquid saving and to a lesser extent on contractual saving. Sorne people rnight reduce their contractual saving by incurring more debt. Increases in everyday expenditures would be slight and would appear with a lag. In order to investigate the long-run implications on consumer be- havior of increases in incarne, it is valuable to use the concept of the Engel curve. An Engel curve describes the proportion of additional income spent on consumption of a particular good or category of good as incarne rises. Consumption expenditures for sorne goods rise more rapidly than incarne and are known as superior goods, while the reverse is true for inferior goods. Over the long run, one would expect a slight aggre- gate increase in the consumption of those goods which are superior as a result of Alaska Inc. This is because in the long run the Alaska Inc. payments will not be viewed as marginal increments to incarne, but rather as a normal part of ànnual incarne to be distributed between consumption and saving as all o·ther in come. Table D.2 shows in very aggregate terms how the percentage of expenditures on various items by families changes as incarne increased 1 'l liiMil 1- L - L.. i lo... - D-23 'l'able D.2 Select<"d Exnendi~~~-(and PercEnt of Total Income) of Families bv Income L:_::_vel, 1973 Income Group (Average Income for Group) Expenditures Food Total Food at home Food away from home Alcoholic Beverages Tobacco Housing Total Shelter Fuel & Utilities Bouse. Furnishings C1othing Transportation Health Care Personal Care Recreation Vacation Trips Reading Hateria1s Education Hisce1laneous Personal Insurance and Pensions Gifts and Contributions 1 Current Consumption Expenditures Excluding Personal Insurance and Pensions and Gifts & Contributions Source: . $5,ooo-5,999 ($5, 443} $ $1,111 1,007 85 54 102 1,690 971 310 223 353 967 363 67 339 122 31 13 43 327 235 5,134 % 20 19 2 1 2 31 18 6 4 6 18 7 1 6 2 1 0 1 6 4 94 $10,000-11,999 ($10 f 934) $ ' $1,546 1,354 181 70 140 2,231 1,164 413 382 632 . 1, 712 470 101 532 209 45 68 95 756 327 7,643 % 14 12 2 1 1 20 11 4 3 6 16 4 1 5 2 0 1 1 7 3 70 ,.._...,.,, rt''b'J!llht'bz'l $25,000 + ($40,494) $ $2,433 1,969 443 165 171 4,818 2,684 639 771 1,550 2,792 853 207 1,943 932 114 534 363 2,265 1,748 15,943 % 6 5 1 0 0 12 7 2 2 4 7 2 1 5 2 0 1 1 6 4 39 u.s. Departrnent of Labor, Bureau of Labor Statistics; Consumer Expenditure Survey Series; Interview Survey 1972-73; Average lmnu'l.1 Expenditures for Corru:1odity ·and Service Groups Classified by Nine Farnily Characteristics, 19ï2 and 1973. 1 Individual categories will not add to total because of exclusions. D-24 in 1973. The most striking observation from the table is the decline in the catego:ry "current consumption expenditures" as family incarne in- creases. This category includes all purchases of durable and non~durable goods and services except for a few small items including housekeeping supplies, non-prescription drugs, and payment of mortgage principal. For the average family in the lower income category, 94 percent of income was spent on current consumption. This percentage fell to 70 percent for the middle income family and to 39 percent for the open-ended cate- gory of highest income families. For the population as a whole, the percentage was 69 percent. The implication of this is that savings of various kinds increase with income of the family. The declining share of current consumption expenditures in the budget is accompanied by a changing mix of expenditures. Food consump- tion falls dramatically as a percentage of income both consumed at home and aï-ray from home. Transportation follows the same pattern, al though the decline is less rapid. The shelter component of housing falls off identically with transportation, but the total housing decline is lessened by smaller drops in other components of the housing total such as home furnishings. In this aggregated summary, no consumption items appear to take an increasing percentage of income as income rises except education. Those items which appear to take a proportionate share of income as income rises include vacation trips, personal care, personal insurance and ~~ ._ f~ 1 i.....i ._ 1 ._ l - L... - L ._ ~' - ~ D-25 pensions, gifts and contributions, and miscellaneous. Clothing expendi- tures are proportional in the middle of the incarne range, but decline as a proportion of the top end . Table D.2 must be interpreted with the understanding that it does not control for differences in size of family, age of head of household, location, race, education, family composition, or housing tenure. All of these affect the expenditure pattern. And being based upon a national sample, it is not necessarily representative of Alaskan consumption patterns at various incarne levels. The broad implications of the table are, however, clear. As incarne rises, expenditures on the basic necessities such as food, clothing, shel ter, and transportation ri se, but more sl01üy than in come. Expendi- tures in other broad categories hold fairly constant as a percentage of incarne and savings grows as a percentage of incarne. From this, it is clear that the expenditure pattern for marginal incarne differs from the average patterns but also that the marginal pattern is a function of the level of income. Any change in the marginal propensity to consume and to save as a result of Alaska Inc. payments would be quite small because of the small relative size of Alaska Inc. payments. They vrould, thus, have a minimal effect on the average propensity to consume different goods. This would be particularly true in the case where the various responses of a whole D-26 population to incarne change are being aggregated. For example~ if a $200 Alaska Inc. payment supplements a $10,000 incarne, that is a 2 percent increase. If the average propensity to consume of that individual were .70 and all the Alaska Inc. increment were saved, the average propensity to consume would be reduced by l percent to .69. The small size of this change eliminates the necessity of attempt- ing to trace through·the Alaskan economy the impact of expenditures and savings of particular types on economie activity defined by industrial sector. This task would have been impossible given a lack of data with i·Thich to relate levels of industrial ac ti vi ty to levels of types of ex- penditures .as well as lack of information on Alaskan expenditures patterns. Rather, increments to income derived from Alaska Inc. can be treated just like other srnall increments to incarne in analyzing their impact on consumption, because the change they introduce in the marginal pronen-'j l liliiil sity to consume various types of goods will be quite small. ..... 1.- f L ...... 1 ' L r L i i ...... L. - ' - ,. !..... APPENDIX E ASSUHPTIONS TO RUN REGIONAL IMPACT CASES Two cases were run through the Man-in-the-Arctic Program regional model-'-one which demonstrated the effects on the Alaskan economy of the introduction of a petrochemical refinery project and (alternatively) one which demonstrated the effects on the Alaskan economy of the expansion of fisheries enhancement in the form of non-profit private salmon hatch- eries. Exogenous data series were developed for both cases as follows: Petrochemicals ·(Table E.l) The assumptions for petrochemicals were drawn from the proposals of the four finalists in the competition to use the state's royalty oil from Prudhoe Bay. The four proposals were quite different from each other, and the data was incomplete, so our data series reflect judgmental selection of data from the four proposals, which, it is hoped, fairly represent a world scale petrochemical plant and refinery in Alaska. Impacts occur both through impact on the stàte treasury and through direct employment. Sin ce the petrochemical plant is not subj ec-t to the state property taxon petroleum production and transportation equipment, and since we are assuming that the state receives a priee at the wellhead which is the same as if the royalty oil were sold by oil companies as agents for the state, out of state, the major fiscal impact to the state of the petrochemical refinery was assumed to occur through the state taxes 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 E-2 Table E.l Statewide Exogenous Impacts of Petrochemical Facility Direct State Tax Receipts From Facility Operations (Million $) 0 0 0 0 46 51 54 55 SE? 58 62 66 67 65 55 50 47 Local Property Tax · (Million $) 0 0 0 0 0 0 2 3.5 6 10 17 30 30 30 30 30 30 Construction · Employmen t (Thousands) 0 0 0 0 0 .050 1.050 2.550 2.550 ·2.550 1.550 0 0 0 0 0 0 Opera ting Employment (Thousands} 0 0 0 0 0 0 0 0 .050 .050 .460 .460 .460 .460 .460 .460 .460 ~ i r r 1- ~ ~ 1 L 1.... L :..... 1 .... ~ E-3 on corporate incarnes, gross receipts, and individual incomes. ·Local im- pact was through the property tax. Sorne information Has available in the four proposals concerning projected direct employment for building and running the refinery~ which was also incorporated into the madel runs as exogenous data. The refinery-petrochemical plant is assumed to be a world scale plant utilizing 150,000 barrels of oil per day at full capacity. The construction period extends from 1979 through 1984, and the company purchases and sells the statets royalty oil on the international market at competitive rates throughout the construction period. Construction of the plant occurs near Kenai, with about 2,000 persans working on site during the peak construction years, and 550 in the Anchorage area. Operations and maintenance employment Has estimated at 460 persans, of which 410 were line production workers, divided 210-200 as residents of the Kenai and Anchorage areas, and 50 management Horkers, all located in Anchôrage. The operations workers were assigned to the petroleum sector, rather than 11 other manufacturing," where they would ordinarily fit in the Department of Commerce Standard Industrial Classifications as grouped for the purpose of constructing the MAP regional madel. This was done for two reasons. The first was that historically, the "othe1~ manufacturing 11 category has a low-value of output per empJ,oyee, compared with national ratio for either chemicals or petJ::>oleum refining. Even the national figures for value added per employee are probably too E-4 low for an Alaskan state-of-the-art, world scale plant using capital- intensive techniques, so the expedient of using the petroleum industry was adopted for estimating gross state product. The second reason was that wage rates in refining are nearlyequal to those paid in ail and gas extraction, but are substantiall~ greater than those paid in indus- tries such as printing and publishing which make up the bulk of "other manufacturing. 11 To get the fiscal impact of the Business License Tax, we estimated sales of products (based on an average of the revenue estimates o:f two of the finalists) at 900 million 1977 dollars in the first year of operations, 1984, and at 1500 million 1977 dollars thereafter. The real priee of petrochemicals was assumed to remain at 1977 levels to the end of the period, with the nominal priee rising at 5 percent per year, the assumed rate of inflation.· Business License Tax receipts were then estimated at one-fourth of one percent of gross sales. To get the corporate income tax estimate, we took the estimate of one of· the four competing firms, which assumed the 9.4 percent maximum corporate tax rate and reduced it by 50 percent to be more in line with state experience concerning taxation of interstate firms, since it is not necessarilytrue that the corporate entity would be a firm doing busi- ness onlyin Alaska. Individual incarne taxes were estimated by the model and did not have to be assumed. ._ ~...... l. 1-: L r ~ 1, io.... L E-5 The local property tax was calculated on the basis of an initial value for the facility of $1.5 billion and a tax rate of 20 mills. This value is gradually attained as the facility is built and remains through the simulation period. Fisheries Enhancement (Table E.2) The impact of fisheries enhancement appears in the Alaskan economy through several processes, the most important of which are identified in the assumptions used to run the regional madel. The primary impacts occur through construction and operations employment in fish hatcheries, increased production labor hours in the fish canneries as a result of increased catch, increased output in fishing and fish processing, together with increases in incarnes of fishermen and cannery workers, and, finally, increases in the yield of raw fish taxes. In order to discuss investments approaching the orders of magnitude involved in the petrochemical case ($1-2 billion, 1977 dollars), we as- sumed a private nonprofit hatchery program with 30 additional hatcheries of 25 million eggs capacity, at an investment of $2-4 million, 1977 dol- lars, per hatchery. The numbers used in the simulations were based on F.L. Orth, The Economie Feasibility of Private Nonprofit Salmon Hatcheries, Alaska Sea Grant Report 77-4, June 1977, together with discussions with Orth, Armin Koernig of Prince William Sound Aquaculture Association, Ken Rumchildt of North Pacifie Processors in Cordova, and judgment on the part of the investigators; 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Direct State Tax Receipts From Operations · (tlillion $) 0 0 0 0 0 0 0 0 .144 .260 .478 .716 .752 .790 .829 .871 .914 Table E.2 Statewide Exogenous Impacts of Fisheries Enhancement Construction Employment (Thousands) 0 0 0 0 0 .210 .360 .420 .540 .210 0 0 0 0 0 0 0 Hatchery Employment (Thousands) 0 0 0 0 0 0 .056 .096 .168 .240 .240 .240 .240 .240 .240 .240 ,240 Value Added in Canneries (Constant Hillion $) 0 0 0 0 0 0 0 0 2.327 4.132 7.503 11.122 11.515 11.973 12.422 12.883 13,359 Additional Income in Fisheries (Million $) 0 0 0 0 0 0 0 0 4.756 8.562 15.731 23.596 24.777 26.013 27.315 28.680 30.115 Value Added in Hatcheries (Constant Million $) 0 0 0 0 0 0 0 0 .298 .512 .898 1.281 1.281 1.281 1.281 1.281 1.281 trJ 1 O"l ...... ' E-7 1 lw- r -The following assumptions were made concerning the hatcheries: corn- bined survival rate of eggs and fry, 2 percent; hatchery escapement rate, 40 percent, brood stock requirement, .00083. We assumed that the income L · from hatchery operations would not be taxable and that sales of fish and fish products by the hatchery would not be subject to the raw fish tax. Landed values to fishermen were assumed to be based on pink salmon weighing 3.8 pounds apiece at a 1976 average landed priee of 45 cents -per pound, which escalates at the general rate of inflation in the eco- nomy. Based on the assumption that the eventual increase in output of lw about 9 million fish per year can be handled by the existing fleet, by . catching fish incidental to fish which would otherwise be caught, a catching cost of two cents per fish (1976 costs) was assigned. The hatcheries were assumed to be built between 1979 and 1983, each 1 L.. taking 30 workers about two construction seasons. Peak construction employment was assumed to be about 540 workers, in 1982. The hatcheries ..... were allocated geographically as follows: Southwest and Southeast, eight L hatcheries apiece; Southcentral and Interior (except Fairbanks area)~ six hatcheries apiece; Fairbanks area, two hatcheries. First returns of fish were assumed to occur two years after hatchery completion. Operations employment in hatcheries was assumed to be four full-time personnel and four full-time equivalent seasonal workers (about 12 workers ..... for about one-third of the year). All were assigned to the fishing sector. """' E-8 In fishing, limited entry laws were assumed to keep increases in employment of Alaskans to a minimum. However, because of increased catch, the output added to the economy by the fishing sector, fisher- man net income (equal to the increase in value of catch, less additional catching costs), and the three percent raw fish tax all increase. Catch was assumed to be delivered in the Southwest Region for hatcheries in the Southwest, Interior, and Fairbanks; to be delivered in the South- central Region for increments to production caused by Southcentral hatch- eries; and to be delivered in Southeast ports if caused by Southeast hatcheries. Processor gross product effects were estimated by computing the historical ratio of Gross Product/Value to Fishermen from the methodology in the April 1974 and March 1975 issues of Alaska Review of Business and Economie Conditions for Food Manufacturing, applying the ratio to the estimated value of catch, and deflating by the estimated gross product. · deflator from the same source. rectly by the model. Processor employment was estimated di- ~..... io.... - 1- - :- 1.... - ..... . t ~ ï..... ~... ;...... ·~ REFERENCES Alaska. Budget Docume_nt, annual. Alaska Construction and Oil, various issues. Alaska Department of Administration. State Investment Portfolio. Various issues, 1970-1973. 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U.S. Department of Commerce, Bureau of Census; 1970 Census. U. S. Depart::Jent of Commerce, "Continuous Hork His·tory Sample. 11 L ~ iii U.S. Department of Commerce~ Office of Business Economies, Survey of Current Business, va:rious issues. U.S. Department of Labor, Bureau of Labor Statistics. ttAverage AnnU:ëÙ Expenditures for Commodity and Service ,Groups Classified by Nine Family Characteristics, 1972 and 1973. 'f Consumer Expenditu:re Survey Series. Washington, D.C. 1976. U.S. Federal Deposit Insurance Corporation, Call Reports and Income Statements, various. U.S. Federal Housing Administration. The Residential Mortgage Market in Alask~. Washington, D.C., 1963. -'(