One of the downsides of working alone, is the inability to bounce ideas off others. There is a lot of information gained from seeing brows furrow, lips curl, and eyes glaze over as you speak.

Getting challenged to clarify a point or getting another perspective is tremendously valuable. For that reason, I am very grateful for the recent opportunity to speak with the intelligent individuals at Commonwealth North.

After having that conversation, and after spending the last few months digging into the data, I would like to share my 3 PFD takeaways before I move on to other topics.

1. The APFC is good at their job, but we need to watch for biases in their forecasts

Forecasting is always a tricky thing.

It’s easy to take a cold, objective look at data. It’s another thing altogether when you have to attach your name to a forecast. That sense of accountability changes the risks and rewards as reality reveals itself around your forecast.

Too often, there is reason to be conservative in forecasting. Either there is an incentive for beating the target, or there is punishment for missing it. So, most forecasters have a tendency to under-promise and over-deliver.

There are also occasions when forecasters are influenced by a desired outcome. Most of the time, this happens without explicit intent. But, knowing what a client will be pleased to hear can sometimes create a bias toward finding ways to get that answer.

This is where we need to be careful as we utilize forecasts. There may be good reasons to be conservative and to plan on a target that is easier to hit. But, over the long run, those conservative forecasts will result in lost opportunities.

There will be times that prudence will save your bacon. There will be other times that risk aversion will create problems that don’t actually exist.

When I look at the APFC forecasts, it makes me wonder why projections are below historical performance. And when I notice that the forecasts for the PERS/TRS accounts call for an 8% return rate while the Permanent Fund calls for just 6.55%, I get curious. My intuition says those target rates are backwards, given the goals of those two funds.

As I talked with Commonwealth North, I pointed out that there may be very good reasons for the APFC to have reduced forecasts. Perhaps they have access to information that the rest of us don’t. Maybe they feel the need to take a more defensive and liquid position as the role of the Fund earnings is changing.

So, I’m not saying I don’t trust the APFC’s numbers. However, I am saying that we need to be aware that hidden biases sometimes exist. Therefore, we need to pay attention to actual performance, and make contingency plans if things work out differently than planned. That includes the possibility that the draw is lower than it needs to be, resulting in a growing fund balance.

2. The POMV approach is an improvement, but not a solution

The POMV approach that was introduced in SB26 provides some structure to the budgeting process. However, it also creates potential problems.

The first of which is what I talked about before. The POMV rate appears to be lower than it needs to be. That doesn’t mean I think the POMV rate should be increased. Rather, it means that we can break that limit when we need to, without hurting the long-term health of the fund.

For example, when the temporary low oil revenues hit in 2015 through 2017, we probably could have taken more money out of the earnings reserve to fund the budget and follow the statute on the PFD. Instead, we probably made unnecessary sacrifices to get through that low point in the commodity cycle. Now we have extra money sitting in the ERA.

If oil prices crash again in the future, the POMV will probably create a similar problem rather than solving it. And, when we receive abnormally high, but temporary, revenues in the future (like when Pikka starts producing), the POMV is probably going to create excess revenues. In that case, it will create a different problem. It will encourage bigger budgets.

So, I’m not convinced the POMV approach is actually helping at all, and it might actually create problems in the future. Since there is already constitutional authority to utilize the earnings, I don’t think SB26 is necessary. A budget cap based on a long-term average revenue projection does everything we need it to do (as long as decision makers follow that law).

3. The PFD program needs to be changed, one way or another

As I wrote before, the PFD program currently sits in a grey area of the law. The Supreme Court’s ruling means that it is not currently a distribution of revenues that belong to the people.

If we don’t like that interpretation, we need to change the law. That almost certainly means we need to put a question to the people in the form of a constitutional amendment. And if we all agree that we should think of the PFD as a distribution from a trust fund, we need to be prepared to pay for government in another way.

And, if we are ok with the idea that the PFD is a line item in the budget, we need to reevaluate what it is meant to accomplish. If it is a way to alleviate poverty, we probably need to change the program to something with an explicit public purpose. That way we can accomplish that goal at a much lower cost.

If we are thinking about the PFD as a way to stimulate the economy, it really isn’t working. We should contemplate other ways to accomplish that goal.

And if we want the PFD to be a way to keep “skin in the game” for the residents, we should roll the PFD program into tax law. That way we can create a tax system that makes the most sense (if you want to see how that would work, look no further than our oil tax laws).

Regardless, we need to change the PFD program. By moving it to the constitution, turning it into a HSS program, or rolling it into the tax code.

At the very least we need the legislature to follow the statutes. As long as the statutory formula is on the books, we should pay it accordingly. If that calculation doesn’t work, and the PFD is going to be calculated based on the status of budget needs and revenues, then we need to revise the statute that says otherwise.

 

2 thoughts on “3 Takeaways from Analyzing the PFD

  1. There seems to be flaws in your line of thinking:
    1. You refer to the ‘economy’ as though it is some sort of being that supersedes individual human beings. What we are considering is the effect of the PFD on the level of commercial activity among an identified group of people (eg. Alaskans) or a given region (eg. Alaska).
    2. You seem to fail to consider that If the PFD is used to pay prior debts (takes, debts, & etc.) or other transactions that cause the money to leave an identified commercial region (eg. Alaska) other funds that would otherwise be used for these transactions would then be available for transactions that could result in money circulating within the region.
    3. Leaving the funds used to pay the PFD in the earnings reserve account would not increase commercial activity in Alaska. (Because the P-Fund is primarily investing in markets outside of Alaska.
    4. Distributing the funds through other mechanisms would have more-or-less the same effect on general commercial activity in Alaska. – The difference is that fewer people would share the initial benefit of the expenditures.
    What it really boils down to is the PFD is the most objectively ‘democratic’ way to distribute the P-fund earnings.

    1. Thanks for your thoughts. Sorry that I didn’t address your issues explicitly in this article.

      On your first point, I agree that there is a difference between the “economy” and the “individuals within an economy”. That’s exactly the point I made on this topic here:

      http://kingeconomicsgroup.com/how-important-is-the-pfd-to-alaskas-economy/

      Your second point is also addressed in the prior article, but is a very challenging issue to deal with in the data. The bottom line is that if people increase their spending due to the PFD, it would show up in the data. If they use their PFD to pay off debt, but then use that freed up credit to make purchases, those purchases would show up in the data.

      The whole credit issue only addresses direct effects, which would lead to misleading results if I were to get data from credit card companies and thus remove those payments from the economy. But that’s not what I did. I looked at the net effect on economic activity. So indirect spending through changing consumption paths are captured in my results.

      I’m not quite sure what your third point is referencing. I didn’t mean to imply we should leave money in the earnings reserve. In fact, I’ve argued the opposite:

      http://kingeconomicsgroup.com/unnecessary-sacrifices/

      On your fourth point, I agree. The primary question is “what are we trying to accomplish?” Different objectives and different strategies will impact different groups differently. That’s what makes this whole issue complicated.

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