Alaskanomics

AEDC 2014 Economic Forecast

Each year, 1500 business professionals gather to hear the results of the Anchorage Economic Development Council’s (AEDC) Business Confidence Index Survey and Forecast for the upcoming year. Wednesday, luncheon attendees also had an opportunity to hear from Anchorage Mayor Dan Sullivan, regarding property tax assessment. Mayor Sullivan reminded the audience that 55 percent of the Municipality’s revenue comes from property taxes. The tax base is composed of 65 percent residential property, 27 percent commercial, and 8 percent personal property. In 2013, the value of property in Anchorage was approximately $37 billion. The Mayor went on to explain how the assessors worked year-round to answer questions and verify that properties were fairly evaluated. Sullivan concluded that Anchorage was doing well financially and this was the fifth consecutive year with a budget surplus for the Municipality.

Bill Popp, AEDC President and CEO, took over the presentation and reported on this year’s annual Business Confidence Index Report (BCI). Full details of the report can be found at www.aedcweb.com. Popp gave a highlight of the results of this year’s survey. Many indicators were flat but business leaders are fairly confident that the economy will continue to rebound in 2014. Over 70 percent of survey respondents felt that the state economy and national economy were barriers for growth in Anchorage. These factors were slightly higher than the availability of a professional and technical workforce. Low unemployment numbers in Anchorage make it difficult to find and keep good employees. Popp stated that he felt that Anchorage is shifting from a workforce development problem to a workforce traction issue. More than half of people surveyed felt that the housing crunch in Anchorage was making it difficult to retain and recruit employees. The overall message for the BCI was that the sense of optimism was high in Anchorage but the state and national concerns weigh heavily on the minds of Anchorage business owners.

A quick look back at 2013 reminded the audience that there was overall job growth in Anchorage. There were 1,000 new jobs and an average unemployment rate of 4.9 percent. The private sector added 1,900 jobs in 2013 but the total number was reduced due to the loss of 900 government jobs. Popp outlined the expectation for various industries in 2014. Oil and gas is expected to continue to grow with an addition of 150 jobs. Throughout Alaska, there are more than 15,000 oil and gas jobs. Health care will continue its steady increase at a similar level to past years. Transportation will see a modest growth, as well as professional and business services. Construction will continue its growth from the drop after 2006. Growth has been steady in construction for the past few years and will continue in 2014. Retail should see a new growth of about 250 jobs. New retailers entering the market promote that they will create 800-1000 new jobs, but many will shift from other retailers and affect the total number. It could be difficult for new retailers to find qualified individuals to fill the positions that are new to the market due to the low unemployment rate. Government is expected to see a decline again this year, but not as drastic. The total loss for government jobs is expected to be about 400. With other sectors included, the total growth for jobs in Anchorage is expected to be 1,200 with 1,600 coming from the private sector.

It is generally felt that while tough times may be coming, the immediate future is looking strong. Industries that saw decline during the recession are rebounding and continuing to grow.  For the full report, visit www.aedcweb.com. There will be a mid-year
look at the numbers at the end of July.

December unemployment rate at 6.4 percent

The unemployment rate for 2013 was down three-tenths of a percent from where it started in January. Throughout the year, the rate hovered in the low to mid 6 percent range, dipping below 6 only once, in May. The unemployment rate in Alaska is still lower than the national average, but the difference is shrinking between the two averages. The Alaska average was 6.6 percent in December 2012 and nationally was 7.9 percent. December 2013 saw a national average of 6.7 percent, only three-tenths higher than the Alaska average.

There is still great disparity between census areas in Alaska. Hoonah-Angoon, Wade Hampton and Skagway all had rates above 20 percent, while the North Slope Borough was at 3.9 percent in December. Most areas saw an increase in unemployment with the Aleutians East and Aleutians West seeing the highest increases with 4.7 and 3.7 percentage points respectively. 

This time of year there are many predictions to what will happen in the coming year. As noted in a previous post, Neal Fried has predicted that 2014 will be fairly flat when it comes to employment numbers in Alaska. Only time will tell if the national average will continue to drop at a higher rate than Alaska’s or if the rates have started to level out and will remain steady.

For detailed employment estimates, see http://live.laborstats.alaska.gov/ces/ The estimates are preliminary and subject to potentially large revisions.

Reviews and Forecasts- Part 2

As discussed earlier, January is busy with various presentations of the previous year and looking forward to the New Year. Commonwealth North joins the discussion by taking an in-depth look at Alaska’s assets from many different angles. The review reports on value, income, and prospects of Alaska’s key assets from the preceding fiscal year; in this case, July 1, 2012 through June 30, 2013. It also tracks performance of those assets and asset managers against pre-identified criteria and metrics.

Joe Beedle, President and CEO of Northrim Bank, hosted the discussion and gave an overview of Alaska’s economic health in 2013. The state’s total GDP grew 1.13 percent to $51.9 billion; while per capita personal income grew 2.75 percent from 2011. Both instances of growth were below the national average. Total net assets were up over 8 percent in 2013 and rose to $76 billion.

Ed Fogles, Deputy Commissioner of the Department of Natural Resources, outlined the past year for the various divisions in his department. Parks and Recreation had a solid year, holding steady from 2012. Oil and gas leases grew slightly over 2012. In 2013, 4.81 million acres of land was leased in 1,696 leases. Petroleum revenue is down, mainly due to lower production, lower oil prices, and the rising cost of production.

Joe returned to give a highlight of the state’s financial assets that include the Constitutional Budget Reserve, Division of Economic Development, Alaska Mental Health Trust Authority, Alaska Industrial Development and Export Authority, Alaska Housing Finance Corporation, Division of Treasury, Alaska Permanent Fund, and the Statutory Budget Reserve Fund. Specific details can be found in the presentation notes on Commonwealth North’s website.

Commissioner Angela Rodell, Department of Revenue, reported on the Treasury Assets. She started by describing how others looked at Alaska. We have very large financial resources that most states would love to have in their possession. The economy and finances are heavily dependent on natural resources, but we do have a great history of conservative oil price and production forecasting. Alaska does have great potential to diversify its revenue through natural gas. As noted in the BOMA presentation, Alaska has a very high median household income, while sitting middle of the pack in unemployment.

The unfunded liability of the pension funds is of great concern to the Governor and the state. At the current rate, the state will owe over $1 billion in payment in a few short years. This payment is nearly 20 percent of the total state budget. The Governor is proposing shifting $3 billion from savings to the pension fund, which will reduce the skyrocketing payments in the coming years and will result in significant savings over the life of the pension fund.

The final part of the discussion centered around the State of Alaska’s enterprises, which include the Alaska Marine Highway, Alaska Energy Authority, Alaska Railroad Corporation, International Airports, Alaska Aerospace Corporation, and the University of Alaska. With the exception of the Aerospace Corporation, all enterprises showed growth in 2013. The enterprises highlight the unique landscape in Alaska. Pat Gamble, President of the University of Alaska, shared the work of the University. The University has seen tremendous capital growth in recent years, as well as asset growth. The University is working to be a viable option for students of all ages and experience. Campuses throughout the state and distance learning opportunities are making a college education more realistic for many Alaskans. 

The luncheon concluded by outlining the importance of our natural assets in respect to the oil investment tax structure and oil exploration and petroleum projects; our financial assets of the permanent fund percentage of value, long range fiscal plan and long range capital project planning, and finally; our enterprise assets investing in our critical infrastructure through railroad, airports, and energy and reliable, affordable energy for all Alaskans.

The full presentation can be downloaded from the Commonwealth North’s website. http://www.commonwealthnorth.org/index.cfm?section=About&page=What's-New&viewpost=2&ContentId=840

Reviews and Forecasts- Part 1

January is a time to reflect on the accomplishments of the past year and look forward to the future. It has been called a season for measuring things. In the past week, the Building Owners and Managers Association (BOMA) and Commonwealth North hosted luncheons with a focus on reviewing 2013 and looking forward to 2014. Both luncheons featured strong panels of speakers who shared their area of expertise with the audience.

At the BOMA luncheon, Brian Meissner, of ECI/Hyer Architecture and Interiors, began by showing that 2013 was a strong year with the values of building permits going well above 2012. Permit values were at their highest level since 2006. He continued by giving an overview of new construction projects in Anchorage for 2014/15. There are a handful of new projects underway that will increase commercial space. He also noted that there was going to be a significant shift to renewal projects in the Anchorage School District. 2014 is expected to be a busy year, but with few surprises in the commercial real estate game.

Next up was Northrim Bank’s, Mark Edwards to discuss commercial finance. He focused on the major paradigm shift that is being felt in the US in technology, banking, and real estate. Due to government interventions, it is hard to predict how the market is truly doing. It does not reflect the true supply and demand for goods and services. Rapid changes in technology are reshaping commerce.  Banking has seen a drastic shift since the 1990s. The number of banks is down sharply, while the dollar amount in deposits has nearly tripled in the same time frame. Finally, real estate is facing challenges moving forward. Rising interest rates and changes in inflation create price concerns for the future.

Brandon Walker, Pacific Tower Properties, gave the forecast for office, retail, and commercial space for the coming year. Anchorage’s office vacancy is very low and has continued to drop in the past four years. Many tenants are choosing to stay put unless they are displaced from their current location. Retail vacancy is well below the national average at just over 4 percent. National retailers still have a healthy appetite for Anchorage and focus their business in three major areas, the 5^th Avenue Mall, Dimond Center and the power centers of Glen Square and Tikahtnu Commons. 2013 was a slow year for new national retailers, but 2014 is expected to pick up with the development of the Outlets of Alaska. The space is 65 percent pre-leased but retailers are waiting to announce their opening until further along in the project. Until then, the rumor mill will continue to turn as to what new stores will be landing in Anchorage. Industrial vacancy is even lower than office space. The challenges for industrial space include tenant fit/obsolescence, land scarcity, and new construction feasibility. Space will always be a challenge in Anchorage for new construction, and vacancy rates will continue to be low until price or construction costs justify new development.

Closing out the BOMA luncheon was Neal Fried, Economist for the State of Alaska. Neal outlined the pattern of Boom, Bust, Recovery and Moderation in relation to the Alaska economy since 1980. The past five years have held steady after 20 years of growth from 1989 to 2008. 2013 was a modest year in employment, seeing a growth of approximately 500 jobs, down from an increase of 3,400 in 2012. Alaska is well above the national average for median household income and places fifth in the nation. If Anchorage were a state, it would sit at the top of the list with a median household income of $86,790, over $6,000 higher than the AK average. Neal predicted that 2014 would be another flat year for employment. He shared with the audience his record on what really happened versus his predictions over the past eight years. Every year, except one, he predicted the correct direction of growth or loss, and the greatest difference was in 2012 when he predicted a 0.6 percent growth when we actually saw a 1.7 percent growth. 

As you can see, there is a lot happening within Anchorage and while 2014 isn’t expected to be a record year, growth and development is heading upwards and there are exciting new projects on the horizon. For the complete presentations from the BOMA luncheon, please visit http://www.bomaanchorage.com/.

A wrap up of the Commonwealth North Assets Review will be seen in Reviews and Forecasts- Part 2.

Alaska Department of Revenue Forecasts Lower Oil Revenue

Guest Author Scott Goldsmith

The recent Alaska Department of Revenue forecast puts petroleum revenues for the current fiscal year (2014) at $5.116 billion (Revenue Sources, Fall 2013).  This is a drop of $2.142 billion from the forecast made last year at this time.  Most of the decline ($1.679 billion) is in the production tax from $3.779 billion to $2.100 billion.  But both the royalty and the petroleum corporate income tax projections also fell, the former by $.320 billion and the later by $.143 billion.  The petroleum property tax prediction was unchanged from last year.

A downward revision in the forecast had been anticipated because of adoption of a new production tax that took effect on January 1, 2014, midway through the 2014 fiscal year.  The new tax, called MAPA—More Alaska Production Act, which was passed during the last legislative session (SB 21), is designed to stimulate investment in new production by reducing the tax burden a high oil prices. 

However the drop in the forecast is, according to the Department, primarily due to several other factors including a 3 percent downward revision in production, a 4 percent downward revision in the price, and higher than anticipated industry capital expenditures.

Using the lower price assumption and the higher capital expenditures, the Department estimates that the production tax liability under the old tax regime (ACES) and the new tax regime (MAPA), would be almost the same.  This is because the elimination of the progressivity of the tax rate under ACES is offset by the higher base tax rate under MAPA.

If this revenue forecast proves accurate, the state will face a $2.190 billion general fund deficit in 2014 based on anticipated spending of $7.1 billion.  Fortunately the state has about $16 billion in available cash reserves to cover this deficit.

The Department of Revenue also revised its long term petroleum revenue forecast downward.  Cumulative revenues from 2014 through 2021 have fallen $15 billion from $54 billion to $39 billion.  This was the second year that the cumulative forecast fell by a significant amount.  Between 2011 and 2012 the forecast fell $9 billion.

The oil price and production assumptions have not changed much from the forecast made last year. 

However the new production forecast does not include additional production that might result from new investment stimulated by the new production tax (MAPA).  The Department reports a significant increase in the level of investment that may lead to such a production increase.