Alaskanomics

Housing Challenges for Anchorage

It is no secret that housing in Anchorage is tight. Whether you are looking to rent or purchase, your options are often very limited. A household must earn more than $50,000 a year to be able to afford to rent the average two-bedroom apartment in Anchorage. For many, this is not a reality.

The housing market for those looking to purchase a home in Anchorage is also tricky. Individuals and families who have outgrown smaller apartments and homes are having a hard time being able to afford the next step up in housing. In Anchorage, the average sale price of homes is rising. In 2013, the average single home sold for $346,977. This is 7.8 percent higher than the average price in 2012. The average in Anchorage is much higher than the national average, which was $211,312 in 2012.

The McDowell Group has estimated that Anchorage will need 18,200 new homes in the next 20 years to accommodate the projected population growth. Due to the geography of the municipality, there is not enough land for nearly 50 percent of the new homes needed. Zoning regulations will have to be altered to allow for higher density neighborhoods to fill the housing gap.

Multifamily rental units are another way to help supply housing. It is an expensive venture for a developer and Weidner Apartment Homes is leading the way in this type of development in Anchorage.  Weidner Apartment Homes plans to expand its Country Lane Apartments and add 250 units to the midtown location. This will be Weidner’s first new development in years and will bring new units to Weidner, whose current units are 97 percent occupied. This is a small step in the right direction for people looking for rental property in Anchorage.

These are only a couple potential solutions to the housing problem in Anchorage. It is becoming harder for companies to attract and retain qualified workers because of the high cost of housing in Anchorage. Lack of affordable housing affects everyone and can be addressed if we all work together to find viable solutions.

Maximum Sustainable Yield: FY 15 Update

The Institute of Social and Economic Research (ISER) recently released its FY 2015 update estimating how much Alaska’s state government can afford to spend from the unrestricted General Fund (UGF) in the coming fiscal year. In this year’s report, author Scott Goldsmith estimates that the state can afford to spend about $5 billion from the UGF in FY15. This is a decrease of $.5 billion, or roughly 10 percent from the FY14 estimate. This is mainly due to declining oil revenues. The estimate is based on the state’s current $139 billion petroleum nest egg, which is a combination of $65 billion in financial accounts and $74 billion in expected oil revenue. Goldsmith notes that by saving incoming oil revenues above the $5 billion level and growth only as fast as population and inflation, the state could build up the Permanent Fund and other financial assets faster than the decline of petroleum revenues. This would allow the state to rely on petroleum earnings much longer than what is currently sustainable. If spending continues at its current rate and grows at an annual rate just 1 percent faster than population and inflation, cash reserves will be exhausted by 2024 and the fiscal gap could reach $3.5 billion.

Goldsmith continues the report by outlining the differences between business as usual spending and maximum sustainable yield (MSY) spending, arguing that MSY spending is the way to solve the budget problems that are arising from lowered petroleum revenues. If the state continues on the business as usual spending path, revenue will need to be made up after the cash balance runs out in 2024. This can be done by using the Permanent Fund and/or new taxes. Both would be needed to fill the budget gap, but would drain the corpus of the Permanent Fund.

Maximum sustainable yield spending allows the state government to determine how much can be sustainably spent from its petroleum wealth by viewing the wealth as an endowment belonging to all Alaskans. The sum of the endowment comes from future petroleum revenue and the state’s financial assets accumulated from saving a portion of petroleum revenues from past years. Goldsmith believes that if properly managed, the endowment, or nest egg, would generate an annual return which could be drawn off for current spending. By limiting this annual draw to the MSY, the nest egg would be sustainable and future generations would share equitably with the current generation in Alaska’s petroleum wealth.

Throughout the update, Goldsmith outlines his plan for MYS and how it would benefit Alaska, not only now, but for future generations. Implementation would take patience and transitioning to a sustainable spending path would be difficult. It would require a cut in spending. Delaying this cut would only postpone the inevitable. The sooner spending issues are addressed, the better. It is going to be easier to make small cuts now, rather than much larger cuts in the future to make up the deficit. Serious consideration needs to be taken when looking at the state’s budget. The concept of maximum sustainable spending is one way to avoid depleting the state’s cash reserves in the near future.

This research is funding by a grant from Northrim Bank. To view the full report visit- http://www.iser.uaa.alaska.edu/Publications/webnote/2014_01-WebNote16-MaximumSustainableYield.pdf

Has Alaska Become a Place Where a Deal is a Deal?

In August, we'll find out

Commentary by Dave Harbour

Last Sunday’s Anchorage Daily News contains a 'news' article describing how Alaskan oil companies are "pouring" millions of dollars into an effort to stop repeal of the State's oil tax reform law.

Citizens should be applauding the companies for upholding a law approved less than a year ago by Alaska's Governor and a majority of the elected representatives of the people.  A number of groups representing the bulk of Alaska's private sector economy are responsibly recommending a sound "No" vote to repeal tax reform.

Here's why citizens should join the fight against activist minority and political groups (1, 2, 3, 4, 5) trying to repeal the recently passed reform:

1.  Alaska's government operating budget is over 90% dependent on Alaska North Slope (ANS) oil production.  Over a third of our entire economy would collapse without ANS oil.  The Trans Alaska Pipeline System (TAPS) that carries ANS oil is 3/4 empty.  It is becoming dramatically emptier: 6-8% per year.  Massive new capital investment is needed to stem and reverse the production losses.  In the most highly taxed, highest cost "oil patch" in the free world (i.e. and we would be happy to discuss Norway anytime, for it is a place where 'A Deal is A Deal'), our leaders last spring decided to reform the tax burden.  Their objective was to increase capital investment, following several years of study and careful analysis.

2.  The Constitution and our kids.  Politicians are fond of quoting Alaska's Constitution requiring that natural resources be developed for the "maximum benefit" of the people.  Trouble is, as we observed in this 2012 editorial, greedy constituencies want the "maximum benefit" of anything now...today...for themselves...and to heck with long term, wise decisions that provide a sustainable economy for their children.  We see this disturbing trend played on the national stage as well as in Alaska.

3.  Alaska's integrity is at stake.  There is no citizen who thinks, "I want our state to be irresponsible".  There is no investor who would say, "I would prefer to invest my money in an insecure area." But when Alaska began increasing its already high oil taxes nearly a decade ago (i.e. after investments had been made), future investment became less secure here. When Alaska made higher tax collections retroactive, Alaska became a riskier, less reliable place to invest. Now, when Alaska's leaders have concluded after years of study that reform is required to save Alaska's economy, special interest efforts to repeal that effort a year later would put a nail in the coffin of Alaska's reputation as a reliable place to do business.

4.  The oil companies' fight is our fight.  Without more investment TAPS throughput inches closer to a disastrous closing of the pipeline and Alaska's whole house of economic cards gets wobblier by the year.  When the cards fall and TAPS oil slows to a trickle -- perhaps even causing closure of the pipeline -- every man, woman and child still here will suffer...a lot.  

• The subsistence lifestyle in rural Alaska will become unaffordable as fuel, airport, social service, transportation, communication and public safety programs and subsidies evaporate.  Over two hundred Alaska Native village corporations and their non profit affiliates along with Alaska Native Regional corporations should be defending tax reform--or live to see their own non profit efforts diminish as their profit making entities face the prospect of increased taxes and fewer contracts. Huge North Slope Borough, Fairbanks and Valdez oil property taxes can be collected only when oil property is present and viable. Less investment produces less local tax revenue.
• Subsidized health care from the smallest village to Alaskan cities will diminish in at least two ways: as direct subsidies diminish and as those with insurance coverage leave Alaska or lose coverage which, in part, pays for charity health care. Advocates for the poor, disabled and sick should be opposing repeal of oil tax reform with every spare spark of energy they can spare.
• Education will be one of the hardest hit areas, as state funding of local and statewide elementary, secondary and university programs decreases. School boards, superintendents and teachers should start appreciating and defending where their funding comes from, in our view.

We continue to be surprised at how few non profit organization leaders testify to the Legislature in support of oil companies, how few write letters to the editor.  Yes, non profits are professional, profligate writers of corporate grant requests, but how many stand up to support oil company investment -- which directly and indirectly affects their own prosperity?

• Alaska has more non-profit organizations per capita (i.e. 6,000) than any other state. While a third of their funding comes from federal sources, much federal and foundation and corporate funding is given on a matching basis. Certainly, non-profits providing youth, arts, education, disabled and dports programs will be badly affected as business giving dries up--as we believe it will with repeal of recently passed oil tax reform legislation.   

We do wonder at the motivation of those who argue more money will flow into Alaska's coffers by repealing oil tax reform.

Two years ago during a private luncheon with a well known liberal leader, she agreed that the state's economy was in peril.  Then, she agreed that the natural result of an imploding oil industry and economy would be that Alaska could once again become a ward of the federal government where houses are cheap, the population diminishes and where the dozens of federal programs and environmental activist organizations would prosper.  I know that she is well intended and believe her to be not evil, just wrong -- at least for my network of friends and coworkers.

A well intended citizen could oppose the tax reform law and support a political party's numbers simply because he or she is loyal to that party.  In that case, the party's economic projections may be trusted on faith -- however rational or irrational they might be.

A not so well intended politician might simply think, "Hey, opposing tax reform as a 'give away' makes me popular with my constituencies, likely to be reelected, more marketable when I retire --  with an oil subsidized retirement check to boot."

On the other hand, one might think certain constituencies -- like Alaska Native oil field contractors -- that make more money when the oil industry makes more investments -- are biased.

Chambers of commerce throughout the state might be biased in favor of the law which they believe will result in more economic prosperity for their members.

In short, all participants in the growing SB 21 repeal effort -- not just supporters of repeal -- will be pursuing their own economic and social agendas.

Citizens will listen to the messages amid the din of rhetoric and vote one way or another, or not vote.

As for this editorial writer, free enterprise wins the argument at day's end.  

We would like to see the 49th state adopt a new slogan: "Alaska, where a deal's a deal!"  After all, Repsol's relatively new investment here results, in part, from an expectation of tax reform.  We therefore align ourselves with the majority of our elected officials who are charged with protecting the public interest.  

We further align ourselves with the major employers and taxpayers of Alaska, who have certainly paid their dues, in spades, and at least deserve to operate in a state that establishes and defends fair and predictable tax and regulatory rules.

We will be voting "No" on the August primary ballot measure asking for repeal of Alaska's oil tax reform legislation.

We believe Alaska's future will dramatically depend on the outcome of that vote.  And in August, the world will know whether Alaska has matured into a place where a deal is a deal.

________________________________________________________________________

This editorial piece appeared February 10, 2014 on the http://www.northerngaspipelines.com website.  Northern Gas Pipelines publisher, Dave Harbour, is former Chairman of the Regulatory Commission of Alaska, Former Chairman of the Alaska Council on Economic Education and former Chairman of the Anchorage Chamber of Commerce.  He has served as chairman of numerous oil and gas conferences, including the annual Alaska Oil & Gas Congress.  His articles have appeared in hundreds of newspapers, magazines and websites throughout the U.S. and Canada.

Alaska’s Construction Spending to be up 18 percent in 2014

The Associated General Contractors (AGC) of Alaska together with supporter, Northrim Bank released the 2014 Alaska Construction Spending Forecast. The report highlights the upcoming year for both private and publicly funded projects in construction throughout Alaska. Construction spending is expected to be $9.2 billion, up 18 percent from 2013.

The oil and gas sector is expected to account for nearly half of the total with $4.3 billion. This is over $1 billion higher than the total for oil and gas last year. Private spending, excluding oil and gas will be about $2 billion, which is slightly higher than the 2013, which was $1.9 billion. Public spending will also increase from 2013. It is expected to be $2.9 billion, up from $2.7 billion last year.

There are four major factors for the robust projection for 2014. The largest reason is due expanded investment plans by the oil and gas industry. Other factors include a larger Department of Defense budget, a reallocation of unspent funds federal highway funds, and strong spending by the state government.

The oil and gas industry is expected to see a 33 percent increase over 2013. It is suspected that this is due to the climate of optimism with the passage of the new oil tax structure for 2014. Not only will new construction be a factor in the coming year, aging infrastructure will be will addressed on both the North Slope and in Cook Inlet.

Mining is expected to see a drop in 2014 due to the fact that the price of gold is dropping. More than half of the expected spending in the mining industry will be on maintenance, continued exploration, and new facilities at the operating mines in Alaska. The six large mines currently in operation are Red Dog, Fort Knox, Pogo, Kensington, and Greens Creek all mineral mines and Usibelli, is the state’s only coal mine. There are also smaller projects that will have construction activity throughout the state.

Utilities are expected to see a jump in 2014 with two new large plants being built for MEA (Matanuska Electric Association) and ML&P (Anchorage’s Municipal Light and Power). There will also be hydroelectric projects and renewable resource projects, like wind and biomass. There will also be an increase in telecommunications in 2014. Spending will be a mix of new firms (Verizon) coming into the market and GCI and Alaska Communications expanding and upgrading current facilities. Utility spending is a combination of private and public spending.

On the public side of the forecast, much of the increase for public spending will be seen by defense spending. There will be a huge increase in military spending for facilities on bases and formerly used defense sites. Fort Wainwright has seven new projects including a new warm-storage hangar, which will cost $36 million. Fort Greeley will also see a large increase in projects, including a $1 billion expansion to the missile defense system, which will last over the next seven years.

Other areas of public spending will see slight decreases that are offset by the increase in defense spending. Overall, there will be a modest 6 percent increase in public spending, in comparison to the 24 percent increase in private spending.

The construction trade is Alaska’s third largest industry, paying the second highest wages. Accounting for 20 percent of Alaska’s total economy, the construction industry reflects the pulse of the economy. These numbers do not include construction workers that are in other industries, such as oil and gas, mining, and utilities. It also doesn’t account for self-employed construction workers. In 2011, it was estimated that there were 9,000 self-employed construction workers in Alaska.

The economy has continued to grow in Alaska. This means more jobs and a growth in the population. This growth has been a catalyst for the residential and commercial construction sector. The oil and gas sector is an obvious driver for this growth, but the other areas discussed above are also helping add to the positive forecast for 2014.

The 2014 Construction Spending Forecast was compiled and written by Scott Goldsmith, Mary Killorin and Linda Leask of the University of Alaska’s Institute of Social and Economic Research (ISER). Visit Alaskanomics’ Resource Section for the full report.