Alaskanomics

Alaska Economic Update- Part 4

By Mark Edwards

Today we wrap up our series on the Alaska Economic Update. Over the past three posts, we have looked at oil prices, jobs, and population. We wrap things up today with the housing marketing and the building environment. For the complete Alaska Economic Update as well as other important studies, visit our ‘Resources’ section.

Home lending activity flat - The Alaska Housing Finance Corporation (AHFC) released its third quarter report on Alaska housing indicators. It tracks new loan activity for single family homes and condominiums in Alaska.  The data is based on a survey representing approximately 95% of mortgage lenders in Alaska and also includes AHFC loans. The survey covered mortgage lending activity in the first nine months of 2014.

It reported 6,889 loans were originated statewide for single family homes and condominiums for a total amount of $1.8 billion. This is nearly identical to the volume in the first 9 months of 2013. Loans were done with an average down payment of 11% for the last five years.  Single family homes accounted for 87% of statewide mortgage lending activity with 52% of those loans occurring in Anchorage. The Mat-Su contributed 18% of the volume, 10% in Fairbanks, 8% in Kenai, 5% Juneau, 2% Kodiak, and 1% in Ketchikan.

10% of total mortgage activity for the quarter was for condominiums and only 3% was multi-family.  91% of condominiums were financed in Anchorage. Juneau accounted for 5%, and the Mat-Su, Kenai and Fairbanks 1%. 

Refinance activity slowed rapidly in 2014, but may rise as interest rates are falling again - 30 year conventional fixed interest rate mortgage loans have been getting less expensive for three decades.  In 1981 they peaked at 16.6% and have undergone a slow and steady decline ever since.  In early 2009 rates dipped under 5% on average for the first time and a surge in refinance activity began. 

According to AHFC statistics, there was less than $200 million in refinance loans completed per quarter in Alaska in 2006 and 2007.  In 2008, the average rose to $400 million.  Then in the first quarter of 2009 the activity spiked to $1.4 billion, followed by $1.2 billion in the second quarter.  During this time, the average 30 year interest rate declined nearly 1.5% in six months. 

The refinance pace slowed somewhat in the last half of 2009, but still finished the year with $3.7 billion in refinanced mortgage loans according to AHFC statistics.  In 2010, the refinance volume declined to $2.4 billion, followed by $2.1 billion in 2011.  2012 saw an unexpected decrease in interest rates again to an all-time historic low of 3.3% by the end of the year.  This led to an increase to $3.1 billion in refinance activity. 

Rates increased throughout 2013 and you can see on the far right of the graph, the result has been a steep drop off in refinance activity.  Rates began declining again last year and finished 2014 at 3.86% on average.  AHFC data is only available through the third quarter of 2014 at this time, so we have not yet seen the year end results.  Rates continued lower in February to 3.71%.  This should be a positive trend for both home sales and refinance activity this year.

Housing statistics still good relative to the U.S. – The recently released survey by the Mortgage Bankers Association shows that Alaska continues to have some of the lowest levels of foreclosures and delinquencies on residential mortgage loans in the United States. Through the third quarter of 2014, Alaska ranked 5^th and 7^th best in the nation out of 50 states in foreclosures and delinquencies of all loan types.

The total inventory of foreclosures in process is 0.9% in Alaska, while the country has a much larger lingering foreclosure inventory at 2.4% due to higher rates during the recession and longer resolution times. These rates are an improvement from four years ago when Alaska’s rate was 1.4% and the U.S. foreclosure rate was 4.6%.

Delinquent loans are more than 30 days past due, but not yet in foreclosure. Alaska is fifth best behind North Dakota, South Dakota, Montana and Hawaii in the overall level of delinquent loans. Alaska’s delinquency rate is 3.6%, while the U.S. average is 6% for all loan types. This is an improvement for Alaska from 4.8% four years ago. The U.S. delinquency rate has also come down more dramatically from 9.4% at this time four years ago.

Subprime lending to traditionally non-qualified borrowers was a large contributing factor to the national mortgage problems. The survey covers 95,176 mortgages in Alaska. 6,110 or 6% were considered subprime, compared to 9% nationally. The rate of delinquencies and foreclosures on subprime loans is significantly higher. However, Alaska is in a far better position and again leads the nation as having the lowest level of foreclosures and is second in delinquencies for this important category. Subprime foreclosures in Alaska are at 2% while the national average is 9.8%. Alaska’s subprime delinquency rate is 9.4% compared to the national average of 19.3%.

Building permits up 430 units in 2014, but still historically low - According to the U.S. Census Bureau, the number of building permits for new, privately owned housing of 1 to 5 unit buildings remained low for the 8^th straight year.  It had been under 1,000 units since 2007, but in 2013 it grew 9% to 1,081.  Last year saw a dramatic jump up to 1,509.  However, this is still half the level seen 10 years ago.

Growth in single family homes increased from 877 to 1,114 last year.  The number of duplexes permitted fell from 66 to 50.  The number of structures with three or four living units decreased slightly from 49 to 45.

The other major growth area beyond single family homes was in multi-family.  The number of structures with five or more units climbed from 10 in 2013 to 33 in 2014.  In terms of housing units that meant a growth from 87 to 300 last year.  The biggest challenge has been making new construction affordable enough to meet buyer’s income levels.  There is a shortage of low cost housing in Anchorage.  Vacancy factors are very low and the number of existing homes under $350,000 is in short supply.  It appears builders have started to take more risk in this market segment, likely aided to some extent by government subsidy programs.  Anchorage is expected to follow other growing cities by becoming denser, building vertical and redeveloping older properties.

Alaska Economic Update- Part 3

By Mark Edwards

Personal income rises 6% mainly due to government transfer payments - Total personal income for Alaska was $39.3 billion in the third quarter of 2014, according to data released by the U.S. Department of Commerce Bureau of Economic Analysis. This is an increase of $2.2 billion compared to one year ago, or a growth rate of 6%.  That equates to per capita income of $53,434 in Alaska.  This is an improvement from the 2.3% growth rate the prior year.

The largest contributor to income growth over the prior 12 months was from wages and benefits of $1.1 billion.  Another $200 million was from gains in dividends, interest and rent. 

The surprising change was a $900 million gain in “personal transfer receipts”. This component of personal income is payments to persons for which no current services are performed. It consists of payments to individuals and to nonprofit institutions by Federal, state, and local governments and by businesses.  Government payments to individuals includes retirement and disability insurance benefits, medical payments (mainly Medicare and Medicaid), income maintenance benefits, unemployment insurance compensation, veterans benefits, and Federal grants and loans to students. The transfer receipt category declined by $82 million between 2012 and 2013.  There is no further detail in the report to determine where the significant increase came from last year.  Over $500 million of this growth likely came from the doubling of the size of the permanent fund dividend from $900 to $1,884 in 2014.

Longer term interest rates are falling – You can see in the graph below that over the last year interest rates have been falling for the 10 and 30 year maturities, while shorter terms have risen.  The 30 year bond is highlighted.  It fell 1.15 % to 2.51% over the last 12 months.  Many factors are considered in this trend.  First, some analysts think the supply of bonds is not keeping up with demand as the US Treasury deficit is shrinking.  In the last two auctions $13 billion in 30 year treasuries were offered and bids exceeded $30 billion both times.  This pushes prices higher and yields lower.  Like the US, long term yields are also falling in Germany and Japan.  This is mainly due to a combination of lower inflation, which improves real rates of return and lower global growth expectations.  Several European bonds are offering negative yields and there are real fears of deflation.  This makes the US relatively more attractive to investors.  Much of the excess demand noted above is from foreign buyers.   Low long term rates are significantly helping the rebound of the US housing market.   

Join us for our final post on the Alaska Economic Update. We will outline home lending, refinance activity, housing statistics and building permits.

Alaska Economic Update- Part 2

By Mark Edwards

In our last post, we discussed the falling oil prices and the possible impact on the economy. Today we will look at jobs, unemployment, and population.

Payroll jobs increase only 0.3% in 2013 and 2014.  No growth predicted in 2015 - Alaska's payroll job count increased by 1,000 jobs or 0.3% last year, similar to 2013 results.  This slight increase is much lower compared to 5,300 jobs added in 2012 and 4,900 in 2011.  The total number of payroll jobs, not including uniformed military and the self-employed, is about 336,700 on average throughout the year.  It is important to note this is a preliminary estimate by the Alaska Department of Labor using nine months of actual data from employer tax returns and three months of estimates.  The final numbers will be revised in March of 2015.

The Alaska Department of Labor’s forecast for 2015 is no change in employment levels.  They predict continued large losses in the government sector.  This has been occurring in federal government as budgets have tightened and are now predicted to decline in state and local government due to low oil prices. 

These public sector job losses will be balanced out by equal growth in the private sector. Continued gains of 200 new jobs are expected in the health care industry due to the continued demographic situation where Alaska has both an aging baby boomer population and a young, under 20 generation.  People require the most health care at the beginning and end of their lives. 

Oil and gas is expected to grow by 200 jobs despite low oil prices because of several large projects underway like Exxon’s work in Point Thomson and off-shore investment by Shell.  Newer entrants like Repsol, Hilcorp and Calleus Energy are also making significant investments in the state.

Retail growth is reemerging after the national recession as many franchise businesses that were preparing to enter Alaska in the last five years are finally following through with their expansion plans now that the US economy has rebounded.  Lower oil prices are also helping consumers by providing more disposal income.  This area is predicted to grow by 300 jobs.  Other forecasted contributors to positive labor growth include seafood (+200) and leisure and hospitality (+300).  We are likely to have a record number of tourists visit the state this year.  Declines of 100 jobs are expected in construction due to low oil prices and lower government spending.  This also impacts professional and business services which is forecasted for a 200 job decline in 2015.

US unemployment rate improves, now better than Alaska - Alaska's seasonally adjusted unemployment rate finished the year at 6.3%, compared to 6.4% at the end of 2013.  The comparable national rate in December was 5.6% an improvement of over 1% from 6.7% at this time last year. 

As seen in the graph below by the Alaska Department of Labor, for over five years Alaska had been doing better than the U.S. in terms of unemployment.  The rate in Alaska in blue has been relatively stable, despite the national recession and the U.S. rate spiked much higher.  Now the U.S. rate is improving relatively faster than Alaska.  This appears to already be affecting population migration trends as jobs are more easily found in the lower 48.

The unemployment rate is better in Alaska’s largest communities.  The preliminary, not seasonally adjusted, rate for Anchorage was 4.7%, Juneau 4.8%, and Fairbanks at 5.6%.  The Mat-Su rate improved from 8% in 2012 to 7.1% in December of 2014, but is still higher than the national unemployment levels. 

Anchorage and Juneau’s rate is in the range of what economists call “full employment.”  At these low levels a majority of those unemployed are due to seasonal, frictional, structural or cyclical reasons.  For example, some seasonal workers only plan to work part of the year and collect unemployment benefits for the remainder of the year.  The frictional part is the natural short-term movement of workers between jobs and first-time job seekers.  The most important issue for employers is these low rates inevitably lead to a scarcity of qualified workers and upward pressure on wages.

Ketchikan and Sitka are the two newest markets for Northrim.  They show moderate rates of unemployment at 6.6% and 5.4% respectively.

High levels of unemployment still persist in several rural areas of Alaska.  The worst situations are the Hoonah-Angoon Census Area at 21.6%, Wade Hampton Census Area 21%, Municipality of Skagway at 21.2%. However, the North Slope Borough has the lowest unemployment levels in the state at 3.7%. 

Population remains virtually unchanged in 2014, first net loss since 1987 - The most recent Department of Labor estimate for Alaska's population is 735,601.  That is a loss of 61 people net for the year.  It is significant because it is the first year since 1987 that the state did not grow.  Since that time there have been 13 years where the net in and out migration of people was negative and 13 years where it was positive.  However, in all the negative migration years, the rate of natural increase (births minus deaths) was larger than any migration losses.

Over the last decade we have been averaging about 11,000 births and 3,500 deaths for a net natural increase of about 7,500 per year.  Natural increase was 7,427 in 2014.  Last year there was a much larger than normal net out migration of 7,488 people.  This is the highest level seen since there was a net loss of 19,245 people between 1986-87 and 15,710 people from 1987-88.  The driving factor is likely to be the relative improvement of the U.S. and world economy compared to Alaska.  Also, the aging baby boom population may be slowly retiring out of Alaska.  

The 61 person net loss in 2014 is compared to a 4,471 population gain in 2013.  To put these last two years in perspective, the average population growth for the prior decade was 8,946 per year from 2002 to 2012.

Join us for our next discussion about personal income and longer term interest rates.

Alaska Economic Update- Part 1

By Mark Edwards

Each year, Northrim Bank publishes the Alaska Economic Update. It is an opportunity to review the past year as well as look forward to the current year in regards to oil prices, jobs and housing. We will break the report into four sections and will post the full report in our ‘Resources’ section for your convenience.

2015 is generally predicted to be a flat year for the Alaska economy.  Some segments like government, construction and professional services are likely to shrink, but these losses will be offset by gains in tourism, health care and retail.  This will result in no growth in the job market and population will likely remain at its current levels.  Historically low long-term interest rates and low levels of building activity are expected to keep the housing market stable.

The largest issue looming is the dramatic fall in oil prices.  The current low price environment has many people rightfully concerned about the possible impacts on Alaska’s economy.  After averaging over $100 a barrel for three and a half years, Alaska has been experiencing prices as low as $45.  As of March 17, 2015, it is at $47.50. However, based on currently available information and analysts’ estimates, prices should begin to increase this year.  The over-supply of oil that led to the recent price drop should moderate as higher cost producers are not able to operate profitably.  Continued global demand for energy is expected to move prices higher by this summer when excess inventories are consumed.  Prices in the $60 to $80 range should keep long-run capital investments from the energy industry stable.  Oil production levels are expected to be stable through 2017.

State government will have to make prudent spending cuts - Arguably, the most impacted sector from a decline in the price of oil is the State of Alaska government.  We are the most structurally imbalanced government in the country in terms of the diversification of revenue sources.  In fiscal year 2014, 88% of the state’s unrestricted spending came from oil taxes and royalties.  On a positive note, this does not include the $11.5 billion in revenues from other sources such as Federal government contributions to the state and returns from our investment portfolios. 

Over $52 billion has been saved in the Permanent Fund and it grows despite the roughly $800 million a year spent on dividends for residents due to investment returns and continued deposits from ongoing natural resource projects in Alaska.

Additionally, the state has over $50 billion saved in other investment accounts.  The largest portion, $28 billion, is reserved for the retirement system obligations for state employees.  Other funds are dedicated to specific department operations, such as $1 billion for airport bonds, $1 billion in the power cost equalization endowment fund to subsidize rural energy costs, $586 million in the public school trust fund and many others.  To balance an estimated $3 billion budget deficit this year the Legislature can draw from the $11 billion Constitutional Budget Reserve, $3 billion in the Statutory Budget Reserve, and $5 billion was in the General Fund at year end 2014.

The current budget deficit is expected to force the Governor and Legislature to freeze the growth in the operating budget and cut the capital budget.  Research from UAA’s Institute of Social and Economic Research (ISER) has confirmed the widely held belief that the state government has been spending in excess of its long-term sustainable levels.  The Gross State Product in Alaska is $51 billion.  A $1 billion reduction in state spending would reduce aggregate demand in our economy by about 2%.  A positive way to look at this would be despite government cuts we would still have a $50 billion economy.  Most analysts predict the reduction in state spending will be lower, in the $500 million range. The new Governor has signaled he is taking the issue seriously, and will proceed with a measured approach, so as not to exacerbate the problem.    

Stay tuned for future posts. The next post will include updates on jobs, unemployment rates, and population.

Alaskanomics Resources Section

Don’t forget to visit our ‘Resources’ section for valuable information on Alaska’s economy. There are publications from the Institute of Social and Economic Research, Anchorage Economic Development Corporation, and Associated General Contractors of Alaska. There are also links to sites with important information for all things economy.

Please let us know if there is another resource that you feel should be added to our page.

Unemployment Steady in Alaska for January 2015

The State of Alaska Department of Labor and Workforce Development released its January unemployment numbers on Friday. The seasonally adjusted unemployment rate for January was 6.3 percent, virtually unchanged from December’s 6.4 percent. Alaska continues to be above the national average, which was 5.7 percent in January.

24 of 29 boroughs and census areas in Alaska had an increase in the not-seasonally adjusted rate. The areas that decreased include the Aleutians East and Kodiak Island boroughs and the Aleutians West and Dillingham Census Areas. These areas typically show a decrease this time of year due to the onset of the Pollock season and other winter fishing. The Municipality of Skagway was the other area to have a decrease, but on by .1 percent from the previous month. Skagway has the second highest level of unemployment behind the Wade Hampton Census Area.

For detailed employment estimates, visit http://live.laborstats.alaska.gov/ces/

A Terrible Constitutional Amendment; Constitutionalizing the Dividend

Alaska Legislative Digest- Supplemental Commentary

By: Mike Bradner

Sen. Bill Wielechowski has introduced a proposed constitutional amendment, SJR-1, that would constitutionalize the Permanent Fund dividend. This would essentially take Fund income off the table for spending on the basic purposes of government, such as schools, health and social needs, public safety, and transportation that might be needed under emergency fiscal conditions. 

We’re not picking on Sen. Wielechowski, but he volunteered to be part of this discussion!

 

Basic Politics 101: What’s the primary purpose of government?

The primary purpose of government, Sen. Wielechowski, is to provide public services, not to pay the public a cash dividend. The latter may be feel good politics, but it lacks a place in the fundamental role of government.

None of us know how this fiscal crisis we’re mired in is going to work out. The odds are we’re not going to get through it without some significant budget reductions, harsh enough that they will also put revenue necessities on the table.

Revenue necessities - taxes!

These “revenue necessities” are polite words for “taxes,” money we will have to pay-citizen taxes they’re called. In the agenda of revenue, use of Permanent Fund income, is also a revenue, citizens surrendering a portion of their dividend for public services.

State lawmakers, as well as governors, in recent years have lived in a political environment where taxes have not been part of the discussion with the public.

Taxes is a political “choke word”

Alaskans seem to have a speech impediment. They can say Tanana, Tutatuliak, Tallahassee, Texas, Tatalanika. But ask them to say “taxidermy,” but hold everything after the “x” and they’ll choke up, and perhaps go into apoplectic shock. On the state level, taxes have simply been off the table for decades, not discussable. As a result, the “political culture” of such discussions is also a blank.

Politicians have to “facilitate” bringing taxes to public discussion

This isn’t to be taken lightly. Politicians have to work up to a dialogue about taxes, as well as use of Permanent Fund income. No one has to rush the barricades. But politicians do have to facilitate “this language,” gradually bringing the public into the discussion. Notice we used the word “facilitate.”

One of the political skills of politicians, especially when they face politically hazardous, and unavoidable, issues is to use their political skills to insure that such issues get on to the table. If they can’t personally touch the issues, then the skill is getting less vulnerable parties to push the issues on the table.

We have not had to deal with revenue issues within the institutional memory of most of our present lawmakers, so it should be no surprise they are reluctant to engage such discussion.

No one yet has put revenue discussion on the table!

• In the aftermath of the 2008 financial crash, and subsequent recession, the first action of many states across the country was to put all their revenues, fees, tax exemptions, and etc. on the table for review (not necessarily advocacy).

• Such a review of our revenues options has yet to occur.

• The recent Commonwealth North report (by people who don’t have to stand for election) managed to do a volume of work without putting revenue issues on the table. They had the opportunity, but made only a reference to such future work.

Talking taxes is politically hazardous, to be sure!

Talking taxes is a hazardous process to be sure. By nature, politicians avoid being first to grab the “third rail” of new and controversial issues. Nurturing revenue issues forward is a delicate dance between legislative leaders, majorities, minorities, and individual lawmakers. Many lawmakers come from districts where such issues may be far more hazardous than others. Then there is the governor, who has a singular constitutional responsibility to lead.

Legislators need to think about the fact that they don’t have to be elected forever.

There is life after politics. They may well have to stand up among flying political bullets. They may survive, they may not. The history of such revenue/tax combat is that the voters, of course, do react. They come down hard on a “tax legislature.” In fact, voters in reaction often don’t distinguish between those who voted for taxes and those who did not - they just whack them all.

However, even where there is a quantum shift in makeup of a Legislature, the new body rarely repeals such taxes. They may move some decimal points, and make political noise, but the revenue enactments generally remain “in place” – they were necessary. However, we are told that many lawmakers who bite the bullet often later get elected again. They apparently were respected for their courage.

Facing up to tough issues, not passing the buck!

Politicians are elected to do what? They are elected to look at complex issues, and at a greater depth than the general public, being busy with their daily personal lives can possibly do.

However, there are many of the elected willing to duck such issues, pass the buck to the public. We’re talking about putting a revenue issue out at public referendum - let the public decide. The result of such a political dodge is that there will be only one answer by the public - that will be an emphatic “no.”

Once putting a tax issue to a public vote, lawmakers are stuck with that as “precedent.”

The odds are repeated efforts will just bring repeated rejection.

 

Income tax, sales tax, or use PF income

The question for such lawmakers who dodge responsibility and pass the buck to the public is:

• “Why the Hell do we elect you.” We elect people to make the tough decision.

The best test of the necessity of a tax is when politicians lay their futures on the line and “do it.”

In the future, like it or not, lawmakers will likely face choices that involves enacting an income tax, a sales tax, and use of Permanent Fund income.

What we “are not” as a state!

We need to remember we are not a “usual state,” we are not Maryland, Delaware,

New Jersey, Connecticut, New Hampshire, Vermont, which you can walk across in a day. Nor are we Ohio, Indiana, Illinois, Iowa , Wisconsin that you can easily drive across in a day. These are states where a kilowatt of electricity can flow border to border, where the tax bases of local governments are relatively uniform, where local governments can support many services without state assistance.

As a state “what we are”

We are is a state that superimposed over the contiguous United States would stretch coast to coast, a fifth the size of the contiguous states. We have two-thirds of the shoreline, an extensive fishery, 82 percent of our communities are connected only by air, the state operating 247 airfields. One marine highway system stretches 1,619 miles along our coastline.

We operate school systems unconnected by roads, and where individual school sites are unconnected from each other. The densities of school populations and school costs defy efficiency in Many of these areas lack a local tax base in the traditional sense. Costs for electricity and heating oil is prohibitively high, climate restricts fuel deliveries to once a year. Community infrastructure is costly and difficult to maintain- water, sewer, waste treatment, and solid waste.

We have gained in our core regional efficiency!

Today the good news is that the costs of our railbelt region (Seward to Fairbanks) are pretty good in comparisons with elsewhere. The same is true for our Southeast Alaska cities and boroughs. The bad news is that a lot of “other Alaska” still has a high cost profile.

All this being said, our windfall of oil revenues due to the 2008 ACES tax, and the escalation of oil prices worldwide, has allowed our budgets to soar.

We can reduce budget, but also have to have a mix with new revenues. A good end result comparison might be with similar core areas in other states.

The same goes regarding what people pay for their services in these ad hoc comparisons.

So what’s going to happen now?

Somewhere here lawmakers have choices to make regarding budget reductions and balancing reductions these with a mix of different kinds of new revenue. Our budget spending is still constrained by oil prices. While we may adopt new revenues that are more predictable, our reliance on oil prices will remain, and oil price will likely remain volatile for some time to come.

There’s a lot more ahead of us!

There is a lot more ahead of us regarding a host of issues that revolve around budget situation. We will have ongoing special reports exploring the shadows of emerging policy. Right now lawmakers are pretty much just looking at budget reductions, disregarding revenue. They are assessing what is structurally possible and over what kind of time span. Cuts take time to implement, programs time to dismantle and phase out. There are also contracts. Likewise new revenue take time to put in place.

 

For information on subscribing to the Alaska Legislative Digest, email [email protected]

 

The State’s Operating Budget: Critical Crossroads, Choices, and Opportunities

Over recent years the state operating budget has increased 102% - from $2.2 billion in FY 2004 to $4.4 billion in 2014. In Commonwealth North's study on the Long Term Economic Sustainability for the State of Alaska (January 2013) they noted that the current level of spending is unsustainable and it's imperative that the state implement a long-term fiscal plan, which will require spending restraints. Fiscal discussions have primarily focused on the revenue side of the state's ledger and on capital project spending. Minimal public attention or discussion has been given to the recurring cost drivers of other state spending.

As a way to find solutions to the budget problems, Commonwealth North enlisted the help of its Fiscal Policy Study Group. The study group is co-chaired by CWN board members Eric Wohlforth and Cheryl Frasca and the group was asked to produce a study that aims to:

• Increase the understanding of cost drivers of the operating budget over the last ten years and the forecasted impact over the next ten years.
• Understand the impact and nature of formula-driven programs and the latitude for change.
• Identify the effectiveness of state programs through a review of its performance measure framework in terms of results delivered and resources required.

More than 6 months of discussion and research allowed the group to produce a report that gives targeted suggestions to evaluate and reduce spending in the state’s operating budget. It is important to evaluate spending before addressing revenue because Alaskans will want to know that the state is being fiscally responsible before being asked/required to contribute to the state’s revenue. The recommendations from the report are below.

• Immediately get Medicaid reforms underway to ensure the state can continue to provide services to those most in need. All formula-driven programs must be reviewed in terms of policy goals, results being achieved and cost effectiveness.
• Administration, unions re-open negotiations to identify short and long-term savings in personnel and benefits costs.
• Ensure all current revenue is available to fund highest priorities by placing all state revenue in the general fund unless external legal restrictions.
• Undertake in-depth review of programs that examines effectiveness and appropriateness and engage citizens in these reviews. Report results to citizens and use data to inform budget decision-making.
• Governor establish citizen-led commission to undertake such a review.
• Establish a process similar to BRAC to implement package of recommendations that will be necessary to re-size state programs.
• Governor and Legislature co-sponsor series of dialogues in which citizens better understand the challenge and through which they provide input on the choices they believe should be made.

Budget practices and process recommendations- Governor

Governor’s budget development

• Citizen panels provide input into Governor’s proposed budget
• Governor moves up budget submission to November 15 to give Legislature more time

Budget practices and process recommendations- Legislature

• Revenue limit
• Establish limit on savings used in any one year- provides additional pressure for spending reductions and prolongs availability of savings
• Deposit all savings into statutory budget reserve- removes ¾ vote requirement to access Constitutional Budget Reserve
• Create Joint Ways & Means committee
• Establish revenue limit by defining, through resolution, amount of savings and other revenues available to fund next budget
• Review revenue forecasting for reliability
• Increase time for budget work
• Return to Constitution’s 120-day session
• Increase interim work on budget
• Special session(s) devoted to budget work if necessary
• Implement contingency plan for mid-year savings when significant drop in revenue

Each of these recommendations involves political obstacles and requires deliberative, thoughtful actions to ensure economic stability. Commonwealth North presented this study to public at an luncheon on February 25 and delivered the report to the Governor and the Legislature on the same day. Read the full report and presentation given by Eric Wohlforth and Cheryl Frasca.