Alaskanomics

Department of Revenue Update- Make It Monday Forum

The Anchorage Chamber of Commerce hosted Alaska Department of Revenue Commissioner Randy Hoffbeck at their weekly Make It Monday Forum. In a continuation of the conference held at UAF earlier in the month, Commissioner Hoffbeck shared his presentation Building a Sustainable Future: Conversations with Alaskans. The Commissioner shared that he and the Governor both agree that before any discussions on revenues occur spending must be reduced. The State must show that the size of government is right before asking Alaskans to weigh in on the revenue discussion. The Commissioner also believed that there are solutions to the fiscal situation, but they all have a lot of baggage that would need to be addressed.

The State is not able to cut its way to a balanced budget. There simply is not enough slack in the budgets without cutting essential services such as education, health and safety and public safety. Nominally, the budget has increased steadily over time with a sharp increase since the mid-2000’s. Adjusted to “real” or “constant” dollars, only recently have we reached post-pipeline spending. Finally, when adjusted for inflation and population, the current budget is lower than most years during the post-pipeline boom. In comparison to other states, Alaska’s total expenditures by population ranks very low.

There is little chance higher oil prices or production will create a balanced budget. At the current rate of production, the price of oil would need to be over $110 to reach $5.2 billion, which is the current size of the unrestricted general budget. If oil stays at the current price of about $60, even an increase to 800,000 barrels per day would only raise $2.9 billion in revenue. Skyrocketing prices and doubling production is not likely in the near future. Many predict that prices will rise, but not much about the $80 mark and while production decline has slowed, it will not increase significantly in the near future.

Commissioner Hoffbeck introduced the Revenue Model that is being used to show the different options for spending cuts and increased revenues. The model puts into perspective how much is needed to create a balanced budget. There is no ‘magic bullet’ for a balance budget and a viable solution will take discussion and compromise from state government and citizens. Alaska currently has the lowest tax burden per capita and a frank discussion will be necessary before moving forward with any tax that affects individuals.

Options to balance the budget include:

• Repurpose financial assets
• Modify oil and gas taxes
• Modify oil and gas credits
• Modify non-oil and gas taxes
• Add new taxes
• Lottery/gaming

It is likely that balancing the $3 billion annual deficit will take a combination of four things.

1. Continued budgetary restraint
2. Taxes impacting individual Alaskans
3. Changes to oil and gas taxes
4. Strategic use of our legacy assets

According to Commissioner Hoffbeck, we are about midway through the path to fiscal stability. A lot of good work has been done but there is still more to go. Education of the general population needs to continue and be increased. Initial conversations have been held with government officials, business leaders and those who typically pay close attention to the matters of state. The public must listen to the debate and stop putting up walls when the words “Permanent Fund” and “Taxes” are added to the discussion. If Alaska wants to have educated children, healthy communities and safe neighborhoods, everything must be on the table for potential solutions to the fiscal situation. The solution is out there and while it is not easy, Alaska can and will find the path to fiscal stability with discussion and compromise.

For more information on the conversation, visit http://gov.alaska.gov/Walker/priorities/transition-2014/sustainable-future/the-conversation.html

Alaska Unemployment at 6.8 percent in May

The State of Alaska, Department of Labor and Workforce Development released its unemployment numbers for May. The seasonally adjusted unemployment rate remained relatively unchanged at 6.8 percent. This is only one-tenth of a percent higher than it was in April. It is still above the national average, which was 5.5 percent in May. In comparison, the non-seasonally adjusted rates fell four-tenths of a percent. This is common with the increase in summer tourism throughout the state.

Most boroughs and census areas had a decrease in the unadjusted rates for April. Denali Borough had the biggest drop going from 17 percent to 5.1 percent. Summer tourism is responsible for much of the increased employment in Alaska. The areas that had an increase in unemployment were the North Slope Borough, Kodiak Island Borough, Aleutians East Borough and Aleutians West Census Area. The North Slope is typically stable throughout the year, but had an unusual winter construction season. The other three are usually different than the rest of the state because of the increase in employment during the winter fishing season.  

Detailed employment statistics can be read at http://live.laborstats.alaska.gov/ces/index.cfm

State Budget Update

By Tim Bradner

How does one explain the extended budget gridlock and political squabbling in the Legislature this year? The session was supposed to end April 19 but it has been extended in special sessions as lawmakers wrestled with difficult funding problems. It took two special sessions, the first called by Gov. Bill Walker and the second by the Legislature itself, but a budget deal was finally concluded June 11.

Part of the problem was financial, part structural, in the way large deficits are dealt with, and part purely political.

Financially, our state government is in truly uncharted waters–oil prices dropped by 50 percent last fall, and so did state revenues that come mostly from oil. Faced with huge budget deficits, Gov. Bill Walker and legislators moved to cut spending, and through the spring the Legislature managed to cut the state operating budget by about $500 million, from $6.1 billion to $5.6 billion in state general funds.

It was heavy lifting because the operating budget has never been cut before to this magnitude. Most state agencies and programs took hits but Democrats in the Legislature (which is Republican-controlled) objected to the scale of reductions to school funding and to a proposal to cancel scheduled pay raises for unionized state employees, which had been agreed to in collective bargaining.

It was over these points, school funding and the pay raises that had been agreed, that Democrats really dug in their heels in negotiating with the Republican leadership. This was the political part.

The cuts aren’t enough to make much of a dent in the deficits, however. The deficit for Fiscal Year 2015 (the current year ending June 30) is now estimated at about $3.8 billion, and for upcoming FY 2016 the deficit is estimated at $3.2 billion. Fortunately, our state has several billion dollars of reserves in savings accounts to draw on, not including the $53 billion Permanent Fund.

However, to gain access to these reserve funds, in the Constitutional Budget Reserve, the state Constitution requires a three-quarters approval in both the House and Senate. This is the structural part of the current problem.

The Senate’s Republican leadership had the needed 15 votes of the 20-member Senate but the House Republican leadership could not muster the needed 30 votes out of 40 House members.

This put the House Democrats, who controlled the needed 10 votes, in a strong bargaining position. They used the leverage, too, forcing a compromise with the House leadership that reduced the cuts to education and funded the pay raises.

The dispute seems mainly symbolic because the amounts of money at stake are small, about $50 million, compared with the deficit and the consequences if an agreement does not come before July 1, forcing parts of the state government to be shut down.

While the budget dispute was resolved for FY 2016, which begins July 1, the issue is likely to return next year, when the Legislature prepares the FY 2017 budget, and possibly in following years, as more money is taken from the Constitutional Budget Reserve and the House Democrats’ votes are again needed for the withdrawals.

Is there any relief in sight on revenues? Oil prices are expected to show gradual improvement, and they appear to be doing so, but most analysts expect a recovery only to $80 per barrel to $90 per barrel over the next two years (they are now a little over $60 per barrel). This won’t help the state budget much.

If a natural gas pipeline is built there will be additional revenues to the state, but how much is unknown and the income wouldn’t come until 2025, when the project begins operating. There are still uncertainties as to whether this big project is economically viable and if it can be built. 

However, given the current outlook for oil prices it is quite likely that state cash reserves, except for the Permanent Fund (which can’t be spent) will be drained before a gas pipeline starts up.

To keep state government solvent, new sources of revenue must be found. A discussion on that question is started in Fairbanks June 5, 6 and 7 in a fiscal conference called by Gov. Walker to weigh alternatives. About 160 Alaskans worked through the weekend to weigh additional budget cuts, possible new state personal income tax or state sales tax, or some way of using Permanent Fund income to support public services.

The conference did not reach firm conclusions–that wasn’t intended–but most working groups at the meeting decided a mix of revenue sources, some taxes and use of Fund earnings, in addition to more spending cuts, will be needed. The real purpose of the meeting was to spark further discussions among Alaskans through the summer and fall. The governor hopes to present new revenue proposals to the Legislature soon.

 

Tim Bradner is a natural resources and state government reporter for the Alaska Journal of Commerce

 

Sustained Conversation about a Sustainable Government

A Perspective on a Weekend in Fairbanks

By: Karl Hanneman

Reflecting upon a long weekend spent at the University of Alaska discussing whether our state government can be sustained by Alaska’s economy, I offer my observations.

I believe the gathering was worthwhile and resulted in meaningful dialogue. Governor Walker, Lt. Governor Mallot, and the entire cabinet should be commended for their efforts to pull Alaskans together. The broad diversity of the political and economic persuasions of the invitees reflect an intent to be inclusive, not divisive. 

Following an informative evening presentation by Gunner Knapp, Institute of Social and Economic Research (ISER), on the expense and revenue facts, the first half of day one focused on voting with red and green stickers to assess what government services are important to the participants. Seven subject matter expert groups and seven randomly selected groups sequentially reviewed all program areas of State government that depend upon unrestricted general funds, currently forecast at about $5.1 billion per year. Both groups said most everything is important, although tellingly, the subject matter groups were tougher on the department programs and budgets that they understood than the random groups were on those same programs. Time did not allow for an in-depth review of state programs or methods of service delivery.

The second half of day one then reviewed various revenue options available to pay for $5.1 billion of government services with projected revenues of only $2.0 billion (at $70/bbl). With much to ponder, everyone then retired for the night.

The second day began with seven breakout groups independently reviewing revenue options in an attempt to close the gap using a simple but effective spreadsheet model prepared by the Department of Revenue. However, upon overnight reflection of the magnitude of the budget deficit, most groups were unwilling to delve into revenue options without further constraint on the cost of government. With insufficient time to revisit program budgets and in order to break the logjam, the administration gave direction to groups to assume a further 10% cut in the FY17 budget to approximately $4.6 billion.

With more red and green stickers to vote on various revenue options available to help close the deficit, a remarkable consistency emerged:

1. Most groups were not willing to ask Alaskans to step up and pay for state government without further spending constraints.
2. All groups recommended broad based revenue options, as most participants recognize that fair application of revenue options across a broad spectrum will be necessary to get buy in from anyone being asked to contribute.
3. Generally, the most viable revenue tools were viewed as:  use of the permanent fund earnings/PFD cap, personal income taxes, and corporate income taxes, including oil industry taxes.
4. Most groups were concerned that further work is necessary to understand the potential impact on Alaskans and Alaska’s economy of these various taxes and revenue options.

Missing from the open forum, but heard being discussed frequently between some participants, was the issue of the growth in the wages, salaries, and health and pension benefits of the state government employees. Overall, the State needs better tools to help manage employee costs.  If this cost element could be better constrained, the potential cost savings would accrue to all Alaskans and all good programs. Unfortunately, the structure of the weekend did not provide an opportunity to raise awareness on the issue that employees costs have grown faster than inflation.

Overall, I was fortunate to have been invited to a productive process to engage in a difficult dialogue.  I appreciate that our elected representatives in the Legislature have already begun wrestling with these tough issues. A humbling couple of days voting with red dots and green dots of little consequence gives me nothing but respect for the effort put forth by the Governor and the Legislature when the votes count.   

 

Karl Hanneman is the Chief Operating Officer of International Tower Hill Mines, Ltd.   He is also a member of the Board of Directors for Northrim BanCorp, as well as a director of Alaska Resource Education, Alaska Mining Hall of Fame, Resource Development Council, Fairbanks Chamber of Commerce and Usibelli Coal Mine, Inc.

Research Matters No. 91. An Introduction to Alaska Fiscal Facts and Choices

Research Matters- Institute of Social & Economic Research

Gunnar Knapp, ISER's director, was the opening speaker at Governor Walker's conference, "Building a Sustainable Future: Conversation with Alaskans," held June 5 to 7 at the University of Alaska Fairbanks. Two former ISER directors, Vic Fischer and Scott Goldsmith, also took part in the conference, which brought together Alaskans from around the state to discuss Alaska's fiscal future. The conference was held at a time when a sudden drop in oil prices has slashed state oil revenues and left the budget for the coming year several billion dollars in the red.

Oil revenues have largely funded state government for more than 30 years. Dr. Knapp's presentation to the conference, An Introduction to Alaska Fiscal Facts and Choices, summarizes the fundamental fiscal problem the state government faces over time: "Alaska oil production is falling and our population is rising. It is hard for falling oil production to support most of state government for a growing population."

The presentation goes on to describe the fiscal realities and choices for Alaskans:

• Unless oil prices rise dramatically and unexpectedly, we won’t have enough money to continue spending at fiscal year 2016 levels with only current revenues and savings, which can't sustain multi-billion dollar draws for very long. 

• We will have to adjust our spending, or how we pay for it. Our only significant and practical options are: cut spending more, raise new revenues, or use part of Permanent Fund earnings.

As Dr. Knapp points out, "None of these options are easy or popular," and "Our choices will affect not just ourselves but future Alaskans."

Download the presentation (PDF, 2.1MB) or watch a video recording. If you have questions, get in touch with Gunnar Knapp at [email protected].

ISER publications are solely the work of individual authors and should be attributed to them, not to ISER, the University of Alaska Anchorage, or the research sponsors.

Alaska LNG Update

The US Department of Energy has given conditional approval for liquefied natural gas (LNG) exports from the proposed terminal at Nikiski. Alaska received approval to export to nations without a free-trade agreement with the United States on May 28, 2015. Approval to export to free-trade nations was given in November 2014.

This approval is significant because it allows Alaska to export to countries who make up a major portion of the LNG market, including Japan, Taiwan, China, India and other Asian nations. Allowing Alaska to export LNG to non-free trade nations illustrates the Department of Energy’s belief that Alaska exports will not diminish the amount of gas available for Lower 48 consumers. Alaska LNG is stranded from domestic and international markets and the planned project is extremely expensive. Alaska will need to be able to export to more than free-trade nations to be successful.

Progress is being made on the plans for the gas pipeline with a proposed plan for the 800-mile route from the North Slope to Cook Inlet. There are many spots where the gasline would cross existing transportation projects as well as natural transportation routes. Crossings include the trans-Alaska pipeline (12 times), the Dalton Highway (22 times), the Parks Highway (12 times), Alaska Railroad (four times) and the Elliott and Kenai Spur highways (one time each). Natural transportation corridors include the Nenana River (four times) and Yukon River (once), as well as nearly 450 waterbody crossings. The crossings range from small rivers and creeks to almost 30 miles across Cook Inlet.

Many discussions were held to find the most efficient way to move gas through the 800-mile pipeline. Teams also assessed the value of above ground vs. below ground pipe. Not only would the pipe cross many transportation routes, it would also be near the Denali Fault line, which produced a 7.9 magnitude earthquake in 2002. The trans-Alaska pipeline near the fault was not damaged due to its elevated support structure.

The summer of 2015 will bring more field-testing in preparation for the environmental reports in early 2016. More than 30,000 acres of land are scheduled to be mapped this summer, which will bring the total mapped to almost 200,000 acres. The project could see its final Environmental Impact Statement (EIS) and Federal Energy Regulatory Commission decision by fall 2018, with possible first gas delivery in 2024 or 2025.

State Budget Update

By Tim Bradner

How does one explain the extended budget gridlock and political squabbling in the Legislature this year? The session was supposed to end April 19 but it has been extended in special sessions as lawmakers wrestled with difficult funding problems.

Part of the problem is financial, part structural, in the way large deficits are dealt with, and part purely political.

Financially, our state government is in truly uncharted waters–oil prices dropped by 50 percent last fall, and so did state revenues that come mostly from oil. Faced with huge budget deficits, Gov. Bill Walker and legislators moved to cut spending, and through the spring the Legislature managed to cut the state operating budget by about $500 million, from $6.1 billion to $5.6 billion in state general funds.

It was heavy lifting because the operating budget has never been cut before to this magnitude. Most state agencies and programs took hits but Democrats in the Legislature (which is Republican-controlled) objected to the scale of reductions to school funding and to a proposal to cancel scheduled pay raises for unionized state employees, which had been agreed to in collective bargaining.

It was over these points, school funding and the pay raises that had been agreed, that Democrats really dug in their heels in negotiating with the Republican leadership. This was the political part.

The cuts aren’t enough to make much of a dent in the deficits, however. The deficit for Fiscal Year 2015 (the current year ending June 30) is now estimated at about $3.8 billion, and for upcoming FY 2016 the deficit is estimated at $3.2 billion. Fortunately, our state has several billion dollars of reserves in savings accounts to draw on, not including the $53 billion Permanent Fund.

However, to gain access to these reserve funds, in the Constitutional Budget Reserve, the state Constitution requires a three-quarters approval in both the House and Senate. This is the structural part of the current problem.

The Senate’s Republican leadership had the needed 15 votes of the 20-member Senate but the House Republican leadership could not muster the needed 30 votes out of 40 House members.

This put the House Democrats, who controlled the needed 10 votes, in a strong bargaining position. They used the leverage, too, forcing a compromise with the House leadership that reduced the cuts to education and funded the pay raises. The Senate has yet to agree to the package, however.

The dispute seems mainly symbolic because the amounts of money at stake are small, about $50 million, compared with the deficit and the consequences if an agreement does not come before July 1, forcing parts of the state government to be shut down.

One way or another the dispute will be resolved for FY 2016 but this will occur next year, for the FY 2017 budget, and possibly in following years, as more money is taken from the Constitutional Budget Reserve and the House Democrats’ votes are needed for the withdrawals.

Is there any relief in sight on revenues? Oil prices are expected to show gradual improvement, and they appear to be doing so, but most analysts expect a recovery only to $80 per barrel to $90 per barrel over the next two years (they are now a little over $60 per barrel). This won’t help the state budget much.

If a natural gas pipeline is built there will be additional revenues to the state, but how much is unknown and the income wouldn’t come until 2025, when the project begins operating. There are still uncertainties as to whether this big project is economically viable and if it can be built. 

However, given the current outlook for oil prices it is quite likely that state cash reserves, except for the Permanent Fund (which can’t be spent) will be drained before a gas pipeline starts up.

To keep state government solvent, new sources of revenue must be found. A discussion on that question is now starting. Gov. Bill Walker is convening a major conference set for Fairbanks June 5, 6 and 7 to weigh alternatives. Much of the discussion will focus on ways of using earnings from the state’s large financial resources, including the Permanent Fund, to help support the state budget.

 

Tim Bradner is a natural resources and state government reporter for the Alaska Journal of Commerce