Alaskanomics

Effects of PFDs on Poverty Among Rural Alaska Natives

A new article in the journal World Development, by Matthew Berman, professor of economics at ISER, examines how the Permanent Fund dividend (PFD) has reduced poverty among the 60,000 or so Alaska Natives living in small, isolated communities far off the road system. PFDs are cash payments the state government makes to virtually all Alaska residents every year.
 
Rural Alaska Natives are much more likely than other Alaskans to be poor, mostly because jobs are scarce in remote areas. They also face considerably higher living costs, which compounds the problem. The author found:

• Without PFDs, more than 28% of rural Alaska Natives would have fallen below the poverty line from 2011-2015, compared with about 11% among all Alaskans. With PFDs, poverty dropped to about 22% among rural Alaska Natives and 9% among all Alaskans.

• But those recent rates are higher than in 2000, when PFDs reduced poverty to 14% among rural Alaska Natives and about 6.5% among all Alaskans. PFDs have become less effective at reducing poverty, partly because PFDs didn't grow as fast as inflation. But also, more Alaskans now have incomes that fall further below the poverty line—so it takes more to lift them out of poverty.

• There is no evidence that the PFD discourages Alaskans from working. Census data show that labor force participation in Alaska is higher than the national average, for both men and women and in every age group, despite the scarcity of jobs in many rural areas.

This article is open access. Download "Resource rents, universal basic income, and poverty among Alaska’s Indigenous peoples," by Matthew Berman, in World Development, Volume 106. If you have questions, get in touch with the author at [email protected].

How is the State Dealing with the Shortfall in Pension Systems?

A new paper by Cliff Groh, in collaboration with ISER faculty, looks at how the state government has dealt so far with a very big problem: the state's two largest retirement systems for public employees don't have enough money to cover future costs of pensions and benefits for state and local employees when they retire. The author also discusses options the state might consider for dealing with the shortfall as time goes on.  

Public pension systems are protected in Alaska's constitution, and since discovering the shortfall in 2003, the state has made special contributions of nearly $7 billion to the retirement systems. But analysts believe it will take billions more dollars in the coming years to balance the funds. That poses a major challenge for the state, in this time of big budget deficits, as well as for local governments, which also need to help pay for the unfunded liability.  

Besides making special contributions to the retirement funds, the state also moved to hold down its future liabilities by changing, in 2006, to a defined-contribution plan for new employees. That meant new employees would not have traditional pensions when they retired but rather individual retirement savings accounts, funded with a share of their wages and an employer contribution. 

The full paper, History and Options Regarding the Unfunded Liabilities of Alaska’s Public Employees’ and Teachers’ Retirement Systems, and a summary, discuss more about what the state has done—and might do—to deal with the pension shortfall, in the face of the ongoing serious squeeze on the state's finances.

If you have questions, get in touch with Cliff Groh at [email protected].

Alaska Economic Update- Part 4

By: Mark Edwards – Senior Credit Officer & Bank Economist

We conclude our Alaska Economic Update today with a look at Oil Prices, State Budget Issues and the Federal Government.

Oil Prices - Oil prices have fluctuated between $47 and $71 over the last twelve months and finished February 2018 at a monthly average of $66.20. They are forecasted to average $56 per barrel in FYE 2018, according to the State of Alaska Department of Revenue.

Alaska’s crude oil production averaged 540,600 barrels per day in FY 2017. This was an increase of 9,300 barrels per day over the previous year and the second year of production growth. The State Department of Revenue forecasts production to rise again in FY 2018 to 550,100 before settling back to 547,900 barrels per day in FY 2019.

The low price environment experienced between 2015 and 2017 caused companies to cut back on spending as certain projects were no longer economically viable. This led to a reduction in State revenues and a loss of thousands of high paying oil and gas related jobs.

State Budget Issues – Low oil prices over the last three years have left the state government with a multi-billion dollar budget deficit due to the heavy reliance on oil taxes to fund government. A short-term drag on the economy has been occurring as the legislature made the difficult decisions to move towards a sustainable balanced budget by cutting government spending and limiting dividends. That impact has been reduced slightly from higher than expected returns on the State’s sizable investment portfolio and improvement in oil production and prices.

The FY 2018 approved budget includes some reductions to government spending and limiting the size of the Permanent Fund dividend to about $1,200 per resident. Total State appropriations, including the dividend, are budgeted for $10.2 billion in FY 2018, down from $10.75 billion in the prior fiscal year. As a comparison, the FY 2015 budget was $12.1 billion. Over the last three years the state government budget has declined by $1.9 billion or 15.4%. The aggregate dividend payout is $582 million lower, the capital budget has been reduced by $529 million, and the operating budget has been reduced by $774 million, according to the Alaska Governor’s Office of Management and Budget.

Revenues have been increasing primarily due to above average investment returns. The Alaska Permanent Fund returned over 12% in FY 2017. This accounted for $3.2 billion of the total $3.4 billion the State earned in its investment portfolio. Oil prices have remained well above the State’s budget forecast for the last five months, which would result in several hundred million in increased petroleum revenue for the State if that persists through the end of the fiscal year in June of 2018.

Current and future deficits are expected to be funded out of the Constitutional Budget Reserve Fund (CBR) or the Permanent Fund Earnings Reserve Account (ER). The Alaska Division of Legislative Finance reports the CBR had $4.4 billion and the ER had $12.8 billion at FYE 2017. The CBR is projected to have $2.2 billion remaining at the FYE June 30, 2018 and the ER is projected to grow to $15.7 billion. In total at FYE 2017, the State had $17.6 billion in undesignated reserve accounts and another $1.5 billion in accounts designated for specific purposes, such as the Power Cost Equalization Endowment, the Community Assistance Fund and the Alaska Higher Education Investment Fund. The net sum of these accounts is projected to increase by nearly $600 million at FYE 2018 to $19.6 billion.

In addition, the Permanent Fund principal, excluding the ER, was $47 billion at FYE 2017. That is budgeted to grow to $47.6 billion in FY 2018. A majority of the investment returns are budgeted to be kept in the ER because they are capable of being appropriated by the Legislature for spending.

Another option that has been discussed intensely is dedicating a portion of the earnings of the Permanent Fund, or a percentage of its market value, to partially fund state government. Broad based taxes are also being discussed seriously.

Federal Government - The change in federal administration in 2017 has the potential to positively impact the government regulation of natural resource development in Alaska and is likely to increase the levels of military and domestic infrastructure spending. Alaska’s strategic location will unfortunately benefit from tensions rising in Asia, specifically in North Korea. Fairbanks has been positively impacted by the announced transfer of two F-35 squadrons to the local Eielson base between 2020 and 2022. They expect a large increase of in base population, adding around 3,500 people including families. This is projected to require over $550 million in base construction and significant residential construction both on and off base, according to a presentation by officials at Eielson Air Force Base.

There is renewed optimism in Alaska for future natural resource development as the new federal administration has taken action to achieve domestic energy independence. According to the U.S. Department of Energy, in November of 2017 oil production exceeded 10 million barrels a day (BPD) and broke the U.S. record that has lasted since 1970. That moved the U.S. past Saudi Arabia and we are now second only to Russia in total oil production in the world. Forecasts project over 11 million bpd is possible this year due to continued shale production gains in Texas and North Dakota. The U.S. also set an all-time record for natural gas production in the lower 48 of 87.1 billion cubic feet a day.

The comprehensive change to the U.S. tax code includes a provision opening the coastal plain of the Arctic National Wildlife Refuge for oil and gas exploration and development. The law requires two large lease sales within four and seven years, with half of the royalties going to Alaska. There have also been executive orders reversing the prior administration’s policies regarding climate change and offshore leasing in the Beaufort, Chukchi and Cook Inlet.

Two Alaskans have recently been appointed for important positions in the U.S. Department of the Interior. Joe Balash is now the Assistant Secretary for Land and Mineral Management. Tara Sweeney, an Alaska native leader from Utqiagvik, was nominated for Assistant Secretary of Indian Affairs. Their representation in Washington D.C. should help with numerous Alaska regulatory issues.

Written by Mark Edwards, SVP Senior Credit Officer and Bank Economist with Northrim Bank. He was an adjunct professor of economics at Alaska Pacific University. Market served the State of Alaska as an Economist in the Department of Commerce and the Department of Revenue, and as the Director of the Office of Economic Development. He has a B.A. in Economics from the University of Virginia and a Master’s Degree in International Business from the Thunderbird School of Global Management.

Alaska Economic Update- Part 3

By: Mark Edwards – Senior Credit Officer & Bank Economist

Today we look at Gross Domestic Product, Income, Population and Employment.

Gross Domestic Product, GDP – Real GDP growth in the United States increased at an annual rate of 2.3% in 2017 compared to 1.5% in 2016, according to the Federal Bureau of Economic Analysis. The increase is attributed to higher levels of consumer spending, non-residential fixed investment, and more exports. These gains were partially offset by declines in residential fixed investment and increased imports.

Alaska’s gross state product (GSP) annualized in nominal terms was $52.2 billion through the third quarter of 2017. Alaska’s real GSP declined for seven straight quarters beginning in the third quarter of 2015. That ended in the second quarter of 2017 when Alaska’s real GSP increased at an annualized rate of 4.8%, followed by an improvement of 1.9% in the third quarter of last year. The major driver was the price and productivity of the Mining, Oil and Gas sector, followed by contributions from Transportation, Warehousing, and Construction. The most notable sectoral declines in terms of real GSP were in Real Estate Rental and Leasing and Government.

Per capita income – Alaska’s per capita income in the third quarter of 2017 was $55,528. This ranked 9th best out of the 50 U.S. states and 10% higher than the US per capita income of $50,463. Total income in Alaska was $41.5 billion, up $64 million from the prior year, despite a population decline. Total income in Alaska began to rise slightly in the second quarter of 2017 and increased at an annualized pace of 0.8% in the third quarter of last year. Wage earning increases in Construction, Transportation, Warehousing and Administrative Services accounted for nearly half of the third quarter growth. An increase in government transfer payments accounted for the majority of the remainder.

Population – The State Labor Department’s 2017 Alaska population estimate is 737,080. Alaska’s population declined last year by 2,629, or 0.4%. This was only the fourth year on record since 1945 where Alaska lost residents. For the last five years, Alaska has had a net out migration of people, likely in response to the relative improvement of the national economy compared to Alaska. However, the total population continued to grow through the natural increase of net births minus deaths of over 7,000 a year. This changed last year as the net out migration increased to 8,885 people and the natural increase slowed to 6,256. The total number of births declined by about 500, while the number of deaths increased due to aging demographics seen throughout the country.

Over 40% of the State’s population resides in Anchorage. Anchorage’s population declined by 0.5% last year, for a loss of 1,454 people. Meanwhile the Mat-Su Borough continues to grow, adding 1,612 people, up 1.6% in 2017. The Mat-Su surpassed the Fairbanks North Star Borough population of 97,738, which declined 1.2% and lost 1,216 people last year. The Southeast Region combined has a population of 72,915. It declined 1.2% last year for a loss of 912 people. Juneau was down 1.4%, Sitka lost 1.9% and Ketchikan remained statistically unchanged.

There are approximately 22,000 more men than women in Alaska, resulting in males accounting for 51.5% of the population. According to work done by both the U.S. Census Bureau and the State Department of Labor, 66% of the population identifies as white, 15% as Alaska Native or American Indian, 7% two of more races, 6% Asian, 4% black or African American, and 1% Native Hawaiian or Other Pacific Islander. As a subset, 7% list Hispanic Origin. 

Employment – The Bureau of Labor Statistics reported the national unemployment rate was 4.1% at year-end 2017 and remained at that level into January of 2018. This is a reduction from 4.7% at the end of 2016. At the peak of the national recession, the unemployment rate reached 10% in October of 2009. The rate has seen a steady improvement since then. There is now talk of rates going below 4% for the first time since the internet boom of 2000 when they reached a low of 3.8%. The U.S. economy is adding close to 200,000 jobs per month with construction, food and drinking places, health care and manufacturing leading the growth. Five U.S. states have actually seen their unemployment rates reach the 2% range. They include Hawaii, North Dakota, New Hampshire, Colorado and Nebraska ranging from 2.4% to 2.9% at the end of 2017.

Alaska’s unemployment rate was 7.3% in December, making it the highest in the nation. The rate was 6.6% at the end of 2016. Rates are lower in larger communities where Northrim has a branch presence. The Municipality of Anchorage’s December 2017 rate was 5.7%, Fairbanks North Star Borough 6.7%, City and Borough of Juneau 5.1%, Sitka City and Borough 5% and the Ketchikan Gateway Borough 7%. The Mat-Su Borough, covering Wasilla is the only area higher than the statewide average at 8.7%.

The Alaska Department of Labor’s preliminary estimates for December 2017 show Alaska’s payroll job count decreased by 3,300 jobs, or 1% during the year. The largest employment declines occurred in the Oil and Gas sector, which lost 900 jobs or -8.6% in 2017. Construction declined 900 jobs (-6.7%), Retail trade fell by 600 jobs (-1.6%), Information down 400 job (-6.6%) and Professional and Business Services also down 400 jobs (-1.5%) in the
past year. Total government jobs are down by 200 (-0.2)%. Federal employment fell by 200 and State jobs by 300, but local government
increased by 300. The only bright spot continues to be Health Care, which added 800 positions (+2.2%) in 2017.

The Anchorage/Mat-Su region lost 2,100 jobs last year and the Northern region declined 1,100 primarily due to Oil and Gas and construction related declines. The Interior and Southeast regions both declined by 400 jobs, while the Gulf Coast and Southwest regions both added 300 jobs. The Labor Department forecasts statewide losses to decline at a slower 0.5% rate or 1,800 jobs in 2018.

The graph illustrates the more volatile swing of U.S. unemployment rates in red over the last 20 years. U.S rates were as low as 3.8% and as high as 10%. In contrast, Alaska stayed within a much tighter band in blue, reaching a low of 6.3% and a high of 7.9%.

Next week we conclude our discussion with a look at Oil Prices, State Budget Issues and the Federal Government.

Alaska Economic Update- Part 2

By: Mark Edwards – Senior Credit Officer & Bank Economist

In our last post we looked at interest rates and inflation. Today we discuss the housing market.

Housing market – The impact of rising long-term interest rates will be most broadly felt in the housing market. Alaska home purchases are financed, on average, with a 10% down payment and 90% debt. A traditional mortgage loan is amortized over 30 years, amplifying the impact of interest expense over the life of a loan. If per capita income is not rising, then people will either have to devote a larger portion of their monthly income to housing, they will have to reduce the price range of houses they qualify for or the price of homes will have to compress in response to the lower buying power of the average customer in the market.

Multiple Listing Services (MLS) statistics for 2017 show 2,799 single-family homes sold in Anchorage, compared to 2,946 in 2016, a decrease of 5%. The average sales price of $364,967 is $1,200 lower than 2016 levels, a change of 0.3%. Average sales prices were 0.2% lower in 2016, compared to 2015.

As of year-end 2017, there were 547 single family homes listed in Anchorage with 233 sales occurring per month over the last year. That results in an average of 2.3 months of supply on the market. All home price ranges under $500,000 have less than a 3-month supply. $300,000 to $400,000 is the most popular price range. The average days on market were consistent at 51 and 50 days respectively, over the last two years.

Most of the softening in the residential market has come in the higher priced homes. The highest paying jobs in the State are in the areas most impacted; namely oil & gas, construction and professional services. Homes priced $500,000 to $750,000 show 3.8 months supply in inventory. The $750,000 to $999,999 segment shows 7.7 months supply and homes over $1 million have 10.3 months inventory. 

According to MLS, there were 993 condominium sales in Anchorage in 2017, down 6.4% from 1,061 in 2016. Average condo sales prices in Anchorage held steady at $213,000 in 2015 and 2016. Last year they declined 0.9% to $211,221 on average. At year-end 2017, there was four months worth of condo inventory on average and only a 2 month supply in the average price range.

In Fairbanks, the 1,155 total sales of homes and condominiums was an increase of 1.5% in 2017. The average sales price was $230,200, a 0.9% increase over 2016. The average days on market decreased from 51 days in 2016 to 44 days in 2017.

In Southeast Alaska, home and condo sales decreased by 9.6% in 2017 to 539 units. The average sales price did grow by 1.6% to $354,554 last year. The average days on market decreased from 104 to 92 in 2017.

Mortgage Rates - 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. They were at a low of 3.4% as recently as August 2016 and have since increased 1% to an average of 4.4% in late February 2018.  Rates have bounced within this narrow band since the beginning of 2011. This will be an important year to determine if a strengthening U.S. economy, coupled with the Fed’s short-term rate hikes and a reversal of quantitative easing, will finally result in rising mortgage interest rates bucking a 35-year downward trend.

Building permits – The US Census Bureau reports a total of 1,553 residential building permits for 1 to 5 unit houses were issued statewide in 2017. This compares to 1,503 in 2016, an increase of 3.3%. It is important to note there are many communities in Alaska that do not require the permits that are tracked in this data. Though this data is not comprehensive, it is a consistent report of activity in larger communities like Anchorage and Fairbanks.

The 1,553 housing permits last year was still much lower than the prior decade, which saw an average of 2,781 permits per year. 73% of last year’s activity was in single-family homes and 16% was multifamily projects with five units or more.

Foreclosure and delinquency – According to the Mortgage Banker’s Association, Alaska’s foreclosure rate at the end of 2017 was 0.64%, which ranked it the 13th best of 50 states in the country. This is actually an improvement from the local “pre-recession” level in Alaska of 0.8% in 2014. The comparable national average foreclosure rate was 1.19% in 2017, improving from 2.27% nationally at the end of 2014.

The national survey reported that the percentage of delinquent mortgage loans in Alaska was 3.37% at the end of 2017, a slight increase from 3.05% a year ago. This ranked Alaska 10th best in the nation. As a point of reference, the rate was 2.95% at the end of 2014. The national average has improved from 5.99% at the end of 2014 to 5.45% in 2017.

Our next post will include updates on Gross Domestic Product, Income, Population and Employment.