Alaskanomics

AEDC 3-Year Outlook Luncheon

AEDC’s annual 3-Year Outlook Luncheon was held Wednesday and featured a recap of the 2017 employment numbers and a look forward to the next three years. This year’s luncheon was the first one in a few years that included some optimism about the future of Anchorage’s economy. AEDC is predicting that we will be out of the recession by the end of this year or in early 2019.

Job losses have slowed and things are starting to look up in a number of sectors. In the first half of 2018, Anchorage has lost 1,600 jobs, which is a decrease of just over 1 percent. This is expected to be the worst part of the year for job loss. It is expected to even out for the remainder of the year. Health care continues to be a strong sector but transportation has also begun to add jobs in Anchorage. During the first half of the year, it has added 400 jobs. In relation to GDP, logistics is the largest portion of the local economy, contributing $3.4 billion to Anchorage’s economy. Transportation is a large part of this sector.

The number of sectors that have remained flat in 2018 is larger than those who were flat in 2017 and the sectors to lose jobs is shrinking. There are sectors that are still losing jobs, but they are losing fewer than in recent years. Retail is the exception, with a loss of 600 jobs. The main loses have come from national chains closing their stores, which was due to national business decisions and not about the local economy. The loss of Sam’s Club, Sears and Toys R Us accounts for about two-thirds of the retail job loss in Anchorage.

The Anchorage Consumer Optimism Index for Q2 2018 continues to climb and is over the mark of 55 which is the point where you can say that the public is optimistic about the future. The overall index is at 57.2, which is the highest it has been since Q1 2015. Local economy confidence is 52.3, personal financial confidence jumped to 68.1, and future expectations is at 54.2. All of the indicators have shown significant growth, especially since 2016.

The 3-Year Outlook Report is consistent with the 2017 report. Anchorage is starting to see a turnaround in the economy. This turnaround will slowly continue through 2019 and 2020, and build slightly in 2021. Most indicators in the report follow this prediction. The past few years have been difficult in Anchorage, but we are starting to show a light at the end of the tunnel of the recession. There are positive aspects of the local economy, which includes tourism, an increase in personal disposable income, and residential real estate, which has not taken a huge hit during the lean years. It is not all blue skies as tariffs loom on the horizon as a potential drag on the economy. Even with this potential problem, AEDC believes that the next few years will be better than the last few. 

For the full reports, visit AEDC online.

State Budget Update

By Tim Bradner

It will take a while for its significance to sink in, but the Legislature’s adoption of a plan to use certain Permanent Fund earnings to help support the state budget is a historic milestone. For the first time since North Slope oil revenues began pouring into the state budget in the late 1970s we have diversified the state’s revenue base.

There’s more to be done, of course. There’s still a deficit, but it’d smaller and more manageable, maybe $500 million for next year compared with – ugh! - $3.7 billion in 2015.

Accomplishing this has taken three years and it’s not unusual for a major change in state policy to take several years. It just takes a while for the Legislature, and indirectly to public, to get their arm around a complex problem. This was, because it affects the Permanent Fund, was particularly sensitive.

There are still problems, too, such as built-in pressures in the budget that will push costs higher, such as health care costs for public employees and teachers, and retirees. Getting a handle on those costs is now a major objective of the state administration.

But we’ve come a long way. State budget director Pat Pitney ticked off some of the accomplishments in a July 13 talk with members of Commonwealth North, a business-focused public policy group based in Anchorage.

Here are some highlights from Pitney’s presentation:

• In 2015 we had a $6.1 billion state budget (general funds, undesignated) but only $2.3 billion in revenues after oil prices crashed.
• Today the budget is $4.7 billion – a 30 percent reduction – and the deficit would shrink to $700 million assuming oil prices at $63 per barrel, the official state forecast. Oil prices are already averaging above that and the deficit is likely to shrink to $500 million. If prices average $73 per barrel over the next year there will be no deficit.
• The spending cuts have not been easy. Today there are 2,900 fewer workers on the state payroll than in 2015. About 1,500 of these are from state executive branch agencies and 1,400 are from the University of Alaska. The savings from these reductions amounts to about $25 million a year in wage and salary outlay.

What if nothing had been done? If the Legislature had not authorized the Permanent Fund earnings draw in Senate Bill 26 and if spending had not been cut the state would face a $3.1 billion deficit in FY 2019. “We have covered 80 percent of this with spending cuts and the Permanent Fund earnings,” Pitney told Commonwealth North. About $1.4 billion of this can be attributed to the cumulative reductions in expenditures and $1.7 billion to money taken from the Permanent Fund earnings reserve this year.

Pitney cited one example of expenditure reductions, in travel. “We’re spending 40 percent less in travel this year than in 2015.”

There are several “shared services” initiatives including facility maintenance, where a pilot program being done in Juneau is being expanded statewide.

Efforts to streamline services in agencies that serve the public directly, like the Division of Motor Vehicles and the business licensing group in the Department of Commerce are getting satisfactory reviews from the public. Much of this is being accomplished through wider use of on-line service.

This hasn’t been easy for some state employees used to the old ways, Pitney said, but the administrative services staff in the different agencies, who tend to the budgets, “are on board with it.”

Discomfort from disruption is understandable. “People want to know, ‘who’s my boss?’ We think it will take about five years before people think this is normal,” Pitney said.

To date, however, reductions have been the “low-hanging,” or at least the “mid-hanging” fruit. Deeper reductions, if they are made, will require major reorganizations. It’s not certain that the Legislature, or the public, will agree to this, either.

In the 2018 legislative session, for example, the Legislature actually ordered increases for certain programs above what was recommended the Governor. One example, while small, was telling: The administration had recommended elimination of $100,000 in grants to community libraries and museums. Legislators added it back.

In another case lawmakers authorized new money as “innovation grants,” for schools to research for new, improved curriculums for certain academic studies.

In health care, where there are major concerns over rising costs, the Department of Health and Social Services is beginning to implement experimental demonstration programs in delivery of health services to Medicaid patients.

The belief is that improved service will make for healthier people and lower costs in the long term.

Legislators also gave the governor his requested increases for public protection and crime prevention, although there was intense public pressure to do more to combat rising crime.

A point Pitney made is that the Legislature, and the public, may have reached the point where they sense enough cuts have been made, and that more reductions will cut into services people really care about.

“Right-sizing” government will always be an imperfect process. Legislators can never know precisely what the right level is. In the end it’s a judgement call. But when push back starts, when legislators back away from cuts and start adding back, it’s a signal.

Tim Bradner is copublisher of Alaska Legislative Digest and is the 2018 Atwood Visiting Professor of Journalism at the University of Alaska Anchorage

Still in a recession (but not everywhere)

As seen in Alaska Economic Trends, written by Neal Fried.

Data for the fourth quarter of 2017 show Alaska is still in a recession, at least on the statewide level, but the employment picture varies widely around the state. While statewide average monthly employment is down by more than 10,000 from 2015 levels, employment in nearly half of Alaska’s 29 boroughs and census areas actually grew over that period. (See Exhibit 1.)

The job gainers

Most of the areas that remain relatively unscathed by the recession lack direct ties to oil activity or large concentrations of state government employment, which includes the University of Alaska.

All areas benefit from a sizeable annual revenue stream from the state, the best example being the money local school districts receive from the State of Alaska, but school funding hasn’t yet sustained significant cuts, unlike state government budgets.

The areas that have added jobs since 2015 have large fishing or visitor industries, or both. Fishing and tourism are less susceptible to the effects of falling oil revenues — in fact, both industries benefit from lower energy prices.

Job gainers with large fishing industries include Dillingham and Prince of Wales-Hyder as well as the

Bristol Bay, Aleutians East, and Lake and Peninsula boroughs. Tourism-dependent areas include Skagway and the Denali Borough, which are home to the two most visited national parks in Alaska: the Klondike Gold Rush Historical Park and Denali National Park. Ketchikan and Hoonah-Angoon have fishing plus tourism.

Valdez-Cordova is the Trans-Alaska Pipeline terminus but is also home to the important Prince William Sound fishery. Despite its oil ties, the area gained a small number of jobs over the period.

A few areas, most notably the Matanuska-Susitna Borough, gained total jobs over the period but began to lose jobs late in 2017, so it remains possible that the recession’s effect on some places is simply delayed.

The job losers

Four areas sustained the largest job losses between 2015 and late 2017: the North Slope Borough, Anchorage, the Kenai Peninsula Borough, and the Fairbanks North Star Borough.

North Slope lost the largest number of jobs by far, all tied to the oil industry. Oil-related employment on the North Slope hit a peak of 13,485 in March 2015, then plummeted to just 8,228 jobs by November 2017.

Anchorage, headquarters to the state’s oil industry, shed jobs as its oil industry and state government both contracted, a story that also played out in Kenai. Fairbanks had both of those plus the added blow of deep cuts at University of Alaska Fairbanks. UAF lost more than 400 jobs over the period.

Juneau, the capital, lost 350 jobs in its large state government sector.

Not all areas’ losses were casualties of lower oil prices. Losses in Kodiak and Sitka were due to volatility in local fisheries rather than oil or state government, for example.

Neal Fried is an economist in Anchorage. Reach him at (907) 269-4861 or [email protected].