By: Mouhcine Guettabi, PhD
A year in review:
In 2019, the Alaska economy emerged from a 3-year recession after losing more than 11,000 jobs between 2015 and 2018. The recovery has, however, been modest as employment averaged 0.4% or 1,400 more jobs between January and November 2019 relative to the same period last year. Oil & Gas and Construction have led this growth as they averaged 510 and 720 more jobs, respectively. It is also important to note that the recovery has been uneven. While we only have borough level data until the month of June, figure 1 shows that a considerable number of boroughs/census areas were still losing jobs as of June 2019.
Figure 1: Employment changes at the borough level between June 2018 and June 2019 (Click graphic to enlarge)
At this pace of recovery, it will take more than 8 years for the Alaska economy to return to pre-2015 employment levels. The economy’s health is partially dependent on government spending, taxation, and dividend decisions. Based on the budget finalized in August 2019, the unrestricted general fund was reduced by $462 million dollars. However, according to proposed budget issued on December 11th, 2019, the FY 2020 will have a supplemental budget of 225 million dollars mainly consisting of Medicaid and Fire related spending. These two pieces of information tell us that the unrestricted general fund budget was reduced by $237 million dollars. From an employment perspective, state government in 2019 averaged about 240 fewer jobs than in 2018 with losses accelerating after July due to University layoffs. As of now, we do not have data to determine the economic consequences from the ferry service cuts. In the next two sections, we turn our attention to the budget for FY 2021 and our employment forecast.
Alaska’s revenue and proposed budget
According to the Alaska Department of revenue, the unrestricted general fund revenue will total $5.059 billion dollars with 62.12% coming from the permanent fund draw. This revenue is before accounting for any dividend distributions. On the appropriation side, the proposed budget for FY2021 includes $4.396 billion dollars for the operating budget, $135.6 million dollars for the capital budget. It also includes paying out a statutory dividend which would require $2.005 billion dollars. Using these figures, the preliminary shortfall for FY 2021 is supposed to be $1.547 billion dollars which is expected to be withdrawn from the Constitutional Budget Reserve (CBR). It is important to note that using such a withdrawal would leave only $542.4 million dollars in the savings account.
Figure 2: Alaska’s sources of revenue for FY 2021 (Click graphic to enlarge)
According the Department of Revenue’s forecast, the state unrestricted revenues between 2019 and 2029 will be between 5 and 6 billion dollars making the deficit a structural and not a temporary issue. Additionally, as we show in figure 3 the share of revenues coming the permanent fund withdrawal will represent around 2/3 of the state’s revenues going forward.
Figure 3: Share of revenues by source (Click graphic to enlarge)
What do we expect for the economy in 2020 and beyond?
Absent significant negative shocks, we anticipate the Alaska economy to continue its slow recovery. For 2020, employment is expected to grow at around 0.7% which amounts about 2,200 jobs. This continued growth will be once again driven by North Slope activity along with construction activity. Additionally, the strength of the national economy will continue to bolster Leisure and Hospitality and the general tourism industry. Healthcare, education will face some uncertainty as they are significant parts of the budget and therefore will be susceptible to possible cuts. Additionally, state and local government will be a drag on the economy as the state continues to deal with fiscal pressure.
Figure 4: Employment forecast 2019-2025 (Click graphic to enlarge)
Future Investments
According to the state's Office of Management and Budget, the state already has a backlog of $2 billion in deferred maintenance, which is growing by $150 million to $400 million annually. To get a sense of the decline in capital spending, we examine how capital spending per capita has changed over time. In figure 5, we show that the average capital spending between 1975 and 2021 is $1,152. For fiscal year 2021, per capita capital spending in real dollars is expected to be $172.97 will be the third lowest since 1975. Between 2015 and 2021, the decline in capital amounts to more than $600 per person.
Figure 5: Per Capita Capital Spending between 1975 and 2021 in Real Dollars (Click graphic to enlarge)
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