Alaskanomics

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.

Alaska Economic Update- Part 1

By: Mark Edwards – Senior Credit Officer & Bank Economist

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 three sections for the blog. Once all have been posted, we will post the full report in our ‘Resources’ section for your convenience.

The Alaska economy has faced two difficult years of recessionary forces. It appears that 2018 will be a year of improvement, and the worst of the economic challenges are behind us or at least trending positive. There has been a short-term drag on the economy from the Alaska Legislature moving slowly towards a more sustainable budget by making difficult decisions on reduced spending levels and lower Permanent Fund dividends. However, a balanced budget solution will have long-run positive impacts through a return of business confidence and a stabilized climate for private capital investment.

Oil prices and production levels have trended upwards in the past year, which have helped close a portion of the state budget deficit and stimulated more exploration activity in the private sector. The federal government has also been encouraging the energy sector with regulatory improvements, leasing activity and the approval of ANWR legislation in the recent tax overhaul bill. Federal military and infrastructure spending is also expected to help stimulate economic activity.

A surging U.S. economy has helped the tourism industry reach record levels of visitors and helped the state government and many residents earn higher than expected returns in their investment portfolios and retirement accounts. U.S. economic strength has put pressure on the Federal Reserve to raise short term interest rates, with more hikes expected in the coming year.

Higher borrowing costs could put downward pressure on home prices, which have held steady in all our major markets despite the recession in Alaska. Building permit activity has increased and Alaska’s foreclosure and delinquency rates are still much lower than the national averages. Inflation has remained low in Alaska, averaging only 0.5% per year for the last three years. Alaska’s gross state product and total income began trending upward in the third quarter of 2017 after seven quarters of decline.

A 1% job loss in 2017 of approximately 3,300 positions in Alaska was driven by layoffs in the oil & gas industry, which most impacted business and professional services, construction and state government. As a result, the population decreased by 2,600, for only the fourth year of decline since 1945. The health care industry continues to expand and has been the leading source of job growth in Alaska over the last decade.

Inflation – U.S. inflation expectations are rising after years of limited change in overall prices. However, the rate of change in “Urban Alaska” has almost been non-existent for the last three years. The Federal Bureau of Labor Statistics (BLS) reported that the consumer price index (CPI-U) for Alaska rose 0.5% in 2017, roughly equal to the 0.5% and 0.4% rate of change in 2015 and 2016.  Inflation for the last decade in Alaska averaged an increase of 1.9% per year. Energy prices increased 12.1% over the year. Without the rising cost of energy, inflation in Alaska would have decreased -0.6% in 2017. There were small decreases in housing, food, education, communication and other services.

Stable prices have helped maintain consumer purchasing power during this period of slower personal income growth. The national rates for the CPI-U began rising faster across the U.S. in 2016 at 1.3%, followed by 2.1% in 2017. This is important for the Federal Reserve because 2% inflation is its target rate for the overall economy. Stable inflation is one of the two pillars of the Fed’s “dual mandate,” along with full employment, guiding how they manage the nation’s monetary policy.  Over the last decade Alaska’s inflation rate only deviated from the U.S. rate when the country was in recession and national housing prices were falling, while Alaska’s home values held stable. Now the reverse is occurring. Housing prices are flat in Alaska and increasing rapidly throughout the country.

Interest rates - The Federal Reserve raised the overnight target rate to a range of 1.5% to 1.75% on March 22, 2018. This follows quarter point rate hikes in June, March, and December of 2017. This was the sixth 0.25% rate increase in two years after nearly a decade of no movement. Although dependent upon a variety of economic indicators and forecasts, gradual increases are anticipated in the coming year. Current market expectations are for two additional short-term rate increases of 0.25% each in 2018, but that is dependent on the continued strength of the economy. While rates are volatile, current levels are below historical levels and are expected to trend upward as the national economy continues to improve. Rising interest rates will impact a variety of industries. Sectors that require more fixed asset investments and higher levels of financial leverage will see borrowing costs rise. Conversely, interest rates paid on short-term CDs and savings accounts should also climb up slowly during 2018.

U.S Treasury rates have increased roughly 1% for all durations between one month and two year maturities. However, you can see in the graph the longer durations in the yield curve have flattened with smaller spreads. The Fed has begun tapering off its investments in long-term Treasuries and mortgage backed securities that it made during the multi-trillion dollar policy known as quantitative easing. As the Fed
slows its activity in the markets, the longer term rates should rise in response to lower demand.  

In the next post, we will have an update on housing issues.

Alaska Employment Forecast for 2018

The Alaska Department of Labor and Workforce development predicts that there will be more lost jobs in 2018, but the decline will not be as large as the past two years. Employment is predicted to decline 0.5% as compared to 1.1 percent and 1.9 percent in 2017 and 2016, respectively.

As outlined in January’s Economic Trends, State government and oil were the first two industries to take a hit when oil prices began to fall in 2014. The State began to cut jobs as early as 2015, while oil and as cut a significant number of jobs in 2016. The two industries lost 4,100 jobs in 2016, which is much higher than the 1,000 predicted to be lost in 2018.

After the large losses in oil and gas and State government, losses were felt in the industries that rely on oil and the State for their business. Construction and professional services had significant declines in 2016 and 2017. Like the other industries, they are expected to continue to lose in 2018, but not at the rate seen in the prior two years.

The final group to see declines in employment is industry that relies on people’s spending. Retail is expected to lose another 200 jobs in 2018, which is similar to the loss seen in 2017 and smaller than the 500 lost jobs in 2016. Leisure and hospitality is also expected to decline this year, but only about 100 jobs are expected to be lost.

Not all industries have had job losses through the recession. Manufacturing, health care, financial services, local government, and the Federal government have all remained flat or have seen increases in the past three years.

Manufacturing relies heavily on outside factors, such as commodity prices (seafood) and national and international demand. This helped insulate manufacturing from job losses during the Alaska recession.

Health care has continued to grow throughout the state and has added 2,900 jobs between 2015 and 2017, and is expected to add an additional 700 more in 2018.

The financial sector has been stable over the past three years and is expected to remain stable in 2018.

Both local and Federal government jobs have had slight shifts since 2015. Local governments are expected to see a minor loss this year and while Federal jobs are expected to remain flat, there is uncertainty in the budget, so the forecast will remain unclear for the time being.

While the job forecast is improving for 2018, it is important to remember that the best way to increase jobs is to have financial stability in Alaska. A long-term fix to the state’s fiscal crisis is needed to be able to fully come out of the recession that we have seen in the recent past.

How much is uncertainty costing the state of Alaska?

By Mouhcine Guettabi, Assistant Professor of Economics, Institute of Social and Economic Research UAA

Due to the decline in oil prices, the state has had to rely on savings to fund government for the last few years. The legislature has, however, not decided how it intends to fund government activity going forward. Given the size of the deficit and the paucity of non-oil sources, it seems that a draw from the Permanent fund is necessary.  While, understanding the potential short term effects from the imposition of taxes or government cuts seems to be fairly well understood, we try to quantify below the potential investment losses stemming from delaying a decision that provides fiscal stability.

What is the scale of private capital spending in Alaska?

While there does not exist a database of private and public capital spending by year for the state of Alaska, we have yearly construction forecasts which use as a proxy for these activities. In figure 1, we show that non-oil private spending between 2013 and 2017 declined by 410 million dollars. In figure 2, we show that O&G capital spending peaked in 2014 at 4.25 billion dollars and was only 2.43 billion in 2017. In other words, capital spending- including oil and non-oil- decreased by more than 2.5 billion dollars in the three years since oil prices declined.

Figure 1: Private sector construction spending (No Oil and Gas) between 2013 and 2017

Figure 2: Oil and Gas construction spending between 2013 and 2017

Is there any academic evidence linking uncertainty and investment?

Baker, Bloom, and Davis (2013) construct a novel index of economic policy based on a diverse array of metrics, performing tests of the index’s validity through a human audit of 3,500 newspaper sources and other common-sense measures. They find that the increase in policy uncertainty that followed the onset of the Great Recession had significant negative effects on aggregate investment and on employment as well as on consumption expenditures. Matching firm-level data with the data series of this index, Gulen and Ion (2013) find that economic policy uncertainty can explain up to 32% of the drop in corporate investment over the 2007-2009 time period.

Do we know anything about the effect of uncertainty at the state level?

Gao and Qi (2012) find that municipal bonds issued by state governments immediately before a gubernatorial election pay a premium of 6 to 8 basis points due to this electoral proximity. Jens (2013) estimates the investment-suppressing effect of a gubernatorial election on the state-level investment during the quarter of the election at between 5% and 15% depending on the subsample, with the closeness of an election exacerbating the decline.

Does the information above allow us to determine how uncertainty affects the Alaska economy?

Private Construction spending in 2017 is supposed to be around 4 billion dollars. Using the 5 to 15% estimated by Jens (2013), we would conclude that the direct effects of policy uncertainty is costing the state somewhere between 200 and 600 million in private capital spending. The decline in spending due to policy uncertainty would indicate that waiting is not a costless option. In fact, the losses due to uncertainty are important and similar in magnitude to the ones the economy would experience due to a tax or further government cuts.

Table 2 Capital spending in billions in Alaska between 2012 and 2017[1]

		2012	2013	2014	2015	2016	2017
Private
	Oil and gas	3.152	3.638	4.255	3.84	3.125	2.43
	Mining	0.34	0.33	0.205	0.21	0.18	0.187
	Other basic	0.01	0.02	0.076	0.025	0.104	0.13
	Utilities	0.794	0.83	0.851	0.68	0.459	0.498
	Hospitals	0.325	0.229	0.23	0.24	0.195	0.336
	Other commercial	0.12	0.15	0.17	0.135	0.15	0.15
	Residential	0.4	0.44	0.48	0.415	0.329	0.277
Private sector  total   total		5.141	5.637	6.267	5.545	4.542	4.008
Public
	National defense	0.46	0.209	0.395	0.435	0.552	0.635
	Highways	0.585	0.824	0.765	0.755	0.705	0.629
	Airports	0.375	0.479	0.425	0.465	0.387	0.37
	Alaska Railroad	0.055	0.024	0.023	0.025	0.026	0.022
	Denali	0.02	0.013	0.009	0.01	0.01	0
	Education	0.408	0.497	0.477	0.465	0.406	0.212
	Other federal	0.207	0.245	0.3	0.255	0.253	0.255
	Other state	0.474	0.45	0.515	0.555	0.422	0.322
Public sector total		2.584	2.741	2.909	2.965	2.761	2.445
Overall total		7.725	8.378	9.176	8.51	7.303	6.453

[1] We use the forecast figures from the construction forecast produced by ISER to proxy for actual capital spending.

References:

Baker, Scott R., Nicholas Bloom, and Steven J. Davis (2012), “Measuring Economic Policy Uncertainty,” manuscript, Stanford University.

Gulen, H. and Ion, M. 2013. Policy Uncertainty and Corporate Investment. Purdue University mimeo.

Jens, C. 2017. Political uncertainty and investment: Causal evidence from U.S. gubernatorial elections. Journal of Financial Economics 124:563-579.

The 38th Annual Alaska Resources Conference

Last week, the Resource Development Council (RDC) hosted its 38^th Annual Resources Conference in Anchorage. The event is the chance for leaders from the tourism, fishery, oil and gas, mining, and forestry industries to come together and share highlights and frustrations from the past year and look forward to the coming year.

As was the case in 2016, presenters were cautiously optimistic about the future of resource development in Alaska. There is still major concern about the State’s fiscal situation. The continued lack of a sustainable plan has caused great frustration in the industry.

There was a bright spot in the first morning’s presentation when Senator Murkowski phoned in to say that the Senate Committee on Energy and Natural Resources released budget reconciliation legislation to open a small part of the non-wilderness portion of the ANWR, known as the ‘1002 Area’ to responsible oil and gas development. On the Senate Committee’s webpage, Senator Murkowski is quoted by saying, “This legislation is a tremendous opportunity for both Alaska and our country. The legislation I released tonight will put us on a path toward greater prosperity by creating jobs, keeping energy affordable for families and businesses, generating new wealth, and strengthening our security- while reducing the federal deficit not just by $1 billion over ten years, but tens or even hundreds of billions of dollars over the decades to come.”

This announcement was an encouraging start to the conference. An additional positive note was that for the 2^nd year in a row, there has been an increase in production on the North Slope and more oil in the pipeline. The increase has been small, but everyone agreed that any increase was good. There was also renewed excitement for the Alaska LNG project, after the announcement of the agreement between Alaska and China. Governor Walker noted that due to the fact that the project had support from the highest levels of government in China and the United States, he was optimistic that the project has new life and could move forward with renewed enthusiasm.

Many speakers noted frustrations that there was still no sustainable solution for the State’s fiscal crisis. Rather than focusing on the negative, presenters chose to focus on what they could do within their own industries to help encourage development across all sectors. Individual presentations highlighted the work that has been done in the past year, as well as plans for future development.

The conference highlighted work between different industries that will help grow the Alaska economy. All presentations, including videos of each session, are located on RDC’s website.

Commonwealth North updates report with recommendations on the State’s Operating Budget

Commonwealth North (CWN) has a long standing commitment to a sound state fiscal policy and working to close the large gap between revenue and spending in the state’s budget. With this in mind, CWN has created a Fiscal Policy Study Group, which became the Fiscal Action Coalition. CWN’s Board of Directors and the Fiscal Policy Study Group published a report in June 2015 that outlined recommendations on how to address the fiscal gap in the state’s operating budget. The report was updated in January 2017. The State's Operating Budget: Critical Crossroads, Choices and Opportunities can be found at CWN’s website, or in the ‘Resources’ section of Alaskanomics.

The report is a great answer to the question of what we should do about the fiscal gap in the operating budget. It outlines strategies for reducing the gap, raising new revenues, and creating efficiencies in the budget process.  The updated report highlights what changed between the 2015 and 2017 report. The revenue decline has continued and savings is still being used to fill the fiscal gap.

The report not only takes a look at the past budgets, but also gives examples of ways to strategically reduce spending while still providing essential government services. Each recommendation is thoroughly researched and gives concrete examples of how the legislature can move forward with the recommendations.

Many in Alaska know that there needs to be a solution to the fiscal gap in the state budget. The work of groups, such as Commonwealth North, shows that there are individuals ready and willing to help educate Alaskans on the issues and work towards compromise and a solution. Please visit the ‘Resources’ section of Alaskanomics for information on more groups working to close the fiscal gap.

Legislative Budget Update

By Tim Bradner

As the Legislature grapples with huge shortfalls in state revenues – the deficit for this fiscal year is estimated at $2.5 billion – there’s talk of new state taxes, which is causing discomfort among many. Never mind that citizens pay virtually no state taxes in Alaska and even get an annual check from the state.

Angst over this has caused extended sessions of the Legislature for two years now. Lines of disagreement are pretty clear and, just like in Washington, D.C., pretty partisan.

Democrats, who control the state House, are arguing that we’ve cut state spending enough, that levels of public services are now at bare bones, and that it’s time to raise revenues. They are pushing for reimposition of a state personal income tax (Alaska had one years ago) and for higher taxes on oil producers.

Republicans, who control the state Senate, say there’s more room to cut spending and we shouldn’t impose new taxes when the state’s economy is down.

Senators agree that taxes on citizens may be eventually needed but now is not the time. Meanwhile, hitting the oil industry with new taxes, with oil prices at half what they were two years ago, seems unwise, Senate leaders say.

The feelings are intense over these disagreements in the state capitol and we’re unlikely to solve the problem this year, to get a long-term fiscal solution in place. That punts the issue to next year and 2018 is an election year, so it seems unlikely much will happen that soon.

Paralysis in the state capital? Politicians unable to negotiate tough decisions? That looks pretty familiar, actually, considering that Illinois went without a budget for three years and New Jersey actually had a state government shutdown, although it was brief.

But our state isn’t really running out of money with $60 billion in the Permanent Fund, and since we’re still sending out Permanent Fund Dividend checks claims of a fiscal crisis look pretty silly when viewed from the Lower 48.

Still, we have drawn down on savings to fund several years of multi-billion-dollar deficits. In fact, we’ve taken $11.3 billion from two ready asset savings funds over the last four years, the Constitutional Budget Reserve and the Statutory Budget Reserve.

At the end of this state budget year next June 30 the Constitutional Budget Reserve could be down to about $2.2 billion (the Statutory Budget Reserve is essentially depleted. Without a change to the state fiscal system, that’s not enough to fund the following year’s budget, FY 2019.

We have to change the system because it’s obvious oil can’t pull this train any longer. In fact, oil prices have dropped again.

But while we haven’t made much progress toward a final solution it’s worth reflecting that, in fact, things are moving in the right direction.

We’ve cut spending, hugely. Our annual spend of state undesignated general fund dollars, the most common way of looking at the budget, is about half of what it was four years ago, in Fiscal Year 2013.

We’ve also largely agreed that we should use some of the Permanent Fund’s annual income, about $3 billion in a typical year, to help fund the state budget. We created the Permanent Fund in 1976, many believe, to help pay for public services when oil revenue winds down. That time has come, after 41 years.

We’ve also agreed, in principle, that the Permanent Fund dividend should be limited through a new formula, so that some of that money could be used for public services. There’s still some disagreement on this – Democrats argue it should be coupled with an oil tax increase – but the fact that most legislators sign off on lowering the dividend is a huge accomplishment.

All this is still a work in progress, however. The structural changes, mainly a framework for using the Permanent Fund income (changing its management so it functions more like an endowment) and the trimming of the dividend, has passed both the state House and Senate in different forms, but they have not yet been finally agreed on. The oil tax question, which is still part of the debate, is not resolved, either.

But even if legislators left these things hanging until 2018 (more likely 2019) we are moving toward a solution. Political bodies move slowly in making major decisions and sometimes it takes three years or more for people to really get their arms around a problem and do something.

I recall that it took three years for the state to make a major change in its state oil and gas tax structure (work started in 2010, it was finally done in 2013) after a huge amount of debate, and even then the question had to be ratified by voters through defeat of a citizen initiative to overturn the Legislature’s action.

An initiative may happen again, with at least the Permanent Fund Dividend part of the proposed fiscal change. Plans are already being laid for a ballot initiative to overturn a trimming of the dividend, if it happens.

Even if these structural changes are made we still have a budget problem, although it is not as serious. These changes would bring about $1.8 billion in new revenues to the state general fund for the budget (they would, separately, fund about $750 million for a trimmed-down citizen dividend). If we assume about $1.5 billion in typical state revenues, from oil and other sources, total revenue would be about $3.3 billion.

That’s still $800 million short of funding a $4.1 billion budget (undesignated general funds), which is where the debate on new taxes comes in. The House Democrats’ proposed income tax would bring in about $700 million a year and an increase in state fuel taxes proposed by Gov. Bill Walker would bring in about $70 million a year.

That solves the math part of the problem. However, Republicans in the Senate and House still say we can wait on the income tax part, meanwhile enacting other parts of the plan, and draw a bit more from savings. The draw would be substantially less because there are new revenues for the budget from Permanent Fund earnings. If those continue to grow, which is likely, the remaining gap may be taken care of in a few years, senators argue.

Democrats’ response to this is that the Senate plan assumes flat funding of the operating budget and no real money for state-funded construction in the capital budget, or for addressing a $1.8 billion backlog of deferred maintenance on university and other state buildings.

Democrats say we should get with this and do new taxes now if we’ll need them eventually. Republicans say not yet, that we can wait longer. And so it goes. 

Tim Bradner is the editor of the Alaska Economic Report and co-publisher of the Alaska Legislative Digest

Alaska Legislature Passes FY18 Budget

It took 157 days and two special sessions called by the governor, but the Alaska House and Senate have passed an operating budget for fiscal year 2018. The budget is a compromise of the two bodies that will allow the state to avoid a government shutdown on July 1. While we are disappointed that there was no systemic change in this year’s fiscal planning model, we are looking for the silver-lining in the situation.

The limit to the Permanent Fund Dividends formalizes the amount for the check ($1,100 or about half of historical practice) and reduces spending for that line item. The budget does not provide inflation proofing for the Permanent Fund, which reduces such appropriation and allows more flexibility in the earning reserve or spendable portion of the Fund. The budget was balanced by taking approximately $2.4 billion from the Constitutional Budget Reserve, which does not have much left in it, but the good thing is that it allows for more earning power in the Permanent Fund by not taking money from the earnings reserve. This is an interim positive step until a POMV type systematic changes are made that builds a more sustainable budget with new revenue sources.

The new budget is not good and not the way that government or business should be run. That being said, it is not debilitating for the State of Alaska and the fact that there is intent to work towards systemic changes is heartening. We will continue to work to educate legislators and the public about the importance of a structurally balanced budget that not only reduces spending but also utilizes the earnings reserve of the Permanent Fund and raises new revenues. This fight is not over, but we have an operating budget for the fiscal year that starts in one week.

Yes, Oil is Down, For Now...But Hold On!

By Tim Bradner

It’s easy to feel uneasy about our state’s petroleum industry right now. Let me cite some reasons:

• Crude oil prices are still down. They are slowly rising but conventional wisdom is that $60 per barrel may be a kind of price ceiling, the threshold where those prolific shale oil drillers flip the switch and bring more supplies, sending prices down again.
• The newspapers are full of articles about layoffs in the oil industry that are now rippling out through the economy, affecting even retail.
• Legislators in Juneau are again talking about increasing taxes on oil producers even though many are still operating in the red. Question: Shall we shoot ourselves in the foot?
• The big gas pipeline/LNG project, which is thought to be our long-term economic savior, now seems more distant than ever.

All the above is true and it is enough to make one feel blue.

But here’s a secret: Whatever we think about our situation now will turn out to be wrong. That’s because we’re always wrong when we think the future will be like the present. It won’t be.

Here are some big positives. Yes, we do need to diversify the economy along with our state revenue sources, which are too dependent on oil. But our petroleum industry has a lot of life left in it, and we now know there’s still a lot of oil on the North Slope. Recent discoveries by ConocoPhillips, Armstrong Oil and Gas and its partner Repsol, and by Caelus Energy confirm that.

This is actually a new paradigm. Until recently, in fact until those discoveries were made, most geologists, particularly government geologists, believed the big heyday of the North Slope was past and that from here on out only small or medium-sized fields will be found.

While there’s a lot we don’t know about the new discoveries – there are still uncertainties about them – but what we do know shows how wrong the past assumptions have been.

For example, it’s a good thing that ConocoPhillips didn’t believe the U.S. Geological Survey when it predicted the National Petroleum Reserve–Alaska would hold mostly natural gas and very little oil. ConocoPhillips is finding a lot of oil, and is now pretty busy with three discoveries there. 

The lesson that ConocoPhillips, Armstrong/Repsol and Caelus is teaching us is that you never know until you drill. (On the other side of the coin, the same must be said about the Arctic National Wildlife Refuge, where there’s a lot of high expectations by Alaskans. Until we can drill, we’ll never really know.)

But this gets me to another point: Those oil incentive tax credits. A lot of legislators call them subsidies. I prefer to call them investments. It’s true that we can no longer afford them and Gov. Bill Walker and legislators are correct that the program, in its present form, needs to wind down.

But the basic idea behind the incentives was to bring more companies to Alaska and get more exploration wells drilled – because that’s the only way more discoveries can be made. The fact is that the incentive program has performed brilliantly. It resulted in new companies coming to Alaska. More natural gas was discovered in Cook Inlet, ending fears of electrical brownouts because of fuel shortages for power generation. More exploration wells were drilled on the slope, with those recent discoveries made.

We can never say that the newcomers, firms like Hilcorp Energy and BlueCrest Energy, Armstrong, Repsol and Caelus, came to Alaska because of the tax credits. They came because we have good rocks. But the tax credit program was what caught their attention. No other place in the world has anything like it. It caused them to come here and take a look and once here they really liked what they saw, in the rocks. Financially, the tax credits allowed them to do more work and at a quicker pace, which speeded the discoveries.

They also allowed companies to tackle new ideas, like the work that Great Bear Petroleum, an Alaska-based company, Burgundy Xploration of Texas and 88 Energy of Australia are going to test the potential for producing oil from the large North Slope shale formations.

That’s out in the future, but let’s put some numbers around what’s been discovered so far.

• ConocoPhillips says its newest NPR-A discovery, Willow, could produce up to 100,000 barrels a day by 2023. Two other ConocoPhillips projects in the petroleum reserve, GMT-1 and GMT-2, are in construction (GMT-1) or in permitting (GMT-2). Together they could add 55,000 barrels a day by between 2019 and 2021.
• Armstrong and Repsol are planning production facilities for their discovery that will be capable of producing 120,000 barrels per day.
• Brooks Range Petroleum, a small independent, has a small project, Mustang, in development that could produce 12,000 barrels per day.
• Caelus has a small project, Nuna, which is in advanced planning that could produce 20,000 to 25,000 barrels per day. Caelus’ big project, further out, is the Smith Bay discovery, which still needs tests but which the company hopes could produce 200,000 barrels per day.

All that adds up to about 400,000 barrels per day of new oil. Let’s not forget that there’s still a lot of undeveloped oil, several billion barrels, left in the big producing fields, like Prudhoe Bay and Kuparuk River. This gives us a lot of reasons to be optimistic.

We are going through some tough times in our state’s “oil patch” but let’s not forget that we’re also coming off several years of boom when oil prices were $100 or more. Our industry is now back to where it was in 2012, and that wasn’t so bad.

Given the uncertainties in future prices we may not see $100 oil, and boom times, again. That could be wrong, of course (and probably will be) but we should plan for what we know, and that includes the knowledge that there’s a lot of oil on the slope.

We can take comfort in that. Meanwhile, let’s not shoot ourselves in the foot. That’s a message to our legislators.

Tim Bradner is editor of the Alaska Economic Report and co-publisher of the Alaska Legislative Digest.