Alaskanomics

What Do We Know to Date about the Alaska Recession and the Fiscal Crunch?

In 2017, job losses in Alaska's ongoing recession spread from the sectors first affected—primarily oil and gas and state government—to the sectors that depend on household spending, including retail trade, accommodation and food services, and leisure and hospitality. Alaska will continue losing jobs in 2018, but at a slower pace— likely in the range of 0.7%. That slower pace isn't a sign of recovery, but rather an indication that the initial shock of low oil prices has made its way through the economy.
 
These are among the findings of a new overview of Alaska's economic and fiscal conditions, by Mouhcine Guettabi, assistant professor of economics at ISER. He also finds that the effects of the recession varied considerably around Alaska in 2016 and 2017, with areas that depend less on oil and gas and state government faring better. But many parts of rural Alaska depend heavily on local government jobs, which held steady through 2017—but face uncertainty going forward, if the state continues to cut aid to local governments.
 
The state government has yet to enact a plan for dealing with the huge budget deficit caused by low oil prices, and the author also includes a rough estimate of how much this fiscal uncertainty reduces private capital investment in Alaska: somewhere on the order of $200 million to $600 million a year.  The overview also considers the effects of different rates of withdrawal from the Permanent Fund earnings reserve, should the legislature decide to use some of those earnings to pay for government operations.

What Do We Know to Date about the Alaska Recession and the Fiscal Crunch?  By Mouhcine Guettabi, with support from Northrim Bank.

Who Earns More: Private or Public Workers?

Research Matters No. 109. Who Earns More: Private or Public Workers?  Mouhcine Guettabi and Andrew Bibler, both assistant professors of economics at ISER, recently looked at how the paychecks of people who work for private businesses in Alaska compare with those of people who work for state and local governments here. Using Alaska Department of Labor data from 2001 through 2016, they found:   • Average earnings are higher in the private than the public sector, across all occupations. That's because men earn more than women, and men make up a bigger share of the private work force—55%, compared with 43% in the public sector.     • Men who work for state and local governments earn on average about $2,000 less per quarter than men working for private businesses. The reason why is that overall, men who take public-sector jobs start out at considerably lower wages—and their wages don't catch up over time, even though they increase somewhat faster than private wages.   • Women working for state and local governments earn on average about $500 more per quarter than women in private-industry jobs. That's because overall, the starting salaries for women in public and private jobs are similar, and salaries for women in public-sector jobs grow faster as they spend time in their jobs.   • But for individual occupations, there is considerable variation in these overall patterns, among both men and women. For some occupations, the gap between public and private pay is larger or smaller to start with, and it can narrow or widen after people have been in their jobs for years.  Download Public and Private Sector Earnings in Alaska (PDF, 619.3KB), prepared for the Alaska Department of Administration, by Mouhcine Guettabi and Andrew Bibler.

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.

Alaska's Economy Then and Now

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

The Alaska economy is currently in the midst of the second year of a recession sparked by the decline in oil prices.  This decline has not only resulted in a reduction of private economic activity but has also resulted in sizable budget deficits given the state’s historical reliance on oil revenues to fund government.

Naturally, legislators and the public at large are concerned about the implications of this downturn on the future health of the Alaska economy and budget. Below, I explain how Alaska’s demographics, and quality of life make it better able to sustain the fiscal and economic stresses it is currently experiencing. I also provide a short overview of where things stand and how we see them moving forward.

-Quality of life

Alaska’s population used to be male dominated and young. Today the ratio of male/female is 1.06 and the median age has increased from about 26 in 1980 to 34 in 2010. Additionally, homeownership rates were at 58% in 1980 and are currently around 66%. These changes matter because age, marital status, and homeownership are significant determinants of migration decision. A smaller exit rate as a result of the slowdown would mean the state’s labor force would not shrink as much as in the 1980’s recession.

-Current status

This current recession is best thought of in phases. Phase one was in 2016 when Oil & Gas, State Government, and slightly later in the year Professional and Business Services shed the majority of jobs. Overall, the state lost 1.8% or 6,220 of its W&S jobs between 2015 and 2016. Phase 2 started in early 2017 when the initial effects described above spread to the rest of the sectors. In this phase, household spending dependent sectors such as retail, accommodation and food services started feeling the multiplier effects. These multiplier effects are essentially the ripples from investment, wage, and job losses. Given that declines in the basic sectors are continuing, we expect a reverberation of these effects into next year.

The initially affected industries have shrunk rather considerably since 2014. For example, employment in O& G in January 2017 was 78% of what it was in 2014, while state government is at 89%. The secondary sectors, while feeling the squeeze, are still holding steady relative to their pre-recession baselines.  

One positive indicator is that the rate of losses in Professional and Business Services have slowed. This sector is typically a leading indicator of economic conditions.

-Future

We expect employment losses by the end of 2017 to be more pronounced- around 2.3%- than they were in 2016. They will also be more evenly spread across sectors than they were in 2016.  In 2018, we also expect negative growth but a smaller year over year decline. These projections do not assume any further budget reductions or taxes.

 

While raising revenues through taxes imposes a negative shock on the economy, this short term pain is necessary for the future health of state.  Also, we anticipate the economy to be in a better position in 2018 to absorb the taxes.

Finally given the size of the budget deficit, use of the earnings reserve coupled with revenues generated through a tax seems to be a sustainable solution that restores consumer and business confidence.

Note:

This blog summarizes a presentation I gave in Sitka to the Alaska Chamber of commerce. You can find the complete presentation here:

http://www.iser.uaa.alaska.edu/Publications/2017-AKThenNow.pdf

 

 

Teacher Turnover Costs Alaska $20 Million Annually

By Dayna DeFeo, Center for Alaska Education Policy Research at the Institute of Social and Economic Research, UAA

On average, every teacher who leaves a school district in Alaska costs that district nearly $20,500. A third of that is for recruiting and hiring a replacement teacher, and half is for training the new teacher. Overall, teacher turnover costs the state’s school districts about $20 million a year.

These are the first systematic estimates of the costs when teachers leave Alaska school districts. Several colleagues and I developed the estimates earlier this year, after interviewing administrators in 37 of the state’s 54 districts about their expenses when teachers leave their jobs.

Turnover among teachers in Alaska—especially in rural areas—has historically been high, and economic circumstances today make it even more challenging to recruit and keep teachers. Fewer people are going into the teaching profession, meaning that the national pool of teachers is low. This teacher shortage, coupled with a strong economy and competitive salaries in the Lower 48, make it more difficult for Alaska to recruit teachers—80% of the state’s new hires are from out of state. Once teachers are hired, keeping them is also a challenge. Data from the Alaska State Policy Research Alliance show that in the 2016-2017 school year, individual schools in remote rural locations had over 30% teacher turnover, schools in hub communities 22%, and schools in more populated areas 14%-16%.

Some turnover is inevitable, and it’s not all bad. For instance, some teachers leave to take other jobs in education, and some retire, indicating stability. But research has shown that high teacher turnover hurts student achievement—and it’s expensive. Our estimates of turnover costs are conservative, based on what school administrators told us about expenses for separation, recruitment, hiring, and training. We did not estimate additional costs districts face, such as teachers leaving mid-year, or the broader costs to Alaska, related to teacher preparation and reduced student achievement.

Still, even our conservative estimates show that the direct costs of high teacher turnover are significant. If school districts could reduce turnover, they would have more money to invest in teaching and learning. You can download the report, The Cost of Teacher Turnover in Alaska, by Dayna DeFeo, Trang Tran, Diane Hirshberg, Dale Cope, Pamela Cravez.

If you have questions, get in touch with Dayna DeFeo, director, Alaska Center for Education Policy Research, at 907-786-5494 or d[email protected].

Local Government State Aid

By Mouhcine Guettabi, assistant professor of economics, Institute of Social and Economic Research, UAA

When oil prices were high, the state government collected billions of dollars in oil revenues every year—and it shared a lot of that money with Alaska’s local governments. State aid helps pay for general government expenses and school operations, as well as municipal bond debt for school construction. And in the years when oil revenues were high, the state also paid for hundreds of local capital projects.

But since 2013, much lower oil prices have left the state with a huge hole in its budget, and in the most recent years the state has been cutting aid to local governments. In 2015, for example, the legislature put a 5-year moratorium on paying any share of new school bond debt, and in 2017 the governor vetoed part of the state reimbursement for existing debt. The state’s community assistance program (formerly called revenue sharing) in the most recent fiscal year was about half what it had been two years earlier. The state capital budget has shrunk to a small fraction of what it was a few years back.

How vulnerable are Alaska’s local governments to continuing cuts in state aid? In the summer of 2017, I analyzed how much Alaska’s 19 borough governments rely on state aid. The analysis looked at changes in state aid to borough governments between 2000 and 2015. It found:

• Boroughs as a group depended twice as much on state dollars in 2015 as they had in 2005. The average share of borough revenues coming from the state increased from 12% to 28% over that decade. But among individual boroughs, that share varied widely. On average from 2000 through 2015, the share of revenues from the state varied from 4% in Anchorage—which has a far bigger tax base than any other borough—to more than 35% in several boroughs with small tax bases.
• State aid also helps support local government jobs—which in turn are important to local economies. In 2015, local government jobs made up roughly 8% to 10% of all jobs in the larger urban areas, but as much as 60% of all jobs in more remote places.
• If borough governments had to replace the state dollars they received in 2015 with local tax dollars, residents of individual boroughs would have to pay anywhere from $250 to nearly $5,000 per person in additional taxes.

This research was funded in part by a grant from Northrim Bank. Download the report, A Regional Assessment of Borough Government Finances and Employment (PDF, 1.8MB). If you have questions, get in touch with Mouhcine Guettabi at [email protected] or 907-786-5496.

What's Happened to the Alaska Economy Since Oil Prices Dropped?

By: Mouhcine Guettabi, Institute of Social & Economic Research

A combination of declining oil production and low oil prices has left the state budget billions of dollars in the red. But how has that big drop in oil prices affected the Alaska economy so far? Mouhcine Guettabi, an assistant professor of economics at ISER, examines that question in Alaska Snapshot No. 1, the first in a series of short papers that will report on various economic and fiscal issues important to Alaska. 
 
In this paper, the author assesses economic changes by looking at changes in numbers of jobs from March 2014 through March 2016, the most recent time for which reliable employment figures are available. Among other things, he found:
 
Alaska lost close to 1% of its wage and salary job—nearly 2,300 jobs—from March 2014 to March 2016. Those losses could reach 2% by the end of 2016.
 
State government and private industry were hardest hit through March 2016, with the state government losing nearly 1,700 jobs and private industry more than 1,500. By contrast, local governments (which include school districts) added nearly 800 jobs during the study period and the number of federal civilian jobs was up about 165.
 
Even though Alaska as a whole lost jobs, some areas of the state and some sectors of the economy added jobs during the study period. The most robust growth was in the Mat-Su Borough, which added 1,100 jobs, and in the health-care sector, which added 1,400 jobs.
 
An estimated one-third of all local government revenues in recent years have been from the state—which raises questions about how vulnerable local governments are, as the state looks for ways to balance its budget. In some areas of the state, as many as half of all jobs are in local government.
 
Download the full paper (PDF, 752KB). If you have questions, email Mouhcine Guettabi at [email protected], or call 907-786-5496. 

On State Fiscal Policy, History Knocking at the Door

By Tim Bradner

In the din of intense debate, like what’s happening right now in Juneau, it’s hard to hear history knocking at the door. But in fact I hear knocking. Here we are–at a pivotal point in our state’s history.

We’re facing a tough set of facts: Oil prices at $30 per barrel; state revenues less than a third of what’s needed to balance the budget and a drawdown of available cash that will leave the treasury empty in four years, except for the Permanent Fund.

Of course, it’s not really a financial crisis. It’s a political will crisis.

We actually have plenty of money on hand, mainly several billion dollars of yearly revenue we’ve never touched, meaning the investment earnings mainly of the Permanent Fund.

This is not the Fund itself, which can’t be spent, but rather the earnings, which have always been available but never spent except for the annual Permanent Fund Dividends.

To illustrate, while the state’s petroleum revenues have gone into the tank, investments revenues, most from the Permanent Fund, are up smartly. Investment income increased from $2.58 billion in state Fiscal Year 2015, the budget year ended last June 30, to an estimated $3.77 billion for FY 2016, the current fiscal year, according to the Department of Revenue’s December 2015 state revenue forecast. For FY 2017, which begins in July, estimated investment earnings are $4.88 billion, according to the revenue department forecast.

So while oil income is down, investment income is up. Viewed that way, our situation is not as stark.

Gov. Bill Walker is widely given credit for being the first politician to call out the fiscal imbalance and propose solutions, including using some of the Permanent Fund’s earnings and also, by the way, asking Alaskans to pay some taxes. The governor’s specific proposals may not pass, at least all at once, but I believe a similar package will eventually be developed by legislators showing leadership.

This is history at the door: We’ll be taking the first step at diversifying our revenue base away from a 90 percent dependence on a volatile commodity–oil. This will help stabilize and diversify our state’s economy, in the long run, because we’ve allowed ourselves to become too dependent on the spending of state oil dollars.

In the meantime it will be a cold shower, however. Alaska jobs are starting to decline after years of slow, steady growth, and this will accelerate the news of more drill rigs being laid down on the North Slope. State budget cuts of several hundred million dollars won’t help.

However, state spending cuts appear to be the political price to be paid for the historic shift in our revenue base. The governor has proposed $100 million in spending reductions after last year’s $400 million cut to the operating budget, but it appears legislators want to go deeper, maybe equal to last year’s cuts.

Gunnar Knapp, at the University of Alaska’s Institute of Social and Economic Research, has estimated that each $100 million in across-the-board spending reduction in Juneau costs the economy about 1,300 jobs. If $400 million in cuts are made for next year’s state budget, the effect will be 6,500 jobs lost, according to ISER’s modeling. Some of that will be in retirements and attrition but the bottom line, loss of jobs in the economy, is still the same.

As a point of information, if we were to simply whack the budget to match available revenues, cutting spending by $3.5 billion (the possible size of our deficit) the effect would be, using the ISER estimates, to lose 45,500 jobs in the state’s economy, well over 10 percent of our workforce.

I can’t think of what that would be like, but it wouldn’t be pleasant. Losing 5,000 to 6,000 jobs will be tough enough on top of the oil patch jobs losses (which are likely to be far fewer lost jobs, actually). However, if it’s the price we must pay for our state’s leaders to muster up the courage needed to transform the finances, it’s worth it.

However, Rep. Mark Neuman, the co-chair of the House Finance Committee, points out that we’ve made substantial budget cuts in recent years that have gone largely unrecognized. In FY 2013 state general fund spending totaled $7.8 billion, a good share of that being the capital budget. In FY 2016, the current budget year, it is $5.4 billion including capital. FY 2017, the financial year beginning next July, will be substantially less.

As painful as this is, there’s a silver lining. We’ve talked for years about making structural fiscal changes but these never happened because we didn’t really have to do it. There was plenty of oil money, or if oil prices did drop they shot up again.

Let’s hope that cycle doesn’t repeat, and that prices stay down at least long enough for these decisions to get made. Legislators obviously are worried about the elections later this year and the effects on their careers, but here’s a chance for politicians to be part of history, a historical state policy change equal, in my mind, to the enactment of the Permanent Fund itself.

Those opportunities, to be part of history, don’t often come along.

Tim Bradner is co-editor of Alaska Inc. Magazine and co-publisher of Bradners’ Alaska Legislative Digest

Alaska Fiscal and Economic Articles of Note

Alaska has the tools and assets to ‘reset’ our government revenue and expenditure allocations by exerting more discipline in the fiscal process. This will be done through legislative and administrative actions in the upcoming legislative session and future sessions. As a state, we have more going for us with financial assets such as the Permanent Fund than any other resource development state and most countries. We simply need to marshal and align our leadership and our resources in a manner that balance the sources and uses of funds while being attractive for investment and sustained (albeit reduced) living standards.

Attached are two articles that are great summaries of the challenges and opportunities for Alaska. One is from the most recent Alaska Business Monthly and the other from a recent article in the Alaska Dispatch News. The Institute of Social and Economic Research (ISER) and the Rasmuson Foundation are both good resources for information on the state’s challenges. Consider joining the Rasmuson Foundation’s mailing list at http://plan4alaska.com/ for updated information throughout the legislative session and beyond.

We will continue to post articles of note on Alaskanomics and encourage everyone to stay informed and engaged.

Alaska Business Monthly- Alaska's Economy: Historical Trends and Future Outlook

Alaska Dispatch News Commentary- Alaskans Must Get Involved, Show Support for Solutions to Close Fiscal Gap

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.