Alaskanomics

For Alaska to Survive and Thrive, Our Fiscal Policy Needs an Overhaul

As seen in Alaska Business Monthly.

By Joe Beedle & Joe Schierhorn

Brexit is an abbreviation for “British exit,” referring to the June 23, 2016, referendum whereby British citizens voted to exit the European Union. We would argue that Alaska’s exit or avoidance to deal with fiscal discipline amounts to Alaska’s exit from economic and fiscal reality, a dysfunctional end to prosperity, an “AK-IT” scenario. We need legislative action to reform our fiscal discipline so that we stabilize our fiscal and economic future and attract investment capital and viable business to the state.

At Northrim Bank, we are very proud of our Alaska roots and work tirelessly to engage with our customers and the community to build the best Alaska we can. As the Chairman of the Board and the President/CEO of the Bank, the two of us have more than seventy years of experience in the financial industry and have lived in Alaska for more than one hundred years, collectively. We have a deep, caring, passion for Alaska and our company and so do our employees. We work every day to maintain discipline and grow Alaska business, and we engage to keep Alaska strong.

The past couple of years have been very disturbing to witness as the state of Alaska has accepted repeated annual budget shortfalls of $4 billion, rapidly diminished our savings accounts, and not made any meaningful progress on systemic or sustainable programmatic fiscal policy improvements. The state has become more divisive and dysfunctional and lost considerable confidence of many stakeholders, including credit markets, private sector investors, and developers of our base industries. Many groups and individuals urged the Legislature to adopt a plan that would provide sustainable relief for the budget shortfall and create a long-term solution to the state’s fiscal problems. Unfortunately, this has not happened and as a result, the state’s liquid financial reserves will drop below healthy levels next year. We do not have time to delay action further!

The lack of a sustainable plan has lowered the state’s credit rating and caused turmoil throughout state agencies and the public and private sectors. We are extremely disappointed that even with all the discussion and public engagement that there is still no workable plan being considered by the Legislature. We know the Legislators are concerned about the upcoming election; but also, we want them to know that we, here at Northrim, stand for election everyday with our customers and investors. It is through our discipline and accountability that we win the votes of our customers. Investment dollars are fungible and mobile, and Alaska is losing opportunities while we wait for legislative action. Again, we urge the Legislature to take action and remember that their job is to maintain stability and create a constructive plan, which sometimes means making difficult, unpopular decisions. It is time for all Alaskans to realize that we need to do what is best for Alaska as a whole, and not just for ourselves as individuals.

There is opportunity in times of struggle. Northrim Bank was born out of the ashes of the recession of the mid-1980s and the two of us do not want to revisit those times again. Through discipline and hard work, we created not only a thriving financial institution but also one that is a resource for our customers and the community. The state’s budget woes do not make up the entire story of the Alaska economy and it is important for businesses to remember that there is opportunity in difficult times; efficiencies can be enhanced, bargain purchases made, and new markets explored. While the oil and gas industry is facing challenges in the current environment, other sectors might enjoy relative strength. We are fortunate to have healthy fishing, mining, transportation, tourism, hospitality, retail, healthcare, and military complex industries. However, the headlines only read that our state can’t balance its budget.

Previously, the governor said the state just has a cash flow problem and had time to correct the “glide path.” To a banker the most important “C” of credit is “cash flow,” and thus we believe a systemic income statement overhaul of state government finances needs to occur to keep from crashing.

Visioning the problem as if Alaska’s state budget was an airplane:

Many things are required to keep the budget on track or the plane in the air; the state has a large plane but it is only one-tenth of the planes in the air; businesses and industries have their own planes and must work together to ensure safe travel for all. As with any flight, planning and coordination is needed to ensure a safe trip; pilots must remain calm and disciplined in the face of an emergency; the Administration and the Legislature are like the pilots of the state’s budget—collectively they must bring discipline back to the planning and execution of the budget. The state’s reserves are on empty and they are not checking the boxes on the checklist to keep the plane in the air.

The Administration has created a plan that has merit and would be successful in maintaining a safe flight. Community partners, such as the Institute of Social and Economic Research, Commonwealth North, Plan4Alaska, and Alaska’s Future have worked throughout the past year to brief the public and Legislature on the importance of a plan that creates a sustainable budget, or safe flight plan. The state’s plane is in a tailspin and we need to work quickly to recover. We no longer have the fuel reserves to keep the state’s plane in the air.

Like many throughout Alaska, we are concerned about the lack of action taken by the Legislature to course correct for the loss of revenue fuel or uncontrollable cost drag on the plane of the state. This past year was the time to plot a strategic flight plan that would keep Alaska flying in the future. As we are all aware, there is no single solution to solve the budget crisis. The comprehensive budget plan must include all of the following items:

• Cuts to the state budget
• New revenue to include, but not limited to, broad-based taxes
• Use of Permanent Fund earnings

As an aside, Northrim as a corporation pays an Alaska state income tax at the marginal rate of 9.4 percent, one of the highest in the country. We both, as individuals, are willing to pay a personal income tax and/or a state sales tax, and we are willing to give up part or all of our Permanent Fund Dividend to help balance our state’s budget.

It is time to reset the expectations of the Legislature. They must lead by doing what is best for Alaska. Discipline over desire is needed to correct the course of the state budget. As noted earlier, we, the Bank, stand for election every day with our customers and our customers remain loyal to the Bank because we have the discipline to maintain a steady flight plan. Customers (or constituents) appreciate discipline over desire and understand that difficult decisions must be made to keep a plane in the air.

Northrim Bank built its own plane out of the wreckage of a bad economy and we are resolute not to allow our reserves or capital to be depleted or let our systems deteriorate. The realization of getting the Northrim plane off the ground took resolve and alignment just as staying credit diligent and capital strong is required today. We not only have the tools and discipline to keep our own plane in the air safe and sound but also the tools to help other businesses maintain a steady flight path themselves and avoid potential disasters.

In the past year, we have created a program called SurThrival. A program that helps Alaska businesses not only survive, but also thrive during times of economic hardship. It started as a response to the fiscal crisis with the state’s budget and grew in response to a slowing economy and is applicable through many types of adversity. Businesses receive tips that will help them SurThrive in a down economy and Bank officers are available to create a plan for the business to help navigate the turbulence of economic difficulties.

We continue to be cautiously optimistic that the state will solve its budget deficit. This will occur through further decreases in government spending, use of Permanent Fund earnings, and generating new revenue through broad-based taxes. At Northrim, we will continue to advocate for a balanced approach to the state budget issues. There are many tools available to deal with the issue. We also believe that there will be opportunities to SurThrive in the current economic environment.

We ask the Alaska Legislature to vote for a disciplined and sustainable fiscal solution that provides opportunities for all Alaskans to SurThrive.

 

This article first appeared in the October 2016 print edition of Alaska Business Monthly.

 

Economic Luncheon Seminar- The Keys to SurThrival

This week, Northrim Bank hosted three economic update luncheons in Anchorage, Juneau and Fairbanks. The annual luncheons outlined how businesses could ‘Learn to not only survive, but thrive in Alaska’s dynamic economy’. Speakers included Northrim Bank President, CEO and COO Joe Schierhorn; Northrim Bank Chairman, Joe Beedle; Northrim Bank SVP, Senior Credit Underwriter and Bank Economist Mark Edwards; and guest speakers Pacific Portfolio Consulting President and CEO Larry Hood and Chief Investment Officer Jim Ayers.

Guests received an update on Alaska’s economy and a special presentation on the economic issues affecting Alaska and the nation. The presentation from Anchorage is posted below as well as in the ‘Resources’ section of the blog. We invite you to peruse the PowerPoint presentations at your leisure. Economic Lunch Presentation

Northrim also rolled out its new program to help businesses survive and thrive in Alaska. The Bank is calling this ‘SurThrival’. Businesses can take a survey and receive a custom report to help the business prepare for potential challenges in the future. More information about the ‘SurThrival’ can be found at www.SurThriveAK.com or www.Northrim.com.

To wrap up each luncheon, Northrim Bank presented a total of $264,500 to University of Alaska programs. Over the years, Northrim has given over $4 million to Alaskan higher education. Northrim invests in the community and is proud to support organizations that are helping build a stronger community for the future. Northrim is a strong advocate for higher education throughout Alaska and supports each of the major hubs of the University.

• University of Alaska Anchorage Institute of Social and Economic Research $100,000
• University of Alaska Anchorage Small Business Development Center $50,000
• University of Alaska Fairbanks School of Management-$50,000
• University of Alaska Southeast School of Management -$40,000
• University of Alaska Seawolf Debate Program- $10,000
• University of Alaska Ketchikan Campus- $5,000
• University of Alaska Sitka Campus $5,000
• University of Alaska Foundation Chris Knudson Endowment Scholarships $4,500

 

The Legislature Must Act on Fiscal Change this Session

By Joe Beedle

Most everyone agrees that now is the time for action by the Legislature to help bridge the fiscal crisis that our state government faces. What started as a politically difficult conversation is quickly becoming an outright battle to ensure fiscal certainty for basic public services while retaining an investment climate for core business in Alaska.

There are voices coming from many sides of the debate; “don’t institute or increase my taxes”, “don’t touch my dividend”, “don’t take away services” and “cut spending to fix the gap”. In the past, the Legislature followed these conflicting voices, expecting that they may not be re-elected if they did not follow the unconstrained wishes of their constituents. Such lack of discipline has resulted in no corrective strategy implementation.  While it may be important for our elected officials to patiently listen to the self-serving wishes of their constituents, it is now critical to realize that the job of leaders is to do what is systemically best for the State and re-set to a more disciplined and logical fiscal plan now to achieve a brighter future for Alaskans for the long term.

The voices arguing against use of the Permanent Fund earnings and increased revenue sources do not understand that if these items are not part of the equation to balance the budget that in a few short years, there will be no savings or future investment to help us out of the hole. There will be no money to pay dividends or provide for essential government services such as roads, education, and public safety.

Unpopular decisions must be made by the Legislature to ensure that state government can operate without continuing a $4B+ deficit annually until we are broke. We urge the Legislature to move forward to enact a sustainable budget and believe that this includes all of the following options:

• Use of the Permanent Fund earnings
• Thoughtful decreases to the cost of State government and implementation of efficiency measures
• Additional revenue sources that include taxes on individual Alaskans

Emotions run high when discussions involve the Dividend and/or taxes, but Alaskans need to have a stake in the state’s budget and the days of oil paying for the majority of state expenses are over. Alaskans carry the smallest tax burden of any state in the nation and receive dividends, while Alaska has the highest per capita cost of state government. We are currently the only state without a state sales tax and state income tax. All other states have one or both.

Our reserves are running low, as is our patience with the State Government. The time to enact or begin enacting a sustainable budget is now and we have the tools to make it happen, but only if all of the tools are utilized to fix the fiscal crisis, including use of Permanent Fund earnings to provide for substantial and immediate relief.

Discipline Over Desire: Finding Opportunities in a Challenged Economy

This week, Northrim Bank hosted three economic update luncheons. The annual luncheon was held in Fairbanks, Anchorage and Juneau. Speakers included Northrim Bank CEO Joe Beedle, Northrim Bank Economist Mark Edwards, and guest speaker Dr. Bill Conerly, business strategy consultant, online contributor to Forbes and author of Businomics.

Guests were given an update on Alaska’s economy and a special presentation on the economic issues affecting Alaska and the nation. Joe Beedle provided information specific to each region in his remarks. Each presentation is attached below. We invite you to peruse the PowerPoint presentations at your leisure.

Guests were also given a copy of the Alaska Economic Update for Spring 2015 as well as a copy of Understanding the Current Oil Environment. The update was written by Bank Economist, Mark Edwards, and has been highlighted over the past two weeks in Alaskanomics. Both pieces are in the ‘Resources’ section of the blog.  

To wrap up each luncheon, Northrim Bank presented donations to University of Alaska programs. Over the years, Northrim has given over $4 million to Alaskan higher education. Northrim invests in the community and is proud to support organizations that are helping build a stronger community for the future. Northrim is a strong advocate for higher education throughout Alaska and supports each of the major hubs of the University.

• University of Alaska Fairbanks School of Management-$50,000
• University of Alaska Anchorage Institute of Social and Economic Research $100,000
• University of Alaska Anchorage Small Business Development Center $50,000
• University of Alaska Southeast School of Management -$40,000
• University of Alaska Ketchikan Campus- $5,000
• University of Alaska Sitka Campus $5,000

Northrim Bank Economic Luncheon 2015 - Anchorage

Northrim Bank Economic Luncheon 2015 - Fairbanks

Northrim Bank Economic Luncheon 2015 - Juneau

Commonwealth North Annual Assets Review

Commonwealth North hosted its 9^th annual Alaska Assets Review on February 18. The program recognizes that as shareholders of “Alaska Inc.” the citizens of Alaska need to be informed about how the assets of their company are performing. This year Northrim Bank President and CEO Joe Beedle and former Lt. Governor Mead Treadwell presented the performance review.

A bit of a history lesson on the reason Alaska has the wealth of assets that it does. During the statehood debate, it was recognized that the state’s population would likely never have the critical mass to finance government through conventional means employed by other states, primarily per capita taxation. In recognition of the need for Alaska to have means to produce its own revenue, the state was granted 104 million acres of land and mineral rights to significant acreage on federal lands. From this, it was felt that Alaska could build and sustain an economy and pay for necessary government services. The annual program tracks the performance of Alaska’s assets, including natural resources, financial assets and enterprises.

The full report and presentation can be found at www.commonwealthnorth.org. A few highlights of the discussion are below.

Alaska's natural resources are abundant and a large part of Alaska's economy.

• The tax revenue from fisheries has increased and the industry is strong, but there is a potential challenge ahead because not all of last year’s harvest has been sold.
• Within the Division of Mining, Land and Water, Alaska’s land position is strong. The state had 100.4 million acres in FY2014, which does not include the 65 million acres of submerged land acquired at Statehood.
• There are five area wide oil and gas lease sales a year. At the most recent sale in November 2014, 300 tracks were leased for $60 million. There is encouraging development occurring on the North Slope and in Cook Inlet.

Financial assets are an important topic of discussion because of the budget issues being seen in Alaska.

• The Permanent Fund Corporation is strong. In FY2014, the fund saw a 15.5% return, which was only slightly lower than the 15.7% benchmark. There are many investment opportunities that are doing well and the corporation is looking to expand into real estate outside of the United States.
• The Constitutional Budget Reserve is one of the options that could be used to bridge the budget gap. It currently holds $12.8 billion.
• Alaska Mental Health Trust Authority is utilizing their land well and making dividends. The state is served well by their investments.
• Alaska Industrial Development and Export Authority has paid $350 million in dividends to the state since its inception.
• Alaska Housing Finance Corporation paid $30 million in dividends to the state during FY2014. Energy and low income housing programs have benefitted Alaskans around the state.

The state’s enterprises are facing challenges, but are working to stay strong.

• The Alaska Marine Highway operates in the red, but is essential for Southeast Alaska.
• Alaska Energy Authority is also operating at a loss but the situation has not changed significantly in the past few years.
• The Alaska Railroad shows a small net revenue, but is facing some major challenges in federally mandated safety regulations. Its income from freight is strong and will continue with increased activity on the North Slope and in Cook Inlet.
• The International Airport System faces challenges, but the fact that Anchorage has the fourth largest cargo airport in the world helps add revenue.
• The Alaska Aerospace Corporation is also challenged, but lawmakers understand its strategic importance and will continue to fight for its survival.
• The University System has a strong endowment and the investment is doing better than recent years. The system has some challenges ahead but will continue to be a priority because additional human capital is necessary to grow Alaska.

To wrap up, Alaska is challenged, but it is also well funded and well endowed. Many people are working on ways to find solutions to the state’s fiscal problems. Commonwealth North has produced a report for Alaska’s leadership. This report highlights some opportunities to work through the fiscal problems and ways to fix the budget gap. This report, Alaska’s Operating Budget: Critical Crossroads, Choices and Opportunities will be presented in Anchorage on February 25 at a lunch hosted by Commonwealth North.

Alaska Economic Update

This week, Northrim Bank hosted three economic update luncheons. The annual luncheons were held in Anchorage and Fairbanks, and this year Juneau as a result of the acquisition of Alaska Pacific Bank. Speakers included Northrim Bank President & CEO Joe Beedle, Northrim Bank Economist Mark Edwards, and guest speaker Dr. Bill Conerly, business strategy consultant, online contributor to Forbes and author of Businomics.

Guests were given an update on Alaska’s economy and a special presentation on the economic issues affecting Alaska and the nation. Joe Beedle provided information specific to each region in his remarks. Each presentation is attached below. We invite you to peruse the PowerPoint presentations at your leisure.

Guests were also given a copy of the Alaska Economic Update for Spring 2014. The update was written by Bank Economist, Mark Edwards, and in the coming weeks, Alaskanomics will review each of the sections and highlight information in individual blog posts. The full update is linked below.

To wrap up each luncheon, Northrim Bank presented donations to University of Alaska programs. Over the years, Northrim has given nearly $4 million to Alaskan higher education. Northrim invests in the community and is proud to support organizations that are helping build a stronger community for the future.

• University of Alaska Fairbanks School of Management-$50,000
• University of Alaska Anchorage Institute of Social and Economic Research $100,000
• University of Alaska Anchorage Small Business Development Center $50,000
• University of Alaska Knudson Scholarship Fund- $4,500
• University of Alaska Southeast School of Management -$25,000
• University of Alaska Ketchikan Campus- $5,000
• University of Alaska Sitka Campus $5,000

Stay tuned next week for a more in-depth discussion of the economic update.

2014 Economic Luncheon - Fairbanks

2014 Economic Luncheon - Anchorage

2014 Economic Luncheon - Juneau

Economic Report Update

Reviews and Forecasts- Part 2

As discussed earlier, January is busy with various presentations of the previous year and looking forward to the New Year. Commonwealth North joins the discussion by taking an in-depth look at Alaska’s assets from many different angles. The review reports on value, income, and prospects of Alaska’s key assets from the preceding fiscal year; in this case, July 1, 2012 through June 30, 2013. It also tracks performance of those assets and asset managers against pre-identified criteria and metrics.

Joe Beedle, President and CEO of Northrim Bank, hosted the discussion and gave an overview of Alaska’s economic health in 2013. The state’s total GDP grew 1.13 percent to $51.9 billion; while per capita personal income grew 2.75 percent from 2011. Both instances of growth were below the national average. Total net assets were up over 8 percent in 2013 and rose to $76 billion.

Ed Fogles, Deputy Commissioner of the Department of Natural Resources, outlined the past year for the various divisions in his department. Parks and Recreation had a solid year, holding steady from 2012. Oil and gas leases grew slightly over 2012. In 2013, 4.81 million acres of land was leased in 1,696 leases. Petroleum revenue is down, mainly due to lower production, lower oil prices, and the rising cost of production.

Joe returned to give a highlight of the state’s financial assets that include the Constitutional Budget Reserve, Division of Economic Development, Alaska Mental Health Trust Authority, Alaska Industrial Development and Export Authority, Alaska Housing Finance Corporation, Division of Treasury, Alaska Permanent Fund, and the Statutory Budget Reserve Fund. Specific details can be found in the presentation notes on Commonwealth North’s website.

Commissioner Angela Rodell, Department of Revenue, reported on the Treasury Assets. She started by describing how others looked at Alaska. We have very large financial resources that most states would love to have in their possession. The economy and finances are heavily dependent on natural resources, but we do have a great history of conservative oil price and production forecasting. Alaska does have great potential to diversify its revenue through natural gas. As noted in the BOMA presentation, Alaska has a very high median household income, while sitting middle of the pack in unemployment.

The unfunded liability of the pension funds is of great concern to the Governor and the state. At the current rate, the state will owe over $1 billion in payment in a few short years. This payment is nearly 20 percent of the total state budget. The Governor is proposing shifting $3 billion from savings to the pension fund, which will reduce the skyrocketing payments in the coming years and will result in significant savings over the life of the pension fund.

The final part of the discussion centered around the State of Alaska’s enterprises, which include the Alaska Marine Highway, Alaska Energy Authority, Alaska Railroad Corporation, International Airports, Alaska Aerospace Corporation, and the University of Alaska. With the exception of the Aerospace Corporation, all enterprises showed growth in 2013. The enterprises highlight the unique landscape in Alaska. Pat Gamble, President of the University of Alaska, shared the work of the University. The University has seen tremendous capital growth in recent years, as well as asset growth. The University is working to be a viable option for students of all ages and experience. Campuses throughout the state and distance learning opportunities are making a college education more realistic for many Alaskans. 

The luncheon concluded by outlining the importance of our natural assets in respect to the oil investment tax structure and oil exploration and petroleum projects; our financial assets of the permanent fund percentage of value, long range fiscal plan and long range capital project planning, and finally; our enterprise assets investing in our critical infrastructure through railroad, airports, and energy and reliable, affordable energy for all Alaskans.

The full presentation can be downloaded from the Commonwealth North’s website. http://www.commonwealthnorth.org/index.cfm?section=About&page=What's-New&viewpost=2&ContentId=840

Commonwealth North Issues Oil Tax Study; Calls for Changes to ACES

Commonwealth North released their oil tax study report, "Alaska's Oil Investment Tax Structure: Establishing a Competitive Alaska." The Board of Directors and members of Commonwealth North engaged in a four month study to evaluate the primary public policy concerns associated with Alaska's oil tax structure. The study group was headed by Northrim Bank President Joe Beedle and Municipality of Anchorage Office of Management and Budget Director Cheryl Frasca. Study group members heard from oil tax payers, legislators, economists, and informed Alaskans. The data was analyzed, compared, discussed, and the final report produced. The study group determined that the current oil production tax, ACES, adversely affects investment in oil production on the North Slope.

The Commonwealth North Board of Directors approved a resolution supported by the findings of the oil tax study report, urging the legislature to reduce the ACES progressivity rate. Many of the presentations from individuals who met with the study group are available on the study group page.

Commonwealth North Releases Railbelt Energy Study

by Joe Beedle

Commonwealth North, a non-partisan organization active in Alaska’s public policy issues, just released a report entitled “Energy for a Sustainable Alaska: The Railbelt Predicament.” The report was prepared by an energy study group of Commonwealth North members with input from energy experts.

The group listed a number of critical action items to address rising energy costs in Southcentral Alaska, including:

1. Local and state governments should implement measures to encourage conservation.
2. Regulatory agencies, utilities, and commercial interests should work together to quickly make gas storage available to help address deliverability issues.
3. With abundant and inexpensive Cook Inlet gas a thing of the past, Alaska must diversify its energy portfolio.
4. Alaska must encourage development of oil and natural gas, including construction of a natural gas pipeline.
5. Alaska’s policy markers and industry leaders should continue the energy dialogue and take a proactive approach to engage the public on energy issues.

As this year’s president of the Commonwealth North board, I encourage Alaskans to read the report and support its recommendations.