Alaskanomics

Alaska Department of Revenue Forecasts Lower Oil Revenue

Guest Author Scott Goldsmith

The recent Alaska Department of Revenue forecast puts petroleum revenues for the current fiscal year (2014) at $5.116 billion (Revenue Sources, Fall 2013).  This is a drop of $2.142 billion from the forecast made last year at this time.  Most of the decline ($1.679 billion) is in the production tax from $3.779 billion to $2.100 billion.  But both the royalty and the petroleum corporate income tax projections also fell, the former by $.320 billion and the later by $.143 billion.  The petroleum property tax prediction was unchanged from last year.

A downward revision in the forecast had been anticipated because of adoption of a new production tax that took effect on January 1, 2014, midway through the 2014 fiscal year.  The new tax, called MAPA—More Alaska Production Act, which was passed during the last legislative session (SB 21), is designed to stimulate investment in new production by reducing the tax burden a high oil prices. 

However the drop in the forecast is, according to the Department, primarily due to several other factors including a 3 percent downward revision in production, a 4 percent downward revision in the price, and higher than anticipated industry capital expenditures.

Using the lower price assumption and the higher capital expenditures, the Department estimates that the production tax liability under the old tax regime (ACES) and the new tax regime (MAPA), would be almost the same.  This is because the elimination of the progressivity of the tax rate under ACES is offset by the higher base tax rate under MAPA.

If this revenue forecast proves accurate, the state will face a $2.190 billion general fund deficit in 2014 based on anticipated spending of $7.1 billion.  Fortunately the state has about $16 billion in available cash reserves to cover this deficit.

The Department of Revenue also revised its long term petroleum revenue forecast downward.  Cumulative revenues from 2014 through 2021 have fallen $15 billion from $54 billion to $39 billion.  This was the second year that the cumulative forecast fell by a significant amount.  Between 2011 and 2012 the forecast fell $9 billion.

The oil price and production assumptions have not changed much from the forecast made last year. 

However the new production forecast does not include additional production that might result from new investment stimulated by the new production tax (MAPA).  The Department reports a significant increase in the level of investment that may lead to such a production increase.

 

Video: 2013 Alaska Construction Spending Forecast

Associated General Contractors Executive Director John MacKinnon and Economist Scott Goldsmith from UAA’s Institute of Social and Economic Research discuss expected Alaska construction spending in 2013 during the recent Associated General Contractors annual Alaska Construction Spending Forecast.

According to the forecast, construction spending in Alaska in 2013 is estimated to be about $8.4 billion, up 8 percent from spending in 2012. Increased spending in the oil and gas sector will account for most of this growth. Spending in this sector is expected to be up 13 percent, from $3.2 billion last year to $3.6 billion in 2013. Also adding to expected growth, a large state capital budget for fiscal year 2013 and $453 million in general obligation bonds that voters approved for transportation projects in the November 2012 election.

 

Click here to download the full construction spending forecast.
Research and printing underwritten by Northrim Bank.

2013 Alaska Construction Spending Forecast Released; Spending Up 8%

The Associated General Contractors of Alaska released its annual construction spending forecast prepared by Scott Goldsmith and Mouhcine Guettabi of the University of Alaska’s Institute of Social and Economic Research. The report provides an informative review and estimate of construction activity in Alaska for 2013.

According to the forecast, construction spending in Alaska in 2013 is estimated to be about $8.4 billion, up 8 percent from spending in 2012. Increased spending in the oil and gas sector will account for most of this growth. Spending in this sector is expected to be up 13 percent, from $3.2 billion last year to $3.6 billion in 2013. Also adding to expected growth, a large state capital budget for fiscal year 2013 and $453 million in general obligation bonds that voters approved for transportation projects in the November 2012 election.

Click Here to download the full forecast.

Research and printing underwritten by Northrim Bank. 

Is Alaska on a path it can't sustain? "Growing spending and falling revenues are creating a widening fiscal gap," according to ISER.

The University of Alaska's Institute of Social and Economic Research (ISER) recently published the FY 2014 Update on the Maximum Sustainable Yield. In this update, Scott Goldsmith writes that Alaska's state government can afford to spend about $5.5 billion in fiscal year 2014, based on the petroleum net egg of about $149 billion.  ISER presents the latest estimates of the maximum amount Alaska can spend while maintaining a sustainable budget. 

"Right now, the state is on a path it can't sustain," writes Goldsmith.  "Growing spending and falling revenues are creating a widening fiscal gap." 

Right now it looks like the state continues to increase spending, even though estimates are pointing toward a looming fiscal crunch after 2023.  According to Goldsmith, the state should save more and restrict the rate of spending growth - and start doing it now.  It's estimated that if Alaska had $117 billion in cash reserves and the Permanent fund by 2023, we would be on a sustainable path far into the future.  The reality is that today we have half that much in financial assets.  

To read the full report, click here.

For "maximum sustainable yield" of Alaska's oil resources, ISER research shows state budget is $1.2 billion too high

In a web note published this month by the University of Alaska Anchorage Institute of Social and Economic Research (ISER), economist Scott Goldsmith examines the concept of "maximum sustainable yield" applied to Alaska's petroleum resources. With oil production dropping, and state General Fund spending growing 8% per year, the state's savings accounts - perhaps including the $40 billion Permanent Fund - will be the only funds available to make up the difference.

Given the "revenue generating capacity" of Alaska's economy, Goldsmith writes that state spending is too high and growing too fast. The General Fund budget must be adjusted downward, but the amount of the adjustment depends on many factors:

• How Alaska's citizens choose to share the state's petroleum wealth with future generations
• The amount of money yet to be collected from future oil and gas production
• What the state's financial investments will earn
• How the Permanent Fund principal and earnings will be used in a fiscal plan

The web note's analysis shows that Alaska's FY2013 budget (the budget approved by the legislature in April 2012 that runs from July 1, 2012 through June 30, 2013) is $1.2 billion too high for "maximum sustainable yield."

 

 

Federal spending in Alaska more than $10 billion annually; third highest per capita spending in the country

A new report by UAA's Institute of Social and Economic Research (ISER) analyzes federal spending in Alaska. For the last five years, base spending has been about $10 billion per year, but in 2009 and 2010 Alaska received additional funds from the stimulus package - the American Recovery and Reinvestment Act - that added $2.2 billion in additional federal funds.

Defense is the largest category of spending, at 36% of the total, followed by grants to state and local governments and nonprofits at 29%. Direct payments to individuals are about 22% of the total, and spending by civilian agencies was 13%.

• Defense spending was $3.42 billion, with just over half for procurement and just under half for wages.
• Alaska received $2.7 billion in federal grants, with just over half for formula grants (like Medicaid) and just under half for project grants.
• Direct payments to individuals totaled $2.04 bilion, with two-thirds for federal retirement programs and one-third for other direct payments (including Medicare, unemployment compensation and more).
• Civilian agency spending was $1.27 billion, with two-thirds for payroll and one-third for procurement.

In 2008, the year before the additional stimulus spending, per-capita federal spending in Alaska was $13,700 - the third highest in the U.S. and 52% higher than the U.S. average. The report notes that the Alaska differential in per capita spending was once as high as 82%.

Information from "Federal Spending in Alaska: Running Out of Steam?" by Scott Goldsmith. The report is part of ISER's "Investing for Alaska's Future" research initiative, funded by a grant from Northrim Bank.

Alaska's "Nest Egg" Grows along with State Spending; "fiscal burden" of excess spending passed to future generations

Alaska's "nest egg" of money in the bank and future petroleum revenues grew by $29 billion in 2011, according to a web note by Scott Goldsmith with the UAA Institute of Social and Economic Research (ISER). However, state spending in FY 2012 is likely to be $7 billion - $800 million more than ISER's research shows is sustainable. Spending more than the state's petroleum revenues can sustain passes a fiscal burden to future generations and reducing the size of the nest egg. Unless the state reduces spending or finds alternative sources of revenue, the report notes, that fiscal burden will grow every year and the nest egg will shrink at an accelerating pace.

If the state's current and future petroleum revenues were treated as an asset from which the state spent only the earnings, Alaska's wealth would be preserved indefinitely for future generations even as our population grows. The report shows that this fiscal burden is much more sensitive to changes in state spending than to changes in revenues.

The report's research is part of ISER's "Investing for Alaska's Future" initiative, funded by a grant from Northrim Bank. As noted in the report, the opinions in the report do not necessarily reflect those of Northrim Bank.

Video Clip: In the oil and gas industry, maintenance spending, rather than new production spending, is expected to continue in 2012

Construction spending in the oil and gas sector as it relates to exploration vs. maintenance is discussed by Economist Scott Goldsmith from UAA’s Institute of Social and Economic Research and John MacKinnon, Executive Director of the Associated General Contractors (AGC) at the 2012 AGC Alaska’s Construction Spending Forecast in February 2012. Click here to view the full report.

Video Clip: Cook Inlet oil and gas development activity is expected to be up in 2012

Cook Inlet oil and gas development activity is discussed by Economist Scott Goldsmith from UAA’s Institute of Social and Economic Research. Scott was speaking at the Associated General Contractors Alaska Construction Spending Forecast for 2012. Click here to view the full report.

 

Video Clip: Projected Construction Spending in the Oil & Gas Sector

Scott Goldsmith, Economist with the Institute of Social and Economic Research at UAA discusses projected construction spending in the oil and gas sector in 2012 during the Associated General Contractors’ annual Alaska Construction Forecast presentation in February 2012. Click here to view the full report.