Alaskanomics

Population trends in rural and urban Alaska

By Tim Bradner

There is an overlooking strength in Alaska’s economy. It is the surprising durability of the state’s rural communities, even small and remote villages. Data from the 2020 census is now being pored through by demographers and economists and it showed that the vast majority of rural villages increased in population in 2020 compared with 2010, a trend that’s contrary to the narrative of increasing outmigration from rural to urban Alaska.

In fact, urban Alaska, the state’s larger communities, lost population, except for the Matanuska-Susitna Borough, which gained as part of a long-term trend.

Here’s why stable rural populations are important: It means there’s money there that is supporting people. And, this is important to larger Alaska communities because rural people make purchases in urban Alaska and spend money there. 

This is all complicated, of course. State demographers say rural populations are growing because more babies are being born than elders dying. There’s still outmigration to larger cities but also a counter-migration of rural people who moved to town deciding that city life isn’t all it’s cracked up to be, and who go home.

It is important to know more about this, whether working-age adults and women of child-bearing age are moving or staying put. Analyses of Permanent Fund Dividend application trends will illuminate this, but that will take time.

For urban Alaska, economists at the state Department of Labor and Workforce Development can document a steady outmigration of working-age adults from Alaska to the Lower 48, where the economy is strong.

This decline is very concerning to business leaders who worry about having enough workers in 10 or 20 years, and it makes the apparent stability of rural Alaska, which are mostly Alaska Native, all themore important. This is where lot of our future workers may come from.

Meanwhile, what’s propping up rural communities? Where’s the money coming from?

The fact is we really don’t know. Anecdotally, we know that federal funds supporting local tribal services like health care support more jobs than they did a few years ago, and that dividends paid to shareholders by private Alaska Native corporations formed under the Native land claims settlement are increasingly important.

The growth and development of Alaska tribes is a relatively new development and will soon be even more important because much of the new federal infrastructure money for rural areas will be channeled through tribes.

Native corporation dividends are also increasingly important. Many of the corporations, which are private, are guarded about releasing financial data, which is their right. We do have information from the ANCSA Regional Association, however, that dividends paid to Native corporation shareholders in 2018 ranged from $300 to $3,700 per 100 shares, the amount depending on the financial performance of the corporation.

Although it is now dated, a 2012 U.S. General Accounting Office report to Congress said $165 million was paid to shareholders in total in 2010. Keep in mind that not all ANSCA shareholders live in Alaska, though most do, so only part of these dividends enter the state’s economy.

However, it’s likely that more of a Native corporation dividend paid in Alaska stays in the economy and is spent to pay bills and buy durable goods, than a state Permanent Fund Dividend (there’s evidence that some of the state PFD is simply saved or used for college tuition and never enters the economy, at least in urban Alaska).

We don’t have recent data but it seems reasonable to assume that ANCSA corporation dividends are contributing more to the rural Alaska economy because the corporations are doing well in their investments in out-of-state businesses as well as in-state activity like mining and oil and gas support.

Natural resource development on Native-owned lands is a factor, of course. The Red Dog lead and zinc mine in northwest Alaska, for example, is on lands owned by NANA Regional Corp., the regional Native corporation, and NANA shareholders working at Red Dog are help sustain small villages in the region.

But these don’t explain all of the stability of rural communities. After all, if rural Alaskans have more money they also have the resources to move, if they desired. It’s obvious that many desire to stay put, and they now have resources to do that, too.

There are a lot of reasons staying put, however, such as family and cultural connections. Also, a big legacy of the 1971 land claims settlement is that 45 million acres of federal lands were returned to Native ownership, a big part of these around Native communities.

Owning land doesn’t always mean exploiting it for financial gain. There’s also the simple pride of ownership and instinct to protect the land and use it to help preserve culture.  

While the land claims settlement created opportunities to stay home, it also created a rich array of educational and professional opportunities for young Native Alaskans, and reasons to leave.

Many talented young people indeed went off to college and got advanced degrees, many from prestigious U.S. universities. Many of them brought their education home and today help manage the Native corporations and their subsidiaries.

Most of the corporate offices are in larger communities because that’s where most of the businesses they own are located. But the new, younger managers, now highly educated, still have roots and family in rural Alaska (and corporate boards mostly from rural regions), and have a bias, if not board direction, to help sustain the communities they grew up in.

This wasn’t always the case, of course. Until the new generation of educated young Native Alaskans took over these corporations were mostly run by non-Natives with little understanding or interest in rural Alaska.

That’s changing, and the web of corporation and tribal development now helping sustain small communities is a great strength for all of Alaska.

Tim Bradner is editor and publisher of the Alaska Economic Report

Governor Dunleavy's FY22 Budget

By Tim Bradner

Gov. Mike Dunleavy has proposed basically a status-quo budget for next year, at least on the expenditure side. What’s unusual is how the governor proposes to fund principal elements of the budget without imposing new taxes.

The governor proposes expenditures of $4.3 million in unrestricted general fund, or UGF, spending. That’s down from $4.6 billion in UGF in the current year, which faces a $854 million deficit.

Budgets for most state agencies are expected to remain about the same. This is important for natural resource industries who say state resource and regulatory agencies must be adequately funded so permits can be done properly, meaning they can be defended in court, and issued on a timely basis.

The $300 million apparent reduction next year will be funded in ways that won’t affect agency operations, one example being an off-budget funding plan for the state’s required matches to federal funds for highways and airports funding and supporting the state’s village safe water program.

This proposal would have the state’s Alaska Housing Finance Corp. issued revenue bonds to fund these expenditures rather than funding them from state general funds, which is the usual approach.

The most surprising of the governor’s proposals, however, is a plan to exceed the annual Percent-of-Market-Value, or POMV, annual draw on Permanent Fund earnings to fund $5,000 Permanent Fund Dividend checks for Alaska citizens in 2021.

If this were to happen, which is uncertain, it would likely draw a sharp reaction from financial markets and analysts who watch Alaska’s handling of its finances.

The three principal government bond rating agencies, Standard and Poor’s; Moody’s Investor Services and Fitch Ratings, applauded Alaska in 2018 when it first adopted the POMV as a healthy diversification of state revenues away from volatile oil income.

Alaska got a heathy bump up in its bond ratings when the Legislature adopted Senate Bill 26, which set the framework for the POMV and limited the annual draw to 5.25 percent of a five-year average of the Permanent Fund’s market value (the draw will soon drops to 5 percent).

However, the rating agencies also said they would watch Alaska closely to see if the state’s leaders have enough financial discipline to stick to the 5 percent limit. What the governor is now proposing would cause the draw to approximately double the limit.

The governor says he can make a case for exceeding the limit temporarily. The state’s economy in bad shape due to COVID-19 impacts, and many Alaskans need help to pay bills. The Permanent Fund has seen an extraordinary runup in its value in recent months including the Fund’s earnings reserve, the account that can be legally drawn on to pay the annual POMV and the dividend. Why not share some of this windfall with the people at a time they really need it, the governor asks?

Analysts in the rating agencies might be persuaded that exceeding the POMV limit one time might be acceptable if there were a dire emergency but they might be skeptical of exceeding it just to pay large dividend checks to citizens.

Despite its natural resource wealth, and large Permanent Fund, Alaska does not have a track record for responsible financial management given the reluctance of political leaders to impose revenue measures that are traditional in other states, like a state sales tax or even a higher state gasoline tax (Alaska’s is the lowest in the nation).

Financial analysts would also doubt that the extra draws would be temporary. Having exceeded the limit once it will be unlikely that political leaders can resist the temptation to dip repeatedly into the Fund’s earnings particularly in election years.
It is the PFD itself that creates this problem. Even with oil revenues down the state comes close to balancing its budget thanks to the annual POMV draw. It is the desire or pay a dividend of any size that creates a large deficit and the need for an extra draw on the Fund’s earnings.

If the Legislature agrees with the plan the bond rating agencies would almost surely lower Alaska’s debt rating. This would have negative affects not only on state bonds but also for the state’s independent corporations and many municipalities.

It would also come at an awkward time because of another proposal by the governor for a $350 million capital projects general obligation bond issue.

Under the Constitution voters have to approve general obligation bonds in a state general election, and the next one is in November 2022. Projects to be included for bonding have yet to be selected but presumably they would include infrastructure.

The governor has mentioned “roads to resources” to aid new minerals and oil and gas development but deferred maintenance on state, school and university buildings might also be included.

With interest rates expected to remain low for the next two to three years it might be a good time for a capital projects bond program. However, if the state’s credit rating is lowered because of the large PFDs, the offering of new debt will come at a higher cost to the state.

Tim Bradner is copublisher of the Alaska Economic Report and Alaska Legislative Digest

Economy struggles amid pandemic

By Tim Bradner

Alaska’s economy is struggling. The COVID-19 closures of business and institutional employers last spring had a heavy impact, leaving thousands of Alaskans suddenly unemployed.

Several billion dollars of federal emergency aid were pumped into the economy through enhanced unemployment benefits and business loans and grants, and these helped soften some of the impacts, but those were temporary measures that will expire.

While a gradual reopening of Alaska’s economy is allowing many Alaskans to return to work this is still tenuous, and employment is still far below levels of early 2020.

There is room for optimism if the COVID-19 virus can be kept under control. So far Alaska’s rates of infection, hospitalizations and deaths are far below national averages, adjusted for population, but it still may be 2023 before the economy returns to its pre-COVID 19 levels, economists at the University of Alaska Anchorage’s Institute of Social and Economic Research have estimated.

Several of Alaska’s basic industries have been severely affected. The state’s oil and gas industry was hit hard by the crash in oil prices as the economic slowdown effected major parts of the developed world, causing demand for fuel to plummet.

Alaska’s tourism industry has effectively lost an entire year with the cancellation of cruise ship visits for the summer and concerns for health while travelling among independent tourists who might otherwise have come to Alaska by air or highway.

It is still uncertain how COVID-19 will affect Alaska’s commercial fisheries, also an important industry. Seafood processors and harvesters are working under strict health protocols, but these have increased costs for the industry. Meanwhile, there are concerns for seafood demand with key segments of the market, like “white tablecloth” restaurants still shut down, and uncertainties in transportation and demand in Asia.

On a brighter note, demand for fuel products is picking up and Alaska oil prices gradually rose above $40 per barrel in June from essentially zero a few weeks previously. If the trend continues past the $50 per barrel threshold North Slope producers may put drill rigs back to work and resume preparations for new projects, work that was largely halted in March when the COVID-19 crisis hit.

Other sectors of the economy, like minerals production and personnel and support work at Alaska’s several military installations are either stable or growing. Alaska’s producing mines are operating normally, with heath safeguards in place. While summer exploration is expected to be down work is continuing on certain major prospects, such as the Donlin Gold project on the Kuskokwim River and a significant new gold discovery in the Yentna mining district in the western part of the Matanuska Susitna Borough.

International air cargo flights through Anchorage’s Ted Stevens International Airport are actually up, according to data from the airport system.

Although many of these are “gas and go” stopovers for refueling, many flights are also operated by major freight operators like Federal Express and United Parcel Service, and these companies operate facilities and employ a substantial number of Alaskans.

In broad terms, the overall outlook is for a gradual return to normalcy, with temporary setbacks still possible. However, there may be lasting changes, as yet unknown, on the pattern of work, schooling and life in Alaska as well as elsewhere in the world.

However, one problem remains unresolved and it still adds uncertainty to Alaska’s recovery.

This is the continued structural imbalance in state government finances, the lack of a secure revenue system as government costs, mostly for public services and protection, continue to rise gradually while the state’s ready liquid asset reserves are depleted.

For decades, oil production and revenues funded most of the state budget, allowing for a generous expansion of public services and major infrastructure construction. The Permanent Fund Dividend, or PFD, was established to shares Alaska’s oil wealth with its citizens. It is unique in the world.

Alaska’s annual spending of several billion dollars a year of its oil revenues has been a major foundation of its economy, the PFD itself adding a billion dollars or more in recent years to the economy. This has spurred consumer spending, although many Alaskans save their dividends, and part of it is in any event subject to federal tax.

However, long before the COVID-10 crisis hit the underpinning for this – the economic health of the state’s petroleum industry – has been in increasing jeopardy. North Slope oil production began declining in 1988 and has continued to drop.

The decline was flattened for a period after the state Legislature passed an oil tax reform bill in 2013 but it has now returned and is expected to accelerate in the next three years.

While there are new oil discoveries and possibilities that the decline can again be flattened if work can be resumed on developing these new prospects there is also a ballot initiative pending in the November state general election that would substantially increase state taxes on petroleum. If voters approve Ballot Measure No. 1 it would double state taxes on Alaska’s largest oil fields, hitting the industry hard just as it struggles to regain its footing.

Meanwhile, the outlook for state finances, which can no longer be supported by oil, is highly uncertain. The state had built up hefty cash reserves during a period of high oil prices but a prolonged price slump starting in 2015 required the Legislature to draw down these reserves by several billion dollars a year.

Although state spending was cut by a billion dollars a year, or about 20 percent, over this period, the Legislature also had to wrestle with multi-billion-dollar annual deficits.

There was little real alternative to the deficits because simply cutting spending in to match available revenues over those years would have required huge spending reductions which would have crashed the economy.

In its response the Legislature chose to draw down assets by $18 billion from liquid reserve funds by between 2016 and 2019, and this now leaves an estimated $2 billion in the Constitutional Budget Reserve, or CBR, the state’s main liquid asset fund, as of July 1.

An estimated $1 billion deficit for FY 2020 and an expected, but unknown, deficit for FY 2021 (wildfire costs are always an uncertainty) will draw this down further.

The state’s CBR fund will be essentially exhausted except for a minimum needed to pay recurring expenses, like payroll, during the year.

There is, or course, the earnings reserve of the Permanent Fund, which is still ample, but although it can legally be spent (the principal of the Fund cannot be spent) it is still part of the Permanent Fund and should not be spent because that would the long-term growth of the Fund.

One positive note is that as oil revenues declined the Legislature has opted to diversify the state’s revenue sources by allowing, for the first time, some of the Fund’s earnings to help support the budget. Previously the Fund’s earnings were used only to pay the PFDs and to inject an “inflation adjustment” of earnings into the principal of the Fund. In 2018 the Legislature adopted a percent-of-market-value, or POMV, mechanism to allocate 5 percent of the Permanent Fund’s realized, or cash, earnings to help support the budget.

This has resulted in about $3 billion a year now being available for the budget and reducing the state’s dependence on oil income. While there are risks with depending on financial market performance for public revenues, just as with oil income, a five-year averaging mechanism on the POMV is expected to smooth out any effects of volatility.

Even with that, however, deficits remain. For FY 2021, the budget year that began July, traditional state revenues including from oil are expected to total $1.15 billion. The POMV draw from Permanent Fund earnings will total $3.09 billion. Total state funds available for the budget total $4.24 billion. When the $680 million expenditure for the PFD is added, a deficit of $982.2 million is projected.

While this appears down from the FY 2021 deficit of $1.3 billion, which included costs for the heavy summer, 2020 wildfire season, it is likely that unforeseen events, like more fires, could add to the $982.2 million current year deficit now estimated.

What is interesting about this estimate is that had the $680 million expenditure not been made the deficit would be reduced to $302 million. A modest increase in taxes would have covered that.

While there are still funds in the CBR reserve the current year deficit will not only deplete the fund but require other sources of income to meet ongoing cash costs, legislative finance analysts now say.

This means the state will have to find other ways to meet its ongoing commitments, and some margin of savings are always needed in case there are emergencies, like from an earthquake.

Short-term borrowing in debt markets, through issuing revenue-anticipation notes, is always possible, but this has costs. There are a handful of other reserves than can be tapped or borrowed from, like the Power Cost Equalization fund, which now has about $900 million.

This is now used to pay subsidies to rural utilities to offset high residential power costs in small communities and using this fund as the state’s “checkbook” for its costs, even if the borrowing is repaid, will reduce the PCE’s earnings, jeopardizing the payments to utilities.

The Legislature will be tempted, with the CBR fund nearly depleted, to reach into the Permanent Fund’s earnings reserve. But this will have consequences. For every $1 billion that the state takes from the reserve, money available under the POMV declines by $50 million in future years, financial analysts to the Legislature have concluded.

Bond rating agencies will take a dim view of this. Firms like Moody’s Investor Services, Standard and Poor’s and Fitch Rating Services are aware of Alaska’s circumstances and were heartened two years ago when the Legislature approved the POMV and its 5 percent limit on draws from the Fund’s earnings. The agencies increased the state’s credit rating on its bonds, which also affect ratings on most Alaska municipal bonds.

If the Legislature were to choose to exceed the 5 percent limit while also ignoring the state’s substantial unused tax capacity (there is no state personal income tax or sales tax) and attempting to continue a PFD payment it would only underscore Alaskans’ inability to deal with their finances. Our credit ratings will sink.

At this point it seems inevitable that the Legislature will face difficult choices. It has to enact some form of broad-based tax like an income or sales tax, end the PFD or cut public expenditures, which would inevitably jeopardize education and public safety.

Continued spending reductions are likely in any event, and many of these will take the form of costs passed down to local governments. They, in turn, will have to increase local taxes.

It was long known that Alaskans will have to eventually deal with their finances. COVID-19 has only accelerated this.

Tim Bradner is copublisher of the Alaska Legislative Digest and Alaska Economic Report

Alaska's Permanent Fund during a pandemic

By Tim Bradner

The times are uncertain, for sure. COVID-19 and its effect has dealt a blow to almost all parts of our economy, from tourism to trade, to oil and gas and potentially fisheries. State revenues are under new pressure as oil prices implode.

There is one thing to be thankful for: Alaska’s Permanent Fund.

Even before COVID-19 the Fund had become an important stabilizer for the state budget because state oil revenues had not recovered from the 2015 oil price collapse before the new one hit.

The Fund now provides about $3 billion a year to support a state general fund budget of about $4.5 billion. Oil revenues were to have provided about $2.2 billion, and non-oil revenues (state insurance, motor fuel, fisheries and minerals taxes) bring in about $500 million. Oil revenues will now be less, so we’ll still have a deficit.

The point, however, is that for the foreseeable future Permanent Fund earnings will likely contribute twice as much as oil to the state general fund. For this we should thank our state’s leaders in adopting Senate Bill 26 two years ago, which established a percent-of-market-value formula in state law to set a maximum draw from earnings of about 5 percent a year.

A “POMV” mechanism for annual payments is common with endowments such as those of big Ivy League universities and large charitable foundations.

When the Fund’s total value is over $60 billion this works out to about $3 billion annually. What’s important is that the actual payment is based on an average Fund value for the five previous years, which keeps the payment steady even if financial markets take a big tumble, which they have. That means we can count on this for at least this year and next.

If financial markets don’t eventually recover the averaging will eventually catch us because if one bad year in five preceding years becomes two years, or three, the 5 percent annual draw will go down.

How far down? State financial analysts are modeling different scenarios, but it could mean a drop of several hundred million dollars in the POMV payment in five or eight years. But that can be planned for, at least.

In the near term we have urgent economic issues in our state that need immediate attention. The federal and state economic aid packages will help, but more will be needed.

Meanwhile, there are some aspects of the current crisis that should concern us in our new dependence on Permanent Fund earnings. We shouldn’t get too comfortable.

For example, under the state Constitution we can only draw on earnings of Fund, not the principal. The earnings are held in a separate Earnings Reserve Account.

As of Feb. 29 the earnings reserve held about $17.8 billion but a $4 billion transfer from the earnings to the principal of the Fund, an additional $700 million for inflation-proofing, both approved by the Legislature last year, and $3.1 billion for the Fiscal Year 2021 POMV are committed to be paid from this. The $4 billion and $700 million transfers to the principal happen on June 30, the end of the fiscal year, unless the Legislature acts before then to reverse these.

But with those accounted for the adjusted value of the earnings reserve would be approximately $10 billion. That’s still a lot, but not as much as $17.9 billion.

But is $10 billion is enough for a little over three years of $3 billion annual POMV draws? Maybe of maybe not, because there’s an additional complication.

State statutes allows only realized, or cash, earnings to be withdrawn. Part of the value of the earnings reserve is in unrealized, or market, gains. If these assets are sold the proceeds are realized gains and can be included in the POMV transfer. But if they are not sold, they cannot be transferred.

In normal times this wasn’t a problem because the only draws on the earnings were transfers from the earnings account to the principal to offset inflation in the principal and to the state General Fund to pay for the annual Permanent Fund dividends, or PFDs. Dividend payments required over a billion dollars annually to be withdrawn from the earnings, depending on the amount of the PFD that year. Last year’s $1,600 PFD required $1.14 billion to be transferred to the state general fund, for example.

Nowadays the $3 billion POMV payment to the general fund must be considered. Currently the PFD payment is included in the $3 billion, so with $1.14 billion taken out for dividends about $1.86 billion is left for the budget this fiscal year.

What’s important about this is that Permanent Fund trustees and its staff must now ensure that there are enough realized (cash) earnings in the till when the cash-call comes for the POMV payment.

As of March 16, there was about $7.9 billion in realized earnings, which seems comfortably enough for two years of $3 billion annual draws and maybe more because there will be more realized earnings coming in. A big portion of the Fund is invested in bonds which make steady interest payments and real estate that brings in rent income, all of which are realized (cash) income. These are not as affected by market volatility as stocks.

A two-year margin and maybe a little more are not enough to be comfortable, and the margin could narrow if the annual 5 percent draw is exceeded, for example to pay larger PFDs as a stimulus to the state’s economy. Some Alaska political leaders are calling for that.

Meanwhile, there are consequences to working with narrower margins. One is that the Fund’s managers now have to be more sensitive to the larger cash draws and will have to manage the asset portfolio with those in mind. It could lead to a more short-term focus for investment strategy, which we have not had to do before.

The Fund has always prided itself on managing for the long term and not worrying about near-term market fluctuations or needs for cash withdrawals. That may be changing now.

Tim Bradner is copublisher of the Alaska Economic Report and Alaska Legislative Digest

Power Cost Equalization

By Tim Bradner

There’s an urban myth that energy costs in rural villages are heavily subsidized. The facts indicate that it’s more complicated.

Power Cost Equalization, or PCE, is a state program that does help reduce some, but not all, rural residential electricity costs. But there are limits to what’s included in the state’s support, and they have been substantially reduced over the years.

What is also important is that commercial enterprises in rural communities, from small grocery stores to fish processing plants, are not eligible for PCE support and pay the full rate charged by a local electric utility.

PCE was originally set up to pay the difference between average power costs in large communities like Anchorage and Fairbanks, and small villages like Napakiak, in the Yukon-Kuskowkim Delta. It doesn’t really do that, however.

Meera Kohler, president and CEO of Alaska Village Electric Cooperative, explained this in a presentation in Juneau last March to the House Special Committee on Energy. Currently, only 29 percent of all electricity sold in small rural communities is eligible for PCE. Commercial enterprises do not get PCE support and neither do state and federal facilities including schools. This means there are 6,000 electricity customers in rural communities who pay full rate, Kohler said.

For residential consumers only the first 500 kilowatt hours a month gets the support. Any use of power over that, and 700 kilowatt hours a month is considered normal, pays the full rate. Any consumer delinquent in his or her utility bill gets the PCE subsidy cut, too.

Some community buildings do get limited PCE support as do water and sewer plants, washeterias and local streetlights, but only up to a limit of 70 kilowatt hours per resident per month.

PCE has been steadily reduced since it began in 1986. The percentage of total power generation costs supported by PCE in 1986 was 32 percent. By 2017 it had been reduced to 16 percent of generation costs even though the population in eligible communities had increased from 62,042 in 1986 to 83,850 in 2017. Total sales of power more than doubled during that period, but the costs covered by PCE dropped by half.

This is good news, of course and it is explained by the increasing efficiencies of village diesel generation plants, thanks to improved technology and investment by rural utilities like AVEC as well as support from the state through Alaska Energy Authority programs.

The development of renewable energy like wind and hydro in small communities in recent years has also helped. Another program of the state energy authority helps fund small renewable energy projects through the Renewable Energy Fund, or REF, but local communities contribute a match to the state grants.

PCE is aimed at helping defray the cost of diesel generation which still supplies most of the electricity in rural communities – it doesn’t subsidize the renewable energy production.

While the program has indeed helped narrow the difference between electricity costs in large and small, diesel-dependent rural communities, there is still a gap even with the support.

In 2017 the average cost of power sold by Chugach Electric Association in Anchorage was about 20 cents a kilowatt hour, or kwH, Kohler told the legislative committee. In Napakiak, in the Yukon-Kuskokwim Delta, the average cost was about twice that, and the same with small villages in the mid-Kuskokwim River region, she said.

However, in some communities that have the benefit of wind or hydro, or both, enjoyed rates below Anchorage. For example in Kotzebue, where wind supplements diesel, the rate was 19.3 cents per kwH in 2017; in Kodiak, where wind and hydro now almost completely displace diesel, the 2017 rate was 15.3 cents per kwH. Juneau, Alaska’s capital city, depends on hydro for most of its power, and enjoys Alaska’s lowest cost of power, about 12 cents per kwH; in 2017.

Power cost equalization as it now exists was created in the mid-1980s when fuel oil prices were high and very high in rural communities because of transportation costs. At the time the state was also enjoying huge revenues from North Slope oil production, which had started in 1977.

The Legislature worked to use the state’s new oil wealth in efforts to reduce energy costs across Alaska. Several hundred million dollars were spent, in cash, to build hydro plants in Southeast Alaska and in Kodiak and near Valdez in Southcentral. To serve the state’s large population centers in Anchorage, the Mat-Su and Fairbanks, an ambitious plan to build a large hydro project on the Susitna River north of Anchorage was developed but then dropped due to high costs (the idea was resurrected in recent years but then again abandoned).

Rural Alaska was extremely difficult, however, with dozens of small communities spread over a hug land area. Legislators and state officials worked hard at it concluded there was no “silver bullet.” The only workable idea was a partial-support program that was modeled on a temporary, early version of PCE implemented in 1980, which was also the first year Alaska received substantial oil revenues.

Even PCE was no magic solution for rural energy problems. The Legislature came back several years later with the Renewable Energy Fund to help support small renewable energy projects where local conditions are suitable, and this has helped.

Today the projects helped by the REF are displacing millions of gallons of diesel that would otherwise have had to be purchased. However, the state has had to throttle back its support for the REF because of lower oil revenues.

But what has been accomplished is helping and there are continuing, and encouraging, technological advances for rural energy supported not only by the state energy authority but also the University of Alaska’s Center for Energy and Power.

Innovations in using surplus power from wind projects to heat community buildings are well along in practical application and researchers, and rural utilities themselves, are exploring ways of using solar, even at northern latitudes, as well as local geothermal resources where they exist.

What PCE does today is help buy time for rural Alaska as these new ideas are developed into workable energy solutions.

 

Tim Bradner is copublisher of the Alaska Economic Report and Alaska Legislative Digest

Gov. Dunleavy trims $220 million from state’s FY 2020 budget through vetoes

By Tim Bradner

Alaska Legislative Digest

Through line-item vetoes to HB 2001 made Aug. 19 when he signed the current year state budget, Gov. Mike Dunleavy reduced spending in the FY 2021 state budget by $220 million, offsetting part of the $375 million added to the budget by the Legislature in the FY 2020 (current year) budget. With these vetoes, the FY 2020 operating and mental health budget, including previously enacted legislation, now totals $4.193 billion in Unrestricted General funds (UGF), $883.6 million Designated General funds (DGF), $702.1 million Other State funds, and $2.7 billion Federal funds according to an analysis by the governor’s office.

Key programs and services vetoed in HB 2001:

• Public Broadcasting: $2.716 million cut  

Note: Emergency broadcasting and satellite service to rural communities will remain

• Dept. of Environmental Conservation: $3.42 million cut

Note: This mainly “program receipts” in the Dept. of Environmental Conservation budget for the Ocean Ranger program to monitor cruise ship pollution. The program is paid for by passenger fees, and the state actually earns more than is spent. The passenger fees will remain but will be spent for other purposes, as yet undefined

• Medicaid: $50 million cut

Note: This is a $50 million reduction of state funds for Medicaid. How the department will deal with this is unknown. Since Medicaid services to low-income Alaskans are federally-mandated unless the state receives a waiver, program costs will continue to be paid. There is likely to be a Medicaid supplemental budget request in the 2020 session

• Behavioral Health Treatment and Recovery Grants: $6.1 million cut

Note: The state administration points out that since 2015 state funds for behavioral health treatment and grants have increased by approximately $58 million due to changes in Medicaid and improved access by providers to Medicaid

• Adult Public Assistance: $7.47 million cut

Note:  Payments will be reduced beginning Jan. 1. Access by recipients to the Supplemental Nutrition Assistance Program (SNAP), or food stamps, will be enhanced

• Nome Youth Detention and Treatment: $2 million cut 

Note: The administration claims the facility is underused. Youths now being served can be relocated to secure facilities in Fairbanks, Anchorage, Bethel or Juneau

• Medicaid adult enhanced dental: $27 million cut

Note: Limited emergency dental services will be offered for Medicaid recipients after Oct. 1. Routine dental services will be offered through nonprofit health centers

• Village Public Safety Officer (VSOP) program: $3 million cut

Note: The administration claims that new federal money is now going to tribes and the state Dept. of Public Safety to enhance security in rural communities

• Alaska Community Assistance Fund: $30 million cut

Note: This was an appropriation to further capitalize the Alaska Community Assistance Fund which the administration claims is not needed. It will not affect a $30 million distribution in FY 2020. However, with reduced capitalization the FY 2021 community assistance payments will be reduced by one third

• Lesser amounts were vetoed from appropriations for rural airport maintenance ($46,000); the Alaska Marine Highway System ($5 million)

Key programs and services restored in HB 2001:

• $21.5 million to Senior Benefits Program
• $110.25 million to the University of Alaska
• $8.8 million to Early Learning Programs, including Head Start, Early Childhood Grants, Parents as Teachers, and Best Beginning
• $759,100 to Alaska Legal Services Corporation
• $809,100 to Online with Libraries and Live Homework Help
• $3.8 million to Alaska State Council on the Arts
• $100,000 to Office of Veterans Affairs for an additional Veterans’ Services Officer
• $2.2 million to Human Services Matching Grants and Community Initiative Grants
• $533,500 to reopening the Utqiagvik Law Office
• $2.7 million to Agricultural Programs*

* Much of the agricultural program restoration is in program receipt authority, for examples where farmers pay for state crop inspections needed to sell farm products to major grocery chains. The program receipt authority had been vetoed earlier but was restored after farmers in the Mat-Su valley complained

Permanent Fund Dividend Battle in Juneau

By Tim Bradner

These are interesting times for Alaska. After several years of recession, the state’s economy appears set for recovery. But now there are concerns over the heated debate in Juneau on the state budget, the amount of the annual citizen Permanent Fund Dividend, or PFD, and the structure agreed last year to use some of the Permanent Fund’s earnings to support the budget.

These could raise new uncertainties and again undermine business confidence.

Last February, Gov. Mike Dunleavy proposed a new state financial plan with sharp spending reductions, reflecting the governor’s desire to “right-size” the budget so spending matches recurring income.

Oil revenues, which once supported robust state operating and capital budgets, took a sharp fall in 2015 when crude oil prices fell sharply. Since then prices have shown only modest recovery.  

During his campaign last year the governor pledged to “fully-fund” the PFD through a formula that has been in state law since the 1980s.

The formula, which many say is now obsolete, calls for one half of the Permanent Fund’s realized earnings, meaning cash income, to be paid out in the annual PFD. Realized earnings includes bond interest, rentals of property and sales of equities or other assets.

The dividend calculation using this approach is done on an average of the past five years of earnings to avoid one-year bumps, up or down, due to unusual events in financial markets.

This formula has been followed over the years and has worked mainly because the Permanent Fund was smaller and the dividends were relatively modest. A growing Permanent Fund has resulted in steady growth, over time, of the PFDs.

With the Fund’s market value now at over $60 billion, the 2019 PFD, following the traditional formula, would be about $3,000, with about $1.9 billion distributed to citizens.

However, in the midst of the state’s financial crisis in 2016 former Gov. Bill Walker reduced the dividend to assure more money would be available for traditional state services, like education and public safety. The Legislature did the same thing in 2017 and 2018 amid the continuing revenue shortfalls.

What Walker and the legislators did, which was to fund the PFD at less than the statutory formula, was legal despite the existing statute.

That’s because state Constitution gives the Legislature the ultimate authority to appropriate funds, for the PFD or any other purpose. If money is short, the PFD appropriation can be cut.

The Legislature’s authority to fund at any amount or even to not pay a PFD, was made iron-clad by a state Supreme Court decision reaffirming that the dividend a state program like others, like schools or the state troopers, and subject to legislators’ decisions.

What has now created a dilemma is that the Legislature set up an internal conflict when it passed Senate Bill 26 last year. This was a landmark bill that established, for the first time, a framework for structured withdrawals from the Permanent Fund’s earnings reserve to help fund the budget.

This is not money from the Permanent Fund itself, which is protected, but from the Fund’s earnings reserve, which holds the accumulated and unspent income and is available for appropriation.

The PFD was not part of the 1976 decision. This came later, put in state law in 1982 as a way to give individual Alaskans a direct share of the oil wealth and to create a citizen constituency to protect the Fund from politically-inspired spending of its assets.

The conflict is that Senate Bill established a mechanism with a percent-of-market-value to determine the annual withdrawal, similar to the way most large endowments work in support of universities or charities. The Legislature chose 5.25 percent and after three years 5 of the Fund’s value, averaged over five years, as the annual limit. Withdrawing more money beyond that would cut into the Permanent Fund’s long-term sustainability.

However, the 5.25 percent withdrawal must cover funds for the state budget as well as the PFD. If the dividend grows at a rate that is different than the overall market growth of the Fund, because the PFD is linked to realized cash earnings, there is a dilemma.

It is that a growing PFD, as a share of the 5.25 percent (or 5 percent after 2021) means fewer dollars for public services. That means services must either be cut or new revenues obtained, most likely by taxes.

The conflict is illustrated by Gov. Dunleavy’s proposed “full-funding,” which would divert several hundred million dollars away from public services next year unless there were taxes, which is unlikely in the near term. 

To solve this problem many legislators believe a fixed allocation could be made within the POMV with a certain percentage for the dividend and a certain percentage for the budget.

The idea of a 50-50 share has many supporters. Such an approach would have money for the PFD increasing at the same rate as money for the budget, eliminating the squeeze on the budget money caused by the formula link if the dividend to realized income.

Two important problems with the realized income approach is that large bumps in cash income, for example through a sale of a major asset, could artificially raise realized earnings, and the PFD, even if there were no change in the underlying market value of the Fund.

It’s unclear as this is written how this will play out. The Legislature has rejected, for now, the large $3,000 PFD and has established a special task force to work out a revision of the formula. The governor still wants the large dividend, however, and has cards left to play, including vetoes of parts of the budget.

It’s a fluid situation – there could still be budget havoc, creating economic uncertainties.

Alaska’s state government is never dull.

 

Tim Bradner is copublisher of the Alaska Legislative Digest and Alaska Economic Report.

 

Post-Election PFD Discussion

By Tim Bradner

What’s significant about the state 2018 state elections wasn’t who got elected – Alaskans have seen Republican governors and Republican-led Legislatures before – but rather how much of the campaign centered on how big the Permanent Fund Dividend will be.

Instead of talking about challenges facing our state government – how to improve schools, slow the growth of health care costs, or how to pay for the $2 billion backlog of maintenance on state facilities – the candidates focused how much cash the state could give away. And this is in a time when Alaska’s finances are still precarious.

In 2015 the state’s revenues were took a nosedive after oil prices collapsed. Alaska’s oil revenues dropped from about $5 billion to $1 billion that year. It was a scary time. To preserve cash Gov. Bill Walker vetoed part of a $1.4 billion appropriation for the PFD, trimming it to $700 million.  That cut the dividend amount, of course, and voters noticed. As governor, Walker took responsibility for his veto. Legislators did same thing the following year, reducing the PFD by about the same amount through an appropriation action in the budget.

As 2018 approached candidates in the elections were quick to take advantage of this with promises to “fully fund” the PFD. Commitments were made not only to fully fund future PFDs but to go back and refund amounts that would have been paid over the last three years. These promises were made without fully reckoning the costs, but voters now expect them to be fulfilled. The amount of money involved is substantial.

According to estimates from the state Office of Budget Management, if the state were to send out a supplemental PFD payment for the current year and the previous two years, the check would amount to $3,701 per recipient at a cost of $2.4 billion.

The money would be taken from the Permanent Fund’s Earnings Reserve, the same account we now depend on to partly support our state budget.

Some background: “Fully funding” the PFD refers to a state law that guides how the PFD amount is to be calculated. That’s if there is a PFD, and the money is available.

This is important. The statute doesn’t guarantee a dividend, it only says how the payment is to be calculated. Essentially, it’s about half of the Permanent Fund’s cash income averaged over the previous five years.

Most Alaskans are confused about this and the campaign talk this year didn’t help. Under our state Constitution only the Legislature can appropriate funds (not the governor) and legislators can vary the amount. They can follow the statute (“fully” funding), appropriate less or even more. It’s totally up to them. The PFD is only a line item in the state budget, no more important than funding for education, state troopers or fish and game management. The Legislature has to decide among these budget items.

What’s important is that we only have a finite amount of income. If we spend more on dividend, following the formula in the statute, there’s less available for traditional public services, schools, troopers and so forth.

Of course, we can always raise taxes. We could enact a personal income tax or raise oil and gas taxes to get new revenue to offset the higher PFD. But if we don’t want to do that the choice is a higher PFD or cuts to public services.

The money involved is considerable, too. That’s why elected officials may come to regret easy promises made during the campaigns.

What’s needed is a discussion of what the PFD really is. Do we want it to be an entitlement, like Social Security? Many now look on it as an entitlement. Or should it be something that mainly helps lower income and middle-lower income Alaskans?

Many Alaskans use their PFDs for basic necessities and many save it for college tuitions, and those are worthy uses. There’s a darker side, too, however. Alcohol-related violence and domestic abuse tend to spike at PFD time, when checks are distributed in the fall.

More affluent Alaskans, upper middle income and upper income, often say they don’t need the PFD. A lot of these dividends are spent on vacations, or simply saved. That is money that doesn’t enter the economy.

Maybe we should have a means test, which is commonly used for many public safety-net programs, so that people in certain income categories get the PFD. This would leave more money available to support public services.

This conversation needs to happen because if we do “fully fund” the PFD in the future the funds lost to the state budget will get large, about $1.2 billion a year by 2023 according to the OMB. That’s as much as we spend to support K-12 education.

The dividend will grow, of course. By 2023 it would be $3,760 per recipient and growing. For a family of five, that $18,800 per year. A dividend that large could really start to attract people to move to Alaska just to get the dividend. Under the state’s residency rules, which have been upheld by the courts, we can’t deny their eligibility.

Interesting, and challenging, questions. Our politicians may regret having made some of these promises.

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

Optimism for North Slope Oil

By Tim Bradner

Those new oil discoveries announced recently on the North Slope are pretty remarkable. It wasn’t too long ago that we’d pretty much given up on major new finds, at least in areas open to exploration.

Now billion-barrel new fields are being found. They aren’t super-giants like the Prudhoe Bay and Kuparuk River fields but the discoveries like ConocoPhillips’ new “Willow” and “Pikka,” now planned for development by Oil Search, an Australian company, are still very substantial.

We have a real possibility of actually increasing the amount of oil flowing through the Trans Alaska Pipeline System. Even if that doesn’t happen it seems a sure bet that production from the slope will at least remain stable. In fact, it has been essentially stable over the last two years. For that, let’s give a hand to the operators of the large existing fields. The Prudhoe field, operated by BP, still produces about half of the North Slope oil. There’s also ConocoPhillips, the Kuparuk field operator, and Hilcorp Energy, which manages several smaller fields on the slope.

Keeping production steady is no small feat given 6 percent annual declines we’ve seen in past years. TAPS was built to carry 2 million barrels a day since 1989 production has dropped to about a fourth of that, to just over 500,000 barrels daily.

It’s important to remember, too, that stemming the production decline in large fields like Prudhoe and Kuparuk, done by squeezing more oil out of the rocks, is just like finding new oilfields.

A lot of Alaskans are hoping for some really big new discoveries, the kind that will really move the needle on production, from the Arctic National Wildlife Refuge, a highly prospective area where there will soon be lease sales.

But ANWR is a crap-shoot. Even the best exploration prospects could be dry holes. Look no further than Shell’s spectacular flop in 2013 at the highly-touted Burger well in the Chukchi Sea, or the failure of Mukluk, a costly Beaufort Sea well drilled in the early 1980s in which companies like Sohio and BP had great confidence, but proved to hold water, not oil.

The new discoveries, which all around the Colville River and in the northeastern National Petroleum Reserve-Alaska west of Prudhoe Bay and Kuparuk, seem pretty good bets, in contrast.

Oil has been found and the wells have been flow-tested, so companies now know they can actually get hydrocarbons out of the rocks.

Cumulatively, what’s now discovered could bringing tens of thousands of new barrels of oil per day to TAPS in the near future.

What’s remarkable is that these finds are in areas like the northeast NPR-A that have been explored for years by companies, but without commercial-scale finds. Why are discoveries being made in what was until recent years considered a lot of caribou pasture?

New technology is one answer. Explorers continue to improve their ability to spot potential underground oil traps in geologic formations previously thought unproductive, and once the oil is found to commercially extract it.

Companies are also quick to credit state tax changes made in 2013 for this, which were very controversial at the time. The tax changes improved the economics of finding and developing new oil set the stage for a burst of new exploration.

The pace of new technology gains has been a real surprise, however. Companies are rapidly improving their ability to drill horizontal production wells, essentially wells drilled sideways. These enable explorers to reach underground prospects several miles from the surface location of a drill rig. It means companies can explore and then produce from a wide expanse of subsurface acreage, a huge financial savings of surface infrastructure.

There are also “multi-lateral” wells, another development, that involve as many as five wells drilled underground from a single vertical well to the surface. These lateral wells can target several oil formations which can be produced through one surface production pad and set of flow lines and utilities instead of several sets if the deposits were developed on a stand-alone basis, as done previously. Again, huge savings.

These technologies are now being combined, with horizontal drilling and multilateral wells used together, and when new methods of profiling and mapping underground rock layers are added we see savings enough to allow tens of millions of barrels of new oil resources to be at an economic even point at oil prices below what they are today.

This is a breakthrough. Previously we assumed $90-per-barrel and $100-per-barrel oil prices would be needed to develop new North Slope oil. Now companies say $60 may be enough, and for some deposits near infrastructure even less.

Here’s the best part: A lot of these new technologies are being developed right here in Alaska. Horizontal drilling, on a commercial scale, was pioneered by BP in the 1980s for Prudhoe Bay.

Horizontal drilling on the North Slope set the stage for shale oil and gas development in the Lower 48, where horizontal wells are used, and that has upended the world’s petroleum industry.

Multilateral wells were similarly pioneered in Alaska, by ARCO Alaska (predecessor to ConocoPhillips) a few years later.

Alaska, in effect, is an applied technology laboratory for the industry because the gain, in new oil, is substantial enough to offset the risk. Alaska contractor companies get the benefit of experience with this, also. Alaskan-owned Doyon Drilling is now operating some of the world’s most advanced drill rigs with horizontal drilling capabilities.

All in all, we’re in a good place, with experienced companies, huge untapped resources, and now oil prices moving up.

Tim Bradner is editor of the Alaska Economic Report and is the 2018 Atwood Visiting Professor of Journalism at the University of Alaska Anchorage

State Budget Update

By Tim Bradner

It will take a while for its significance to sink in, but the Legislature’s adoption of a plan to use certain Permanent Fund earnings to help support the state budget is a historic milestone. For the first time since North Slope oil revenues began pouring into the state budget in the late 1970s we have diversified the state’s revenue base.

There’s more to be done, of course. There’s still a deficit, but it’d smaller and more manageable, maybe $500 million for next year compared with – ugh! - $3.7 billion in 2015.

Accomplishing this has taken three years and it’s not unusual for a major change in state policy to take several years. It just takes a while for the Legislature, and indirectly to public, to get their arm around a complex problem. This was, because it affects the Permanent Fund, was particularly sensitive.

There are still problems, too, such as built-in pressures in the budget that will push costs higher, such as health care costs for public employees and teachers, and retirees. Getting a handle on those costs is now a major objective of the state administration.

But we’ve come a long way. State budget director Pat Pitney ticked off some of the accomplishments in a July 13 talk with members of Commonwealth North, a business-focused public policy group based in Anchorage.

Here are some highlights from Pitney’s presentation:

• In 2015 we had a $6.1 billion state budget (general funds, undesignated) but only $2.3 billion in revenues after oil prices crashed.
• Today the budget is $4.7 billion – a 30 percent reduction – and the deficit would shrink to $700 million assuming oil prices at $63 per barrel, the official state forecast. Oil prices are already averaging above that and the deficit is likely to shrink to $500 million. If prices average $73 per barrel over the next year there will be no deficit.
• The spending cuts have not been easy. Today there are 2,900 fewer workers on the state payroll than in 2015. About 1,500 of these are from state executive branch agencies and 1,400 are from the University of Alaska. The savings from these reductions amounts to about $25 million a year in wage and salary outlay.

What if nothing had been done? If the Legislature had not authorized the Permanent Fund earnings draw in Senate Bill 26 and if spending had not been cut the state would face a $3.1 billion deficit in FY 2019. “We have covered 80 percent of this with spending cuts and the Permanent Fund earnings,” Pitney told Commonwealth North. About $1.4 billion of this can be attributed to the cumulative reductions in expenditures and $1.7 billion to money taken from the Permanent Fund earnings reserve this year.

Pitney cited one example of expenditure reductions, in travel. “We’re spending 40 percent less in travel this year than in 2015.”

There are several “shared services” initiatives including facility maintenance, where a pilot program being done in Juneau is being expanded statewide.

Efforts to streamline services in agencies that serve the public directly, like the Division of Motor Vehicles and the business licensing group in the Department of Commerce are getting satisfactory reviews from the public. Much of this is being accomplished through wider use of on-line service.

This hasn’t been easy for some state employees used to the old ways, Pitney said, but the administrative services staff in the different agencies, who tend to the budgets, “are on board with it.”

Discomfort from disruption is understandable. “People want to know, ‘who’s my boss?’ We think it will take about five years before people think this is normal,” Pitney said.

To date, however, reductions have been the “low-hanging,” or at least the “mid-hanging” fruit. Deeper reductions, if they are made, will require major reorganizations. It’s not certain that the Legislature, or the public, will agree to this, either.

In the 2018 legislative session, for example, the Legislature actually ordered increases for certain programs above what was recommended the Governor. One example, while small, was telling: The administration had recommended elimination of $100,000 in grants to community libraries and museums. Legislators added it back.

In another case lawmakers authorized new money as “innovation grants,” for schools to research for new, improved curriculums for certain academic studies.

In health care, where there are major concerns over rising costs, the Department of Health and Social Services is beginning to implement experimental demonstration programs in delivery of health services to Medicaid patients.

The belief is that improved service will make for healthier people and lower costs in the long term.

Legislators also gave the governor his requested increases for public protection and crime prevention, although there was intense public pressure to do more to combat rising crime.

A point Pitney made is that the Legislature, and the public, may have reached the point where they sense enough cuts have been made, and that more reductions will cut into services people really care about.

“Right-sizing” government will always be an imperfect process. Legislators can never know precisely what the right level is. In the end it’s a judgement call. But when push back starts, when legislators back away from cuts and start adding back, it’s a signal.

Tim Bradner is copublisher of Alaska Legislative Digest and is the 2018 Atwood Visiting Professor of Journalism at the University of Alaska Anchorage