Alaska's Fiscal Crisis
Yesterday, I met with a number of Alaskan friends who are private sector leaders.
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All readers of our news and commentary know that since the turn of the century we have been warning of the perfect fiscal storm preparing to ravage the 49th State.
We have described the reasons for Alaska's pending fiscal crisis which have been as clear as "neon painted handwriting on the wall":
Today's related Alaska Fiscal Crisis news:
ADN, by Alex DeMarban. (NGP Photo) BP will reduce the active rig count at Prudhoe Bay from five drilling rigs to just two, a decision caused by low oil prices that is expected to impact oil production and more than 200 contracting jobs while sending negative waves across the state’s oil-dependent economy. …
The decision followed discussions involving Prudhoe Bay partners ExxonMobil, ConocoPhillips and the operator of the field, BP, said Dawn Patience, a spokesperson with BP Alaska. …
The job losses come after other losses in Alaska’s oil industry, said Gunnar Knapp (NGP Photo), director of the Institute of Social and Economic Research.
“That’s a real bummer,” he said. “Every decision of this sort has a consequence for the economy, and the problem is that these are not only a lot of jobs, they are high-paying jobs.”
It also means efforts to stimulate overall North Slope production in Alaska, around 550,000 barrels of oil daily recently, could be delayed. …
Shell and Apache Corp. have in recent months announced they are ending their efforts to find oil in the Alaska region; ConocoPhillips has reduced its Alaska workforce; and oil companies ENI, Repsol and Brooks Range Petroleum have announced project delays. …
Rebecca Logan (NGP Photo), general manager at the Alaska Support Industry Alliance, said the decision will affect between 200 and 300 jobs directly, and remove millions of dollars from the economy as soon as….
At Prudhoe Bay, BP will continue to operate one coil and one rotary drilling rig. In other areas of the North Slope, Caelus is also operating two drilling rigs, ConocoPhillips is operating four and Hilcorp is operating one, Logan said.
ADN Op-Ed by Charles Wohlforth. A new study shows that Alaska’s economy will crash on the scale of the 1980s recession, regardless of how the Legislature handles the state’s deficit. What is being decided in Juneau is whether the calamity will be much worse. (See Below)
Alaska is America's biggest per capita spending state, biggest debtor state per capita; and
- Alaska is nearly 90% dependent on oil for its government's operating budget and over a third of its economy depends on oil investment and spending; and
- Oil is a volatile commodity. When combined with human nature, government officials unwisely increase spending and entitlements when money is plentiful but are loathe to cut spending when volatility produces less money; and
- In addition to low oil prices, Alaska's economic umbilical cord to the great Alaska North Slope (ANS) oil fields, the Trans Alaska Pipeline System (TAPS), is 3/4 empty and on a downward trend; and
- Rather than working cooperatively with oil investors to enhance Alaska's competitive position as an investment destination, many elected leaders have demonized the industry for decades and created a "deal is not a deal" reputation for tax instability; and
- The federal government under administrations of the two last presidents, particularly the current one, have done little to encourage the world class opportunities for energy wealth production on Alaska's federal lands — or anywhere; and
- The feds have in numerous incidents we have documented herein, violated the constitutional right to due process, injuring the "rule of law" and further endangering Alaska's ability to be a self sufficient state (i.e. read, "Remembering the Past"); and
- Our friend, Andy Foster, now brings us news that the enviro-industrial-governmental cabal is bringing political correctness that could put another nail in Alaska's economic coffin to a whole new level — make it unlawful to criticize the "proven science of global warming/climate change," whatever…; and
- With Alaska's available savings accounts within two years of being depleted to feed a multi-billion dollar annual deficit (i.e. and difficult access to the constitutionally protected, $50 billion Permanent Fund), the fiscal crisis is at the State's doorstep; and
- This year, the majority of politicians seem more inclined — despite rhetoric to the contrary — to keep their bloated government and personal benefits as whole as possible by implementing some valid and cosmetic cuts while increasing tax burdens on private sector companies and individuals; and
- The governor continues to initiate new financial burdens on the state, including: expansion of medicaid, and; subsidization of a local government regulated natural gas facility in Fairbanks, and; equity (i.e. risk) ownership in a gas pipeline/LNG export project whose feasibility is as yet unproven.
In this environment, therefore, it is no surprise that the country's financial analysts and credit rating agencies — a number of whom have been our readers for nearly a decade — are warning investors about increased investment risk in Alaska.
The storm clouds are now overhead ready to open up with an epic, economic downpour as elected officials scurry around looking for easy answers … and, as companies and individuals make plans to 'hunker down' or leave the state.
In the last few days, BP has announced a major reduction in Alaska North Slope development — and supporting employment and contracting — that could help sustain the life of TAPS.
Last week, Apache Oil announced plans to leave the state.
Some retail operations are closing and others are showing signs of economic fatigue.
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Yesterday, the somber meeting with my great friends and savvy business leaders demonstrated that the handwriting on the wall during the last decade has been real: "Alaska has developed a bigger spending habit than it can afford."
The "Great Land", the former "Pioneering State", the admired "Last Frontier" is teetering on its last economic legs. It has become just another "welfare state", losing both its balance and reputation as the one place in the United States where personal responsibility and self reliance were slogans to which its citizens proudly aspired.
Thankfully, iconic accomplishments of a few conquering climbers of Mount McKinley, some brave Iditarod mushers and a couple decent Alaska television reality shows have kept a little of Alaska's mystique alive.
But Alaska's economy is now unsustainable. It's politicians have ignored the warnings of its business leaders for three decades. It has ignored both the warnings and recommended remedies of its own, "Institute of Social and Economic Research" (i.e. ISER). It now faces an economic depression greater than the one it experienced in the '80s when the price of oil plunged to the $10/barrel range. Then, Alaska at least had the benefit of a nearly full pipeline and a smaller, less costly government as prices began to recover.
Today, Alaska has a much bigger government, low oil prices, diminishing oil production and a political class that seems to be relying more on a strategy of hope and miracles than calm, deliberate and even sacrificial decision making.
During yesterday's meeting, one of my colleagues said, "This is a really somber meeting." I remember thinking, "It's not really so much a somber meeting as a realistic meeting. In the face of fiscal crisis, it behooves us to be candid and not surprised at our condition." I thought, "How can anyone possibly be surprised; explicit warning signs have been visible and publicized for years."
I offered an observation. "So in leaving our meeting, it might be good to have our position on this situation well considered and ready to offer our friends." I went on, "Government should make decisive cuts in expensive operations we can no longer afford before placing tax burdens on an ailing companies and individual citizens. We should meet or exceed the ISER budget goals by trimming government before trying to enhance revenue." I said, "Every dollar taken from companies and individuals to make government whole, makes the private sector poorer."
In leaving the meeting, I thought, "Honestly, we and our elected officials created this fiscal crisis via our own actions or lack of action. Most ignored the warnings. Decision makers avoided taking minor corrective actions when it would have been easy. Now, our options are fewer: massive spending cuts and/or imposition of massive, new multi-billion dollar revenue streams on a population of about 3/4 million folks."
The first step should be massive cuts in government expenses, leading to a government Alaska can afford through thick and thin, through volatile oil markets of the future.
The second step might be to fund — not "wanted" or even "needed", but only "essential" — services, by beginning to tap the $50 billion, constitutionally protected, Permanent Fund.
Governor Jay Hammond (NGP Photo) created it partly as a rainy day savings account and partly to keep government's hands off an overabundance of oil tax income collected during an era of plenty.
The Administration and Legislature could set an example by using initiative to:
- sell un- or under-used government equipment and facilities, eliminate most state-owned agency vehicles and drive essential vehicles for more years before replacement. Use private sector repair facilities subject to lower budget restrictions.
- rent private sector vehicles, equipment and aircraft where possible, eliminating state employment, facilities and hidden expenses
- state agencies to be given minimal travel budgets; eliminate agency arranged travel and let agency heads approve travel consistent with reduced budget
- eliminating most public relations staff expenses
- eliminating 'assistants to the governor; let the agency commissioners become the governor's advisors without the need for intermediaries
- downsize administrative and legislative office space and quality where possible to "B" standard rather that Class "A" standard, for example. Sell more expensive assets that can be more economically procured
Job losses predicted in new study would rival Alaska's worst ever (See Complete ADN Story With Charts Here -dh)
A new study shows that Alaska’s economy will crash on the scale of the 1980s recession, regardless of how the Legislature handles the state’s deficit. What is being decided in Juneau is whether the calamity will be much worse.
Gunnar Knapp, director of the University of Alaska Anchorage's Institute of Social and Economic Research, downplays the severity of the coming crash if the Legislature picks the best options outlined in the report he presented last month. But the numbers speak for themselves.
The percent of Alaska’s job losses from state budget cuts, taxes and reduction of Alaska Permanent Fund dividends — and all three appear necessary — will be as much or greater than the 7 percent job loss when the economy tanked between 1986 and ‘88.
"That would be what our numbers say," Knapp agreed.
And that’s the best-case scenario.
If the Legislature mishandles the situation, as it appears poised to do, judging by some legislators’ hard-line attitudes, then an economic crash could come with an impoverished long-term future.
After looking at the numbers in the report, I realized we have focused too much on the differences between the current situation and the ’80s crash, when 14 banks and other financial institutions failed and the population shrank by more than a tenth.
The differences are real. In the ’80s, excessive state spending created a bubble in the construction and real estate industries, devastating the economy when the bubble burst. This time we don’t have a bubble. That means the crash will hit slower, hurting industries other than real estate.
But a downturn of similar scale for jobs and income is unavoidable because reduced oil prices and production have stopped the flow of billions of dollars into Alaska, most of which reached our economy through government spending.
“We’ve lost billions of dollars that aren’t coming back,” Knapp told Commonwealth North on Thursday. “We have to adjust to this.”
The report, “Economic Impacts of Alaska Fiscal Options,” doesn’t consider the option of higher oil taxes, which is a gaping and inexcusable hole. But that’s not ISER’s fault. Knapp wasn’t given time or money to adequately look at all aspects of the problem.
Gov. Bill Walker's administration funded the study for $60,000. The Legislature hasn't done even that much.
When we’re done with the current crisis, we should fire legislative leaders who waited until the brink of the precipice to start asking serious questions. Decisions they make now will affect the economic life of every Alaskan, and they are making them in a rush, groping in ignorance, because they didn’t do their homework.
Knapp’s shocking conclusion is that even if the Legislature makes the best choices, closing the current $3.8 billion deficit would cost up to 30,000 jobs in direct and indirect losses. And barring unexpected good news, the real numbers could certainly be worse.
Here’s how those worse numbers add up:
The report looks only at the economic impacts of future changes to state spending and taxation. But the state has already made heavy cuts that have yet to hit the economy, including a reduction in construction spending that will bite in 2017. That billion dollars in reduced capital spending alone will cost around 9,000 jobs, using the factors in the report.
Also, the report doesn’t cover job losses in other basic industries. The oil industry lost about 9 percent of its employment in 2015 and will lose more. Mineral and fish prices are down and the strong dollar could discourage overseas visitors. The U.S. Department of Defense is still considering force reductions in Anchorage. Those other industries aren’t in a free fall like oil, but they’re not in a position to pick up slack, either.
The study also doesn’t capture how job losses could compound themselves if business people lose confidence and fundamentally change course.
This is the impact GCI president and CEO Ron Duncan emphasized as he mobilized business and labor leaders to push the Legislature for a solution. Duncan said that if the Legislature doesn’t balance the budget this year — or set itself on a clear path to do so — businesses including his own will halt investment, cancel plans, lay off skilled staff and send money outside the state to pay down debt or invest elsewhere.
Knapp’s report tracks how money flows through businesses, but not how they might change their basic behavior.
“He is looking at only the portion of the economy that is driven by government. He isn’t looking at the private-sector reaction, and the private-sector reaction will be uncontrollable,” Duncan said. “We’re looking at an absolute economic cataclysm.”
That alone explains his activism with the Legislature to get action this year, Duncan said.
“We won’t have any choice but to start dismantling this company, and so will any other private sector company,” he said. “I do not want to spend the next three years dismantling what it took me 40 years to build. That thought makes me sick to my stomach. But I won’t have any choice.”
Duncan and others hope that a balanced fiscal plan, like the one proposed by Gov. Bill Walker, would get the pain over with and provide certainty in the economic outlook. Knapp recommends spreading cuts and tax increases over two years to reduce the shock, but others would prefer to pull off the Band-Aid quickly to hasten the day when growth can return.
Either way, having no plan at all is unacceptable, creating the prospect of greater pain later and the possibility of a cascading “uncontained failure,” as Duncan puts it.
That danger may be hard to believe because the recession hasn’t shown up yet. We’re in a moment like crossing a mountain snow cornice that is cracking, before the inevitable avalanche has started. Maybe some quick thinking now can keep us whole when we hit the bottom. But we are going down, one way or the other.
“Alaska’s situation today is a fundamental loss of the way we earn our way in the world,” said economist Gregg Erickson. “I don’t think there is any doubt that we are headed for the deepest recession in Alaska’s history as a state.”
Scared yet? I am. But I’m not leaving, so I’m digging deeper into Knapp’s report to learn how we can soften the fall and protect those most vulnerable. I’ll cover that in my next column.
Charles Wohlforth’s column appears three times weekly.