Budget Sustainability And Moderate Energy Policies

Alaska’s House Speaker In Today’s Op-Ed Explains Why “It’s Not Easy”

Gov. Walker’s Permanent Fund bill faces defeat in House

by

Dave Harbour

Alaska’s House Speaker, Mike Chenault. NGP stock photo by Dave Harbour

We have been relentless in urging the legislature and governor of Alaska (i.e. and elected officials of other energy producing states and Canadian energy provinces as well), to 1) adopt moderate and reasonable oil and gas taxes, royalties and regulatory controls, and 2) structure intelligent budgets that can withstand the commodity volatility that comes with reliance on energy income, and 3) reject temptations to socialize industry activities and create larger, entitlement populations.

Moderating Energy Policies

Moderating tax and royalty and regulatory policies attracts energy investors.  Since oil and gas are capital intensive businesses, governmental policy must give comfort to those who would risk hundreds of millions — or billions — in a local area.  But if those investors have confidence in the integrity, fiscal certainty and durability of governmental policies their investments can create enormous benefits for local citizens.  Their capital intensive activities attract all manner of support companies with well compensated employees whose spending injects vitality into the entire economy.

There is another factor almost always ignored or taken for granted.  Capital intensive oil and gas wealth production sustains local, state and federal governments (i.e. their programs and public employees), schools, ports, non profit services, public safety, and virtually all other activities.  Without those investors risking big money in our jurisdictions, we would either have to cut government down to a smaller size and see our economy implode with the exodus of our neighbors … or tax ourselves to make up the difference.

Many oil producing areas are sharing the financial and political challenges of Alaska now as all of our “people intensive” governments and businesses try to figure out how to compensate for the contraction of the “capital intensive” energy sector.

So as Alaska, North Dakota, Alberta and other highly dependent fossil fuel wealth producing areas suffer with low energy prices, now is a good time to reflect on how we might all redouble our efforts to attract energy investors with more reasonable, moderate policies.  After all, it’s actually more in our self interest than theirs.  We live here.  They can move their operations, over time, to competitive areas more dedicated than we have been to providing moderate energy policies.

Structuring Intelligent Budgets

In today’s Op-Ed (Scroll down), Alaska House Speaker Mike Chenault (NGP photo above) points out the difficulty in creating what an objective observer might call an, “intelligent budget” in a political environment.

Both Chenault’s House and the Senate are composed of coalitions spanning the philosophical spectrum.  Some want to sustain government at the expense of higher private sector taxes.  Some want to sustain entitlement programs at the expense of general government services and the private sector.  Some are convinced that the private sector that pays for government should be kept whole at the expense of government cuts.  Some want more taxes.  Some want to spend state savings accounts as budget subsidies.  Some want to use earnings from Alaska’s over $50 billion Permanent Fund.

The result: Chenault says some costs have been cut but other efforts to increase sources of income have failed.  That means that the state — even as its creditworthiness is being downgraded by the major credit rating agencies — will spend more billions of its savings to subsidize government over the next year.  Absent a huge increase in oil production and/or oil prices Alaska’s fiscal crisis will be even more critical next year than it was in 2016.

Lucky for some of the retiring legislators this year that the November elections will select their replacements to solve Alaska’s fiscal Gordian knot next January.

A sustainable budget policy for Alaska, in spite of this year’s Herculean legislative effort, remains An Elusive Dream (i.e. “and now, we’ve left Alaska, because there was no gold mine….”).

Reject temptations to socialize industry activities and create larger, entitlement populations

In the midst of its fiscal crisis Alaska’s governor, with support from the legislature, is funding equity ownership in a gas pipeline/LNG project.  This comes at a time when LNG prices are historically low and the number of LNG competitors is historically high–and when certain legislators and the governor have actually had the temerity in the last year to threaten the state’s largest investors with a gas reserves tax.

So politicians believe it to be popular to try to achieve greater profits from Alaska’s rich North Slope gas reserves by pouring public money into ownership of a transportation scheme to monetize the gas.

We have urged public officials to avoid equity ownership in private projects for many more reasons that we should repeat here.  But the state’s savings, subsidizing the budget will go dry within a couple years.  Under this circumstance, why would one liquidate those savings faster on a risky project that has not been approved, whose feasibility may never be proven.  And why invest hundreds of millions now, when the project — even if it were successful — could not begin to provide returns both of and on the investment for about a decade?

This is not to even mention the governor’s fixation with government subsidies and loans and project management focused on creation of a new natural gas utility for Fairbanks citizens, whose cost of service could be more than their present fuel oil utility bills.

But entitlement programs may be Alaska’s biggest burden over the long haul.  This is because politicians are tempted to create entitlements when oil cash is plentiful.  Yet, because entitlements are ‘permanent’  the whole populace is committed to funding them when oil cash is scarce.

In rich times, conservative politicians are lulled or intimidated into accepting new entitlement program proposals by liberals in exchange for new public works projects.

The growth in entitlement programs produces an explosion in beneficiaries of those programs whose propensity will always be to vote for the liberals who safeguard them.  Public works (i.e. capital spending) produces additional tens of thousands of beneficiaries who also tend to vote for and spend big dollars supporting liberal political candidates.  So, ironically, liberal candidates for public office benefit as much or more than conservative politicians from capital spending.  This is particularly true in a state whose public employees are unionized and whose ‘little Davis-Bacon’ law requires that ‘prevailing wages’ (i.e. union scale) be paid to public works project workers.

Conclusion

We draw readers’ attention to all of these dynamics to describe how difficult it is in a democracy, and especially in Alaska’s democracy today, to develop a sustainable budget.  We believe that a sustainable budget would  1) tax and regulate citizens/businesses fairly, 2) would be more logically driven than politically directed, and 3) avoid the temptations of creating too generous entitlements, too many capital spending projects and too much public risk by engaging in private sector equity adventures.

Perhaps understanding the complex dynamics at work is the best effort citizens can make right now to prepare for fiscal challenges in 2017.

Instinctively, it seems the best intelligence, the best judgment, the best diplomacy and the best intent are required to resolve what looks to be the biggest crisis in the young history of America’s 49th state.

Op-ed by Representative Mike Chenault, Speaker of the Alaska House of Representatives

(Also appearing in the Alaska Dispatch, here)