ALASKANOMICS: Today we observe Alaska’s unsolved fiscal crisis and conclude that special interest advocates will ultimately create the “lowest common denominator” solution, which may be neither logical nor an answer to the fiscal mismatch between government income and spending. Follow Alaskanomics for reliable updates! -dh
Alaska Senator Lesil McGuire
Alaska state senator Lesil McGuire offers the opinion piece below on how to use some of the Alaska Permanent Fund earnings for a partial solution (Read more)
On June 6, the Alaska Senate passed a historic measure, sponsored by the governor, to restructure the Permanent Fund. I have been working on this since January 2015. Since the vote last Monday, I have received many responses from Alaskans. Some have been in support, and some have expressed extreme displeasure. I believe the vote on Senate Bill 128 was the most important vote I have taken in my 16 years of service, and I wanted to make sure some things are clear.
Alaskans have been benefiting from our oil for decades. It has paid for our schools, hospitals, clinics, ports, harbors, public safety, roads and more. We have put it to work. What SB 128 does is allow us to use our finite asset in an infinite way: to benefit generations of Alaskans through a dividend check while funding critical services.
Since the trans-Alaska oil pipeline was completed, Alaska has relied on a single commodity for up to 90 percent of our state revenue — oil. If I were to write a book on the last 40 years of Alaska history the major theme would be: price per barrel of oil multiplied by volume in the Trans-Alaska Pipeline System.
That has been our budget and that has been our story. The wild swings of a commodity market have seen us in prosperity and in deficit. We cannot control the commodities market; we are at its mercy. We are all in this together.
Over the last 18 months, the price of oil has collapsed. Over this same period of time, the Legislature has made good on its promise to cut the size and cost of government. We have cut $1.2 billion from the budget over the last two years. We have made reforms and found efficiencies in critical areas like Medicaid, criminal justice and the Power Cost Equalization program. Still, Alaska has a deficit of over $3 billion this year.
One thing is clear: We cannot cut ourselves out of this deficit. Some may say further cuts are needed, and I agree. Our major cost-drivers are not capital projects or oil and gas credits. Education funding is $1.4 billion, and health and social services are $1.2 billion. That equals $3.6 billion of a roughly $4.3 billion budget. These are critical pieces in understanding why further cuts are hard and will take time, and why we need a restructuring of the Permanent Fund now. We must be strategic with our budget and with our assets.
One thing that strategic money managers do is make their assets work for them. Alaska is blessed that former leaders saw the boom of oil and, knowing it was temporary, set up the Permanent Fund to share these one-time gains across generations of Alaskans.
Still, the Permanent Fund is our single largest asset. To date, the earnings from the corpus of the fund have only ever been used to pay out the annual dividend. I wholeheartedly support the dividend program — that is why I voted “yes” on SB 128 — to preserve the program. Without reform, the dividend program will go away. It will cease to exist.
I cannot restate this enough: Without a structural change the dividend program will stop.
We cannot cut ourselves out of the deficit. Our Constitutional Budget Reserve will be gone in two years, and at that time, we will have to use the earnings of the Permanent Fund or shut down government. Under that scenario, does anyone think there will still be a dividend paid out? I do not, but we can save it if we act now. SB 128 is the biggest thing we can do to save the dividend.
Some have said SB 128 takes money out of the pockets of hardworking Alaskans to be used to pay tax credits to oil and gas companies. That is a convenient talking point, and would be powerful if it were accurate. The budget as a whole is like a pie, you can cut the pieces based on desired funding and results. It could just as easily be said any reduction to a dividend under SB 128 would go to fund education, troopers, road maintenance, or health care for the elderly.
Fairbanks News Miner by Max Buxton
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Alaska Governor Bill Walker
The oil and gas tax credit bill passed by the Alaska Legislature this week could spur another change in direction for the Interior Energy Project.
At the request of Senate Finance Committee members, Gov. Bill Walker is considering putting a hold on the project’s selection of a source of natural gas while Interior Alaska Native corporation Doyon, Limited, conducts its summer oil and gas explorations in the Nenana Basin.
As the Finance Committee considered extending the “Middle Earth” tax credits in May, some legislators wanted assurances that Doyon would have a market for gas it might find. The credits are for fields outside the North Slope and Cook Inlet.
The Interior Energy Project was on course to finalize a partnership with Salix, Inc., this fall to build a natural gas processing facility in the Cook Inlet. As was explained in a letter sent to Walker on May 14, the legislators worried the Interior Energy Project’s plan would preclude the Interior buying presumably cheaper gas from the Nenana Basin.
“We could support the extension of Middle Earth credits,” the letter signed by six of the committee’s members said. “However, as a state, one could conclude that we seem to be competing against ourselves by supporting both projects.”
Finance Committee Co-Chair Sen. Anna MacKinnon, R-Eagle River, said in a Friday interview with the News-Miner that spending state resources on a Cook Inlet plant while providing tax credits for explorations in the Interior didn’t make sense.
“The gate price (for Doyon’s project) would be substantially less than what is being bid,” she said. “We don’t want to get in the middle of the governor’s process, but it was raised as an issue that if we’re going to continue the Middle Earth credits … why would we want to be competing with ourselves?”
MacKinnon said the request is only to slow the decision on sourcing gas for the Interior Energy Project and not any other part related to gas distribution or gas conversions.
Fairbanks Republican Sen. Click Bishop signed the letter, but fellow Fairbanks Republican Sen. Pete Kelly did not. Kelly could not be reached for comment Friday.
The project with Salix is estimated to begin delivering gas to the Interior in early 2018. Doyon Lands and Resources Vice President Jim Mery told the Alaska Journal of Commerce the company could potentially begin delivering gas to the Fairbanks area in 2019.
Walker’s response on May 17 indicated he was open to the idea but warned that he was not certain about the legal hurdles of switching partners this late in the process.
“Your request for a six-month decision delay indicates a time frame of October/November; that being the case, and all other considerations taken into account, the resulting 60-day delay does not seem unreasonable,” he wrote. “I will require a legal analysis to determine the legality of a delay and to determine if potential liability exists.”
With the plummeting price of a barrel of oil, the cost for heating oil has dropped close to the Interior Energy Project’s target for gas. That’s given Fairbanks residents substantial relief from the high heating prices that lead to the creation of the project in 2013. It’s also given the project more time to work on lowering the cost of the project to make it more attractive to local residents.
Walker spokeswoman Katie Marquette said the governor is still considering the request and has yet to make a final decision.
$1,000 is nothing to sneeze at!
by
Andrew Jensen, Alaska Journal of Commerce
Only in Alaska could a guaranteed $1,000 to every man, woman and child be considered a rip-off.
Only in Alaska could such an unrealistic attitude take hold fueled by widespread expectations that everything should be paid for by the federal government funded by U.S. taxpayers and the state government funded almost entirely by a single industry.
Those who have opined that the Permanent Fund Dividend has created an unhealthy sense of entitlement among Alaskans have been proven more right than wrong over the past couple days as the howls of “raids” on the Fund and claims of outright stealing from people’s back pockets emanate from internet cowboys’ (and girls’) keyboards and legislators from both parties.
For a state filled with people who endlessly espouse the refrain of “it’s our oil!” it’s a small wonder that in the 39 years of oil flowing through the Trans-Alaska Pipeline System many have not bothered to think about what being an owner state means.
Owning the oil means owning the risk. If some Alaskans don’t want to ever feel the brunt of commodity price cycles then they should quit saying “it’s our oil!” and say what they really mean about the treasuries of the companies who produce it: “it’s our money!”
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That’s what it looks like when the state constantly moves the tax levers to take in more at high prices and then take in more at low prices as if the oil companies are nothing more than a money printing press for the government.
The attitude of these Alaskans, reflected by a majority of the House and Gov. Bill Walker, are downright Venezuelan.
To put things in perspective, ExxonMobil finished 2015 with $3.7 billion in cash on hand. Even if the state could seize it all Hugo Chavez-style, it wouldn’t cover this year’s deficit. ConocoPhillips, the state’s largest oil producer, finished 2015 with $2.3 billion in cash on hand. That would cover a little more than half of next year’s deficit.
The state, meanwhile, has nearly $54 billion in the Permanent Fund and nearly another $8 billion in the Constitutional Budget Reserve. It will take in more than $1.1 billion this fiscal year from the oil industry despite the fact the producers spent a good chunk of this year losing money on every barrel.
Since the Swanson River discovery in 1957, the state has taken in nearly $116 billion in unrestricted petroleum income and has paid out more than $21 billion in dividends since 1982. But to hear the loudest voices tell it, we’re getting hosed by the oil companies.
You’ll never hear them talk about the 10 Democrats who controlled the Senate from 2006-12 and passed bloated budget after bloated budget and approved ever-escalating government union contracts that have raised the state payroll to some $1.4 billion.
Yes, Republicans controlled the House back then as they do now, but maybe someday the Democrats will be called to account for their spending habits as well, which included billions of dollars in tax credits under ACES that dwarfed PFD distributions in several years while production continued declining by 6 percent per year.
And what has the state done with that money? Alaska still has some of the worst education and health outcomes in the nation.Its state employees get generous raises every year for achieving nothing more than an “acceptable” review on their performance, if they’re evaluated at all.
The damage that will be done to the state from loss of oil production and loss of jobs will far outweigh the damage from distributing the historical average from the Permanent Fund as the Senate voted to do.
Media reports and Democrat talking points are that the PFD has been “halved” under this bill. Cutting it to $1,000 from a projected $2,000 is indeed cutting it by half.
It would also be accurate to say that the PFD has been capped for the next three years near the historic average of $1,089 per Alaskan. The average total distribution since 1982 has been $621 million compared to the $700 million that will be sent out this year.
To put it bluntly, the idea of spending $1.4 billion on PFD checks in the midst of a $4 billion deficit is insane, and those who advocate for the PFD being the No. 1 spending priority for the state are irresponsible.
The PFD was less than $1,000 in 2004, 2005, 2012 and 2013. It was less than $1,200 in 2003, 2006 and 2011.
In other words, the 2016 dividend will still be roughly equal to seven of the last 13 years even after being “cut in half.”
The sky didn’t fall then, and it’s not going to fall now from a PFD reduced from an all-time high to its historic average at a time of historic deficits. Anyone saying different is probably trying to get elected.
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