What Kind of Alaska do we want?

A packed crowd gathered at the 49th State
Brewing Company on December 10, 2019  for Alaska Common Ground’s fiscal
forum entitled What kind of Alaska do we want? How
do we get there?
The discussion
featured Senator Natasha von Imhof, Co-chair of the Senate Finance Committee;
Anchorage Mayor Ethan Berkowitz; CIRI Government Relations Vice President, Greg
Razo; Institute of Social and Economic Research economist, Mouhcine Guettabi;
and Atwood Chair at the UAA Department of Journalism, Larry Persily. Thea Agnew
Bemben of Agnew::Beck moderated. The goal of the event was to increase public
knowledge and understanding of the realities of Alaska’s financial situation,
and of potential measures to achieve a positive fiscal future.

Senator von Imhof launched the forum with a
well-illustrated dose of reality (see her presentation slides
here
). “We are at a
crossroads!” she said. Alaska cannot stay solvent if the state continues to pay
dividends at, or even close to, the current statutory amount. She wants the
legislature to find middle ground for all spending and establish a spending
cap. Though she believes there are still government inefficiencies to be
corrected, she noted that “It takes time and focus and energy to find more
efficiencies…large cuts have to be walked back.”

She and other panelists highlighted the fact that Alaska’s primary
source of revenue for government spending is now through management of the
Permanent Fund as an endowment under Senate Bill 26. State revenue from this
source now exceeds revenue from petroleum production, and, based on current
projections, will continue to do so. The statute established 5.5% as the
percentage of the market value available from the Permanent Fund this year.
Next year it will be 5%. Other endowment systems were studied, and percentages
were carefully gaged and set to protect the principle of the fund.

Greg Razo noted that Alaska’s public
spending must recognize the food insecurity in villages where part of the
economy is subsistence hunting, fishing, and gathering. Climate change is
threatening this ancient and traditional part of Alaska’s economy.

Mayor Berkowitz described how once
generous state assistance to Anchorage has been reduced over the years to a
pittance. Now the state does not even clear sidewalks on state roads within the
municipality. He sees great potential to build the earnings of the Permanent
Fund by investing more money in it. The Mayor advocated dividing the growing
“percent of market value” earnings three ways to establish an ongoing percent
for municipalities, for state services, and for dividends.

Mouhcine Guettabi and Larry Persily
took the lead in emphasizing the economic value of quality of life and the fact
that attracting people and economic development to Alaska depends greatly on
having good state educational systems, transportation, and other public
services. Persily concluded by telling people to look at the math, face
reality, and find the revenues to build the secure and prosperous state that we
want. All speakers noted that establishing ongoing fiscal predictability and
stability would be an economic stimulant. The need for new revenue sources,
such as taxes, was mentioned frequently in describing a positive fiscal future
for our state.

The event was audio recorded by Alaska
Public Media, livestreamed on Facebook, and video recorded by Jenson Hall
Creative. You can watch the video here. Co-chairs of the planning committee for this forum were
Janet McCabe and Cliff Groh. Cliff Groh has written a series of articles for
the Anchorage Press on Alaska’s fiscal issues. You can read one here. If you want to read them all, search for Cliff Groh at anchoragepress.com.




It’s Probably Worse than you Think

By Cliff Groh, Nov 4, 2019, Anchorage Press

Alaska’s fiscal outlook is bad due to factors
such as drooping oil prices, long-falling Alaska oil production, and an absence
of broad-based taxes. The non-partisan Alaska Legislative Finance Division
projects that starting next year, the State faces annual deficits exceeding $1
billion under current law and the most likely assumptions.

But that gloomy scenario probably understates
our fiscal squeeze. Numerous other factors either threaten future revenues or
create pressures for spending to increase.

Let’s start by looking at some of those upward
pressures on the budget: the unfunded liabilities of the state government’s
pension systems; the capital budget; and refundable oil tax credits.

The State of
Alaska is paying off the unfunded liabilities previously built up in the Public
Employees’ Retirement System (PERS) and the Teachers’ Retirement System (TRS)
under an officially adopted payoff plan that runs at least until Fiscal 2039.
Actuaries project that the annual installments under that plan will increase
every year but one, and also project that those installments will total more
than $8 billion over the decades. Changing demographics and shifts in financial
markets, however, could increase that total price tag over the next two
decades.

The capital
budget was probably too large in some years of high oil revenues. That spending
for buildings and other infrastructure has fallen substantially in the last half-dozen
years, however, and this year it is less than $150 million in General Fund
spending. Experts see that number as too low. The Office of Management and
Budget estimated in 2018 that the State of Alaska has needs for deferred
maintenance totaling $1.87 billion. One observer’s calculation is that the
annual capital budget should be at a minimum tripled to start catching up on
that backlog.

Then there’s
refundable oil tax credits, an obligation which the Alaska Department of
Revenue estimated at $700 million in June of 2019. The State has proposed to
pay off the credits through a bond program now in litigation while paying zero
for the credits in the current year’s budget. The obligation to pay the oil tax
credits is much weaker legally than the obligation to pay in full the pension
system benefits, which are explicitly protected in the Alaska Constitution.

Now let’s turn to
the revenue side of the equation. Climate change poses a systemic fiscal danger
to our state.

The evidence of
this global phenomenon is all around us. Humans are changing their behavior in
reaction to the changing physical world. The use of electric cars may blow past
gasoline-powered vehicles by 2040. Oil companies are changing their names to
shed their oil-only images and are focusing increasingly on wind, solar, and
other renewable sources. Carbon taxes are likely to further reduce the demand
for oil worldwide. At least one major energy producer—Norway-based Elsinor
(formerly Statoil)—has projected that oil demand could start to decline by
2030, as Alaska Public Media’s Elizabeth Harball noted in 2018.

Climate change
already appears to be reducing oil production from Alaska’s North Slope, as
long-time oil industry observer Tim Bradner has pointed out. The Arctic is
warming at rates twice as fast as regions further south, and those higher
temperatures thaw permafrost and reduce the efficiency of oil-producing
facilities.

The climate
change news will probably get substantially worse for Alaska. Energy companies
recognize that there is a growing possibility that the warming planet will lead
to significant amounts of oil now ticketed to be produced to end up in the
ground unburned. Some of that oil stranded by climate change is likely to be on
the North Slope, in part because that region is expensive to work in and
high-cost provinces are most likely to be the home of stranded oil.

Over the next
year—and over the next 10 years or so—the downside risks for Alaska on the
fiscal front appear to exceed the upside potential. Alaskans should prepare
accordingly.

Cliff Groh is an
Anchorage lawyer and writer as well as the legislative assistant who worked the
most on the bill in 1982 that created the Permanent Fund Dividend we have
today. He also designed a course he taught at the University of Alaska called
“Navigating Alaska’s Fiscal and Economic Challenges.” This is the ninth
installment of a continuing series on the Permanent Fund Dividend and Alaska’s
fiscal system.