| Today, we ponder Alaska's 2015 challenges below — including less capability to fund energy projects. We also sympathize with our Canadian friends. The Calgary Herald's Deborah Yedling said of TransCanada's Russ Gurling that, "three fronts consume Girling’s time and energy — the Energy East file, an activist shareholder and, of course, the Keystone project." |
Is Alaska beginning a new year of acrimony or accomplishment?
Yesterday's Alaska Dispatch piece by Dermot Cole pretty well summarizes the difficult budget issues and political pressures faced by North America's most economically dependent oil & gas producing state.
by
Dave Harbour
As the new year begins, so does the start of what may soon evolve into a contentious, new Legislative session.
|
Politico by Hillary Flynn. Alaska runs on oil — its economy is more dependent on it than that of any other state. With no sales or personal income tax, the bulk of state revenue is tied to natural resources. At the same time, the state woefully misread the direction of oil prices, predicting they would remain at over $100 per barrel for fiscal 2015. They are now below $60. For now, they are counting on $14 billion in rainy day funds — double those of any other state. But rating agency Moody’s Investors Service, financial analysts and others
Washington Post by Niraj Chokshi. …Alaska, more than any other state, is threatened by the low prices. Moody’s Investors Services, the credit rating agency, on Tuesday revised its outlookfor the state from stable to negative, noting that the drop in oil prices “now threatens to rapidly and significantly reduce the state’s budgetary reserves.” “Alaska is far more vulnerable than any other U.S. state…." On January 31, 2012, Governing asked, "Will the good times last?": "High oil prices are a boon for Alaska, whose credit rating recently went up to the coveted triple-A level. But waning oil production, unpredictable prices and looming pension costs remain challenges." (Comment: Politicians ignored the obvious. -dh) Readers may also track this issue on Alaskans for Sustainable Budgets…. |
NY TimesDuring the session, beginning on January 20, lawmakers and the new governor face an unexpected decline in the value of oil upon which is based about 90% of Alaska's state operating budget.
Constituents — not just government — feel the impact, too. Over a third of the entire economy rests upon dependency upon and unstable foundation of volatile, world oil prices. (Note our belief that government dependency on commodity prices is more dangerous than private economic dependence on commodity production. The former typically makes up for lost taxes by increasing taxes — further inhibiting economic investment and vitality — while the latter makes up for diminishing revenue by undertaking efficiency measures.)
Soon, one can expect rating agencies to begin auditing state and local governments, along with publicly traded companies in Alaska. Financial analysts throughout the investment world are preparing new reports for their clients. Agencies of government dependent on revenue bonds and general obligation bonds — at certain, low interest rates and favorable 'coverage' requirements — will be under increased scrutiny that could affect consumer costs in a number of areas, including state capital projects, municipal services and monthly utility rates.
Alaska's multi-billion dollar deficit overshadows losses occurring in all other oil and gas producing states and provinces in North America, which could stimulate rising political acrimony.
Elected officials, as we have seen nationally and locally, tend to err on the side of overspending.
National overspending leads to printing fiat paper dollars that taxes citizens by ultimately devaluing their money as prices rise. State and federal overspending causes overtaxing temptations. Both overspending and overtaxing in local governments tax the future of citizens as politicians strive to fund today's wants.
Unlike Washington, local governments cannot create new money out of thin air. They must collect it in direct taxes or by borrowing it and agreeing to pay lenders interest rates influenced by rating agencies, upon whose expertise investors must rely.
Alaska is seeing the confluence of these issues today as its unsustainably high budget — the highest per capita in America, twice as high as US federal per capita spending — is under attack by low oil prices. This income deficiency leads to higher deficits, a rapid depletion of government savings accounts, and a sure-fire appointment with insolvency.
Will Alaska leaders this year create new taxes, cut spending or kick the can down the road again, bringing savings accounts down to new lows? Or, more likely, will they try to create a combination of the above?
The republican-led legislature, with the former Governor, passed legislation to reform and moderate one of the most onerous oil tax regimes in the free world. Added to Alaska's tax disincentive to invest are Alaska's high labor rates, difficult climate, proximity to markets and logistical handicaps. The objective of the tax reform, adopted under provisions of Senate Bill 21 (i.e. SB 21) was to increase investment leading to higher production over time and a more sustainable fiscal regime. Unfortunately, not much was done to moderate spending, contrary to the suggestions of a state university think tank, the Institute of Social and Economic research (ISER).
Some democrats, though out-voted on SB 21 tax reform, decided to work with activist environmental and other constituencies to promote a voters initiative that would do an end-run around legislative action, and repeal oil tax reform. Last August, they came close, but lost as voters narrowly decided to stay with tax reform.
Obviously, any enthusiasm investors had for SB 21 tax reform and political stability in the 49th State had to have been diluted by efforts to repeal that reform.
Today, investors must be left with a troubling 4-fold reality that:
1) While oil tax reform passed and survived an Alaska voter's repeal initiative, a new initiative could reappear any day; and
2) Alaska's long-term sustainability depends on the unlikely ability of politicians to cut generous state entitlement programs, not just a few capital projects; and,
3) Alaska's state employee retirement program's unfunded liability of almost $10 billion pretty much cancels out the value of its "rainy day savings accounts". We believe this leaves the State morally–if not technically–incapable of subsidizing the operating budget without tapping the sacrosanct, $50+ billion permanent fund, which, itself, is not the answer to a sustainable government; and,
4) even if those thorny problems are solved, Alaska's wonderful natural resource investment potential still faces volatile natural resource prices and worldwide competition from areas with lower labor rates, more temperate climates, closer proximity to markets and simpler logistical challenges.
Now, Alaska has a new Governor, Bill Walker (NGP Photo-L), who opposed SB 21 tax reform and courted democrat constituencies to win the election against republican incumbent Governor Sean Parnell (NGP Photo-R). Of course, we wish Walker well, but we also realize the difficult policy decisions he must surely see in the path before him.
The ADN news/editorial piece yesterday highlights what could be a coming year of acrimony absent an abundance of courtesy, good-will and recognition of the common challenge we all face.
The piece quotes some who contend that those supporting SB 21, Alaska's oil tax reform law, misled the public. Any Alaskan who trumpets blame undermines cooperation and defies the public interest. The piece also quotes SB 21 advocates who point out that the passage of tax reform takes time to manifest itself into multi-year, multi-billion dollar investment decisions and new projects. (Critique: A reader in another blog later pointed out that to understand the source of the problem we should discuss 'fault'; and, I admitted that I could have been more clear. My point was not to stifle free speech or honest critique but rather, "in this critical year we should focus on cooperative solutions rather than who did what to whom in the past. While investing our full energy to find solutions now and throughout 2015, we should distinguish between actors seeking personal gain from those seeking the best outcome for all Alaskans." -dh)
|
What's The Answer? Our first hope is that other oil producing states/provinces will learn from Alaska that a sustainable economy is, first, difficult but, second, possible. (Subscribe to Petroleum News Bakken) It is difficult because officials elected by human beings tend to want to promise and deliver more than they should. But sustainable oil economies are possible when the voters demand responsibility. Spending could be limited by a constitutional mandate using an effective population, CPI formula with a savings requirement and an emergency spending provision. Spending could also be restrained if contitutional reform limited industry sector tax revenues to some per capita or operating budget percent limit…again, with reasonable savings and emergency spending provisions. If government signals investors that it is committed to a reliable, capped amount of tax revenue from various tax-vulnerable industry sectors, tax paying investors can more freely invest with a reasonable guarantee of long-term returns. The primary beneficiaries of responsible government policies, the citizens, may then have confidence that their own taxes, jobs, reasonable but restrained government programs and economic dreams can be sustained with honest, hard work. |
Some Alaskans may hold out hope that the state's ponderous, per-capita government could survive by virtue of a quick reversal of oil prices. But there is a problem with that hope. The fundamental problem is that even with last spring's higher prices, Alaska's oil-dependent operating budget still needed billions from savings when that budget was based on $105/Bbl oil.
So what is Alaska's current, best hope for a sustainable economy? That's the job of elected officials. That's why they were elected. Do we see among them public spirited, dedicated, unselfish, peace makers who will work cooperatively with each other to solve a common problem? Or, will we see them take up arms and seek to use the state's economic problems to leverage political self interests as a fragile economy crumbles?
We offer for our readers' consideration a possible solution, a concept, in the box to the left. But, as with all great undertakings, the outcome depends on the integrity, courage, creativity and diligence of real leaders — which points to this wise counsel of old:
Matthew 7:15. "Beware of false profits, who come to you in sheep's clothing, but inwardly they are ravenous wolves. You will know them by their fruits. Do men gather grapes from thorn bushes or figs from thistles? Even so, every good tree bears good fruit, but a bad tree bears bad fruit. … Therefore, by their fruits you will know them."
Amen, dear reader….
TODAY'S Houston Chronicle Energy Stories:
Leave A Comment