Bill Walker, governor, Alaska, Standard and Poor's, downgrade, oil, taxes, john donne, ernest hemingway, for whom the bell tolls, Photo by Dave HarbourGovernor Bill Walker's Outrageous Decisions

by

Dave Harbour

RATING AGENCY WARNS ALASKA: A VERY SIGNIFICANT AND VERY BAD OMEN. THIS ACTION WILL AFFECT THE COST OF MONEY AND, THUS, INCREASE ALASKA'S DEFICIT.  WARNING OF A RATING DOWNGRADE PORTENDS MORE BAD NEWS TO COME ABSENT A SIGNIFICANT TURNAROUND IN STATE POLICY.  -DH

STORY BY ANDREW JENSEN, JOURNAL OF COMMERCE

Standard and Poor’s Ratings Services lowered the outlook on the State of Alaska’s credit rating from “stable” to “negative” on Aug. 18, and gave politicians one year to reorganize the fiscal house before the downgrades accelerate.

Standard and Poor’s wrote that the current budget deficit is inconsistent with the state’s “AAA” rating on its general obligation bonds and its “AA+” on appropriation-backed bonds, but cited the state’s still healthy budget reserves as a bridge that could maintain the high ratings.  (READ MORE HERE).

Note: Circa. 2007 your author (i.e. a regulatory commissioner at the time) had the responsibility of briefing approximately 20 investment companies and the three rating agencies in NYC on Alaska's fiscal challenges.  Approximately two dozen of those professionals have remained on our email alert list over the years.  These analysts are the best and the brightest in their financial fields and Alaskans should never be so provincial as to think that what is said and done here is not noticed by investors, analysts and lenders in New York and throughout the world.  

Alaska is not an Island unto itself….

-dh

Immediately after the November election Governor-elect Bill Walker (NGP Photo) assured assembled members of the Resource Development Council for Alaska that he was not their enemy.  

We suspected his poor performances over the years in a quixotic representation of the so-called "Port Authority" would be reflected in his governorship.  

But, we held out hope that performance of his new duties would match his significant charisma and public speaking talents.

Alas, to this watcher of Alaska's slumping economy, the new Governor has engaged in a pattern of poor decisions.

He announced opposition to the Alaska Gasline Development Authority (AGDC) concept of being a back up plan to deliver Alaska North Slope (ANS) Gas to the state's residents.

Then, he began to criticize the large gas transportation project aimed at both monetizing ANS gas through exports and providing taps along a pipeline right-of-way to residents.

We commend the major Alaskan investors/oil producers and Trans Canada for maintaining a stiff upper lip and good attitude as they continued their multi million dollar effort to prove the feasibility of the Ak-LNG project amid a volatile world economy and a failing and unsustainable Alaska economy.

Meanwhile, appearing to do everything possible to discourage the state's largest investors, he began touting his ability to use AGDC as a vehicle for competing with the major Ak-LNG project.  Many of us were bewildered at the strategy, or lack thereof, that could lead a Governor to support investment in one project, then advocate using another state organization to compete with it.  
 
Today, we are not bewildered by such decisions; we conclude them to be outrageous behavior by a public official.
 
In the early part of the year, the Governor began to hint that increased industry taxes might be part of the answer to Alaska's deficit budgeting.  Most savvy observers have long observed that in order for Alaska to become solvent again it must encourage more oil development, not discourage it.

With Alaska failing to balance its budget or even enact significant cuts in its spending, the state's governor proposed even more deficit spending: expanding Medicaid.

Following the Legislative session, earlier this summer, he vetoed legislative expenditures to fund tax credits lawfully accrued by oil producers for investments in the state.

He then championed expanded state involvement in creating a natural gas utility for Fairbanks but urged his 'independent board appointees' to the Alaska Industrial Development and Export Authority (AIDEA) to switch gas sources.  AIDEA now seeks to obtain expensive natural gas reserves (i.e. 3x higher than current, Lower 48 prices) from the limited Cook Inlet supplies serving the major population in South Central Alaska while abandoning the world class reserves on the ANS where gas could be obtained cheaper.

As we noted in yesterday's posting, Walker is now beginning to threaten the oil industry with a reserves tax — an outrageous and hostile act that would tax private sector energy investors for NOT producing gas even if market timing indicated caution and prudence in project sanctioning.

Today, we note that Standard and Poor's has begun the process of downgrading Alaska's credit rating (i.e. story right column above).  Three ANS oil industry taxes and a royalty payment fund about 90% of Alaska's state government operating budget and support over a third of the state's economy.  The 40-year-old Prudhoe Bay field responsible for most of that wealth has been declining in recent years at a 5-7% annual rate.  The trans-Alaska pipeline transporting that crude oil to market is nearly 3/4 empty.  Major transportation difficulties are now on the horizon and without significantly increased oil throughput, the pipeline could shut down within just a few years–or sooner.

Meanwhile, Alaska will have burned through all of its major savings accounts within the next two-three years.  While a $55 billion Alaska Permanent Fund is a tempting source of cash, the state's Constitution prevents easy access to it.  In any case, spending that savings would not lead to a sustainable economy; it would just prolong the point of no return.

On top of the fact that the state is not earning what it spends…using its savings…and its governor wants to increase spending…three other factors portend economic disaster for Alaska absent masterful management of money and resources: 1) A nearly $10 billion unfunded liability in the State's employee retirement programs; 2) a steadily declining level of oil production; and 3) an average oil price this summer that is half of what it was last summer.

Were we advising the Governor, we would:

  • urge action that would support investment in the state–and honest partnership with investors.
  • We would significantly cut spending in America's highest per capita spending and debtor state.  
  • We would seriously attempt to wean the highest per capita population of not-for-profit corporations in America from state government largess.  
  • We would cut virtually all capital spending, save for maintenance (i.e. which really is in the operating category).
  • We would undertake whatever legislative changes that could lead to not overspending on public employee overhead.  
  • We would also cut all higher education spending that worked counter to Alaska's resource development priorities (i.e. mandated by Alaska's constitution), and
  • we would energetically fight the Federal government every step of the way as it, and its environmental allies, seek to scuttle the 49th ship of state.

Somehow, we think this Governor to be incapable of such decisiveness, though we are still open to being pleasantly surprised.  But we'd better be surprised quickly because a 'drop dead' date quickly approaches and to survive, Alaska needs a major policy overhaul.

If this doesn't happen, we are mindful of John Donne's 1624 observation, later made more famous by Ernest Hemingway, who predicted and then lived the reality of really tough times: the Spanish Civil War.  We hope Governor Bill Walker takes history to heart, for he, too, is no island unto himself.   Outrageously bad decisions can not only create a bad governor's legacy, but can forever injure the economic future of an entire state, our hopeful offspring and coming generations of our descendants.

"No man is an island, entire of itself; every man is a piece of the continent, a part of the main. If a clod be washed away by the sea, Europe is the less, as well as if a promontory were, as well as if a manor of thy friend's or of thine own were: any man's death diminishes me, because I am involved in mankind, and therefore never send to know for whom the bell tolls; it tolls for thee."  -John Donne

Amen.