Looking ahead to Alaska in the 2020s – steady as she goes, but some bumps loom

It was rough going for Alaska in the last half of the 2010s. In 2019, the final year of the decade, Alaskans had their share of big bumps, these coming from Juneau, not oil markets.

Prices for crude oil – Alaska’s economic lynchpin – imploded in late 2015, setting off a three-year recession. That leveled out in 2019, but new bumps to the economy came from Juneau as new Gov. Mike Dunleavy tried a one-year shock treatment to ‘right-size’ the state budget. The governor achieved about half of what he wanted to erase a systemic deficit, but he felt it was progress.

What lies ahead for 2020?

Fewer bumps, for the short term. But the long-term systemic problems remain, both for the state government budget and the economy as a whole.

For the economy, statewide wage and salary employment figures from the Alaska Department of Labor and Workforce Development is the best source of objective information we have. Job numbers steadied in 2019 with very small monthly increases all through the year.

It’s encouraging, but the recovery is weak so far.

For the near-term no big upsets are apparent. The sale by BP to Hilcorp Energy of its Alaska assets will see about half of BP’s employees hired by Hilcorp, maybe more as the transition continues, with a number of BP employees taking severance packages and many others retiring. The economic effects of this will be muted because many people accepting packages and retiring will remain in the state and part of the economy.

Even the number of BP workers actually laid off will receive severance payments and many will wind up going to work for other firms working in the Alaska industry, past studies on industry layoffs by the state have shown.

For the petroleum industry itself, the near-term outlook is for a steady pace. Two companies exploring and developing new projects, ConocoPhillips and Oil Search, have substantial winter drilling, engineering and construction programs underway, and the pace will pick up in the next few years if substantial projects planned are given final approvals.

In the state’s other industries, the outlook is similarly for steady going with one industry, tourism, on a sharp upward trajectory. Mining exploration is at a good pace and several major new mines are in advanced planning, such as the large Donlin Gold project west of Anchorage; Pebble, near Iliamna southwest of Anchorage, and the Livengood gold project north of Fairbanks.

Fisheries are always cyclical, and the 2020 outlook is more another strong sockeye salmon harvest in Bristol Bay but a mixed outlook for other coastal regions in other fisheries in the Gulf of Alaska and Southeast Alaska.

For state, a budget problem remains

For the state budget, a deficit remains, at least if Permanent Fund dividends, or PFDs, are paid. The governor’s plan for Fiscal 2021, the state financial year that begins July 1, has a $1.5 deficit in spending over revenues.

Dunleavy assumes, however, that a “full dividend” of about $3,000 is paid, which is highly problematic. There’s little support for it in the Legislature, which actually appropriates funds for the PFD. If a more normal dividend is paid, for example the $1,600 PFD paid in 2019, the deficit shrinks by half.

House Speaker Bryce Edgmon points out that if no dividend were paid there would be a small budget surplus next year. It’s highly likely a PFD will be paid at some amount because of the popularity of the dividend and its importance to Alaskans of moderate income who use the PFDs to help ends meet. Edgmon said he supports a PFD but that the Legislature will determine its amount.

Besides the difference over the PFD between the governor and Legislature the 2020 legislative session will be relatively smooth sailing, at least for a while, and absent the drama of 2019 when the governor pushed to shut down state ferries for the winter, cut the state university budget by a third, and end state aid to municipalities on school bonds.

Dunleavy compromised on all of those but got part of what he wanted – a bare-bones winter ferry service, the university cuts moderated and spread over three years and school bond aid at half the normal amount, which the governor will continue next year.

There are minor reductions to agencies but essentially the proposed state budget for state agencies is about the same as this year. The governor is even allowing increases in “formula” programs such as the state’s support for school districts and has said these will continue unless the Legislature changes the statutes that contain the formulas.

There are other built-in increases, such as for public employee pensions.

Bumps in 2020 – how to fund deficit

The bumps will come in the 2020 legislative session when the Legislature has to deal with the deficit, whatever it is. This year the governor is happily passing the buck to legislators to devise cuts in programs, or to propose raising new revenues through new taxes. Significantly, Dunleavy said he’s willing to discuss new revenues, meaning taxes, with legislators but has not taken a position.

One way or another the deficit will be dealt with, however, because the Constitution requires the Legislature to pass, and the governor to sign, a balanced budget. The strategy followed over the last three years of funding the deficit out of the state Constitutional Budget Reserve is no longer a realistic option because the reserve fund has now been drained to a minimum of what is needed for immediate cash needs and as an emergency reserve for disasters like earthquakes or major floods.

Legislators are loathe to tap the one other source of cash – the Permanent Fund’s earnings reserve – because earnings from this fund, which has a healthy balance, are needed to fund dividends and to help fund the state budget itself. In fact, Permanent Fund earnings now pay for most of the state budget. Traditional revenues, such as form oil, now finance less than half the budget.

One way or another, new taxes loom

One way or another, it seems new taxes are inevitable. On the state level, one likely candidate, according to legislators, is an increase in the state motor fuel tax, which at 8 cents per gallon is the nation’s lowest and hasn’t been changed in decades. Another is a state sales tax because there is now no sales tax in Anchorage and Fairbanks and much of the Matanuska-Susitna Borough, where most of the state’s population resides.

One complication in the motor fuel tax is that it will likely be strongly opposed by legislators whose constituents tend to drive long distances to work, such as in the Matanuska-Susitna Borough. Those legislators will likely demand that motoring constituents not be singled out and that other kinds of state fuel taxes also be increased, which would bring in taxes on aviation gasoline, marine fuels and, most important, large volumes of jet fuel sold to international air cargo carriers at Ted Stevens International Airport in Anchorage.

On a state fuel tax the complication is that many smaller Alaska cities and boroughs do have sales taxes, however, so the complication for a state sales tax will be how to avoid the “pancake” effect of piling one sales tax atop another, making the combined state and local tax on purchases very high. There are also uncertainties over how much revenue a state sales tax would bring in, particularly if in municipalities that have sales taxes the state sales tax is not applied, which is one option for avoiding the pancake effect.

Many argue that a state sales tax would be a way to tax summer tourists, but the revenue gain of taxing visitors is likely overstated. Also, tourists already pay special taxes, such as the local hotel/motel “bed” taxes, state vehicle rental taxes and a state passenger tax on cruise ship visitors.

A state personal income tax is another possibility but given the political makeup of the Legislature it is unlikely in the near term.

Meanwhile, the state’s budget difficulties are already driving up taxes in many Alaska communities. With many kinds of state assistance being throttled back property taxes are being raised and changes made to local sales taxes in many smaller Alaska communities.

If state payments for local school is again funded at 50 percent of the normal level there may have to be tax increases in many municipalities to cover this, even in the Matanuska-Susitna Borough. The school bonds are a legal responsibility for municipalities, and the state support was never a guarantee.