Alaska’s petroleum wealth has kept the state’s economy afloat during times of global recession, but those days are likely numbered if resource mismanagement continues, a prominent Alaska economist warned Wednesday at an annual industry luncheon, which organizers ended with a call to action against a movement to invalidate recent oil tax reforms.
Hundreds of professionals from the oil and gas industry and other prominent businesses gathered on a sunny afternoon at the Dena’ina Civic and Convention Center in downtown Anchorage for the Alaska Gas and Oil Association’s annual luncheon to hear two economists speak about the state of Alaska’s economy. Among the luminaries in attendance were former Alaska Govs. Frank Murkowski and Bill Sheffield, Anchorage Chamber of Commerce President Andrew Halcro and several current state legislators.
Ed Rawles, chief economist at Wood Mackenzie, spoke first and offered a global economic snapshot of dire straits for many parts of the world, from Europe’s “staggeringly high” unemployment rates, to Japan’s exorbitant debt.
Afterwards, University of Alaska Anchorage Professor Emeritus Dr. Scott Goldsmith took the stage, calling Alaska’s situation “a little more upbeat when taken within that context.”
But while Alaska’s economy is still afloat thanks to its nest-egg of petroleum wealth, Goldsmith projects big problems on the horizon, problems that appear to be closer than he first concluded.
Alaska has around $60 billion squirreled away, mostly in the Permanent Fund, and the rest in a variety of rainy day accounts. The value of all Alaska’s assets, both money saved and projected future revenue from undeveloped gas and oil, rests at $149 billion -- that’s $200,000 per resident, Goldsmith said.
Yet if the state continues to spend oil revenues at the current rate, and with some assumptions about potential new revenue sources, Goldsmith’s study, released in January, finds that Alaskans will face a "severe fiscal crunch" soon after 2023.
Although Goldsmith's study doesn't account for it, the governor and Legislature have added another variable to the mix: Senate Bill 21. The legislation championed by Gov. Sean Parnell and passed by lawmakers would slash oil taxes by an estimated $1 billion a year or more, depending on the price of oil, compared to the system in place when the study was released.
“If oil revenues are going to be less by a billion dollars a year, that just moves that cliff that we’re looking at closer, maybe a year, maybe two years,” Goldsmith said in an interview on Wednesday.
Proponents of SB 21, which awaits the governor's signature, say tax cuts are necessary to increase oil investment in Alaska, where average daily oil production has been in decline since 2002 after falling from its all-time peak in 1988. So will the tax cut pay off in the long-term?
“I frankly don’t know,” Goldsmith said.
“As a state that claims to be an owner state, we haven’t done a very good job of managing our biggest resource ... (and) when it comes to tax policy, we’re not the kind of experts that we should be in knowing what the effect of changing the tax will be,” he continued.
It’s a complicated issue circling around far more variables than Alaska’s tax policy, from technology and oil prices to competing taxes in other jurisdictions. Much of Alaska’s debate has centered on theory and anecdotes instead of analysis, Goldsmith said. He stressed that Alaska needs more in-state experts analyzing how to manage its oil reserves.
“We expect the Legislature to become experts in that, but they really can’t,” he said.
What Goldsmith is sure of is the management of Alaska’s biggest resource is paramount in maintaining the state’s fiscal health.
“We have one hell of an asset, and as the owner state, we should be paying a lot of attention to how it’s managed. If we screw up, we won’t get another chance,” Goldsmith later said to the audience.
Goldsmith has also championed cutting back on state spending, the growth of which has mirrored increased revenue from high oil prices in recent years. His study estimates that sustainable General Fund spending hovers around $5.5 billion. That means the state needs to cut its spending by roughly $2 billion a year, according to his figures. This year’s budget cuts of $1 billion that passed the Legislature weren’t enough, he said.
One way to decrease spending, or at least increase public involvement? Re-institute the income tax, which was eliminated by Gov. Jay Hammond and lawmakers in 1980. Goldsmith says that way “People will start to notice how we’re spending our money.”
It’s an idea he’s floated before; in February he said that an income tax would give people “skin in the game,” a reason to care where the state’s money was flowing.
But Goldsmith said there is still hope for Alaska in managing its petroleum wealth. He cited the island nation of Kiribati, which in 1956 established a revenue reserve fund from its booming guano industry, a resource mined for use in fertilizer production. Even though the guano industry fizzled by the late 1970s, the money did not, and today the reserve fund is the size of its GDP.
“If they can do it, we can do it,” he said.
As the luncheon came to a close, AOGA’s executive director Kara Moriarty took the stage and thanked the Parnell administration and several lawmakers for their support in passing SB21. Sens. Cathy Giessel and Lesil McGuire; House Speaker Mike Chenault, and Reps. Dan Saddler, Eric Feige, and Bill Stoltze were in attendance, Rep. Lance Pruitt was not.
“AOGA certainly was active this season,” she said, and thanked the staff for their hard work. She also thanked those who testified for SB21 during the session.
But she ended on a more serious note.
“As you know there has been a proposal for a referendum to repeal Senate Bill 21, and the folks are gathering signatures as we speak,” she said.
"If this referendum goes on the ballot, it is the quintessential definition of instability because it leaves a huge question mark over what really is the tax structure over the oil tax industry for 2014 or even beyond.”
She urged the crowd to vote no on the referendum in online polls that have already begun circulating.
Contact Laurel Andrews at laurel(at)alaskadispatch.com