Commentary

Is this Alaska’s future?

FAIRBANKS — The deep cold of winter had settled in along the Chena River in the days before Christmas, locking the heart of Alaska’s only real Interior city in a deep freeze. Strolling the streets downtown was depressing for an Alaskan who’d live here before and during construction of the oil pipeline.

Downtown once pumped the lifeblood of commerce through The Golden Heart City. No more. The heart of Fairbanks was grim.

The comfortable, six-story Springhill Suites by Marriott hotel that went up 15 years ago at the corner of Cushman St. and First Ave. appeared almost as empty as the closed-for-the-winter hotels to the south along the George Parks Highway near the entrance to Denali National Park and Preserve.

Elsewhere, it was only worse.

The abandoned, 11-story Polaris Building towered over the vacant lots where other buildings had already been torn down. Christmas shopping was tough because there were only a handful of businesses open. The only place that appeared to be thriving was “Chena Bingo.”

Walking around downtown, it was hard to avoid a one-word thought: Detroit.

Outside the city core, still busy malls anchored by national chains — Fred Meyer (Kroger), Walmart, The Home Depot and more — helped push the thought away. Yes, Fairbanks had problems, but Fairbanks has always had problems. It’s an outpost on the edge of the Arctic to which winter annually brings a frozen version of hell.

Sure, it’s now often a smoky hell versus a clean-air hell, but Fairbanksans are working to fix that. A wood-burning ban was still in the news. It highlighted the problem of high energy costs across the Interior of the state.

People burn wood here not because it is the best fuel but because it is the cheapest fuel. But that has been the case in the Alaska Interior forever. Life is tough. The winter days are hours short. The temperatures can plunge to 50-degrees-below zero, so cold that if you take a cup of warm water and throw the water into the air it explodes into instant ice.

I was thankful it wasn’t 50 below. But the 20-degree-below cold of December chilled an Anchorage-softened Alaskan to the bone. The thoughts inside my head went something like this: “It isn’t that bad. How soft are you? You’ve spent a fair bit of time all alone on the Iditarod Trail at 50 degrees below. You shouldn’t be whining about this. Man up!”

And yet, I admit, I was happy to return to Anchorage with its temperatures a full 40 to 50 degrees warmer, and put the thoughts of Fairbanks behind where they stayed until not long ago.

Are we the next Detroit?

A headline on a CNBC.com story brought all those worrisome Fairbanks observations streaming back in a hurry, though the story covered a broader scope than just the Interior city.

“As oil tanks, will Alaska become the next Detroit?” the headline asked.

The author, former New Hampshire governor and three-term U.S. Senator Judd Gregg, noted Alaska is safely sitting on a big supply of cash these days, but he also warned that with oil prices low and threatening to stay that way for some time,”Alaska’s leaders need to be careful that they do not fall into the same trap other governments have by opting for quick fixes at the expense of long-term economic health.”

The story went on to identify a potential landmine buried in Gov. Bill Walker’s fiscal plan.

“…The plan includes the issuance of $2.5 billion in pension obligation bonds, also known as POBs. POBs are a debt instrument that essentially let local governments pay unfunded pension liabilities by betting that the investment will earn a higher return than the interest costs of the state’s pensions,” wrote Judd, the former chairman of the Senate Budget Committee.

“If this feels slightly familiar, it might be because Detroit did its own $1.4 billion pension bond deal in 2005. Ultimately, the bet was a disaster. Not only was the move labeled by the Detroit Free Press as ‘the last straw’ that led to Detroit filing for Chapter 9 bankruptcy, the deal became a controversial focal point of the city’s 2014 bankruptcy trial and was held up as epitomizing the reckless risk taking municipalities should avoid. Now, with $65 billion in savings, Alaska is no Detroit—but this type of move is never taken lightly.”

The idea of Alaska betting on investment returns to fund itself is believed to have originated with John Tichotsky, the state’s chief economist. Tichotsky holds a doctorate from Dartmouth. And obligation bonds have been an on-again, off-again darling of some economists since the 1980s.

Publicly the idea of profiting off investments was first floated in the state by Alaska Dispatch News publisher Alice Rogoff, who in April 2015 wrote that she wanted “to share with you one idea that could help fund state government. Some in state government and the business community have talked about it, but there hasn’t been any news coverage, in part because there isn’t any formal proposal. But this idea would spare us the economic pain of austerity — and do so responsibly.

“Here’s the concept in a nutshell: Besides oil, Alaska has another vital resource — huge cash reserves and assets. This, in turn, provides us credit and the ability to borrow money against it. And with today’s low interest rates, it may be the perfect time for our state to borrow. We could then take those cash loans and invest them in the markets, and earn a rate of return much higher than the interest we pay. Anything we’d earn above the interest rate could be used to help fund government.”

Judging from the Facebook comments at ADN.com, a lot of people liked Rogoff’s idea. And there are places where obligations bonds have met with success.

“Proponents of the bonds argue that under the right conditions—low-interest rates and high investment returns—they can offer budget relief and savings,” the Pew Charitable Trusts reported after an examination of the mechanism.

But it went on to warn that “projections that lead to the decision to issue these bonds can be inaccurate, and a downturn in the stock market can put a government even deeper in the hole”

 

Pension obligations are at the moment a little discussed subtext in the Alaska fiscal dilemma. Historically, the state gave public employees way too sweet a deal. People of a certain age in Alaska likely know friends looking for a “Tier 1” mate, a reference to a state employee who got the best package: retirement at age 50 with 30 years of service and free lifetime medical for yourself and dependents for life. The state has since reduced the size of retirement benefits, but it remains obligated to earlier commitments. It’s a problem.

So, too, the growth of government — another Detroit-like problem — linked, in Alaska’s case, to oil wealth. When 90 percent of the cost of government was being easily paid by taxing the oil industry, there was no good reason for lawmakers to say “no” to constituents looking for support for their favorite government program.

Oil was to Alaska what the auto industry was to Detroit.

The only game in town

Detroit imploded in significant part because it was a one-industry economy. The industry was the automobile, and when automobile production started leaving Detroit, the city crumbled.

“The massive Dodge Main plant, which employed more than 30,000 workers at its peak, winnowed its workforce to a few thousand before closing in 1980,” writes Thomas J. Sugrue in “Motor City: The Story of Detroit.” “Ford’s River Rouge plant hemorrhaged jobs beginning in the 1950s—and although it continues operations today, it has but a few thousand workers, a shadow of its World War II–era might.”

Alaska’s economy isn’t as dependent on oil as Detroit’s economy was on manufacturing. Alaska gets a big economic boost from federal spending on national defense and social programs. It has a healthy fishing industry and a steady growing tourism industry. But oil is a mainstay.

“The model of the Alaska economy shows that about one third of the jobs and personal income in Alaska in 2005 depended on the petroleum industry — its production activities, its state and local revenues, and the earnings of the savings accounts funded by petroleum revenues,” according to Scott Goldsmith, an economist at the University of Alaska’s Institute of Social and Economic Research who has spent much of his life studying the Alaska economy.  “If the flow of dollars into Alaska from these sources were to disappear, Alaska would lose about one-third of its jobs and personal income.”

This isn’t quite a Detroit scenario. But it’s close.

Detroit’s decline from vibrant city of 1.8 million people with the highest per capita income in the country to an urban wasteland of 700,000 began with slow but steady loss of about half of all jobs in automobile manufacturing. But as, the New York Times later pointed out in a 2013 story headlined “Anatomy of Detroit’s Delcine, the ultimate population crash was “decades in the making, caused in part by a trail of missteps, suspected corruption and inaction. Here is a sampling of some city leaders who trimmed too little, too late and, rather than tackling problems head on, hoped that deep-rooted structural problems would turn out to be cyclical downturns.”

Missteps, corruption, inaction? Too little trimmed too late; a failure to tackle problems head on, and a hope that economic crisis was only a cyclical downturn?

Does anything sound familiar Alaska?

The good news for the 49th state, obviously, is that it can’t take a hit like Detroit. It’s mathematically impossible. There aren’t 1.1 million here to leave. But a 60 percent population decline echoing Detroit’s isn’t impossible.

The state’s population BO (Before Oil) was less than 400,000. A 60 percent drop in the future would put the population back in that range. Government, mining, commercial fishing and tourism supported the state before, and they could still support a state in the future, maybe even a bigger one than in the 1970s.

Government and tourism are now more profitable than they were then. Commercial fishing has grown, too, but its benefits to the state today are harder to assess. A lot of fish processing has moved elsewhere as have valuable fishing permits. Sixty-five percent of Bristol Bay driftnet permits, the most valuable permits in the Bristol Bay region, are now owned by fishermen from Outside; two-thirds of processing workers are from Outside; and significant secondary processing has moved south as well, according to Gunnar Knapp, an economist wit the University of Alaska’s Institute of Social and Economic Research.

The shift in the fishing economy is visible all over the state. Most of the canneries which once dotted the coast of the state from Ketchikan north are gone. Along with some Alaska processing shifting south to Canada or the Pacific Northwest, a lot is moving west to China. About a third of the 2009 Alaska salmon catch was simply headed and gutted here and then shipped to China for further processing, according to SustainableFish.org. The percentage shipped to China has been reported to be growing ever since.

Inherent problem

Then, too, Alaska is visited by a lot of people who share in its economy but don’t really care one way or another if the state survives. Transient oil workers, commercial fishermen, tour operators from Outside and other seasonal workers have no investment in the state’s future.

For some of those folks, the reality is that life here in the summer might be a better if a bunch of the people who live here year round left. Alaska is something of a colony. I once asked Knapp why. He had a simple answer:

“Because a lot of people like it that way.”

But the transients many of us who live here sometimes despise for their lack of investment in that amorphous entity called Alaska aren’t the biggest problem the state faces today. The big problem is human nature.

The big lesson from Detroit is the obvious one: People hate change.

They so hate change that even when they can see a problem coming, they too often refuse to act until they have no choice or it is too late. Government in Alaska now finds itself high-centered between two sides that don’t want change.

On the left are public employee unions and supporters of social services who oppose any significant cuts in the size of state government and want to fix things with new taxes, which always have a negative effect on the economy, and a raid on the earnings of the Alaska Permanent Fund.

On the right are businessmen and Libertarian-minded Alaskans who fear a raid on the Permanent Fund, hate taxes and want to fix things by reducing the size of the state bureaucracy.

Many of the politicians who Alaskans love to bash find themselves legitimately caught in the middle. The Democrat-backed Walker administration, with the support of the public employee unions, is backing a tax-and-continue-to-spend plan that redirects funds from the Permanent Fund into the bureaucracy.

Republican lawmakers, even those who believe the state needs to use some of the permanent fund earnings, worry that if they go along with Walker they will find their heads on the pitchforks of the electorate come the next election. They have reason to be fearful.

Walker’s plan tries to lock spending in at near the present level, and there are a lot of self-proclaimed conservatives in the socialist state of Alaska who remain adamant government is way too big of a brother even as they demand their handouts from him

in the form of Permanent Fund Dividends.

Against this backdrop, the words of the New York Times version of Detroit’s history truly resonate:

“A sampling of…leaders who trimmed too little, too late and, rather than tackling problems head on, hoped that deep-rooted structural problems would turn out to be cyclical downturns.”

It’s possible Alaska’s governor and Legislature could do the kind of budget cutting that needs to be done. It’s possible they could fix the deep-rooted structural problems that result in the commercial fishing business transferring so much of its wealth elsewhere. It’s possible they could come up with some way to attract news industries to diversify the economy.

Anything is possible. But is it probable?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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