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Down, down, down

capture

Graph courtesy UAA Institute of Social and Economic Research

Alaska’s largest city is leading the bust as the once-booming economy of the 49th state collapses in the wake of falling global oil prices, according to new report just out from the University of Alaska Anchorage Institute of Social and Economic Research.

 

Most in the Alaska business community knew this downturn was coming despite a statistical lag that for a time made it look like crude oil trading at below $50 per barrel might not be that bad. Unfortunately, it is that bad.

ISER’s  “Alaska Snapshot” focusing on “What’s Happened to the Alaska Economy Since Oil Prices Dropped” notes “job losses during the first of falling oil prices were small, because many (state) projects were underway and had to be completed. Also the state’s generous capital budgets of 2012, 2013 and 2014 were still making their way into the economy.”

Most of that capital improvement money has now been spent and the results are showing in the construction industry and professional consulting businesses which have begun shrinking rapidly alongside the oil industry.

Economist Mouhcine Guettabi projected statewide job losses could reach 2 percent by the end of the year. Losses were already close to 1 percent between March 2014 and March 2016 with 2,261 jobs gone.

 

More than 65 percent of those jobs were in Anchorage, which lost almost 1,500 jobs as the major oil companies reduced their operations in the north, and construction and consulting began to suffer.

Bright spots

There were a couple positive indicators in the report. Guettabi noted minor gains in jobs in the leisure and hospitality industries, mainly tourism, and in manufacturing businesses, mainly commercial fishing, and a big increase in health-care businesses that added more than 1,400 jobs as they began to deal with the state’s sick and aging population.

Americans 65 and older have become the country’s largest group in terms of size and percent of the population, according to the U.S. Census, and Alaska leads the aging trend.  “Alaska had the largest percent change between 2000 and 2010 (at) 78.9 percent,” the Census reported. 

The Alaska median age of 34.3 remains lower than the national average of 37.6, according to the Alaska Department of Labor. But the median has shifted radically since the 1960s when it was 23, according to ISER.

The other bright spot in the new data  is a significant uptick in trade, transportation and utility jobs since 2014. Why isn’t exactly clear, but this is not the only oddity in the data.

It also shows significant job growth in the Anchorage bedroom communities of the Matanuska-Susitna Borough, which were expected by many to suffer most as the economy slides into recession. As of this report, the Mat-Su gained more than 1,100 jobs. And it was a statewide oddity in that it showed job growth in all sectors of the economy – mainly in the private sector, but also in the public sector at the federal, state and local levels.

In nearly all other areas of Alaska, state and federal government jobs were disappearing, sometimes to be replaced by local government jobs but not always. Guettabi said in an interview that a small boom in the growth of local government jobs appears problematic.

“I don’t believe it’s sustainable,” he said.

Government-dominated rural Alaska

“Many areas—especially remote, rural ones—depend a lot on local government,” his study says. “In a few areas, local government jobs make up half or more of all jobs, and in many other areas a quarter or a third. Only in Anchorage and the Fairbanks and Denali boroughs does the share fall below 10 percent.

“We’ve also shown that while many local governments added jobs during the study period, they depend heavily on state money and could be vulnerable as time goes on.”

Since shortly before Alaska became an oil-rich state in the 1970s, local governments have been collecting a third to as much as 50 percent of their revenue in the form of state revenue-sharing.

Some rural areas of the state are now almost wholly dependent on government to provide jobs.

“Kusilvak census area (formerly Wade Hampton) in Western Alaska is at the top, with two-thirds of all its jobs in local government. In the Lake and Peninsula Borough on the Alaska Peninsula and the Yukon-Koyukuk area in the Interior, local government provides about half the jobs,” the report says.

Guettabi cataloged Alaska census areas with jobs in the “most vulnerable sectors” – construction, professional jobs and government. It paints a picture of a lot of people in rural Alaska in economic peril. The list is led by the North Slope Borough (NSB), which has for decades lived off oil and now is threatened to die due to the low price of oil.

The ISER study listed 84 percent of NSB jobs in danger. Fifty-four percent of them are in the oil and gas sector. Elsewhere, it’s the downsizing of government that threatens. Of the 67 percent of jobs in Kusilvak in danger, 66 percent are with government, according to the report.

All across rural large numbers of jobs are threatened by state and local government spending cuts. The study lists 61 percent of the jobs in the Yukon-Koyukuk census area of the Interior as vulnerable to state and local budget cuts. The number is 50 percent for the Lake and Peninsula Borough on the north side of Cook Inlet, 45 percent for Prince of Wales Island in Southeast Alaska, 42 percent for the regional hub cities of Bethel in Western Alaska and Nome in Northwest Alaska, 36 percent for the Hoonah area in Southeast, and 35 percent for the Northwest Arctic Borough.

All exceed or match the 35 percent of jobs in Juneau thought to be vulnerable to state and local budget cuts, and Juneau – the capital of Alaska – has long been considered a “company town,” the company business being government.

 

Going forward

The time has clearly come, Guettabi said, for Alaskans to take a serious look at the how to fix a state economy built around taxes on oil that it is no longer worth what it once was and flowing from the North Slope at a steadily decreasing rate.

“A spike in oil prices really does not do anything at this point,” he said. To bail Alaska out of its current economic crisis, crude would have to climb to $200 per barrel. Thoughts are now that prices might work back up to $70 per barrel in a year or three.

“That is not a panacea,” the economist said; there is no avoiding the fact tough economic choices will need to be made. And they are tough.

“People (in Alaska) have never paid for government,” he said. “So figuring out how to ‘right size’ it is very difficult.”

That is not quite true. Alaskans paid income taxes into the 1970s, and in some areas of the state, such as Anchorage, property owners still pay significant property taxes to support local government. But it is true that a generation has grown up without paying any sort of statewide tax because oil revenues paid for 85 to 90 percent of government costs.

Gov. Bill Walker has been pushing for reinstatement of income and other taxes to supplement falling oil revenues. He has had opposition. Whether to raise state revenues to fix the problem or reduce state spending further is a difficult question.

Either way, Guettabi admitted, there is a question of “how much damage you can do.”

He suggested that what Alaskans really need to do is determine exactly what sort of government services are essential, and then work toward a plan to fund them. That sounds easy, but reality is something different.

Government has done some downsizing. The ISER study shows a net loss of 908 state and local jobs from 2014 to 2016. State jobs actually shrank by 1,691, but local governments added 783 positions.  How long those positions will last is unknown, given the state is in the process of rolling backing revenue sharing.

The state still faces a budget deficit of more than $3.5 billion per year and is living on its savings. About 60 percent of the state budget – some $3 billion – is spent on education, and health and social services.

Nobody has expressed much willingness to make cuts in those two departments, and few have expressed a willingness to pay taxes or part with any or all of their annual Permanent Fund Dividends.

“I don’t think there are any popular options,” Guettabi said. “No matter what you do, you’re going to take something away from somebody they don’t like.”

That’s true no matter whether it’s a dollar taken out of someone’s pocket in the form of a tax, or a government service someone enjoys taken away because of a budget cut. The University of Alaska  this fall tried to eliminate cross-country skiing and running programs to save a few million dollars and ran into a buzz saw of opposition.

Because of reactions like that, the tempting thing for politicians to do is to do nothing. But Guettabi, like most economists, believes action of some sort in this case trumps inaction.

“The more we delay,” he said, “the worse it could get.”

 

 

 

 

 

 

 

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11 replies »

  1. Hi Craig: Isn’t the state going to exhaust its savings in another year or two? If the legislature won’t act voluntarily to fix the fiscal gap, they will be forced to act when when the piggy bank is empty and there are no more savings accounts to raid.

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  2. Our GDP in Alaska is ranked 45 out of 50 states….Right between Maine & North Dakota….that’s where it has been for years and that is what you get when you hand over your most valuable resource to TEXAS based companies….their GDP by the way is #2 in the nation and very steady.

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  3. Craig, I respectively have to say … that you can’t be right about the Anchorage economy declining. Come on! Cuz jeez … a year ago Charlie Wohlforth of the ADN declared that, after talking to 3 retiring oil company engineers, that the oil price impact would be “painless”. (https://www.adn.com/commentary/article/oil-layoffs-painless-buyout-recipients-and-alaskas-economy-benefits/2015/12/27/) As you have pointed out in previous writings of yours (https://craigmedred.news/2016/11/07/why-why-why/), no one researches more than Charlie. No one is better at writing about bidness than Charlie! Right!? So don’t sweat the economic decline, Charlie says it will be “painless”!

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  4. Suppose the fact that having the two largest national forests in the country, the Tongass and Chugach, sit practically idle with almost zero renewable timber production, means nothing to the sustainability of state government and the economy (especially that of our coastal areas outside of the rail belt).

    Mix in the fact that the other large renewable resource – fish – drains the state of net revenues instead of adding to its coffers, has no relationship to getting our fair share and financial affairs in order.

    Let’s keep the eye on the oil and gas Piñata where it belongs – lets focus on how to pound the heck out of this diminishing financial resource and look the other way regarding the other natural resources in this state. And forget mining – everyone knows it is evil like oil and gas development, is non-renewable, and can’t possible aid in high paying jobs or state tax revenues…

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    • unfortunately, the history of timber in this state has largely followed the history of the fishing industry: net money loser for the state. but you’re right about the rest, aside from the oil and gas industry, the state has failed badly at getting a fair share for Alaskans out of its resource wealth. kind of makes those personal-use dipnet fisheries look better, i guess. at least people can take some value out of something “in-kind.”

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  5. “As of this report, the Mat-Su gained more than 1,100 jobs.”

    Amazing! I retired to the Mat-Su in 2004. I have no idea what keeps the local economy rolling except for the old guard, by and large pro-development construction guys, pulling the strings of the biggest continguous voting block (Republican) in the legislature.

    Should make for an interesting session. Stay tuned.

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    • i’d guess a significant part of that Valley job jump is due to the expansion of medical facilities in the valley. we’ve added jobs we now have to find a way to pay for as a friend of mine (a good, card-carrying liberal, by the way) observed to day. he gets it. i’m not sure how many in the legislature do. it will be an interesting session as you observe.

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  6. Lynn – oil production is destined to decline over time, but the questions of the day are twofold: over what span of time and by how much. there are considerable volumes of new oil that have been discovered on the North Slope. whether and when they see production is at the moment an important question. oil prices appear to be inching upward. OPEC appears like it might try to keep that movement going. $70 per barrel oil isn’t a panacea, but $70 per barrel and some more production would certainly help to stabilize the bleeding. then the question is how to fully to stop it and start to heal the wound. those are tough issues that might require, to continue the medical analogy, an amputation or two to save the patient.

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    • Craig,
      Yes, a non-renewable resource is just that: “non-renewable”, and gross production decline over time is as predictable as the tide. Thank God we created the Permanent Fund and now it’s earnings must come into play as they were intended to do – pay for state operations. Roger Cremo offered the solution;however, we did not heed his precient suggestion. The significant political problem facing us now is that we are breaking the unwritten contract between Alaskans and their government regarding those earnings from the Permanent Fund. That contract was, in effect, “You send me a check using the same formula as last year and I don’t care what you do.”

      I understand that Alaska once produced about 25% of the nation’s domestic oil supply yet now we are in the single percentages so we are being carried along in the current of world energy economics with very little influence in the market. We are a state with a population that equals about that of Memphis Tennessee. We can expect no more recognition from the Feds than does Memphis and that enthusiasm will certainly be dampened as long as we keep our “negative income tax”. Our small population contributes to the problem when the concept of economic momentum is considered including the possibility of tax revenues from that economy. I argue that we have serious structural problems in our government. For example, over all these years our state government has refused to seriously “deconcentrate” power from the state level by at least forcing the creation of local taxing authorities which might have helped to cushion the upcomming blow. Now watch the MOA take a serious hit when the state imposes a sales tax leaving us only property tax revenue while property values decline (as they did in the 80s).

      I am all for healing our fiscal wound; however, our “wound” is more like drug addiction and many argue that the patient will not co-operate until he or she hits bottom and with funds remaining in the CBR we aren’t there yet. .

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  7. The Alaska Legislature primarily owns this. Regardless of the Governor’s budget request the Legislature appropriates the funds that pay for the budget. The Legislature created and continue to use the secretive caucus that mandates voting for the final appropriation regardless of sustainability and also voting to quash minority input. They fell into their own trap by appropriating the funds (mostly as Capital spending under Parnell) that hyper-stimulated the economy and now they are swinging a tiger by the tail. Of course the Governor could have line item vetoed those appropriations to a sane level; however, the short term political benefit of being the “sugar daddy” who created jobs while avoiding the recession in the lower 48 was too tempting.

    Regardless of price, the production level of oil has to decline over time and therefore state revenues from this non-renewable resource will decline because of either factor. That is a fact our state government refuses to recognize. Now, while the players have changed, these new players refuse to change the structure that created this mess and so the observation attributed to Professor Einstein comes to mind when he pointed out that attempting to solve a problem using the same equations and expecting a different result is the definition of insanity.

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