Governor Walker Talks About Alaska's Fiscal Situation

Half a Plan Won’t Do

Medium Grind – News and Analysis

Following is a brief interview with Alaska Governor Bill Walker regarding the state’s fiscal situation and the various options to put the state back on an even keel. The governor talked about what it will take for him to accept any plan from the Legislature, and about the importance of getting a complete plan in place now. Following the interview is some general analysis from Grinder News.

GRINDER NEWS: During your media availability regarding the spring forecast you said the state has to act now on a change to the state’s fiscal structure. When asked about how much of the administration’s proposal would need to pass to avoid a special session you seemed to say it should all pass this session to eliminate uncertainty, but that the provisions will be phased in between now and 2019. Does that mean if the Legislature narrows the gap significantly, but leaves out some provisions for the time being you’ll call legislators back to finish the job?

GOVERNOR WALKER: It is critical that the legislature pass a complete fiscal plan this year so we can move on to building economic opportunities in the future. If the legislature is not able to complete this task during their regular 90-day session, I am prepared to add more time to the clock. This does not mean each component of the plan must take effect in 2017. In fact, under the New Sustainable Alaska Plan, we would not reach a balanced budget until 2019. This would avoid significant negative impact to the economy this year while still providing economic certainty for the future.

GN: When asked about AKLNG, you said you still think the project is viable, and that if some partners back out there is still the option to go ahead with whomever remains. You also said the producers want the gas monetized, so even if they don’t go ahead themselves they’re still in favor of a project. That said, the state is clearly not in a position to continue into FEED under the current fiscal situation. How important is that to your desire to get the fiscal package passed in its entirety this year? In other words, is the need for liquid assets for the AKLNG project a key driver in the your sense of urgency for a complete fiscal plan? If the state doesn’t close the fiscal gap by the end of 2017, will AKLNG have to be shelved?

GW: I am committed to bringing Alaska’s North Slope gas to the global market. In order to do that, it is absolutely critical that we get our financial house in order and ensure a stable state economy in the future. Passing a complete fiscal plan this year will help prevent further downgrade of Alaska’s credit ratings, and make sure the state has the financial means to move this project forward.

GN: How much longer can the state go without a meaningful capital budget before causing grave harm to the economy? What is the administration’s vision for infrastructure beyond the gasline?

GW: Capital projects play an important role in building our state’s economy, improving infrastructure, and providing well-paying jobs to Alaskans. By passing a complete plan this year, we can provide the fiscal certainty necessary to further these economic opportunities in the future.

GN: Of course you can’t give a dollar amount, but how important is some significant reduction in oil and gas tax credits this year? Is there any concern that a large reduction in credits will negatively impact investment and production, or are we simply past that point anyway given the current price climate?

Along that line, are you even convinced the SB 21 model was going to produce significant new production anyway? Though prices are likely to remain low for the next 15 to 20 months, is it necessary to reexamine SB 21 sometime in the near future?

GW: While it is important to incentivize further development of Alaska’s oil and gas resources, I have a fiduciary responsibility to protect the state treasury. Currently, Alaska pays more on oil and gas tax credits than we receive in petroleum revenue. As one of the state’s largest expenditures, this is something we are obligated to examine.

Analysis:

Each of the past three Alaska revenue forecasts has been bleaker than the last, and economic reality has underperformed even those gloomy forecasts. There are no significant increases in oil production on the horizon, and prices have crashed and don’t appear likely to improve measurably for at least the next 15 months ... after that it’s anybody’s guess. State capital spending has been stripped to almost zero, and the state’s operating budget has been slashed by billions. In spite of all that what was a $3.6 billion revenue shortfall just a short time ago has now grown to a $4.1 billion shortfall. The government could be completely shut down and Alaska would still be nearly $2 billion in the hole. That’s just to set up a cheery backdrop.

The reality is Alaska can no longer rely on the three major oil producers to pay its bills. By way of royalties, corporate and property taxes and oil production taxes the majors for many years accounted for about 90 percent of Alaska’s revenue. Oil revenue will likely remain an important revenue source for the state, but market volatility combined with production declines make those revenues too unpredictable and unstable for them to be the budget foundation they have been. A change in Alaska’s fiscal model is needed, and that is the driver behind Walker’s proposed fiscal plan. In no other state do residents get their infrastructure, schools, law enforcement, utilities and other services for free. No other state pays its residents for using those services. When oil was flowing fast and earning strong profits it was a great ride for us Alaskans. We’re fast approaching a time when we’ll have to help pay for the services and capital projects that keep the economy strong and the quality of life high here.

When the governor introduced his plan he said it was written in pencil, and he has continued to say that. Some interpret that to mean significant parts of the plan could simply be erased, but that doesn’t appear to be Walker’s intent. He has never said the mechanics of his plan were untouchable or unalterable, but he seems to be clear that the end result must be maintained – a balanced state budget by 2019. The governor’s proposal achieves that by phasing in certain provisions over the next three years, but Walker seems to be clear that legislators should not plan to go home to their families and reelection campaigns until they’ve passed a plan that achieves that goal.

House minority Democrats have said any revenue approach that includes only the use of Permanent Fund earnings will not be acceptable. That means House Democrats are not likely to vote for a draw on the Constitutional Budget Reserve to balance the FY 17 budget if a more comprehensive plan isn’t adopted. It sets up a likely end-of-session battle with a few new twists. If House and Senate majority leadership decides to leave some of the governor’s tax provisions off the table and simply go to some model of Permanent Fund earnings use, the House minority will likely refuse to release CBR funds. In the Senate the four-member Democratic minority doesn’t have a dog in the fight, so Senate leadership will be able to pass a budget and get a CBR draw, just as it did last year.

One difference this year is that once legislative leadership has decided to go to the PF earnings reserve, a CBR draw is no longer an absolute requirement. Leadership could simply decide to balance the FY 17 budget with funds from the earnings reserve, leaving the minority with no trump cards to play this year. Minority members have said they’d like to limit the CBR draw anyway in order to stretch the state’s savings further. That makes sense because the CBR vote is really the only reliable way the minority can influence outcomes. In the minority’s favor is the fact that Gov. Walker appears unwilling to settle for a partial solution to the state’s fiscal dilemma this year. The Democrats have hoped for alignment with the administration since Walker was elected, but the relationship has been uneven. This year, while the governor fights for a plan that is anchored with PF earnings use, some Democrats are still seeking to enshrine the PFD in the Constitution and others have expressed discomfort about income taxes, and still others are advocating for a more aggressive approach to oil tax reform than Walker’s plan incorporates.

Given that House and Senate leadership have yet to find common ground, it sets up at least four distinct camps in the battle for a budget, and it will likely end in a prolonged process and some entertaining rhetorical flourishes.

Adding to Walker’s sense of urgency is his longtime passion to bring Alaska’s natural gas reserves to market. When the bills creating the AKLNG project passed, Legislators and the Parnell administration were bullish on the notion that Alaska had finally found the right model at just the right time to get a gasline built. But Alaskans have heard that tune before, and it has always ended in tears. A drop in fossil-based energy prices and market gluts in both oil and gas have essentially priced Alaska gas out of the market, yet again. Walker remains hopeful that the project can still be completed.

In the current gasline plan Alaska must participate, with money, along with other partners. The plan is currently in the Pre-FEED stage, meaning partners are gathering information and determining the potential cost and economic viability of the project. After that, partners will determine whether or not they want to proceed to FEED, where real money will be spent. Alaska’s problem, of course, is that the state doesn’t have a lot of money to throw at megaprojects right now, and in the current market some of the producers may well pull out. Compounding that, the state’s fiscal travails have also led to a downgrading of Alaska’s bond rating. While the state’s rating is still good, it will be downgraded further if Alaska doesn’t get its fiscal house in order. That will mean it would be more difficult for Alaska to even borrow funds to participate in the project. Walker has to realize that without stabilizing the state’s revenue stream and balancing reasonable budgets into the future the AKLNG project is teetering on the verge of becoming yet another failure in Alaska’s decades-long natural gas dream. It’s strong incentive to convince the Legislature to pass a complete fiscal package this year.

Finally, the state will have to address its capital budget problem soon. As capital funds continue to dry up, the infrastructure industry, which provides quality jobs and creates infrastructure that powers industry and the general economy ceases to be an economic engine. Significant losses in government jobs, and likely further losses in teaching jobs have already taken revenue out of the general economy. Further job losses put the state in danger of a significant recession, and an end to capital projects diminishes future economic prospects as well.

Gov. Walker has decided the time is now for Alaska to reimagine its approach to fiscal planning, and he appears to be firm in his desire for the Legislature to pass a complete fiscal plan this session. With an election pending it may be difficult to achieve that result. Whether a protracted budget battle will help or hurt those up for reelection is yet to be seen. That failing to address the state’s huge revenue shortfall will hurt the state and its general economy is unquestionable.