Economic time bombs ticking

Alaska Permanent Fund adviser does report on post-oil boom economy; three more money managers work on their own reports, all at no charge to state

Larry Persily

Petroleum News Juneau Correspondent

Most Alaskans have long known how dependent the state’s economy is on oil and gas revenue, and how North Slope production is heading down, but that doesn’t mean it’s time to pack up and leave the state. Instead, says a report prepared by an investment adviser to the Alaska Permanent Fund Corp., it’s time to “focus squarely on Alaska’s most pressing challenges” and consider what’s needed for an economically healthy future.

“Over 40 percent of Alaska’s base economy … is directly related to petroleum production,” says the report by Kennedy Associates Real Estate Counsel Inc., an investment adviser to the Permanent Fund for almost 20 years.

“Although Alaska’s economic base has diversified over the past decade … the long-anticipated decline in North Slope oil production from its peak in 1988 will continue to have an increasingly dampening effect on economic growth and fiscal revenues.”

Despite the state’s relatively stable economy the past 15 years, the report cautions there are risks ahead. “There are ticking time bombs that threaten its employment base, fiscal health, levels of personal income, and overall quality of life.”

Advisers prepare reports at no charge

In addition to the Kennedy Associates’ report, presented in September, three more of the fund’s money managers — stock managers Dresdner RCM Global Investors, UBS Global Asset Management and Lazard Asset Management — are working on their own reports, Storer said.

“We can get insight from our managers on how companies evaluate Alaska and what impediments they see. We don’t expect them to all provide the same thing.

“Maybe we can provide the state with how these firms evaluate those kinds of decisions,” Storer said.

The Permanent Fund’s Alaska Development Research Committee will meet sometime after the first of the year to review all of the reports. The committee includes board chair Carl Brady and fund trustees Gregg Renkes and Eric Wohlforth.

Information to help discussion

“If you don’t have God-given natural resources to develop,” Brady said, the alternative is to use ingenuity and technology to create and develop other economic opportunities. “Because of a depleting resource,” he said, “we’ve got to take benefit of what we’ve reaped and do something to move into the future after natural resources.”

In addition to living off oil resources, Alaska’s economy has profited from growing federal spending. But, there’s a downside to that combination. “Having 70 percent of state economic activity dependent on two major sectors (petroleum and the federal government) means the state is particularly vulnerable,” the Kennedy Associates’ report says.

“Today, federal government spending provides one-third of personal income, and federal employees’ wages and salaries alone are responsible for 13 percent of all jobs in the state.” Looking past the increase in federal spending, the report also notes that practically all of the growth in average personal income in the state over the past decade came from the increase in Permanent Fund dividends — the annual payments from the state’s savings account. “Real wages and salaries have actually fallen,” the authors noted.

Report lists economic priorities

• Address the fiscal gap between declining revenues and state budget needs.

This will involve raising new revenues from non-petroleum sources, and downscaling or eliminating entire state programs.

“The state must also eradicate the growth-inhibiting incentives of the ‘Alaska disconnect,’ where new non-oil producing employment is a net drag on state finances.”

Without a broad-based tax to collect a share of economic activity, the report explains, “Each additional basic sector job added to the economy costs more to state finances than it generates. … This ‘disconnect’ creates an unintended, though bizarre, incentive for state policymakers and legislators.”

• Continue support for future petroleum and natural gas development.

The report lists as positive steps the state’s ongoing efforts to win congressional approval for oil and gas development in the Arctic National Wildlife Refuge and to promote construction of a natural gas pipeline to bring North Slope gas to market.

“Moreover, the state should continue to explore cost-effective and environmentally feasible infrastructure projects,” such as the proposed extension of the North Slope Haul Road west toward the National Petroleum Reserve-Alaska.

• Emphasize retaining and attracting a skilled and educated workforce.

“Creating a pool of 21st century-skilled laborers is more than educating one’s own — it also means welcoming outsiders and creating the right quality-of-life and other inviting place-based characteristics (such as cultural amenities and community-based programs).”

• Actively promote development of the state’s telecommunications services, and recruit air cargo-related business to take advantage of Anchorage’s role as an international hub.

“Alaska’s fast-growing air cargo industry will soon be facing an important turning point,” the report says. Either Anchorage will lose its role primarily as a refueling stop because of advances in aircraft technology and new polar routes, or it can develop a portfolio of cargo distribution and production roles to attract new business.

• Recognize that not every community can be saved.

“One of the most difficult challenges policymakers and economic development officials face is that of making choices between maximizing long-term returns on investment for a state or region at large and preserving communities and industries in decline, at large expense.” The future will be an adjustment for Alaskans, Brady said, recalling the Legislature’s decision in 1980 to abolish the individual income tax and the creation in 1982 of the annual Permanent Fund dividends. “How much better could it get?” he said.