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Navarre argues for diversified revenues
Tells House Finance that complete dependence on oil-based state income out of step with the increasingly diversified economy Alan Bailey Petroleum News
With an increasingly diverse economy and oil revenues that fall well short of projected spending, Alaska needs to diversify its revenue sources, Mike Navarre, commissioner designee of the Alaska Department of Commerce, Community and Economic Development, told the Alaska House Finance Committee on March 19. Alaska has a bright future, with major economic opportunities from natural resources, including oil and gas, mining, fishing, tourism and agriculture. But the state’s fiscal problems undermine investor confidence in the state, discouraging investments in new projects, Navarre said.
“Our fiscal situation is a real and significant disincentive to investment,” he said.
There is much good news in the Alaska oil and gas scene, with increased oil production for the third year in a row, and with new potential developments on the horizon on the North Slope, coupled with the opening of the coastal plain of the Arctic National Wildlife Refuge for oil and gas leasing. The Alaska liquefied natural gas project is progressing because of Chinese involvement.
“But all of this will require billions of dollars in private investment,” Navarre said. “When making a decision, investors look closely at profit and also at fiscal stability.”
And Alaska oil and gas competes with huge oil and gas resources in the Lower 48.
Fiscal battles Alaska lawmakers have been conducting annual political battles over the fiscal deficit and state taxes, Navarre said. Meanwhile, an annual $2.6 billion funding shortfall has been drawing down the state’s savings. And compounding the problem is the fact that at current Alaska oil production levels the incremental impact of rising oil prices on state revenues is much less that it was when production was higher.
Navarre presented data showing the steady climb in the gross domestic product in Alaska from non-oil industries. By comparison, the oil and gas GDP has been volatile and has grown less overall, while also falling in recent years. Revenues into the state’s unrestricted general fund have followed the GDP trend for oil and gas, and not the trend for other industries, Navarre commented, to illustrate the decoupling of state revenues from the state economy as the economy diversifies.
SUBHED: Population related costs The key problem that arises from this decoupling is the fact that, while state revenues bear no relationship to the size of the state’s population, the state expenditures have a significant population related component, in particular from formula-based programs such as K through 12 education and health and social services. And, given that these formula-based programs account for a large chunk of state funding, addressing the state’s fiscal challenges through cutting government expenditure is more easily said than done, Navarre suggested.
Cutting the formula programs as a means of balancing the state budget will have direct impacts on the people in the community, he said.
“Cuts have real impacts that must be weighed,” Navarre said. “Cutting government will mean cutting services, cutting local funding and real economic impact.”
Navarre illustrated the problem using, as an example, a theoretical industrial investment in the Fairbanks North Star Borough that might create 5,000 new jobs, with 4,000 of the job positions being occupied by new Alaska residents. The resulting property taxes in the borough would more than offset the borough’s increase in school district costs. But, while the state would gain no additional revenue from the development, the state’s costs could increase by $30 million, including $25 million in increased school funding, Navarre said.
Increasing state costs in this way would further exacerbate the state’s fiscal woes, thus further undermining the state’s credibility as a place in which to invest, Navarre argued.
Strong objections Two committee members took strong objection to Navarre’s argument - this line of argument appears to say that new investment in the state should be discouraged, because the investment costs the state money, these committee members said. In fact Rep. Tammie Wilson, R-North Pole, refused to listen to Navarre’s presentation. Wilson said that Navarre’s hypothetical Fairbanks investment scenario, as depicted in his overhead slides, appears to imply that the state cannot afford military investment. She said that she was not willing to send that message to the military.
Currently the U.S. Air Force is engaged in a major infrastructure development near Fairbanks, in support of the F-35 fighter aircraft that will be coming to the Eielson Air Force Base.
Rep. Steve Thompson, R-Fairbanks and Fort Wainwright, picked up on the same criticism. Perhaps the fertilizer plant on the Kenai Peninsula should not be re-opened, or troop numbers at Joint Base Elmendorf Richardson should be reduced, Thomson quipped, adding that he did not agree with Navarre’s report.
Navarre responded that his intent was to stimulate discussion about the issue of unfunded state costs that would likely arise from new investment in the state. Everyone in Alaska supports investment by the military. But people have tended to assume that oil and gas revenues will continue to fund the costs to the state government of economic diversification.
“That is a premise that is not sustainable and will be a disincentive to investment,” Navarre said.
Pruitt: jobs and Permanent Fund Rep. Lance Pruitt, R-Anchorage, commented that, in his view, many new jobs available from new investments in Alaska would be picked up by existing state residents, a phenomenon that would reduce the demand for state services such as Medicare or unemployment benefits. Private investment, whether it is in oil and gas or in some other industry, is the best way of decreasing government costs. A combination of that and use of the state’s Permanent Fund earnings should bring the state within striking distance of a balanced budget, Pruitt said.
Navarre said that he agrees that the use of Permanent Fund earnings forms an essential component of any economic plan for the state. But use of these earnings will still leave a funding gap, in a situation where diversification of the economy comes in combination with levels of oil revenue well below levels that the state has enjoyed in the past. The resulting fiscal problems will put at risk the very oil and gas investment needed to sustain the economy and state revenues, he said.
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