Political Transitions in Alaska and the FY 2010 Budget Jerry McBeath University of Alaska Fairbanks INTRODUCTION This report discusses the factors behind the Alaska FY 2010 budget. It treats the Alaska economy in 2008 and 2009, demographic changes, and important movements in state politics, with a special focus on the national rise of one Alaska political leader—Governor Sarah Palin— and the fall of another, Senator Ted Stevens. The 2008 elections brought slight changes in the composition of the state legislature and a large change in the state’s congressional delegation. The report continues a focus on issues affecting Alaska’s future revenue stream—the natural gas pipeline—and its reputation, the state’s predator control policy. The next section of the report introduces the governor’s operating, supplemental, and capital budget requests, their revision and adoption by the legislature. Legislators paid less attention to the expenditure than the revenue side of budgets, and in the short 90-day session wrangled with the governor over federal stimulus funding, and whether it had “strings.” The final section analyzes state revenues and spending planned for FY 2010. THE ALASKA ECONOMY IN 2008 AND 2009 From the start of the state’s fiscal year on July 1, 2008 (FY 09) to the end of the fiscal year, the Alaska economy experienced extreme volatility in oil prices, but because of surplus revenues saved in previous years, Alaska was in better economic shape than most other states. Because the state is primarily dependent on royalties and taxes collected from oil/gas production, we focus on changes in oil prices before considering other resource sectors. Oil Prices. At the start of FY 09, oil prices had peaked at $147/barrel, a nearly 100 percent increase in just one year (Anchorage Daily News [ADN], 7/12/08). By early March, 2009, prices had dropped to less than $43/barrel, a precipitous change and a larger than 100 percent decline in less than one year. Yet during this period, the oil markets registered the largest single-day price gain in history (Fairbanks Daily News-Miner (FDNM], 9/23/08), as prices increased $25.45. In late December 2009 they fell to the lowest level during the year, some $28.27/barrel (FDNM, 12/21/08). By late June 2009, oil prices were in the $65-69/bbl range. There were a few other upward spurts in prices, but for Alaska public finance, the news was mostly bad, prompting questions about the accuracy of the state Department of Revenue’s forecasts. The global recession significantly reduced demand for oil, and the economic slowdown led to a glut in world oil supplies early in 2009. Variability in price can be attributed primarily to the slowness of OPEC to cut production. In late November 2008, the cartel declined to reduce production, when the price of oil had dropped by two-thirds (FDNM, 12/1/08). It was not until AK-1 late January that OPEC slashed production by 3 million barrels a day in order to stabilize prices (FDNM, 1/26/09). Changes in the value of the dollar also added to oil price volatility. Oil/Gas Production Prospects and Problems. The enactment of the new and stiff petroleum production tax in 2007 (see McBeath, 2008 and 2009, and McBeath et al., 2008) elicited threats from multinational oil companies that they would reduce their investment. However, until late in 2008, ExxonMobil, BP, and ConocoPhillips (the primary oil multinationals active in Alaska) continued exploration and development work. As late as early December 2008, BP announced that it was budgeting more than $1 billion for Alaska projects (ADN, 12/7/08). The majors reported huge profits in the third quarter (FDNM, 11/3/08), and ConocoPhillips registered $2.3 billion in profits from Alaska operations in 2008 (but paid an even higher amount, $3.4 billion, in non-income taxes [ABR, 3/24/09, p. 6]). Then, as the recession worsened, the producers indicated they would be cutting back on their investments. For example, ConocoPhillips announced it would be cutting 4 percent of its Alaska workforce and 18 percent of its capital spending in the state (some $2.8 billion). The jobs of 1,300 workers were at risk (FDNM, 1/18/09 and 3/5/09). The Flint Hills Refinery in North Pole neared bankruptcy and invited the state to buy it out (FDNM, 12/11/08). It shut down one of three refining units in March (FDNM, 3/14/09). Notwithstanding these projected (and real) cutbacks, the state revenue department’s spring forecast, based on information provided by companies working in the state, was rosy. This report projected increases in the oil industry’s capital investment from $2.2 billion in FY 09 to $3.0 billion in FY 10. Operating expenses were projected to increase from $2.2 billion in FY 09 to $2.4 billion in FY 10. The revenue department attributed the likely increases to the state’s investment tax credit and incentive program (DOR, spring forecast; also AER, 4/15/09, pp. 1-2). Although no new oil finds were reported in this period, the natural gas frontier looked good. Anadarko, a small oil/gas producer, announced that its work on the Gubik gas field was quite promising. Scientists stated that the Alaska North Slope had huge deposits of frozen natural gas. In their judgment, the supply was about 85 trillion cubic feet, more than two times larger than the earlier reported total of 35 trillion cubic feet of accessible natural gas (FDNM, 11/13/08). The state and ExxonMobil have had a running dispute over Exxon’s leases of natural gas deposits in Pt. Thompson. The state claims that the company failed in its obligation to develop the leases; it took the company to court, and ultimately cancelled several of the leases. Exxon alleged it spent $800 million on development of infrastructure at Pt. Thompson and was in full compliance with lease terms (FDNM, 9/30/08). Finally, early in 2009, the state allowed Exxon to proceed in development of two of the leases in this huge gas field, once regarded as a critical piece of the state’s plan to market North Slope natural gas (FDNM, 1/28/09). ExxonMobil drilled the first well in the gas cycling and condensate project before mid-year (AER, 6/18/09). The Fraser Institute’s Global Petroleum Survey 2009 contained unsettling news for oil and gas development prospects in Alaska. This survey of 577 respondents assessed barriers to investment in oil and gas exploration and production in various jurisdictions. Alaska (onshore) AK-2 ranked 78th of the 143 jurisdictions evaluated, somewhat below the median globally (as it had been placed the previous year). Only two US states, California and Colorado, ranked lower. Table 1 indicates the percentage of respondents believing that, in the question area, Alaska’s policy was “a mild” or a “strong deterrent to investment,” or the company “would not invest due to this criterion:” Table 1.—Alaska’s Perceived Investment Climate, 2009 Criterion Percentage 1. Fiscal terms 33 % 2. Taxation regime 26 % 4. Cost of regulatory compliance 56 % 5. Regulatory uncertainty 41 % 6. Environmental regulation 73 % 7. Local processing requirements 26 % 8. Labor regulations 30 % 9. Local public infrastructure 43 % 13. Labor availability 50 % 14. Aboriginal land claims 48 % 15. Political stability 17 % 16. Security 5 % Source: Fraser Institute, 2009, selected pages, appendix. The majority of respondents with negative views thought that the Alaska regulation or practice was only a “mild” deterrent to investment, and Alaska did score higher than oil rich regions of the Middle East, Africa, and Latin America. Nevertheless, the state’s rankings had declined, report authors opine, because of “increasingly costly fiscal terms and tax rates” after revision to the production tax in 2007 (Fraser, p. 10). Increased scrutiny of oil company adherence to environmental rules after the massive 2006 North Slope oil spill probably played a role as well. Finally, the corruption scandals of 2006-07 certainly influenced company assessments. The only respondent to comment specifically about Alaska said: “Notoriously corrupt government. Essentially a Third World country.” (Fraser, p. 31) Alaskans hope this is an unrepresentative comment. Other Natural Resource Production. News from other sectors of the Alaska economy in 2008 and 2009 was mixed. The mineral industry sector performed reasonably well. In 2007, product value reached a record high of $4 billion. Mineral exploration and development spending remained strong in 2008. Exploration spending totaled $328 million, about the same as the previous year. Work on mines in construction totaled $380 million, a 19 percent increase over the previous year. Minerals-related employment increased to 4,334 jobs. However, the value of mineral production declined about 29 percent, to $2.4 billion, because of falling base metal prices (AER, 6/8/09). This influenced the value of Alaska exports, which dropped to $3.6 billion (but this was still the fourth highest year on record [ADN, 4/5/09].) AK-3 In previous reports we have mentioned mineral discoveries, but the most significant was in early 2009. International Town Hill Mines, a member of the Cardero Group, announced a world class discovery near Livengood, 70 miles north of Fairbanks. This was one of the largest gold mine discoveries in the last decade (FDNM, 1/30/09). Alaska’s coal deposits are world class too, and environmentally preferable because of their low sulfur content. The state’s primary producer is Usibelli Coal Mine. Its surface mines near Healy in interior Alaska supply in-state users and an active export trade to South Korea and other Pacific locations.