Leadership Lost: "Ruh Roh, Raggy"

January 17, 2012: As the second session of the 27th Alaska State Legislature begins in Juneau today, the big mystery will be if state senators do anything more this year than continue to scare the bejeebers out of Alaska's private sector employers.    

So far, a strong, articulate voice on the economy has remained elusive in the hallowed halls of the state senate. In fact, from the deafening silence of supposed pro-business Republicans, you'd think somewhere along the line they got neutered.

Lets cut to the chase. We don't need to roll the Mystery Machine to arrive at the discovery that state government has only two ways to influence resource development: taxes & permitting.

That's it. Taxes & permitting. So when it comes to policy makers exercising these levers, a heavy hand on either kills economic investment. 

The current ACES tax regime was adopted in just mere days by the state senate, more than doubling oil production taxes on an industry that already pays for ninety cents out of every dollar that state senators spend. 

Today the State of Alaska is balancing its budget based on $94 per barrel oil. If current oil production decline trends combined with current budget increases persist, in just four years the state will need $142 per barrel oil to balance the state budget.

That's the real danger Shaggy.

But instead of a productive discourse about tax reform we're getting distractions visa vie proposed legislation designed to tell the public that state senators want to suddenly save. Nice to see the same lawmakers who held the capital budget hostage for three weeks because they were protesting potential spending cuts, have found fiscal religion.

However these proposals are all non-starters and are intended to provide political cover during an election year.

Take for instance Sen. Bill Wielechowski's proposal to constitutionally cap spending and mandate a deposit of 2/3 the surplus into the state's savings account. His legislation calls for capping unrestricted oil revenue at six billion with annual increases in the base amount determined by federal indices beginning July 1, 2013.

While this sounds eminently reasonable, it's completely unworkable. Ironically, as a vocal opponent of oil tax reform, Wielechowski's proposal actually makes the case we're desperate for more oil production.

Let say that Wielechowski's bill passes the impossible gauntlet of approval by both the legislature and voters taking effect for fiscal year 2013/14.

If for FY14 the population had increased 1.5% over 2013, and the CPI had gone up 2.5% from 2013 to 2014, then it would be $6 billion plus a total of 4% additional (1.5% population and 2.5% CPI), for a new “cap” of $6.24 billion.

If you hold the increase steady for 2015, adding another 4% to the base, you'll have a new cap of $6.48 billion.

Here's the problem; the forecasted unrestricted oil revenue in 2015 is only $6.3 billion due to declining production. 

Just two years into the spending cap, the cost of state government will exceed oil revenues and there will be no surplus for saving.

And from there the cliff into our savings account is steep.

In addition, this type of "save us from ourselves" legislation ignores the reality that lawmakers will find a way around the spending cap in spite of shrinking oil production. 

On any given year lawmakers could easily be forced to exceed the cap with a combination of education (foundation formula increase), education (court-ordered school construction), PERS/TRS funding, Medicaid, not to mention adding new operating cost like the prison at Point Mackenzie.

Wielechowski's bill shows that even with his proposed spending cap the biggest threat still remains; declining oil production. His proposal shows the need for more oil revenue, which is an argument for more oil production, which is an argument for tax reform.

Sorry to be so simplistic but it's based on two words; taxes and permitting.

That's it. Those are the only two tools the legislature has to stimulate real oil development and generate additional revenues to pay for the growing cost of state government. Since high taxes have been identified as the culprit for a drop in new investments, the state needs to act or pay the price. 

By the year 2020, fifty percent of Alaska's projected oil production will come from investments that have yet to be made. With long lead times for oil development projects, someone in the state senate needs to wake up and become an advocate for Alaska's private sector economy. 

Where is the leadership?

Where are those meddling kids?