Monday, April 29, 2013

On Glen Biegel Wednesday at 6:15 am ...

I will be on the Glen Biegel Show Wednesday morning at the 6:15am -- yes, the 6:15am -- slot.  As most of you know, Glen recently moved to the mornings from 6 - 9am.  I am up early anyway, but I still will have coffee in hand.

On the agenda, oil policy, fiscal policy -- maybe even some on the latest UAA controversy (which is as much a fiscal policy story as anything else).  On at KBYR 750 AM if local or listen on the web by clicking  here.  Call in with questions to 907-274-5297.

Friday, April 26, 2013

Short Takes| UAA's Case disappoints ...

The Anchorage Daily News carries a story this morning on the continuing UAA saga.  The headline is "UAA chancellor defends athletic director Cobb."

One of the most interesting pieces of this story came Monday during the Casey Reynolds Show.  There, a caller reported on an earlier meeting with Cobb:
... we had a meeting down in the locker room after all the alumni were up in arms about the whole arena. And Dr. Cobb said, basically along the lines of it doesn't matter how much money this Athletic Department loses, the state is awash in money and we are just going to get a blank check.
The podcast of the show is here; the call starts at the 7:50 mark.

Nothing in Chancellor Case's comments carried in today's article addresses that issue.  Instead, the focus of Case's defense is centered mostly around the performance of the University's sports programs other than hockey.
"What doesn't resonate as well with some hockey people is we're a Division II school and our Division II sports are in the top four percent in the nation. 
"That's something I don't take lightly. That says a lot. I was talking to (Great Northwest Athletic Conference commissioner) Dave Haglund recently, and he told me it was OK to share this: In his experience, Steve is probably the best athletic director in the conference. 
"That's not compelling to our hockey fans, maybe, but it is to me.''

Read more here:
All that may be true, but it is not a good defense of either Cobb, or Case's confidence in him.

As the University's own Institute of Social and Economic Research (ISER) has pointed out repeatedly, Alaska is headed for an economic crisis.
Right now, the state is on a path it can’t sustain. Growing spending and falling revenues are creating a widening fiscal gap. In its 10-year fiscal plan, the state Office of Management and Budget (OMB) projects that spending the [state's current] cash reserves might fill this gap until 2023 ….   
But what happens after 2023?  Reasonable assumptions about potential new revenue  sources suggest we do not have enough cash in reserves to avoid a severe fiscal crunch soon after 2023, and with that fiscal crisis will come an economic crash.
Maximum Sustainable Yield: FY 2014 Update (ISER, Jan. 2013).

In that environment it is critical that every arm of state government work to minimize costs and maximize contributions.

I have been involved in a number of university fund raising efforts in my life and in my experience, athletics play a key role.  Athletics brings people in the doors, helps to develop a sense of institutional loyalty and commitment, and over time, converts that support to dollars.  Supporters that start with athletics often become supporters of other programs as well.  It is one of the significant front doors through which a university builds strong alumni and other donor support.

Instead of serving that function, UAA's athletics program is now driving potential supporters away, out of the front door.

Whether he realizes it or not, one of Chancellor Case's greatest responsibilities to the institution and the state is to lead the University's fundraising efforts.  When first named to his position, UA system President Patrick Gamble asked a team of highly respected consultants to evaluate the University system and provide recommendations.  One of the areas on which the President asked the team he retained to focus was fundraising (or, what universities prefer to call "institutional advancement").

In the final report (referred to as the "Fisher Report" after the leader of the team), the team had the following to say:   "The Chancellors, in coordination with staff or key volunteers, are crucial to soliciting [major] gifts and providing careful stewardship and attention to this group of donors. ... the Chancellors, with appropriate help from the President, must be in the forefront of this fund raising activity."

Regardless of how the Commissioner of the Great Northwest Athletic Conference (who, after all, effectively is hired by the Athletic Directors) may feel about Dr. Cobb, the litmus test that Chancellor Case should use in evaluating Cobb's performance is whether he is making the contributions to the University that need to be made by an Athletic Director as Alaska heads into its fiscal storm.  Is he bringing alumni and supporters in the front door and helping to strengthen UAA's support and financial outlook.

Undertaking such an assessment is part of the Chancellor's role of "providing careful stewardship" of the University's efforts.

Rationally evaluated in any number of ways (attendance in major arenas, financial health of major events, alumni support) the answer to the question of whether Cobb is performing those tasks at the required level is "no".  Indeed, Cobb is moving UAA in the reverse (and wrong) direction.

I am confident the legislature next year will be evaluating how all of the state's institutions are preparing to deal with reduced budgets and what efforts they are making to maximize contributions from other sources to their bottom lines.  As I have discussed previously on these pages one of the criteria for evaluating the University system will be whether the institutions are doing as well as their peers in attracting contributions from alumni and other supporters.

Chancellor Case has the opportunity to make UAA's position much better by starting out fresh with a new Athletic Director.  Given the history that has built up, Dr. Cobb is never going to return to the starting point, much less help make up the additional ground that UAA requires in preparing to shoulder its share of the institution's costs.

Chancellor Case is wrong, very wrong in putting his confidence in Dr. Cobb. As leaner economic times arrive it is only a matter of time before that becomes apparent.  The only significant question is how much additional ground UAA will lose in the meantime.

Thursday, April 25, 2013

Short Takes| The power of a (misleading) headline ...

The Alaska Dispatch posted its story on Conoco Alaska's first quarter 2013 earnings this afternoon.  The headline reads:
ConocoPhillips reports $540 million in first-quarter Alaska profits
Let that soak in for a moment and reflect on your reaction.  And then, compare that with the reaction you would have if the story instead carried the following headline:
 Alaska receives $900 million, ConocoPhillips $540 million on first-quarter Alaska production
As we have written elsewhere on these pages, Alaska and Alaskans face some very challenging decisions in the years ahead as we come to grips with the state's oil and fiscal policies.  What the state is earning from oil is as directly relevant to those discussions, if not more so, than what the state's investors are earning.

Focusing attention only on what others receive, without providing in the same breath also what the state already is receiving, misleads Alaskans.  It fails to provide the additional context that the state already is receiving significantly more.

If the state's news sources are truly interested in educating Alaskans (rather than spinning them), they should provide both numbers at the same time, and indicate the importance of each by including them in the headlines.  The Dispatch's approach of putting a private investor's share in the headline, with the state's buried seven paragraphs down is both disappointing and unhelpful.

Wednesday, April 24, 2013

Alaska Fiscal Policy| More on UAA ...

I wrote a piece Monday on the decision by the Alaska State Hockey Association (ASHA) on Saturday to issue a vote of "no confidence" in University of Alaska - Anchorage (UAA) Athletic Director Steve Cobb.  The Anchorage Daily News reported on the vote Sunday:
In a resolution sent to a range of university and state leaders, the association cited the steady decline of UAA hockey and claimed repeated efforts to reach out to the university’s athletic department and hockey coaches have been “systematically met with callous indifference.”
As I explained in my piece, I believe this story is as much about Alaska fiscal policy as anything else.  Unlike other public universities, UAA does not raise a significant amount of its budget from alumni and other supporters. Instead, the state underwrites virtually all of the University's costs beyond those covered by tuition.  Because UAA does not have to reach out to donors and supporters, it does not have to pay attention or otherwise cultivate a relationship with them.  The result is the attitude of "callous indifference" noted in the ASHA resolution.

Since Monday, the story has continued and not in a good way for UAA.  

Yesterday, the UAA Hockey Alumni Association, which counts more than 300 former Seawolves among its membership, issued its own vote of no confidence in Dr. Cobb.  Their explanation for their decision proves my earlier point about UAA's indifference to its supporters.

According to the Anchorage Daily News report of the Association's decision, "[s]ince ... it was formed a few years ago, the alumni group has raised more than $100,000 for UAA hockey and the athletic program, including $55,000 for an endowment fund."  Yet, as with the ASHA, the Association feels"shunned" by Cobb's actions.

As if to put an exclamation point on the discussion, a caller on Monday morning's Casey Reynolds Show recounted a discussion with Dr. Cobb during an earlier situation:
... we had a meeting down in the locker room after all the alumni were up in arms about the whole arena.  And Dr. Cobb said, basically along the lines of it doesn't matter how much money this Athletic Department loses, the state is awash in money and we are just going to get a blank check. 
The podcast of that discussion is here; that call was from the 7:50 - 10:00 mark.

Put another way, we really don't need your support and don't have to put up with your ideas.  We will run this program however we want to because the state will keep paying the bills.

Sometime Monday, after the first story broke, Tom Case, UAA's Chancellor weighed in with a statement that included the following, "I have confidence in the steps being taken by Athletic Director Dr. Cobb ...."  KTUU's report on the statement is here.

Subsequently, in response to today's story about the action taken by the Alumni Association, the ADN reported "UAA Chancellor Tom Case ... could not be reached [for comment]."  Hopefully, that means that UAA's Administration is reconsidering its course of action.

Its failure to do so will expand this issue.

Among other things, the Chancellor is the primary face of the university to the larger community.  In the normal university, this is not intended merely as a "public service" role; it is the position where the rubber meets the road in terms of developing a solid and significant fundraising base.

In Monday's piece I wrote about the Fisher Report, the results of a study of the UA system by a team of highly respected higher education consultants commissioned by then newly-installed UA President Patrick Gamble in 2010.  The portions I wrote about Monday related to the "mediocre, at best" efforts of the University to connect in a serious way with its alumni and supporters.

To recap from the report, "[t]he giving rates of alumni to UAF’s, UAA’s and UAS’s annual funds ranges between one and six percent; embarrassingly low ….”  By contrast, “[t]he national average for alumni giving is over 17 percent, and some institutions go as high as 60 to 70 percent.”

The report also identified who is responsible for leading the recovery from this situation.  "The Chancellors, in coordination with staff or key volunteers, are crucial to soliciting [major] gifts and providing careful stewardship and attention to this group of donors. ... the Chancellors, with appropriate help from the President, must be in the forefront of this fund raising activity."

Chancellor Case's action in this situation will tell the broader community whether the attitude of "callous indifference" of the University toward its supporters extends to the person charged with being "in the forefront" of the University's fund raising activity.

What we saw Monday in the Chancellor's reaction likely was the academic equivalent of the military response of "closing ranks."  This isn't the time for that.  Instead, its time for the Chancellor to step up to one of the most important functions of University leadership -- connecting the University to its outside supporters and constituencies.

Sometimes University supporters become overzealous.  But even then, because they have been asked to and have become investors in the University enterprise, their voices deserve respect.  That hasn't happened in this situation.  Instead, at least to this point, the University's attitude toward what it should view as some of its most valued and committed supporters has been one of disrespect.

Regardless of the ultimate outcome of this situation, however, my point from Monday's piece stands.  It is time for the University to connect and develop its supporters.  For the very reasons Dr. Cobb unintentionally made clear in his locker room speech, the state should reduce its funding by the amount that the University should be raising from its alumni and other friends.  The state should not be the University's blank check.

In a time of declining state spending, its time for the University system to start pulling the same weight as its peers in the L48.

Short Takes| Hmmmmm ...

I just finished listening to the second hour of Monday's Casey Reynolds Radio Show.  I was out of town Monday, but I understood from a friend that Casey talked about the current situation at UAA, which I had written about that morning (and am again this morning).  As it turns out he had read the post and was talking about it on air.

The podcast of the second hour is here; the discussion of the post runs from roughly 18:15 to 30:30 of the segment.  Casey makes an interesting -- and unexpected -- comment at the end of the segment, at roughly the 30 minute mark.  I am honored by the comment and the company. 

Frankly, as I have said elsewhere, I do think there is scope for an Independent candidate for Governor in 2014.  At least from a fiscal policy perspective, which drives a number of others, Juneau is seriously broken.  

This year the Governor proposed and the Legislature passed the second largest combined capital and operating spending package in Alaska's history, oddly claiming in the process to be "fiscal conservatives."  They aren't.  

As the University of Alaska-Anchorage's Institute of Social and Economic Research (ISER) made clear before the session started, "In fiscal year 2014, Alaska’s state government can afford to spend about $5.5 billion."  Spending above that level, ISER warned, would continue "the state ... on a path it can’t sustain," leading ultimately to "a severe fiscal crunch soon after 2023, and with that fiscal crisis will come an economic crash."

The Governor and Legislature's combined response?  A final spending package of $6.8 billion, fully $1.3 billion (or nearly 25%) above sustainable levels, and as I mentioned above, the second highest in Alaska's history.

Adding injury to injury, toward the end of the session the Governor announced that he intends to double down on this reckless policy, proposing a "fiscal plan" that maintains spending at the same level -- $6.8 billion -- for the next five years.  The plan affirmatively contemplates deficit spending in the range of $700 million per year.  The difference between that and the sustainable spending level will be significantly more.

As I have explained elsewhere on these pages, at the end of that road lies disaster. "[E]ven with oil tax reform and a production response that results in 0% decline, the state simply emerges at the end of the five year period at the edge of the fiscal cliff ISER describes in its study, perhaps even earlier than 2023."

Twenty years ago in the midst of a similar failure of fiscal policy by both parties, Maine voters rebelled and elected an Independent as Governor.  The experiment was a success.  Reelected with 59% of the vote after his first term, Governor King ultimately left office with Maine's fiscal house back in order.  This past year, running with the support of federal fiscal hawks former Wyoming Senator Alan Simpson (R) and former Clinton White House Chief of Staff Erskine Bowles (D), King was elected to the U.S. Senate, again as an Independent.

There is a lesson in that for both Alaska parties.

King, by the way, is a graduate of the University of Virginia School of Law.  So am I.

Thursday, April 18, 2013

On Glen Biegel this morning ...

I will be on Glen Biegel's new morning show -- KBYR Morning News/Comment with Glen Biegel -- at the 6:45 am segment today.  Anand Dubay is joining Glen as host this morning and we will do a quick update of where Alaska stands on oil, gas and fiscal policy.  AM 700 KBYR on the radio, available on the web here.

Tuesday, April 16, 2013

Short Takes| Well, at least I have one reader ...

The second hour of today's Casey Reynolds Show contains an engaging -- and often humorous -- interview with Senator Hollis French.  The segment is available here; the interview with Senator French begins at about the 13:00 mark.

Casey had suggested I listen to the interview and a little over 15 minutes in (at the 30:15 mark) it became apparent why.  Invoking my name for the second time in the interview (the other was in response to Casey's mention of my name around the 27:15 mark), Senator French started taking issue with my recent column in the March 2013 edition of the Alaska Business Monthly -- Alaska Oil Policy|  "Maximum Benefit".  He was suggesting that the decline curve I used in that piece as the optimum (3%) was, in fact, what Alaska was experiencing, and thus, there was no reason to adjust taxes.

As Lisa Demer pointed out in a recent piece in the Anchorage Daily News, there was a lot of discussion in the closing days of the debate on SB 21 over decline curves.  Indeed, one of the last presentations made before House Finance by EconOne, the Administration's consultant, was entirely about the effects of the bill under a broad range of decline curve scenarios.

Suffice it to say that Senator French and others took one view, but as Lisa Demer's article points out the Administration, supported by recent state production forecasts, took another.  The point that Senator French overlooked in the course of discussing my article, however, is that the decline curves I used better fit both recent history since the passage of ACES and the long-term state forecasts made both before and during the debate began on SB 21.

But, hey, I am just happy to know that someone reads the pieces I write.  And Senator French isn't always a critic.  During the first Senate floor debate on SB 21, Senator French used another presentation I made during the session as support for one of the amendments he offered at the time.  (The floor debate is available here.  Senator French's comments begin at 5:45pm (18 minutes into the segment) and extend to 5:53pm (or 26:30 of the segment)).  Maybe I will get a Christmas card from him after all, Casey.

Saturday, April 13, 2013

Short Takes| A conversation with Dave Stieren ...

I was on the Dave Stieren Show Thursday to discuss the current status of oil tax and fiscal policy reform.

The discussion ended up being part of a larger discussion that transcended the current legislative session, which Dave started earlier in the show, continued after our conversation and returned to again in his morning commentary Friday.  Our discussion  focused mostly on my sense of where oil tax reform and fiscal policy will stand at the end of this session, and how they may play as issues during the 2014 electoral season.

When put that way, my take was that this legislature has stumbled to a result on oil tax reform which will produce some investment, but is not a long term fix to Alaska's issues.  As I explained during my segment, the level of spending -- and the pressure to maintain state revenues (demonstrated by the continued debate about putting the base rate at 33 or 35%) -- has gotten in the way of developing a sound oil tax policy.

And as Dave and I discussed during the segment the state is nowhere near fixing its spending (fiscal) policy.  Indeed, if anything, it has become worse this session as a result of the Governor's apparent satisfaction with leveling annual spending at $6.8 billion -- which seems like a significant cut only because last year's budget was the largest in the state's history.  To put that level in perspective, $6.8 billion is the second largest budget in the state's history, and now the Governor proposes essentially to freeze spending at that level for the next five years.

As I pointed out in a written commentary also on Thursday, even if oil tax reform produces a significant production response, the state cannot sustain that level of spending without a significant call on its fiscal reserves, which at the end of the five year period will leave state government at the edge of a serious fiscal cliff.  Essentially, that policy appears designed to spend away Alaska's fiscal reserves, needed to sustain future spending levels, simply in order to avoid making hard decisions now.

Dave's opening segment on the issue is the first 11 minutes of the second hour of the Thursday show, which is here.  My segment is later in that hour, starting at 22:35 and running to the end.  Dave then continued the discussion for the first 10 minutes at the beginning of the third hour of the show, which is here.  Dave's Friday morning segment is not yet available; I will post it when it is.

Thursday, April 11, 2013

On the Dave Stieren Show this (Thursday) afternoon ...

I will be on the Dave Stieren Show this afternoon at the 3:30 pm segment to discuss the current status of oil tax reform (House Finance just released a new draft Committee Substitute) and state fiscal policy (the proposed budget is now the second highest regular session budget in state history) ... and there's four days remaining in the regular session.

Tune in at AM 750 if in Anchorage or here on the web.

Wednesday, April 10, 2013

Short Takes| A conversation with Glen Biegel

I was on the Glen Biegel Show Monday to discuss a variety of issues, including oil and budget policy, Norway ... and Margaret Thatcher.   The podcast of the complete discussion (23 min.) is here.  Among other thoughts ...

On SB21 (oil tax reform): "This isn't going to be the big bang.  This bill isn't going to pass and all of the sudden everything is going to be right with the world and we never have to worry about [oil tax issues] again.  What we are going to have here is a little bang, or a little few bangs.  We're going to increase investment in the state, but we are still going to need to worry about oil policy going forward.  ... We are going to need to worry about, as they have done in the UK, how we identify tax rates that go after other opportunities."

On fiscal issues.  "We have slowed the boat down. ... The test is going to come in turning that boat around and starting it back in the other direction.  And this Legislature is not going to accomplish that.  ... Glen:  Does [that] require the Governor to be brave, to have courage?  Brad:  Absolutely, [but so far] the Governor has come out with a 5-year fiscal plan that I think is just kicking the can down the road in ways that are very bad for the state."

Tuesday, April 9, 2013

Short Takes| One-Time Lease Extension Bill Approved by State House of Reps

Rep. Olson's HB 198 is an effort to change the tools available for extending state leases.  For various reasons, including the fact that Alaska is a challenging environment in which to operate quickly due to permit and other requirements, investors sometimes are not positioned to be in production by the end of their initial lease term despite making reasonable efforts.  To some degree that inhibits investment and activity on the front end, as investors consider the potential that they later may lose the value of their efforts by the expiration of the lease term despite their reasonable efforts.

In the past the state has addressed these issues through various means, such as the formation of units, that have longer term implications and potentially lead to friction between investors and the state at later points.  While the approach reflected in this bill carries its own potential for friction, if fairly administered over the long term by the Department of Natural Resources, as it likely will be, this approach should provide a less adversarial and more routine means for addressing the issue.

A radio report on the HB 198 is here:  One-Time Lease Extension Bill Approved by State House of Reps | Radio Kenai.  Materials related to the bill are here.  The bill now goes to the Senate for consideration in the final week of the session.

Sunday, April 7, 2013

Short Takes| Shannyn Moore must not have been a waitress ...

Shannyn MooreShannyn Moore ‏@shannynmoore  Dear idiot - when the price of oil goes up, so do our costs to plow roads & heat schools. That's why you need progressivity.

Sometimes when I have other things to do, I follow what is going on in the Alaska Legislature by checking Twitter. For those that haven't entered the Twitter age yet, people posting (or, in the vernacular, "tweeting") can put a "hash tag" on their post, which any of the usual Twitter applications will then aggregate and allow you to read separately, rather than diving into whatever else anyone on your friends list may be talking about.  

Because today is the NCAA WBB semifinals, for example, a large part of the current posts in my Twitter feed are about how the Louisville - California game went, or how UConn is doing against Notre Dame. I knew all I wanted about that, but wondered how things were going this afternoon in the House Finance Committee hearings on SB 21, so I clicked on the column I have set up for posts that reference " # akleg.

That's when I ran across the above tweet from Shannyn Moore, a blogger, talk radio host and sometimes columnist for the Anchorage Daily News.

As I have pieced things together, evidently someone in the SB 21 hearings had brought up progressivity and someone else had suggested progressivity was not a good thing (which its not if you are concerned about staying competitive throughout the price range investors use to evaluate potential oil investments).

Shannyn then decided to add her two cents, talking to no one in particular (since she wasn't at the hearing) but reaching out to the Twitter universe in general.

The first thing that caught my attention was her use of the word "idiot."  In the very few times in my life I have used that word in public, I have been very careful to make certain what follows is accurate.  There is nothing quite as bad as referring to someone as an idiot, and then immediately proving you are a moron.

Shannyn, evidently, doesn't follow the same rule.  Immediately following her opener, she posted "when the price of oil goes up, so do our costs to plow roads & heat schools. That's why you need progressivity."

Uh no.  When the price of oil goes up, so automatically do state revenues.  You don't "need progressivity" for that to happen.

To illustrate, if the state tax rate is 15% at $80/bbl, that produces state revenue of $12/bbl.  Even at the same tax rate of 15%, if the price of oil increases to $100/bbl, so does state revenue (to $15/bbl).  Even staying at the same 15%, if the price of oil increases to $120/bb, so does state revenue (to $18/bbl).

I recognized this was higher math, so I thought I should check it with the waitress serving us at the restaurant I was sitting in when I read Shannyn's tweet.

My question to her:  "even if I am only going to tip you the same 15%, would you prefer me to have an $80 tab, or a $100 tab."  Her quick reply, "$100."  "Why," I asked.  "Because I make more money at $100 than $80," she replied.  "I'll be," I said, "even if I don't use progressivity [well, what I really said was, "even if I don't increase the percentage"] in determining my tip."

Looking at me like I was the idiot, she replied "yes sir.  I make more money when the tab rises, even if you don't increase the percentage."

Huh.  Shannyn must never have been a waitress.

(The really sad thing?  Five people have retweeted Shannyn's tweet and three have "favorited" it since she first sent it.  I guess there are less former waiters and waitresses wandering around than I had thought.)

Saturday, April 6, 2013

Short Takes| The News-Miner goes off track a bit ...

An editorial in the Fairbanks News-Miner today -- "Finish the job: Engineering buildings need complete funding" -- goes off track a bit.  Normally the News-Miner editorial column is strong on fiscal reform, pointing out the need for serious cuts in spending in order to sustain Alaska's future (see "Alaska Fiscal Policy| The Fairbanks News-Miner Gets It," Thoughts on Alaska Oil & Gas (Jan. 7, 2013)).

This morning, however, the column somewhat falls prey to a common Alaska affliction -- arguing on the one hand for spending restraints, but then on the other for the Legislature to fund just this one project.  In the News-Miner's view, "[t]he Legislature is trying mightily to keep the 2013 capital budget under control, which is a laudable goal, but it would be a shame if the engineering buildings at our two university campuses failed to receive a second year of funding this year."  The column then goes on to argue that the Legislature should find a way to provide the money.

As these pages have made clear throughout, the total, all-in budget for the unrestricted general fund this year should be $5.5 billion.  See "A Serious Wake-Up Call from ISER: “In fiscal year 2014, Alaska’s state government can afford to spend about $5.5 billion," Thoughts on Alaska Oil & Gas (Jan. 3, 2013).  Spending more shifts the resulting fiscal burden -- in simple terms, essentially imposes a tax -- on future generations.

There should be a rule -- and I urge it on the News-Miner going forward -- that anyone proposing to spend an additional dollar (in my view, above $5.5 billion) should identify at the same time an equal amount of spending to be cut.

Its not that the capital budget announced this week isn't a target rich environment for that sort of thing.   In two different line items, for example, the current bill proposes to spend $2.1 million on "Service High School Field Turf and Stadium Amenities," and another $.8 million on "Service High School Track Improvements and Stadium Amenities" (p, 98, lns 18-29).

That's fine, I suppose, but as a state do we really think its appropriate to reduce money that future generations need saved now to pay for basic teacher salaries going forward, so that the current generation can have four games a year on an astroturfed football field?  And even if we think spending that amount of money is appropriate, is it more important than spending it on completing needed Engineering Buildings on at least one of the state's two major college campuses?

It might take some work, but even this year's proposed budget is sufficiently full of fluff that over the course of a day it would be fairly easy to identify an offsetting amount of savings in order to make room for what the News-Miner, at least, believes are higher priority items.

In my view, those who understand the state's coming fiscal crisis -- including the editorial column of the News-Miner -- have a continuing responsibility to do something about it.   If they (we) want to argue for state spending on this project or that, we should have at it.  But we should be responsible, and ourselves help make the hard choices that we argue the Governor and Legislature should be making by identifying specifically an equal amount that should be cut.

Want to spend a penny above the sustainable level -- even on something as laudable as education -- then identify where the offsetting savings can be made.  Otherwise, forfeit your turn to ask for more spending.

Thursday, April 4, 2013

Short Takes| David Gottstein raises good questions, but has the wrong answer

In a piece in yesterday's Alaska Disptach ("The State of Alaska is Recklessly Flying Blind With Your Future," Alaska Dispatch (Apr. 3, 2013)), David Gottstein argues that "Alaska is behind the times and is woefully lacking the proper and standard business practice analysis tools and methods necessary to make sound and good investment decisions over the management of its natural resources."

From that he suggests that Alaska should invest in developing some specific financial modeling tools he describes in order to improve its decisionmaking progress.

Gottstein's opening premise is valid.  In other pieces, I also have argued that Alaska is flying blind to its detriment in making various decisions related to oil policy.  SeeAlaska Oil Policy|  Out of Alignment,” Alaska Business Monthly (Nov. 2012).

But the solution is not more studies and consultants.  Frankly, Alaska has hired more consultants and conducted more studies than any other government with which I ever have been involved or observed.  This legislature is no exception and, in fact appears already to have done some of the work suggested by Gottstein.

Toward the end of his piece, for example, Gottstein suggests that a tool should be developed for evaluating the relative shares of the revenue stream being received by the federal government, Alaska and the producers.  In fact, that analysis -- and a chart very similar to that suggested by Gottstein -- already are part of the work underlying SB 21.   See pages 26 and 27 of EconOne's March 25th presentation on SB 21 before the House Resources Committee.

But the fact that some of the analysis he suggests has already been done does not undermine Gottstein's central point.  Alaska is flying blind -- or at least in heavy overcast -- with respect to the development of its oil policy.  As I have argued elsewhere, what Alaska needs is not more analysis and more consultants.  Instead, what Alaska needs is to participate as an investor in its own future.  See Alaska Oil Policy|  Achieving Alignment,” Alaska Business Monthly (Jan. 2012)

The oil investment market is a continual and complex dynamic.  Occasional, one time analysis -- even good, occasional, one time analysis -- at best gives a viewer only a snapshot into what is driving investment in Alaskan's natural resources.  Just like individuals should not make a one-time decision about the investment of their retirement plans and then let them sit unattended and unevaluated as the financial markets swirl around them, Alaska should not rely on occasional, one time evaluations of its competitive position in investment markets and then let the result sit unattended and unevaluated, as others make the decision when and how to develop Alaska's resources.

The solution to the "flying blind" issue raised by Gottstein is not more studies or tools.  Like other governments have when faced with the same situation, the solution is for Alaska to become directly involved in the development of its own resources through co-investment and partnership with industry.

As I have said elsewhere, "Alaska owns the oil and gas resources located on the state’s lands; it inevitably is integrally involved in their development. The question is: what management approach best develops the resource? Co-investment is a proven [and indeed, the global standard way] to achieve that objective."

Short Takes| Jack Roderick is wrong

Tuesday, Dermot Cole wrote a blog piece on Jack Roderick's testimony before House Resources.  "Jack Roderick offers sound advice to lawmakers about need for more research on oil taxes," Faribanks News Miner (Apr. 2, 2013).  The piece praises Jack for suggesting "[y]ou have to have some guarantee [from the companies that they will spend the money you're giving them in Alaska], and preferably in writing that that will happen ... before giving a tax break."

The problem with demanding such "guarantees" is that the state is neither willing -- and perhaps, constitutionally impaired -- from giving any guarantees of its own.  As a result, there is no "guarantee" to a producer if it makes an investment in Alaska based on one set of tax provisions, that the tax provisions won't change two years later and convert to state take a portion -- perhaps a large portion -- of the revenue stream on which the investor relied in making the investment in the first place.

It is not enough to suggest in that instance that the producer can back out if the legislature makes such a change.  Because oil and gas investment is front end loaded, by the point such a change occurs the investment already will have been made and, just like the Prudhoe and other infrastructure on the North Slope today, it will have become a sunk, immobile cost.

Knowing that, investors will never make a "guarantee" as long as the state retains the right to change the rules once that investment is made.  Insisting on such an upfront commitment simply assures mutually assured destruction between the two sides, as investment -- and production -- continue to decline.

As I have written elsewhere, I greatly respect Jack Roderick -- and Dermot Cole for that matter -- but they simply are wrong on this one.  In order to obtain guarantees, the state will have to give them as well.  Neither the state (nor Jack, nor Dermot) have indicated any willingness to do so, and absent that, neither will the state's largest investors.

Monday, April 1, 2013

Alaska Oil Policy| Irony ...

My first column on Alaska oil policy appeared as a Compass piece in the Anchorage Daily News in October 2009.  The title of the piece was "Alaska poorer for outdated oil attitude."

The focus of the piece was on Alaska's failure to keep pace with what the New York Times in a then-recent piece characterized as an industry "hot streak."  As the Times reported, "[t]he oil industry has been on a hot streak this year [2009], thanks to a series of major discoveries that have rekindled a sense of excitement across the petroleum sector, despite falling prices and a tough economy."

My piece pointed out that Alaska was not participating in the boom and suggested some reasons:
To put it bluntly, for the past several years, Alaska's exploration signals to the industry have said "go elsewhere." 
Recent legislative enactments, such as the Alaska Gasline Inducement Act and the ACES oil tax, come to mind as examples. The root cause runs deeper, however. 
Alaska has become smug and arrogant about the industry legislatively, administratively and even on the editorial pages of some newspapers. A good example is the attitude expressed earlier this year by one of the governor's "energy" advisers, Joe Balash. 
In a recent international survey conducted by a Canadian institute, Alaska ranked 78th out of 143 states and governments in an assessment of policies designed to encourage oil and gas production. When asked to comment on the results, Balash said, “Alaska is right where it ought to be. ‘We … have tough terms; we set the bar high. … We have world-class resources. Arkansas and Mississippi don’t.’
(The quote from Balash is reported in "Report critical of Alaska's relationship with oil industry," Fairbanks News-Miner (Jun. 28, 2009).  A copy of the piece is available by paging down through the collection of articles here.) 

My column went on to criticize the 2009 Parnell Administration and Balash suggesting "Alaska's 'tough terms' have shot Alaskans in the foot."

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That piece came to mind again when I was reading a story about Alaska's current situation in yesterday's Los Angeles Times.   The story, entitled "Oil revenue fuels intense fighting among Alaska lawmakers," reports on the current debate in the Alaska legislature over oil taxes.

The story echoed what I wrote in 2009.  According to the story, "[s]omewhere along the way, the North Slope golden goose stopped laying. Production on the slope's aging fields has dwindled to barely a quarter of what it was in the 1980s; once the nation's largest oil producer, Alaska now ranks behind Texas, North Dakota and California."

The irony?  One of the persons quoted in the story yesterday as supporting the need for reform is the same Joe Balash who, in 2009, said "Alaska is right where it ought to be ... [with] tough terms."  In the 2013 version of the story, however, Joe -- as has the Parnell Administration -- has changed horses.  This time Joe is quoted as follows:
"I was talking with a gentleman from BP, back in 2008 when oil prices spiked. He didn't have authority to sign the checks to pay the tax each month. He had to get authorization from London — the checks were that big. And he was the chief financial officer," said Joe Balash ....
Hindsight is always 20/20, of course, but what a difference it might have made in Alaska's history if, rather than spending its time boasting of its "tough terms," the Parnell Administration instead had stopped to read the New York Times back in 2009, or Joe had stopped to understand what the "gentleman from BP" was telling him in 2008.

Another irony?  I have never met the Governor of Alaska, much less talked to him about oil policy.  Joe Balash?  He's now the Deputy Commissioner of the Department of Natural Resources, responsible for oil policy.  That, frankly, explains a lot.

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