Thursday, July 6, 2017

Why the oil industry -- and even the Alaska Journal of Commerce -- should support maintaining the PFD as is ...

While he likely doesn't realize it, Alaska Journal of Commerce editor Andrew Jensen's latest editorial makes a compelling case for keeping the PFD as it currently is structured. "AJOC EDITORIAL: 75 million reasons SB 21 is working," https://goo.gl/EG2rrS.

As we have explained at the beginning of every presentation we have done over the past two years on Alaska's fiscal situation we believe the Administration's dismal revenue forecasts (which in turn have driven the discussion about the "need" for "new revenues") are off significantly because they lowball both oil price and production. See "The Special Session version of “Implementing Governor Hammond’s 50/50 Plan," https://goo.gl/nE15Eo at 3-8.

While Jensen uses the data for another purpose, the editorial does an excellent job outlining the case for why the Administration's production forecasts are off (way off). Correct those for the reasons Jensen outlines and the price numbers to reflect the non-politically driven forecasts from the federal Energy Information Administration, International Energy Agency and others, and Alaska's fiscal situation becomes much less bleak and the resulting "need" to cut the PFD or reach for any other so-called "new revenue" measure much less credible.

But as good a job as it does on that point, Jensen's analysis completely misses the mark on another key component in the ongoing debate about oil taxes.

Jensen's piece focuses mostly on trying to make out a case for retaining SB 21. We agree with his argument as far as it goes.

But SB 21 did not survive the 2014 referendum (and will not survive the current and future attacks) solely because it may be "successful" in maintaining production.

Instead, SB 21 survived the 2014 referendum because Alaskans saw a direct connection between that goal and their well being. Yes, Alaskans engaged in or related to the oil industry supported it because of the prospect of increased jobs, and some of those tied to the government may have done the same because of the prospect of increased state government revenues (and thus, job security).

But that wasn't the reason large numbers voted to sustain it. The reason for that? Because ordinary Alaskans also saw a direct benefit to themselves from incentivizing increased investment and production.

Oil industry types like to tell themselves in their echo chamber that is because Alaskans accept the generalized notion that the economic benefits of increased oil industry activity somehow trickle down to ordinary Alaskans.

But, in fact, the closest tie to the oil industry for the vast bulk of Alaskans is the PFD. Alaskans intuitively understand that increased production means more contributions to the Permanent Fund, and ultimately from that, a higher PFD. Many support the oil industry, and thus, supported SB 21 because, as Alaska shareholders, they see it as leading directly to increased money in their own pocket even if they aren't directly involved in the industry.

The Alaska Senate Majority and Alaska House Majority Coalition proposals to cut and cap the PFD undermine that link. Rather than providing a tangible and significant link between the oil industry and average Alaskans, a reduced, capped and largely stagnant PFD will dramatically change the dynamic.

Instead of viewing the oil industry as a source of ongoing income directly to them (no "trickle down" required), average Alaskans increasingly will come to view the industry as an alternative source for funding government. Upper middle, middle and lower income Alaskans will view the PFD cut as taking money from their pocket, which instead could (and increasingly will in their view, should) come from those better positioned to pay, i.e., the oil companies.

Rather than viewing the oil industry as a means of growing the pie to the benefit of all, Alaskans will view their share as stagnant to declining with the only hope for improvement (or avoiding further decline) dependent on shifting some additional share of the responsibility for funding government to the oil industry.

Yes, SB 21 is working and retaining it is good for the oil industry, their employees and others tied to it. But for it to retain broad public support it has to mean something significant as well to average Alaskans. The PFD is the way that occurs and maintaining the PFD as currently structured is as -- if not more -- important to retaining broad public support for SB 21 as anything else.

In short, working as intended isn't enough; working successfully has to mean something -- and something more than trickle down -- to ordinary Alaskans.

So, if Jensen's purpose in writing the editorial was to lay out the case for retaining SB 21 long term he missed an important step. He missed the connection to average Alaskans. In our view that requires retaining the PFD as currently structured as well.

If ordinary Alaskans believe they stand to realized a significant benefit in a successful outcome, they will continue to support it. If they start to view the industry merely as an alternative means of relieving an increasing burden of funding government, they won't.