On Casey Reynolds tomorrow (Thursday) morning ...

I will appear on The Casey Reynolds talk radio show tomorrow (Thursday) morning in the 9:30 am slot to discuss Alaska oil and fiscal policy.  Casey was kind on his show this morning to my recent piece on the coming oil tax debate -- Five things to look for in oil tax reform ….  His take on the show's Facebook page:

Brad Keithley does what no one in the oil industry, Parnell admin, or legislature seemed capable of doing: Tell us what oil tax reform is needed and why.

We'll see if I can live up to that in person.  Follow along -- or better yet, call in -- on the internet at KFQD, or locally at 750 AM.

On Glen Biegel this afternoon ...

I will be on Glen Biegel's radio show this afternoon at 4:30p to discuss fiscal issues.  With the Governor's next budget due December 15, its time to start getting serious about moving to a sustainable budget model.

The Senate Majority appears to agree.  In a press release issued at the time the new Senate Majority was formed the Majority included as one of its "TOP THREE AREAS OF FOCUS:"

Develop sustainable capital and operating budgets for current and future generations.

Following on that I recently wrote a piece entitled "Alaska Fiscal & Oil Policy| Now the really hard work begins …" to help describe what moving to a sustainable budget will involve.  I will be on Glen's show to discuss.  Listen -- or better yet -- call in.  On the internet here; locally, on AM 700 KBYR.

A learning opportunity ...

December 3 and 4 (Monday and Tuesday of the first week of December), Law Seminars International, Inc. is presenting its eighth annual conference on "Energy in Alaska."  The conference is designed to cover both the development of Alaska's "cash" energy resources (oil, natural gas, coal) and meeting Alaska's internal energy needs.  Mark Johnson, the General Counsel of Chugach Electric, and I are Co-Chairs.

As the results of the recent elections unfold, we are making a few tweaks to the agenda.  One is the addition of Senator Cathy Giessel, the incoming Chair of Senate Natural Resources, as a speaker.  

We have worked hard to design a program that lives up to LSI's goal of making this a comprehensive conference on current Alaska energy issues.  Please join us if you are able. The details are available here.

The Senate gets it, the House ... hmmmm

In a companion piece published today I suggest that the hard work for those -- including me -- advocating a change in oil taxes lays ahead in the upcoming session, rather than behind in the elections.  The challenge is to make the hard decisions necessary to reduce spending to sustainable levels, both in order to preserve fiscal stability for future Alaskans and to avoid the short-run revenue reductions necessary to achieve long term revenue growth from undermining the first objective.

The key to achieving both goals is to retain focus from the outset on the primary objective, which is to keep faith with both current and future Alaskans by reducing spending to sustainable levels.  With that, the second goal -- achieving tax reform in order to build future production and future wealth -- becomes much easier.

It is a daunting but achievable set of goals, assuming that the focus remains on both.  

The new Senate Majority appears to understand the focus.  In the press statement following their initial organization, the new Senate Majority listed three goals:

• Increasing oil production in Alaska and, in turn, the flow rate of the Trans-Alaska Pipeline.

• Delivering affordable energy to Alaskans to their energy needs, as well as commercializing our vast supply of natural gas and exporting it to create a new economy in Alaska.

• Develop sustainable capital and operating budgets for current and future generations

The first and third points obviously hit the mark dead on.

The House Majority is much less clear on the second point.  In their release, the House appears to list five priority areas:

• Oil tax reform, 

• Affordable energy, 

• Quality education, 

• Public safety, and 

• Responsible investments.

Interestingly, despite the fact that one of the co-heads of last year's House Special Committee on Fiscal Policy is an incoming Co-Chair of House Finance, budget issues didn't make the top five.  Indeed, while it is not clear what "responsible investments" means, some speculate it is code for "capital items."

Certainly its early in the session and these are preliminary lists.  More importantly, if a split exists, it is more important for the Senate to understand the priorities than the House.  The most controllable part of the overall budget is the capital budget, and the Senate takes the lead on that budget.  If the House fails to find reductions in the operating budget sufficient to create room within sustainable levels for a capital budget, the Senate largely can enforce the result on its own by simply recommending no capital budget.

Of course, it will be better if both bodies are in alignment.  There is hard work ahead, and it will be easier on both -- and better for the state -- if both -- and the Governor -- are focused on the same objectives. 

$1.9 billion, $453.5 million and now more to go ...

Given the size of the Operating Budget, the room in a sustainable budget for capital spending from the General Fund this current fiscal year is roughly $100 million.  As the University of Alaska Anchorage Institute of Social and Economic Research ("ISER") put it in a recent report, spending above that level will increase the "fiscal burden" being shifted from this generation of Alaskans to those coming next.

Ignoring the effect on future Alaskans, the Legislature nevertheless passed and the Governor signed a $1.9 billion capital spending bill this year, plus a bill authorizing a vote on bonds to cover an additional $453.5 million in spending.  Supported by the Associated General Contractors of Alaska, American Council of Engineering Companies-Alaska and other special interests which benefit from the money, the bonds passed.  

Using the ISER analysis, the combined effect on future Alaskans creates a hole of approximately $2.3 billion in the "nest egg" that future Alaskans need for this generation to create if future generations are to enjoy the same level of government goods and services as this generation.  At current return levels and combined with the additional hole created last year, that likely translates into a reduction of approximately $500 million per year (out of roughly $5.6 billion) in revenue needed by future Alaskans if they are to maintain parity with the current generation.

Put another way, the actions of this past Legislature alone -- ratified by the Governor -- effectively have enacted a tax increase equal to roughly 10% of state spending if future Alaskans are to maintain parity with this generation.

Now, this morning's Anchorage Daily News reports that this year's capital spending spree not only is not over, but indeed, has probably exacerbated the claimed "need" for additional capital spending in future legislatures.

In an article taken from the Alaska Journal of Commerce entitled "Transportion bonds pass, but most projects will need more funding," the ADN reports:

While Bonding Proposition A provides a boost for all the jobs, many of them are still only partially funded. ... [Various] projects are further from meeting monetary goals, even with bond help. Current plans to expand the Port of Nome are expected to cost nearly $182 million. The port work will receive $10 million, which will be used primarily for conducting preliminary studies on the project .... 

The $30 million provided for Port Mackenzie's work brings secured funding to $146, or 54 percent of the project's total cost .... Even though more money is needed to complete his and other undertakings in Alaska, Von Dongen said Proposition A was a good start.

As the ISER report indicates, at current rates of spending Alaska is headed for a fiscal cliff of massive proportions within the next decade.  This morning's ADN article makes clear that past legislatures and the Governor not only have done nothing to stop the race toward the cliff, they have accelerated it.

The opportunity -- the only opportunity -- to stop the plunge is now, while the state continues to receive oil revenues in excess of what it needs to meet a sustainable budget.  Putting those excess revenues into savings will create the "nest egg" that the ISER report explains future generations require.

Instead of creating the necessary savings, however, past legislatures and the Governor have only made the problem worse.  Its time to change directions.

Read more here: http://www.adn.com/2012/11/11/2689370/transportion-bonds-pass-but-most.html#storylink=cpy

Read more here: http://www.adn.com/2012/11/11/2689370/transportion-bonds-pass-but-most.html#storylink=cpy

"Don't tax you, don't tax me, tax that fellow behind the tree ..."

For a time earlier in my life I lived in Louisiana.  During that period I became fascinated with the Long's -- Huey and his son, Russell, who during part of the time I lived in the state served as Louisiana's senior United States Senator.

Both Long's were the source of great quotes during their lifetime.  One of Russell's returned to me this morning as I was reading an article from yesterday's Fairbanks News-Miner.

The article -- Armstrong Oil and Gas chairman talks future of Alaska oil -- reports on recent remarks made by Bill Armstrong, chairman of independent oil producer Armstrong Oil and Gas.  The company is active in trying to develop new fields on the North Slope, and recently also developed a new field on the Kenai Peninsula.

As reported in the News Miner, Armstrong had this to say about the need for Alaska oil & gas tax reform

Armstrong said the political discussion has oversimplified the state of Alaska’s oil production. ... issues ranging from stringent regulations, tightly controlled infrastructure and yet-to-be-proven business economics of the new plays are all inhibiting a boom, but he said that, by far, the biggest factor is Alaska’s tax regime. ... “The North Slope of Alaska is not competitive.”

... But Armstrong says the ... $2 billion-per-year tax cut ... doesn’t get at the heart of the issue. ...  Instead, Armstrong advocates for a tax regime that incentivizes increased oil production from new oil fields, leaving traditional fields for a later discussion.

As I have explained elsewhere, there is vastly more oil potential remaining in the existing units located on the North Slope than in the new areas being pushed by Armstrong and similar companies.  As I also have explained, the current tax credit system, which Armstrong proposes to bias even further, is pushing Alaska farther away -- not closer to -- refilling the pipeline.

Essentially Alaska's current system taxes production from existing units higher in order to generate the revenue needed to fund "tax credits" (i.e., subsidies) for exploration activities in areas outside of the existing units.  Armstrong certainly understands that interaction; hence, his desire to leave the tax treatment of "traditional fields for a later discussion."

That is what brought Russell Long to mind.  Long, a longtime Chairman of the Senate Finance Committee, during a particularly combative hearing on tax policy summarized the position of someone testifying before the Committee as follows:

"Don't tax you, don't tax me," said Long, "tax that fellow behind the tree ..."

To Armstrong, the existing units are "that fellow behind the tree."  Unfortunately, Alaska's future is standing right beside "that fellow."  Armstrong evidently does not realize his shot will hit both.