#AKoil We had a debate ...

 As I had noted on these pages before, Professor Willie Hensley asked UAA Professor Emeritus Dr. Stephen Haycox and me to join his graduate level seminar on Alaska Policy Frontiers this Saturday to debate the repeal of SB 21, the oil tax reform bill enacted last session.

Dr. Haycox supports the repeal effort, which will appear on the ballot this coming August.  I oppose repeal and believe SB 21 should be retained.  Steve Johnson, the Director of UAA's highly acclaimed Seawolf Debate Team joined also to moderate.

The debate was covered by Jill Burke of the Alaska Dispatch ("Experts debate Alaska's oil tax tug-o-war").  Jill's accurately summarized the discussion as follows:

Where Haycox came armed with a general sense that SB 21 had been rushed, industry-led and industry-supported, and that the combination made for a bad origin, Keithley came armed with statistics and charts, data designed to highlight the impending “financial abyss” Alaska will soon face if replacement revenue for dollars lost to declining oil production aren't swiftly located.

The debate was taped and will be made available to the public in the relatively near future. I will post a link on these pages when its available so that readers can make up their own minds about the discussion.

In the meantime, I have posted above a couple of the "statistics and charts" I used during the discussion (they also are available here). Regular readers of these pages will recognize most and understand the points they make.  Pending the video, new readers may get some sense of the points I use them to make by reading a couple of my past pieces:  Alaska Oil Policy|  Missing the Point (Alaska Business Monthly, July 2013) and Rep. Gara's myopic view (Juneau Empire, July 7, 2013).

#AKoil| A debate on SB21 ...

As I have written before on these pages, Professor Willie Hensley's graduate level UAA class on Alaska Policy Frontiers is the best college course I have taken, lifetime.  One of the reasons is his ability to bring together various historic and other themes to make the course relevant to the current issues confronting Alaska.

During those semesters I have attended, toward the end Professor Hensley has focused the class on one or two contemporary Alaska issues.  Issues arising out of the boarding school era is one.  The conflicts involving the Pebble Project have been another.

This semester, the class is going to focus on the debate over the repeal of SB 21.  As he has previously, to make the discussion as current as possible, he is bringing people in from the outside to assist in the discussion.

To that end, he has invited UAA Distinguished Emeritus Professor and noted Alaska historian and columnist Dr. Stephen Haycox and me to join the class the afternoon of Saturday, March 29 to discuss the issue.  Steve Johnson, the Director of UAA's Seawolf Debate Program also will be joining to moderate.  Dr. Haycox believes that SB 21 should be repealed in the referendum scheduled for this coming August.  I believe SB 21 should be sustained and the repeal defeated.

Given the topic and the number of requests he has received, Professor Hensley has arranged with UAA to open this segment of his class to the public and moved the class to a larger classroom.  Seating will be limited, however; the classroom only holds 84.

The details of the discussion are at the attachment above.

When I posted a notice of this discussion after Dr. Haycox and I first agreed to it, blogger Linda Kellen Biegel added a comment that Dr. Haycox would "wipe the floor" with me.  In sports that usually is called trash talk, ends up on the locker room wall and usually backfires.  I think Andrew Halcro also said words to that effect at one point before a debate before the Anchorage Chamber on sustainable budgets.  That didn't work out so well for his side.

But frankly, I think this will be less a "debate" in the formal sense than a discussion of the issues.  I have been a longtime reader of Dr. Haycox's work and greatly respect (even though I don't always agree with) his perspective.  Indeed, within the reach of the desk where I am typing this note I can lay my hands on at least three of his works.  I am looking forward to the discussion and, if you have an interest, welcome you to join us for it.  It should be interesting.

#AKbudget| Rough seas ahead ...

An article earlier this week in The Wall St. Journal caught my eye -- as it should every eye in both the Administration and the Legislature as they increasingly come to grips with budget issues heading into the second half of this year's session.

Titled Eni CEO Sees Oil Price Falling to $90 a Barrel, the article reports on a speech by the head of Eni -- one of the Top 20 oil companies in the world -- in which he predicts "oil prices are likely to fall to around $90 a barrel [by 2017] as global supply rises and demand falls back thanks to a shift to more natural gas usage and increased fuel efficiency."   A copy of the full speech is here.

That caused me to concentrate more closely on something I hadn't in awhile -- but should more often -- the current NYMEX crude oil futures for the remainder of this year and beyond.  Admittedly, while these futures prices reflect real, live bets on which some traders have invested money, they are merely market (and sometimes, very thin market) predictions of where price may be headed and not definitive assessments.  As with anything else in the market, they are subject to change at a moment's notice as they certainly would, for example, if some catastrophe shut down production in Saudi Arabia for an extended period or the EPA banned fracking in the US.

On the other hand, based on the information available at any given point in time, the futures prices are probably as good an assessment of where oil prices are headed as anything else -- and they are increasingly reflecting the same future ahead as Eni's CEO predicted in his speech.  Glancing at the futures prices as of the close of trading yesterday, these are the current prices (Brent/WTI -- ANS typically falls somewhere in the middle) per barrel for deliveries in December in each of the following years:  2014: $104.34/95.21; 2015: $99.50/87.27; 2016: $95.76/83.20; 2017: $93.47/81.29; 2018: $91.75/80.13; 2019: $90.39/79.24. The usefulness of the prices trails off the farther out in time they go, but absent intervening factors unknown at the time of the trade, the near term (i.e., next 18 - 24 month) price levels usually are reliable indicators of where price is headed.

The reason that the headline and these prices should catch eyes in Juneau is because they differ markedly from those on which the Administration's current 10-year forecast is based -- and which the legislature is currently using to make judgments regarding the Governor's proposed FY 2015 budget and beyond.  The following chart compares the prices used in the Administration's most recent 10-year forecast against the midpoint of the current Brent/WTI futures price for December of the same year.

The consequences of such differences are significant.  In its report on the Governor's budget, the Legislative Finance Division included a chart showing the effects of oil price on FY 2015 budget levels.

The Governor's proposed $5.6 billion (UGF) budget balances at an oil price of $117/bbl.  At the oil price forecast used in preparing the budget ($105), however, the Governor's proposed budget results in a deficit (draw on savings) of $1.04 billion.

At $90/bbl, the deficit rises to in excess of $2 billion, and that assumes that the total UGF budget -- operating and capital combined -- remains at $5.6 billion.  If the budget rises to $6 billion -- as some have speculated it might as a result of legislative-driven earmarks -- the FY 2015 deficit balloons and alone starts approaching $3 billion. At that level (and assuming the legislature agrees with the Governor irrevocably to transfer $3 billion from the CBR to the PERS/TRS account), the state's remaining financial reserves at the end of FY 2015 will be less than $10 billion -- barely enough to scrape through three more years at current spending levels before experiencing the "fiscal crisis" and "economic crash" predicted for the early 2020's last year -- and repeated again this year -- by UAA's Institute of Social and Economic Research.

Admittedly, the Eni CEO's prediction is that the industry will only reach such price levels in 2017, progressively ratcheting down from current levels to those in the meantime.  But that doesn't relieve the urgency with which the Administration and legislature should respond.  In order to be at a spending level that can tolerate a $90/bbl world by 2017, the state needs to make some very significant cuts between now and then, and in addition, retain as much in savings as possible along the way.

In my view, that should mean using every possible means to restrain spending to the $5.6 billion originally proposed by the Governor this year and starting to identify the additional significant cuts that will be required again next year to stay on pace to deal with a lower crude price world by 2017.  Frankly, as I will explain in another piece later this weekend, I am not sure we are there.

As Eni's forecast and the NYMEX futures make clear, the state is headed for some very rough seas ahead.  The second half of this coming legislative session will reveal much about whether we are doing a good job of battening down the hatches.

UA/UAA| Enough already, the postscript ...

Oddly enough given the popularity of some of the subjects I have written about before, the piece I wrote yesterday ("UAA| Enough already ...") has completely blown past the previous record for most hits in the first 24-hour period after being posted.  The piece hit the 24-hour mark with 700+ hits, which is short of The Drudge Report and maybe even, closer to home, Amanda Coyne's AmandaCoyne.com, but is a high number for "oil and fiscal policy nerd" blogs of this ilk.

As those of you reading this follow up will likely already know, yesterday's article was about UAA's request for an additional $2.7 million in state funding to cover the operating costs of its new sports arena, which, unlike every other similar arena built in the United States in the last 20 years, has been built entirely from state funds.  (Most other similar arenas built during the same period have required at least 50% alumni and donor buy-in before turning the first spadeful of dirt.  And, some, like the University of Virginia's John Paul Jones Arena are at the other end of the spectrum, having been built almost entirely with private funds.)

Not unexpectedly given the number of hits, I received a few follow up notes and posts.  Some were critical, saying Alaska is small, unique and its University system is relatively young, and as a result we shouldn't be surprised that the state needs to provide the bulk of the funding for such facilities.

My response to that is simple:  first, the University of Alaska system isn't that young (the University system itself was founded in 1917 and UAA dates from 1970, now nearly 35 years ago); second, UAA didn't even try to raise private funds for the new arena (I recall being at early meetings where I and one other raised the issue of developing an effort to raise private funds, and watching Dr. Cobb, sitting at the end of the table, shake his head and say no, the Legislature will take care of us); and third, if that's true, we should have built a facility more in line with Alaska's fiscal condition, rather than a $109+ million "Taj Mahal" that will likely stand going forward mostly as a memorial to the state's excesses during the early 2010's (the boom before the following bust).

Most writing notes agreed with my points, however, adopting the same basic premise that the University system either needs to develop a supportive revenue stream from alumni and donors or accept that it will receive increasingly lower levels of funding.  One was explicit, suggesting that, in these economic times, other state programs, such as K-12, should not be expected to accept lower funding levels in order effectively to "subsidize" a University system that is failing to help itself by developing the alternative sources of revenue successfully solicited and used by its peers.

And one note in particular was thought provoking.  The comment pointed out that the leaders of both the University system as a whole (Patrick Gamble) and UAA, the system's largest campus (Tom Case) are former military generals, whose careers have continually focused in one way or another on obtaining government funding of various projects.  That skill set, the commentator suggested, is significantly different from that required to raise funds from alumni and private donors.

To a large degree, government funding of the military (or, the reader suggests, a public university) is a given, and obtaining funding is a matter of simply convincing a small group of people to give what essentially is other people's money to your project over another.

On the other hand, convincing alumni and private donors to contribute money is a much different endeavor.  Giving their own (or corporation's) money to a given university is far from a given, and even if they are of a nature to be generous, there is a lot of competition for the dollars among a wide range of institutions.  From personal experience, I can attest that the sales effort required to be successful in a private context is far different, and far more intense, than supporting requests for funding from government.

The writer of that comment ultimately suggested that in order to change the intensity and success of the University's private fundraising efforts, changes in leadership may be required.

That may be the case.  In the same 2011 report to President Gamble referenced in yesterday's piece, the outside consultants he retained had this to say (at p. 63-64) about private fundraising efforts directed toward "major gifts and planned giving effort[s]."  Such targets are the keystone of any successful private fundraising effort:

The Chancellors, in coordination with staff or key volunteers, are crucial to soliciting these gifts and providing careful stewardship and attention to this group of donors.  Planned gifts provide examples for others to follow, and the Chancellors, with appropriate help from the President, must be in the forefront of this fund raising activity.

Certainly, my most recent experiences with Chancellor Case and indirectly, with President Gamble, have not reminded me of past, successful efforts by other university presidents and deans in soliciting my support for their institutions.  I honestly have never dealt before with (or even heard about) an institution like UAA, that takes a donor's money at the same time it takes preemptive actions in secret proceedings.

But that could just be me and Gamble and Case may have the ability, if directed and incentivized, to refocus UA and UAA's efforts on developing external revenue streams.  If so, however, they need to do it quickly.

The commentator who suggested that UA's failure thusfar to develop significant alternative revenue streams is effectively hurting other state programs is correct.   There is a substantial amount of demand within state government for the limited funds that are available.  If UA took less because it was able to rely on another revenue stream more, some other program (or, perhaps more beneficially, Alaska's future generations) would receive the remainder.

Others are going to start reaching the same conclusion soon, perhaps as soon as during this legislative session.  They will want President Gamble and Chancellor Case to have answers.  Either they need to, or the prior commentator may prove right, their usefulness may have reached its end.

UAA| Enough already ...

I must admit to almost choking last night upon hearing the following as the lead on the 5:00 pm news. "UAA Needs $2.7 million Before Opening Alaska Air Center."

The Alaska Airlines Center on the University of Alaska-Anchorage campus is set to open this summer but the $2.7 million needed to pay for the arena is not yet approved. ... The Alaska Airlines center has already cost more than $100 million .... Athletic director Keith Hackett said Governor Sean Parnell would like to see the $2.7 million operating budget for the center cut nearly in half, to about $1.6 million. ... "[But w]e're hopeful, we're always going to be hopeful, that the [additional] funding is going to be put into place,” he said.

Are you kidding me?

• The state budget for this year is already $2.2 billion in the red, 
• the budget for next year already is projected to be more than another $1 billion in the red, even before adding on "legislative priorities" (the Alaska euphemism for "earmarks"), 
• both of those two together (combined with the Governor's proposal to transfer $3 billion from the Constitutional Budget Reserve to the PERS/TRS accounts) will drain nearly a third of the state's cash budget reserves in two years alone, 
• the University of Alaska - Anchorage's own Institute of Social and Economic Research reports that in a single year Alaska's sustainable spending level has fallen by 10% (from $5.5 billion to $5.0 billion), 
• the state has already sunk more than $109 million of state money into the new Center, fully funding a project that in any other part of the country would have required at least 50% alumni and private donor buy-in before a spade of dirt was turned,
• not to mention that the University system itself already has admitted that its business model is unsustainable and is in the process of cutting programs, and that UAA has gone out of its way to adopt kangaroo-court like policies and procedures that hugely discourage private giving to its programs,

but yet, UAA now wants the state to provide an additional $2.7 million per year -- because you know once we start down this path its not going to stop -- to cover operating costs?  

What happened to the previous assurances, made during the $60 million bond drive and requests for additional state funding, that, once built, the facility would pay for itself through events and sponsorships? What happened also to the assurances that this building would not impair other campus programs?  With UAA now engaged in the "prioritization" of its academic programs, is someone seriously going to try to argue that throwing more state money at the Center isn't coming at the expense of other programs?

The end.  Enough.  Stop the insanity.  Not only should the Legislature reject UAA's request for an additional $1.1 million in funding, the Legislature should root out the $1.6 million that's in the budget now and strike it out.  Use that toward funding the proposed $11 million in additional funding for the Base Student Allocation (BSA) that the Governor requested in the State of the State, but is not included in his original budget; use it toward funding the constitutionally mandated payments to meet the state's PERS/TRS obligations; use it, god forbid, to reduce the deficit that the state otherwise is going to run this year and that, ultimately, will be borne in one way or another by future generations of Alaskans.

Use it for anything other than letting UAA off the hook one more time in doing what every other higher ed institution in the US is doing right now -- reaching out to (and learning to treat fairly) alumni and private sector donors.  When Tom Case, Keith Hackett and no doubt, Steve Nerland and Don Winchester come down to Juneau or call on the phone and ask the state yet again to pitch in more of other people's money to support the project, tell them that its time instead to put in some of their own and that they should redirect their remaining talents and efforts to helping the University reach out to its alumni and other private donors to step up to their share.

In a 2011 report prepared at the request of UA President Patrick Gamble, a group of outside experts assembled by him to take a look at the University concluded 

The condition of institutional advancement—the management of private giving—at the University of Alaska is mediocre at best. Despite some large gifts (mostly of a corporate variety), UA does not have a history of a well-organized contemporary approach that is standard for a comparable system.

Instead, UAA's approach, as former Athletic Director Steve Cobb was once reported to have said about UAA Athletics, historically has been this: “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.”

Steve Cobb is now gone; so is the state being "awash in money."  It is time for a new approach at UAA.  

As I said late last year in a different context but that many supported generically: 

The simple truth is Alaska has outstripped its financial capacity to add any more new spending to its mix. Just as each of us face in our own lives, Alaska only has so much earning power and the fact is we are now spending well past our current income.

When each of us face that point in our own lives — when we spend past current income — we institute limits. We don’t buy a new truck, take the next vacation, buy a new cabin or even add HBO/Showtime to our cable line-up. 

Of necessity, the same steps are beginning to occur now that we have crossed the line at the state level. Fiscally speaking, at current spending levels Alaska is running on fumes. The state’s fiscal structure can’t tolerate layering on more programs; instead, it is time to start facing up to the fact that even the current programs are going to need to be rolled back.

That admonition applies equally as well here.  Its time for UAA to grow up and become a real university system.  The Governor and Legislature should not enable them by continuing to take out the wallet when the system comes to its parent and asks for more money.  Its time for them to go out and earn it on their own.

Discussing the Flint Hills closure on The Dave Stieren Show this afternoon ...

Dave Stieren has asked me to join him on his show at 2:30p this afternoon to discuss Flint Hill's announcement yesterday of the anticipated closure of its North Pole (Alaska) refinery.  The Dave Stieren Show is available locally at KFQD FM103.7/AM750 and online here.

Like TAPS, oil production, the military and a few other things, the Flint Hills refinery is one of the linchpins of the Alaska economy.  In various ways, the refinery has an economic reach far beyond its borders.  Its exports of jet fuel to Anchorage's Ted Stevens International Airport, for example, are critical to the economic health of the Alaska Railroad.  It is the fourth largest property taxpayer in the Fairbanks North Star Borough -- a key component in the financial support behind the Borough's government operations and schools.  Its supply of jet fuel to Eielson AFB is a key component of the base's operations.  The 125 jobs the refinery provides are among the best paying in the area and help support both the local real estate market and a number of local small businesses.  Its operations have the effect of reheating the oil reintroduced into TAPS, which is an increasingly important part of TAPS operations.

In short, the loss of the refinery and its economic contributions to the Interior and the state are going to have a significant and wide ranging impact.  Tune in this afternoon at 2:30p to hear Dave and I discuss.

The University of Alaska and its spending habits ...

According to contemporary news reports, University of Alaska President Pat Gamble had the following to say about the University's current fiscal situation at last December's Board of Regents meeting:

... the business model of the university is now not sustainable.  We are trying to hold tuition down.  The general fund is not going to supply the growth.  We're not getting anything out of interest rates.  The discretionary funds that come from grants are limited and probably going to stay at least flat.

Gamble predicted going forward, "[t]hings like growth, things like planning for new buildings, things like opening up new programs, all those kinds of things could very likely just be off the table."

Earlier in the year, the Chancellor of the University's Anchorage branch announced a plan to analyze all of the branch's various programs and rank them for funding prioritization, with those at the bottom "possibly facing elimination."  According to the University's description of the program, the

[r]anking will be done by placing each program or function in one of five quintiles: Priority for higher investment; Consider for higher investment; Sustained resources; Transform; Subject to further review or consider for phase out. Each quintile for academic programs will contain an equal number of programs ....

That means up to a fifth of UAA's programs and administrative functions will be up for reduction or elimination by the end of the process.

So it was somewhat shocking yesterday afternoon when I was looking through the catalogue for an upcoming art auction in Juneau that I saw the University of Alaska Southeast (UAS) listed (at p. 12) as one of the primary financial backers of the event.  The auction is being put on by the Sealaska Heritage Institute "in an effort to promote Native art, raise funds for construction of the Walter Soboleff Center and to establish Juneau as the capital of Northwest Coast art."

At its level of giving ("Copper Level"), in exchange for its support UAS is receiving:

•Front placement, table of 10, •Handmade copper tináa for each table guest, made by Tlingit artist Héendei, •2 complimentary bottles of wine for the table, •Verbal recognition and name/logo recognized in slideshow display during event , •Recognition in Tináa Art Auction catalog/program, SHI’s website, promotional materials, annual report, and annual video, •Quarter-page ad in Celebration 2014 program, 5,000 copies distributed, •Invitation to Sneak Preview Reception with the artists on January 31, •Alaska Airlines and hotel discounts.

Now, don't misunderstand my point.  At a personal level I deeply support the mission of the auction and, in fact, was looking through the catalogue to see if there were any pieces on which I wanted to bid.  Having recently donated a portion of my collection to a local university where I used to live in Oklahoma, I always am looking for opportunities to build it back up (no doubt, so that I can give it away again).

But as much as I support the mission personally, I am appalled in a period during which the University itself recognizes that it has an unsustainable business model and is headed toward significant retrenchment that it is spending money essentially subsidizing the foundational activities of a profitable regional corporation.  Not only are such expenditures off mission, they are, ultimately, a slap in the face to the employees and students who are being asked to bear the brunt of the retrenchments made necessary by the state and university's current fiscal conditions.

This morning I attempted to identify how much in total the University system -- and indeed the state overall -- are spending on similar efforts, buying tables or otherwise supporting what essentially are fundraising efforts by private and non-governmental institutions.  But the information provided online by the Office of Management and Budget and the Legislative Finance Division doesn't go into that level of detail and, interestingly enough, the state's "checkbook," an effort initiated during the Palin Administration to provide transparency and accountability for state expenditures, doesn't include payments made by the University system.

As the House and Finance Committees continue to consider the University's budget during the current session, however, I and likely others will urge them to keep this experience in mind, ask the University to identify from its own books how much has been spent on such programs in the past and identify the efforts it intends to make to eliminate these non-mission related expenditures in the future.

If we are to leave a legacy for the generations to come, it is time for Alaska government to spend smarter, not more.  Eliminating these types of expenditures at all levels of state government is one of the ways it can and should do so.