PHOENIX – Some Alaska officials, facing persistent low oil prices that could threaten the state's triple-A rating, say it needs to change the way it does business.
Such changes may include the way it categorizes its financial reserves, new revenues through new taxes, smarter borrowing and investing, or some combination of those things.
When Alaska's legislature returns in mid-January, Gov. Bill Walker will try to advance a multi-faceted plan to close Alaska's $3.5 billion budget deficit. Alaska this year projected a more than $2 billion revenue drop from fiscal 2014, largely due to declining revenues from the petroleum industry.
In August, Standard & Poor's put the state on negative outlook because of its budget deficit.
In late October Alaska's Financial Opportunities Working Group unveiled a series of recommendations to get the 49th state on a more solid footing.
"To address the significant budget shortfalls created by declining oil revenues, the state is reducing spending and considering options to increase revenues from new taxes and resource development projects," Alaska Attorney General Craig Richards, who led the working group, wrote in a letter accompanying the report. "However, these measures are unlikely to alone close the current deficit at current oil prices. And because Alaska's oil production is expected to decline, even significantly higher oil prices will only delay—not solve—the state's long-term budget problems."
Richards warned in his letter that the working group paper is only a start, and that the work will need to continue for years to optimize Alaska's wealth management policies.
Walker has already managed to advance some of his short-term goals, mainly with respect to maximizing Alaska's vast untapped natural gas reserves.
Earlier this month, state lawmakers working in a special session passed legislation appropriating almost $150 million for a gas pipeline project that Walker has said will be key to erasing the deficit.
The more than $45 billion Alaska liquefied natural gas project includes facilities for cleaning and liquefying natural gas as well as a roughly 800-mile pipeline to bring gas from the North Slope to a Gulf of Alaska port.
In October Walker announced he had received written assurances from both ConocoPhillips and BP that they will make their share of Alaska's North Slope gas available for the pipeline project.
The working group's report is comprehensive and goes far beyond revenue ideas to include an analysis of the state's debt policies.
"Initial modeling suggests that an increased level of debt has the potential to improve state financial returns and boost state wealth," the working group paper said.
"An optimized capital structure can increase long-term investment revenue, decrease certain kinds of risk, and grow Alaska's savings," it said.
The working group said that the state, long flush with money from the energy industry, has been misguided in eschewing bonds for pay-as-you-go financing.
While the state's portfolio does include more than $800 million of general obligation bonds, the working group concluded that additional leveraging would be a smarter approach, because the cost of debt can be outweighed by returns on the investments of Alaska's cash assets.
"Although the desire to avoid debt in cash-flush times is understandable, it was unsophisticated asset management," the group's report said.
"Debt creates risk, but it also can produce greater returns," the report said. "Like other tools for adding to an asset base, investing borrowed money at higher rates of return than the cost of capital provides access to additional compound interest gains. Over the long term, the likelihood of enhanced returns exceeds the risk associated with well-managed levels of debt, particularly with appropriate risk mitigation strategies and adjustment mechanisms."
The working group also addressed another Walker priority: the Alaska Permanent Fund.
The Permanent Fund, an investment pool seeded by oil royalties, was founded by state constitutional amendment in 1976.
Each year, Alaskans receive a permanent fund dividend based on the average income of the fund over the previous five years: $2,072 this year.
The fund is worth about $51.8 billion as of Nov. 17, according to the Alaska Permanent Fund Corporation. Walker has been suggesting that the state consider using the Permanent Fund to bankroll state services as part of the budget solution.
The paper suggests that growing the dividend payments at their current rate reduces Alaska's investment potential and could be unsustainable in the long run.
Deven Mitchell, Alaska's state debt manager, said the conversation Alaska leaders are having and will continue to have largely has to do with how Alaska should choose to categorize its revenues.
"The state may need to shift what it has done," Mitchell said.
The working group addressed a primary potential shift: the creation of a so-called "sovereign wealth fund."
"Under what this paper calls a sovereign wealth fund model, all or most oil revenues are deposited directly into the sovereign wealth fund, and revenues available for state expenditure are taken out of the fund based upon a formulaic approach that is not dependent on the price of oil," the report said. "Under a sovereign wealth fund approach, the consequence of oil price fluctuations is transferred from the general fund and into the sovereign wealth fund, which can better manage volatility."
Mitchell said the state is also considering the idea of a pension obligation bond issuance, something Alaska's legislature authorized in 2008 but which the state has never done.
Mitchell said that while the state is serious about the idea, it has not made any decisions.
"Nothing is approved and final at this point," Mitchell said.
The state has also toyed with the idea of creating a base sales tax, which it does not currently have.
Alaska will be issuing bonds next month as part of what Mitchell said is a "fairly comprehensive refinancing" of the Alaska International Airport System.
The system operates the airports in Anchorage and Fairbanks.
The airport revenue bonds are the only revenue bonds Alaska is authorized to issue.
Mitchell said the issuance will include a series with interest subject to the alternative minimum tax, and a non-AMT series, and that there will be two sales.
A sale of about $100 million is slated for the week of Dec. 7.
Another sale of about $90 million will follow at a later date.
