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Community Perspective

Private sector, not government, drives an economy

Despite what you might read in some recent media publications, Alaska’s economy is recovering. Jobs have increased every month since last year’s election, GDP is up by more than 3%, wages are climbing, and the private sector is showing a willingness to invest in Alaska. If you believed some of the recent doom and gloom headlines, you’d think that state government is truly the economic driver of a state’s economy and without it we are destined to fall off the cliff. In reality, when looking at the entire operating budget and all fund sources, the reductions equate to about a 6% reduction from fiscal 2019 — hardly fiscal Armageddon for a state government that has been living comfortably for several decades. Fortunately, most Alaskans understand the private sector, not the government, is what drives an economy.

It’s true that Alaska’s private sector has been through the wringer the past four years, but businesses large and small are starting to get back on their feet. A smaller, leaner, more efficient government will help build confidence as these businesses make investment decisions in Alaska.

While there’s been a bit too much “the economy may never recover” rhetoric, it’s good to see Anchorage Economic Development Corp. recognize some of the great things happening in our economy. Some highlights include statewide cruise volumes increasing 16.5% as well as new developments on the North Slope adding an estimated 350,000 barrels per day in the next few years. Alaska is and continues to be a resource state, and AEDC nailed it when reporting North Slope investment is “an encouraging sign of optimism among producers.”

Overall investment on the North Slope has increased from $4.4 billion in fiscal 2018 to a projected $5.5 billion in fiscal 2020. These developments will require several billion dollars of additional investments by the private sector. We’re realizing this investment rebound is due in large part to the fiscal stability we’ve had in place for the past five years. Make no mistake, Alaska doesn’t have the expertise or balance sheet to develop these resources. We’ll continue to rely on private sector investment to get our resources to market. They in turn must count on the state to put in place a stable budget that lives within its means.

There was a substantial disconnect between how private sector and government reacted to the recent recession. The private sector was forced to react swiftly and immediately while government refused to face the reality of the recession. Just look at the actions taken over the past few years. Spending far outpaced annual revenue as we blew through $15 billion in our biggest savings account, the Constitutional Budget Reserve. At the same time, family households and businesses small and large were forced to adjust their spending habits. During this time Alaska lost more than 12,000 jobs, of which a small fraction were government jobs. Job losses are painful regardless of how they are funded, but government was held harmless for the most part through the CBR spending. It’s more important than ever we create a smaller government footprint.

Alaska holds nearly $70 billion of reserves, almost 25% of which is in unrestricted accounts. Those assets generate nearly $4 billion per year in earnings and represent a potential source of funding should a temporary reduction in revenues cause cash flow troubles. That’s on top of over $2 billion of other state revenues that cover nearly half of the cost of running our state government. We have a coverage ratio that is the envy of almost any other government.

I met with all three rating agencies (Moody’s, S&P and Fitch) recently, and they recognize the vast financial and natural resources with which Alaska is blessed. They also gave the previous Legislature and governor kudos for passing Senate Bill 26 in 2018 — the percent of market value framework that accesses a portion of the Alaska Permanent Fund Earnings Reserve. However, they also correctly point to the statements made by those same politicians last year regarding SB 26 as only a “partial fix.” The PFD calculation has been faithfully followed for nearly 37 years. SB 26 is 12 months old and incomplete by many legislators’ own admission.

Government can assist in this recovery by getting its fiscal house in order. Alaska is blessed with tremendous resources and will rely on private sector capital to monetize our resources. An unbalanced state budget will lead to confiscation of hard-earned private sector dollars. It’s imperative we reduce the government footprint to put our state on solid footing for generations to come.

Bruce Tangeman is commissioner of the Alaska Department of Revenue.


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