Saturday, December 8, 2012

Fiscal Cliff: Alaska's problems lie elsewhere

There is a great deal of press on the so called fiscal cliff that Congress has been wrestling with since 2011. After working on the issue for almost two years, no progress has been made. What is at stake, what is the potential impact upon Alaskans?

The fiscal cliff is a failure on the part of Congress and President Obama to reconcile the Administration’s desire to push the United States further into deficit spending and wealth redistribution with fiscal reality. The Obama Administration wanted a tax increase on those earning over $250,000 per year, without any reductions in spending. The Republican majority in the House had to this point refused any tax increases and had worked instead on spending cuts. The amount in contention with respect to the ‘fiscal cliff’ negotiations is about $600M. The total deficit for 2012 is approximately $1.1T.

The tax increase is an about face for President Obama who said in July, 2011 that no tax increases were necessary, that deductions and loopholes would provide the necessary revenues.

The United States is borrowing $4.8B per DAY to fund government. President Obama’s administration has accomplished the greatest expansion of government since FDR’s New Deal Administration in the 1930s. In the first two years of his adminstration, the federal government grew by 117,000 employees.

In 2011, an attempt was made to resolve the $1.6T in deficit spending for that year. Congress failed to reach a consensus and appointed a bipartisan supercommittee to negotiate a budget. The supercommittee failed. No budget was produced, and the federal government has been operating on debt limit increases since.

However, Congress did agree that if no budget was passed, sunset provisions would end the Bush tax cuts and a 10 year reduction in military spending termed sequestration would occur. The military budget would be cut 9% per year, or $55B per year, beginning in 2013, and continuing for another 9 years. Another $55B would be cut from domestic programs: social security and Medicare. Personal income taxes across the board would increase as the Bush tax cuts would also sunset.

The expected increase in taxes to the average middle class taxpayer is over $2,000 with the Obamacare increases in set to begin this coming year.

Bottom line is that the Republican Congress will most likely cave on the no tax position on the upper income bracket increase. However, that may not be enough for President Obama, as he does not want any decreases in spending. Therefore, it appears that the Republicans in Congress are in a no win situation, as the Obama Administration and the Democrats have them in a no win situation. If the Republicans cave on the tax increase on the upper income earners, there will be no accompanying decrease in spending and the deficit will continue to increase. If the Republicans hold their ground and House Speaker Boehner does not cave, then they will be blamed for the sequestration cuts, the end of the Bush tax cuts, and the negative impact upon the economy.

The reality is, that the Democrats have never failed to increase taxes when it suited their agenda. Therefore, they feel that they will not be the losers if there is a failure to remedy the ‘fiscal cliff’ scenario. They will simply blame the ‘intransigence’ of the Republicans.

The national debt figure that is admitted by the Obama Administration is estimated at $16T, an impossibly large number for most people to comprehend. However, that figure may be just an indicator, and nothing more. Former Representative Chris Cox, former Chair of the House Republican Policy Committee and the Securities and Exchange Commission, and former Representative Bill Archer, former Chair of the House Ways and Means Committee, both of whom served on President Clinton’s Bipartisan Commission on Entitlement and Tax Refore in 1994, wrote in the November 26, 2012 WSJ that the national debt is being purposefully understated to hide the true cost of government and the liabilities of entitlements to the people. They stated that were the federal government required to account for future and present liabilities to Social Security, Medicare and federal employees retirement benefits, these liabilities exceed $86.8T.

Corporations are required by law to report these liabilities, but not the federal government.

Former Reps Cox and Archer disclosed that U.S. liabilities are increasing at a rate of $8T per year. In order to reduce deficit spending, tax revenues of $8T would be required to balance the deficit. Unfortunately, the total adjusted gross income of all Americans earning more than $66,193 per year is $5.1T, leaving a deficit of $2.9T necessary to balance the budget. In otherwords, there is not enough money available/collectable by the IRS to balance the budget. Ever.

The truth is, the United States went over the ‘fiscal cliff’ years ago.

As America’s remote northwestern step-child, given the 222 million acres of federal lands to the approximately 103 million acres of State lands granted by the federal government at Statehood in 1959, Alaska is particularly vulnerable to any cuts in federal spending. 239 villages are largely dependent upon federal grants and other funding under BIA programs. Alaska further depends upon federal highway funding to repair and maintain existing roads, airports, and harbors, and to construct new infrastructure.

According to the Institute of Social and Economic Research, UAA, federal spending in Alaska in 2010 amounted to $10.9B. The federal government provided $3.5B in grants, $2.6B in payments to individuals (BIA), $3.3B in defense spending for wages and procurement in the State, and $1.5B in federal agency spending in wages and procurement. Governor Parnell’s budget for the same year was $10.5B in capital improvements and State operating budget.

Alaska is not like the rest of the United States in that Alaska came into the Union in 1959 as a largely undeveloped frontier State. It was recognized that the amount of money it would take to give Alaska parity in transportation and communications infrastructure exceeded the money available from federal resources. Congress gave Alaska a 90% royalty from any resource development as a means of self-funding needed roads, airports, and harbors. Today, most of Alaska is still accessible only by boat or airplane.

The State does not receive any royalty from development on federal lands, including offshore leasing for oil and gas development. Shell Oil Company’s off shore development in northwestern Alaska’s continental shelf will not produce any royalties for the State of Alaska. The benefit will be to the local villages that provide services and labor for the project.

The State of Alaska has managed to save approximately $45B in the State’s Permanent Fund (PF), largely invested in the stock market from royalties and taxes produced by the North Slope oil development. The PF is intended to fund State government should there be a severe economic downturn and declining State revenues. Every year, Alaskans enjoy a dividend check from the PF from a percentage of the PF’s earnings. This is one of the first programs that will go by the wayside, if federal expenditures and federal funding is sharply reduced. Especially, in the face of declining oil production. Expect to see legislation for a State income tax in the near future.

The PF is very exposed because of the amount of money invested in the stock market. During the massacre of 2000, the PF lost $10B in a matter of a few days. The money has since been restored, but the potential negative impact of severe downturns in the stock market is still there.

The oil industry revenues contribute approximately half of Alaska’s 374,000 jobs, largely State and local government. Directly, the oil companies account for 4,497 jobs, and another 8,410 jobs in the oil service sector. It is estimated that another 28,837 jobs are created through the trickle down of oil company Alaska wages and procurement. The oil industry has provided over $170B in revenues to the State since Statehood. (ISER 2010)

The reality of Alaska’s economy today is that it is oil driven. There is very little in the way of diversity in our economy. Alaska’s economy is oil and government and the retail and construction sector that support oil and government. Alaska has been fortunate to have a defense spending priority because of the strategic geographical position Alaska has with respect to Asia and the Pacific.

The defense initiatives benefitting Alaska has seen an increase in the number of National
Guard personnel on full time active duty.

The Alaska Air National Guard has seen a tremendous growth with a C17 heavy lift squadron and three aerospace rescue and recovery squadrons based at JBER near Anchorage, and a KC135 aerial tanker squadron at JBEW near Fairbanks. These are active duty squadrons with strategic support and war support missions.

The Army National Guard has seen some changes structurally with a new Military Police Battalion replacing an infantry battalion. The Alaska Army National Guard gained the security and operations responsibilities for the Ft. Greeley Missile Defense Base near Big Delta, Alaska. The Army National Guard in Alaska has a UH60 Blackhawk company and a C23 Sherpa company at JBER near Anchorage, an Eskimo scout battalion located in various villages throughout the interior and western Alaska, and a transportation battalion located in the Matanuska Valley. The AK ARNG is now organized as a battlefield surveillance brigade, rather than an infantry brigade consisting of cavalry, infantry, and organic air support.

The National Guard has pumped a lot of money into Alaska since 9-11 and provides jobs or an extra paycheck for part-timers for more than 2,000 Alaskans who serve in the National Guard in Alaska.

However, the USAF recently announced a 5,000 man reduction in manpower with some personnel to be transferred to the federal USAF, along with a reduction in ANG fighter squadrons nationwide. It is doubtful that Alaska’s ANG will be affected, as the ANG role of heavy airlift squadron and aerial refueling are strategic missions, and global in nature. Thus far, only midwestern States’ ANG fighter squadrons have been mentioned as being in jeopardy for the reduction or transfer of personnel and equipment to the USAF.

The U.S. Army has a Stryker Brigade at JBEW as it primary maneuver element in Alaska. The USAF has a squadron of F22 Raptors at JBER and a squadron of F16s at JBEW. Therefore, there is little impact locally with respect to any reduction in federal military forces in Alaska. It looks like the 9% reduction in the DOD’s budget, should sequestering happen on 31 December, will have little impact because of Alaska’s strategic geographical position.

The increased emphasis on the development of Arctic resources has seen the stationing of a U.S. Coast Guard cutter at Pt. Barrow and air patrols of the northern and northwestern coast of Alaska above Kotzebue. This has mean money and opportunity for the villages in the area used as support bases.

This year’s State budget is $12.5B. An incredible amount of money for a state with about 650,000 residents. Even with the incredible budgets beginning with Governor Frank Murkowski in 2003, Alaska’s leadership has failed to diversify since the first oil and gas lease sales on the North Slope in the late 60s. This has left Alaska in its present predicament of being largely a single source economy, fueling a bloated and socialist State government. Granted, the PF will keep the State afloat for three or four years post any shut down of the Trans Alaska Pipeline System (TAPS). Last years budget was declared unsustainable by Rep. Bill Stoltze, Co-Chair House Finance. Yet, an even larger budget was passed for 2013.

Whether it be Fiscal Cliff or the shut down of TAPS, Alaska has some hard times coming if the leadership of the Legislature and Governor Sean Parnell cannot come to grips with the long term implications of the failure to act on an in-state natural gas pipeline to tidewater and the inevitable increase in south central natural gas prices by at least 8%-13% due to the need to import natural gas into Cook Inlet. Since the early 1990s, some legislators and mayors of south central boroughs and cities have been warning of the shortfalls in the production of Cook Inlet gas insufficient to meet the needs of Alaskans during winter months. This coming year will see the first Russian LNG tanker loaded with LNG coming into Cook Inlet.

The bottom line is that it does not look like the federal government will cut spending in Alaska anytime soon. It is not the desire of the Obama Administration to cut government spending, but to increase spending and the to increase the size and reach of the federal government. What is inevitable, given the past history of democrat administrations, is that our taxes will go up. Given the incredible reality of a $86.8T debt, the U.S. is in serious, serious trouble financially. Eventually, this mess will impact Alaska’s economy in a very negative fashion. However, reality is not what Washington, D.C. is about. The worst is yet to come.

54% of Americans who voted, voted for a socialist expansion of government with the increase in deficit spending and increased liabilities that come with the lack of reality associated with socialism. They have given their future generations an incredible burden, but shirked their responsibility with Obama’s reelection.

Already, the Obama Administration is planning a carbon tax, which will certainly impact Alaska’s coal and diesel power generation costs and increase the cost of power to all Alaskans. Obamacare will increase medical costs to Alaskans, and restrict services.

Unfortunately, the Fiscal Cliff and Obamacare are not the real threat to Alaskan’s welfare or cost of living, as we are in the same boat there with the rest of Americans. The real threat to the economic well being of the State of Alaska and her people is the shortsightedness of our Governor and the Legislature to provide a sound, diversified economic base for the future with sufficient low cost energy to insure that future. 35 trillion cubic feet of the energy available is in natural gas under Alaska’s North Slope. After 35 years, that energy has yet to be tapped.

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