The Morning Headlamp — Continually Declining Oil Prices Necessitate Government Downsizing

Alaska’s deficit continues to grow. In a recent interview, State Senator Mike Dunleavy (R-Wasilla) sat down to discuss the looming legislative session, and ways he plans to address the state’s multi-billion-dollar deficit. The regular legislative session lasts only 90 days; which is a relatively short period of time to deal with many complex issues on top of how to handle the widening budget deficit. Illustrating the seriousness of the situation, Sen. Dunleavy was quoted as saying, “We thought it was bad last year. We lost $600 million when [oil] went from $64 a barrel to $38, so the hole keeps getting bigger. It doesn’t get smaller.”

From Sen. Dunleavy’s perspective, the two most effective ways of overcoming Alaska’s budget woes are to implement substantial reductions in the size of state government and use funds from the Earnings Reserve account of the Permanent Fund. Dunleavy believes that using the Earnings Reserve Account of the Permanent Fund could keep government running at a reduced level without impacting Permanent Fund Dividend checks. Such a strategy is similar to Dr. Scott Goldsmith’s sustainable budget model, which calls for unrestricted general fund spending (UGF) of $4.5 billion, or lower. For state government to become more efficient, and accountable to the public it must be right sized. Sen. Dunleavy thinks “we’re going to be looking at $500 million to $1 billion” in additional cuts this legislative session. The two biggest drivers of Alaska’s budget are K-12 education, and the Department of Health and Human Services.  Sen. Dunleavy chairs the Education Committee, and noted that “reductions…may be touching education; they may be touching health and social services; they may be touching things like the ferry. They may be touching a whole host of things that have to be looked at.”

Headlamp believes that all state government departments and programs must be examined and analyzed. A goal of legislators should be to enact policies that enable a robust private sector, help create jobs, and ensure economic prosperity for Alaska’s next generation. Headlamp commends Sen. Dunleavy for recognizing these factors, and focus on reducing the budget. In coming weeks Headlamp will present choices and ways in which state government could be right sized. We encourage legislators and Gov. Walker to lead, and take bold actions in 2016. We can’t afford not to.

AKLNG will take questions now. Alaska LNG project teams are working to answer questions and fulfill requests for more detailed information from over a dozen federal and state agencies that submitted several hundred pages of comments for the teams to consider in their next round of draft “resource reports.” The reports will be used to prepare the project’s environmental impact statement. In addition to environmental studies, Alaska LNG project teams continue to look for opportunities to reduce costs in design and construction planning. Particularly in view of low global oil and gas prices, cost reduction is an important part of the work, Fritz Kruse, interim president of the Alaska Gasoline Development Corp., reported to his board Dec. 18. The corporation represents the state’s interests as a 25 percent owner of Alaska LNG. Headlamp is glad that there continue to be open channels of communication between AKLNG partners and regulatory agencies as well as a substantial budget reserved for environmental oversight. AKLNG will see long-term success if good business practices are continued.

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First Reads

Alaska LNG working to answer agencies’ questions
Alaska Business Monthly, Larry Persil, January 6, 2016

Oil Prices Decline More Than 5 Percent as Stockpiles Increase
Alaska Dispatch News, January 6, 2016

Oil Prices: What’s Behind the Drop? Simple Economics
New York Times, Clifford Krauss, January 6, 2016

Sen. Dunleavy talks state budget before 2016 session
KTNA, Phillip Manning, January 6, 2016

ConocoPhillips donation to UAF slated for engineering building
Fairbanks Daily News Miner, Casey Grove, January 6, 2016

Mining woes deepen with worst start in a decade as metals slide
Fairbanks Daily News Miner, Luzi Ann Javier and Danielle Bochove, January 6, 2016