Alaska's construction forecast for 2015: annual report for the Construction Industry Progress Fund and the Associated General Contractors of Alaska.

• Author: Goldsmith, Scott
• Position: SPECIAL SECTION: Building Alaska

Dear Alaskans,

The Construction Industry Progress Fund (CIPF) and the Associated General Contractors (AGC) of Alaska are pleased to have produced the 13th edition of "Alaska's Construction Spending Forecast." Underwritten by Northrim Bank, compiled and written by Scott Goldsmith and Pamela Cravez of the University of Alaska's Institute of Social and Economic Research (ISER), the "Forecast" reviews construction activity, projects and spending by both the private and public sectors for the year ahead.

The construction trade is Alaska's third largest industry, paying the second highest wages, employing nearly 16,000 workers with a payroll over $1 billion. It accounts for 20 percent of Alaska's total economy and currently contributes approximately $8.5 billion to the state's economy. The construction industry reflects the pulse of the economy. When it is vigorous, so is the state's economy.

Both CIPF and AGC are proud to make this publication available annually and hope it provides useful information for you.

AGC is a non-profit, full service construction association for commercial and industrial contractors, subcontractors and associates. CIPF is organized to advance the interests of the construction industry throughout the state of Alaska through a management and labor partnership.

--Mike Shaw, CIPF Chairman The 2015 Forecast is generously underwritten by Northrim Bank

Overview

The total value of construction spending "on the street" in Alaska in 2015 will be $8.5 billion, down 3% from 2014. (1,2,3)

Wage and salary employment in the construction industry, which increased an estimated 6 percent last year, to about 17,600, will decline slightly in 2015. (4)

Oil and gas sector spending will fall 2% to $3.8 billion from its record level of $3.9 billion last year.

Other spending will be $4.7 billion, a decline from $4.9 billion last year.

Private spending, excluding oil and gas, will be about $1.7 billion, down from $2.0 billion last year--while public spending will increase from $2.9 to $3.0 billion.

Construction spending in Alaska in 2015 is expected to be strong in spite of the drop in the price of oil from more than $100 per barrel in the summer of 2014 to between $45 and $50 today.

However, the longer the price stays low, the greater the risk that some projects will be cancelled or postponed. It is impossible to predict what will happen to the oil price, because world supply has outstripped demand. The price will stabilize, and perhaps begin to increase, only when the low price stimulates more demand and eliminates high cost production, a process that could take more than a year. A further complication is the unpredictability of the role of OPEC in determining oil supply. In particular Saudi Arabia, the largest producer, could decide to restrict supply for political or strategic reasons.

Because of the drop in the price of oil, the state is facing a general fund budget deficit of about $3 billion for the current fiscal year (FY2015) and is projected to have a similar deficit in FY2016 (which begins July 1 of this year). However, this will not have a large negative impact on state government construction spending this year for several reasons.

In FY2013 the state appropriated a record high $2.3 billion from the general fund (excluding grants from the federal government) for capital spending. In addition the legislature gave the state authority to sell $0.45 billion of general obligation bonds for transportation projects. Much of that record appropriation is only now becoming "cash on the street." And even though the general fund capital budgets in the last two years have been only $1.1 billion, there are still billions "in the pipeline" that will keep state spending strong this year.

Because of the size of the state budget deficit, it is possible that some projects in the pipeline that have not yet been approved could be cancelled. This will be moderated by concern over the negative impacts on the economy.

In any event the project backlog will begin to taper off next year. Furthermore, the governor has proposed a bare-bones general fund capital

budget of about $100 million for FY2016 that would just cover the state match on federal grants.

Fortunately, federal spending, mostly consisting of grants, both to the state (about $1 billion annually) for transportation (roads, harbors, the railroad and the ferry system) and sanitation projects, and to non-profits for health facilities and housing, is not sensitive to the price of oil. Although the federal government has a difficult time producing a budget, the level of federal spending this year should be similar to last year. Furthermore, spending for national defense has also remained robust.

The oil and gas sector is always a difficult category to forecast. Because plans can and do change, and because of many factors associated with weather, logistics, the availability of supplies, the evaluation of work completed, regulatory and environmental challenges, tax policy and other operational and strategic concerns.

Spending plans developed by the oil and gas companies during the last quarter of 2014 suggested an increase in spending of 18% for 2015 compared with the year before. However, this target is unlikely to be met because oil prices have continued to fall since those plans were announced. We estimate spending will be about the same as last year. As price expectations continue to change every company will continue to re-evaluate its investment plans.

The lower oil price means both a dramatic reduction in cash available for investment in new projects and also a reduction in the profitability of those new investments. Fortunately the industry tends to make investment decisions based on a conservative, and long run, oil price. Consequently the drop will have less negative impact on the viability of projects than on the ability of companies to move forward with investments because of capital constraints.

However, some of the largest operators in Alaska are quite strong financially, and others have funding sources not tied to the oil price. Furthermore, in Cook Inlet, activity is more sensitive to the price of natural gas than of oil, and the state, through its tax credit programs, has also provided a funding source not directly tied to the price of oil. Finally, the industry is under political pressure to show that the new state production tax, SB21, has stimulated new investment. Consequently, strategic considerations might help to keep the flow of investment spending high.

The economy of the state has slowed somewhat over the last three years. Job growth continues, albeit at less than 1% per year. Population growth, which had been tracking employment, came to a halt in 2014. Out-migration exceeded inmigration for the second year in a row.

This slowdown, combined with the heightened uncertainty about the future direction of...