Strategies to prepare Alaska for the economic marathon: fitting Alaska into the new global ecosystem.

• Author: Roy, Ashok K.
• Position: ECONOMY

The opinions expressed in this article are the author's own and do not reflect the views of the University of Alaska.

The purpose of this commentary is to paint with a broad brush the new global ecosystem in which Alaska's economy will operate in the years ahead, make some suggestions to guard against the hubris of past success and Black Swans (i.e., high impact events), and generate cognitive discourse on Alaska's fiscal structure and economy. An effective strategy, according to Dr. Vijay Govindarajan, manages the present, selectively forgets the past and creates the future. The key to Alaska's success in the economic marathon lies in what we will do today that will ultimately intersect with strategy twenty years from now. We are at a strategic turning point, and have to recognize that Alaska has to make structural changes to accommodate fundamental long-term shifts in funding models. To stay ahead of the curve, we will have to model the uncertainty from strong secular economic headwinds in our paradigm shift.

More than 56 percent of Alaska's state budget and 90 percent of its general fund revenues come from oil (i.e., production tax, petroleum property tax, corporate income tax and royalties from state-owned land). Another 20 percent of the state budget comes from federal funds (Medicare, Medicaid and infrastructure). Investment income (mainly from the Permanent Fund) makes up most of the balance; however, these are not used for general government services. Alaska is one of five states without a state sales tax, one of seven states without a personal income tax, and the only state with neither a state sales tax nor a personal income tax.

One-third of Alaska's economy depends on federal spending, one-third on petroleum, and the remaining one-third depends on drivers such as: mining, tourism, timber, seafood, international air cargo and miscellaneous services. This is commonly known as the "three-legged stool." Federal spending in Alaska is currently $10 billion annually which is the third highest per capita spending in the nation. The University of Alaska, which is Alaska's fourth largest employer, also depends on federal awards (approximately $175 million without student financial aid and pass- through). These federal grants will become, obviously, much more competitive in the years ahead. Research revenue is vital, as for every dollar of state investment in the University of Alaska research; the university generated $5.60 million in additional research revenues. In other words, with federal deficits, federal spending in Alaska will be impacted. At present, according to Moody's (moodys.com), the state of Alaska has AAA, stable credit rating but with a relatively high liability ranking based on income and population as a result of the state's petroleum tax based revenue system.

Against the pressures emanating from diminished gross domestic product projections, burgeoning federal deficits which will mean reduced federal aid to Alaska, slowdown in Asian and European economies, the looming so-called "fiscal cliff," declining oil production, rising Medicaid costs, approximately $11 billion in unfunded pension liabilities for the state of Alaska (PERS and TRS), and other macro-economic outlook bring up interesting structural challenges for the state.

So, what can Alaska do so that its budget does not get too squeezed by...