Alaska’s Uncontained Failure: Layoffs, Deficit, and an Uncertain Future

Depressed petroleum markets are not just lowering prices at the pump. They are redefining the very fabric of Alaska’s once stable economy.

A new study by Dr. Gunnar Knapp predicts the current 3.8 billion deficit could cost up to 30,000 jobs in direct and indirect losses of jobs across the state.

Thirty years ago, the Alaskan economy saw nearly one in every ten jobs disappear. In what has come to be known as the State Spending Recession, the extraordinary growth of state capital spending resulted in the loss of 1.660 jobs per month at its peak. Alaska saw 14 banks close in the span of three years and a population loss of ten percent from 1985 to 1988.

Exacerbated by the housing and heavy construction bubble the state created, memories of the 1980s recession still elicit a very visceral anxiety from Alaskans today.

And according to a new study published by the University of Alaska’s Institute for Social and Economic Research this month, that anxiety is not unwarranted.

The study, titled Economic Impacts of Alaska Fiscal Options and led by Dr. Gunnar Knapp, shows that Alaska’s economy will crash on a similar scale to that of the 1980s recession with the potential for a long-term economic depression. The report considers the economic impact of future changes to state spending and taxation.

Examining different options, the research presents the percentage of Alaska’s job losses from state budget cuts, taxes, and the reduction of the Alaska Permanent Fund dividends. It details potential policy options for the legislature to consider, and which government workers would be most affected by each option. Each option varies in who is most affected and the relative magnitude of impacts. Overall, Knapp recommends spreading cuts and tax increases over two years to reduce any consequential shocks.

While the research itself does not advocate for or against any option, the report concludes that closing the current 3.8 billion deficit would cost up to 30.000 jobs in direct and indirect losses.
A lack of “significant progress this year” by the legislature to close the deficit could result in even more jobs lost in the years to come.

Significant progress means:
“(1) Major reduction in the deficit; (2) Consensus on a plan for what else we will do and when we will do it; and (3) Showing that we can and will achieve sustainable, stable and predictable state spending revenues.”

The state of Alaska has already made heavy cuts in spending that will hit the economy in full in 2017. Using the metrics of the new report, these billions of dollars in reduced capital spending by the government will alone cost 9.000 jobs.

A Lack of Legislative Action

Knapp’s study was commissioned by Governor Bill Walker’s administration for $60.000 to better understand the government’s options.
Earlier in 2015, Governor Walker proposed a plan to fix the deficit with income tax and permanent fund restructuring. And while the Governor has played a major role in addressing Alaska’s current economic downturn, his legislature has not yet engaged in finding a meaningful policy and budget resolution.

Many Alaskans have criticized the state legislature in Juneau for doing nothing thus far to address the issue. Telecommunications corporation GCI president and CEO Ron Duncan fears an “uncontained failure” if no legislative plan is created. Alaska Dispatch columnist Charles Wohlforth has gone so far as to call for a dismissal of “legislative leaders who waited until the brink of the precipice to start asking serious questions.”

The Alaska Senate is set to pass a version of the state-operating budget this week to support the House’s own plan, which was passed last week. While the budget will include parts of addressing the recession, Governor Walker was stressed the need for a more comprehensive, long-term fiscal plan to address the multibillion-dollar deficit.

The Layoffs Beyond Government

The new report by Dr. Knapp focuses only on the portion of the economy that is driven by government and does not cover that which is driven by the private sector. Consequently, it does not taken into consideration job losses in other basic industries that have driven the Alaskan economy for decades. While absent from the report, such job losses have been felt across the state throughout 2015.

The oil industry, which once accounted for one third of all Alaskan jobs, lost about nine percent of its employees last year. Just this week, BP announced that workers can expect another four percent of Alaskan employee and agency layoffs in the month to come, resulting in about 84 job losses. This follows a January BP announcement that it would reduce its Alaska workforce by 13 percent, cutting 270 jobs.

These issues are only going to get worse in the years to come with the continued trend of low oil prices. Mineral and fish prices are also down, and the strength of the American dollar has been identified as a potential obstacle for tourism growth. Even the US Department of Defense is considering force reductions to protect its northernmost state. Such job losses could expand to skilled worker layoff and decreased service investment if business people lose confidence in Alaska’s ability to balance its deficit. As noted by GCI CEO Ron Duncan he and other business leaders like him will halt investment, cancel plans, lay off workers, and send money outside the state.

The Deepest Recession

When pressed to look hard at the unavoidable recession looming over their state, Alaskans remember the suffering of the 1980s. But there is a major difference between today’s deficit and yesterday’s economic downturn. In 1985 excessive state spending created a real estate and construction bubble that popped. Today’s Alaska does not have a bubble. And it does not have a single victim industry.

The crash that began last year will hit Alaska slower, but it’s poised to do more damage. The new report and the labor statistics of Alaska show that it will hit many industries, affect many families, and fundamentally redefine the way Alaskans earn a living. Dr. Knapp has said that Alaska’s “lost billions of dollars that aren’t coming back. We just have to adjust.”

Alaska is the first northern government to face a quicker-than-expected transition to a less oil dependent economy. But they will not be the last. Local governments across the Arctic region will be keeping a watchful eye on Alaska this week as the Alaskan legislature reads Dr. Knapp’s report and plans for an uncertain future.