‘Glass-half-full’ governor confronts oil-driven fiscal crisis

By Margaret Kriz Hobson | 03/09/2016 07:50 AM EST

ANCHORAGE, Alaska — Alaska Gov. Bill Walker (I) is an optimist with a “glass-half-full” perspective on life. And that might be exactly what Alaska needs right now as the nation’s most petroleum-dependent state copes with rock-bottom oil prices.

ANCHORAGE, Alaska — Alaska Gov. Bill Walker (I) is an optimist with a "glass-half-full" perspective on life. And that might be exactly what Alaska needs right now as the nation’s most petroleum-dependent state copes with rock-bottom oil prices.

For years, Alaska has relied on revenues from its North Slope oil fields to underwrite up to 90 percent of the state’s operating budget. But with oil prices now stuck in the $30- to $40-per-barrel range, that near-total dependence on oil has resulted in a whopping $3.8 billion budget deficit for the state.

Despite the state’s fiscal crisis, Walker is convinced that Alaska is on the brink of bigger and better times. The 64-year-old Fairbanks native will tell anyone who will listen that Alaskans are strong, resilient people who can tackle this problem much as they’ve overcome other serious hardships, most dramatically the record magnitude-9.2 earthquake of 1964.

Bill Walker
Alaska Gov. Bill Walker (I) stands at the ceremonial start of the famed Iditarod sled dog race this weekend in Anchorage. | Photo by Margaret Kriz Hobson.

The governor insists that the key to Alaska’s future lies in overhauling the state’s financial structure and commercializing the abundant natural gas reserves on Alaska’s North Slope. But both signature initiatives are facing major financial and political barriers that could define his term as governor.

Walker’s lifelong mission has been to build a pipeline to carry gas to rural Alaska communities and foreign markets. For the last 30 years, he’s been involved in advancing some version of a gas pipeline project. The repeated failure of those ventures actually impelled him to run for governor.

"I worked with all of our former governors back to Gov. [Tony] Knowles in trying to progress the gas line," Walker said in an interview with EnergyWire. "I’ve tried everything else. I’ve sat in every other seat you could sit in except this one. So that was a driving force for me" to become governor.

During the last two years, Alaska has made more progress than ever before on commercializing the 34 trillion cubic feet of natural gas reserves known to exist on the North Slope.

In early 2014, the state joined forces with Exxon Mobil Corp., BP Alaska and ConocoPhillips Co. on a plan to build a $45 billion to $65 billion gas pipeline and export mega-project. That alliance, known as the Alaska LNG Project, was created under Walker’s predecessor, Gov. Sean Parnell (R).

The partners have nearly completed preliminary engineering work and have acquired hundreds of acres of land in the Kenai Peninsula needed to build a liquefied natural gas export terminal to ship Alaska natural gas to Asian markets beginning in 2024-25.

But continuing low oil and gas prices are casting a deep shadow over the project. Seriously hit by declining oil revenues, the state’s industry partners are worried about advancing into the next stage of engineering and design on the venture, which would cost billions of dollars (EnergyWire, Feb. 18).

Those concerns are echoed by the U.S. Energy Information Administration, which wrote last week that "[p]roposed LNG terminals in the United States face not only increased competition from other domestic and foreign terminals that have been completed, but they also face uncertainty in global LNG demand."

Walker is doggedly fighting any potential delays, though he has yet to explain how he would keep the gas line on track. "I’m working hard to make sure there’s no slowdown," he said. "I don’t think there’s a reason to slow down."

The governor insisted that potential buyers are looking well beyond today’s market conditions. "You don’t necessarily want to look at where we are today and say it’s going to be this way in 2024-2025," he said. "The market makes that decision."

But the governor’s continued optimism is becoming a tough sell to oil company executives as well as lawmakers in the Alaska capital city of Juneau.

"A growing number of legislators are starting to see the reality that this may not be the time for an Alaska LNG project," said Larry Persily, former head of the White House Office of the Federal Coordinator for Alaska Natural Gas Transportation Projects and now special assistant for the Kenai Peninsula Borough.

"Not to say that they’ve given up on the project," Persily said. "They’re just accepting that it may not happen on the schedule that we thought it was going to happen as recently as last year. There’s too much to gamble on a very crummy market at the moment."

Son of pioneers

Walker is a tall, solidly built family man who’s been married to his wife, Donna, for 38 years. The couple has four children and four grandchildren.

A likable, slightly formal person with a quick smile, the governor wears his heritage as a badge of honor. Born in Alaska before the region became a state, Walker proudly describes his parents as Alaska pioneers.

Both parents came north during World War II, his father as an Alaskan Scout with Castner’s Cutthroats in the Aleutian Islands and his mother to work on the Alaska-Canadian Highway project.

Walker was deeply affected by the devastation of the 1964 Alaska earthquake and tsunami, which wiped out his family’s construction business in Valdez. Helping his family survive those dark days instilled in him a serious work ethic that continues today.

The governor recalls that it was ultimately the construction of the Trans-Alaska oil pipeline that "lifted us out of the depths of our despair and created incredible opportunities for Alaskans all across the state."

He noted that at the time, he worked "as a carpenter, as a laborer, as a Teamster by day. At night, I built houses. It was a time when you just knew that you were going to better yourself if you applied yourself."

As work on the pipeline was winding down in the late 1970s, Walker jumped into Valdez politics, serving on the City Council and later as mayor.

After attending law school, Walker rose to state prominence as an oil and gas attorney and became project manager and general counsel of the Alaska Gasline Port Authority.

That group, created by the city of Valdez, Fairbanks North Star Borough and North Slope Borough, championed construction of a natural gas pipeline project from northern Alaska to an export terminal in Valdez, with an off-take point at Fairbanks. Like most of the state’s other gas line projects, the venture never got beyond the planning stage.

Walker first ran for governor in 2010 but lost the Republican primary to Parnell. At the time, Parnell was completing the four-year term of former Gov. Sarah Palin (R), who resigned from the governor’s seat in 2009. In 2010, Parnell was elected Alaska governor in his own right.

In early 2013, Walker again filed to run in the Republican gubernatorial primary for a rematch with Parnell. But he later decided to skip the primary and run as an independent.

Then two months before the November 2014 general election, Walker and the state’s Democratic candidates joined forces in a new alliance that they calculated would have a better chance of defeating Parnell than either would individually.

At the urging of state union officials, the competitors formed the Alaska First Unity ticket, with Walker running for governor and the Democratic gubernatorial candidate, Alaska Native leader Byron Mallott, as lieutenant governor.

The new team ultimately beat Parnell by a little over 6,000 votes in the general election. At the time, Parnell was under attack for his administration’s role in a sex abuse scandal involving the Alaska National Guard.

New perspective after a year in office

Since taking office, Walker has taken a populist approach to politics, relying on town-hall-style meetings and a steady stream of speeches and news conferences to sell his message to Alaskans.

During his first year, the governor repeatedly clashed with state Republican leaders, who accused him of negotiating by press release. One Alaska political insider explained that "Bill makes the mistake of equating schmoozing and sucking up with corruption and bad government. But that’s how you get your initiatives passed."

This year, Walker has taken steps to ease the tensions between the two sides, holding regular meetings with the state House and Senate leaders and inviting them to dinners and bowling matches.

Walker has a more cautious approach to working with the state’s oil and gas companies than the more industry-friendly Alaska Republican leadership or Parnell, who was a lobbyist for ConocoPhillips before becoming governor.

The governor’s perspective was shaped by his days as an oil and gas attorney. He represented the city of Valdez in lawsuits that charged the oil companies with lowballing the property tax valuation of the industry-owned Trans-Alaska pipeline system.

He took the state of Alaska to court for allowing Exxon Mobil to hold onto and develop its promising natural gas leases at Point Thomson in northern Alaska despite decades of industry delay.

In Walker’s view, oil industry executives make investment decisions based on company profit, not Alaska’s welfare. "There’s no question that it’s a major plus to have Exxon, BP and ConocoPhillips," the governor acknowledged. "But they have their own internal limitations on where they do projects. They have to weigh one against the other.

"We don’t. We only have one. Because of that, I am fairly laser-focused on this [natural gas] project," he said.

Walker is convinced that the state should take a more aggressive role in deciding how and when its North Slope natural gas and other resource are developed, rather than repeatedly beseeching the companies to invest in new projects.

"It should be a different model going forward where the sovereign is more of a participant than we’ve been in the past," he argued. "For the last 38 years of trying to get a pipeline, the state was not acting like a sovereign. We were acting subservient to the leaseholders. And that’s not what I do."

During his election campaign, Walker was critical of Parnell’s handling of the Alaska LNG project. He specifically attacked Parnell’s complicated agreement with TransCanada Corp., which allowed the pipeline company to pay some of the state’s expenses in return for a partial ownership stake in the project.

Once in office, Walker pushed the Republican-controlled Legislature to buy out TransCanada’s contract, a step that gave Alaska a full quarter share in the venture. Lawmakers agreed to the plan, however, only after TransCanada testified in favor of the buyout (EnergyWire, Nov. 6, 2015).

Circle of advisers

The governor relies heavily on a tight circle of advisers — sometimes to the exclusion of top state professionals, according to his critics.

Walker appointed his former law partner Craig Richards as Alaska attorney general. The governor’s chief of staff, Jim Whitaker, is a former Fairbanks North Star Borough mayor who worked closely with Walker on the Alaska Gasline Port Authority project.

Walker has two deputy chiefs of staff: Marcia Davis, served in Palin’s administration and was a strong critic of state oil tax changes made by Parnell, and John Hozey, who served as an aide to the late Alaska Sen. Ted Stevens (R) and was city manager of Valdez.

The governor has become close with Lt. Gov. Mallott, who served as mayor of Juneau. In addition, Walker’s wife, Donna, who is an oil and gas attorney, is also part of his core team.

Walker has been criticized for hiring a string of expensive outside consultants to help negotiate with industry and improve relations with Washington, D.C.

The governor’s political support comes from Alaska’s unions, Native groups and some Democrats, though many have challenged the governor’s more conservative political proposals. Industry officials say he’s also backed by roughly one-third of the state’s residents who have historically suspected that the oil industry is out to take the state’s resources and run.

Despite tensions with state Republican leaders, the governor maintained a high popularity rating during his first year in office. A November poll gave Walker a 64 percent approval rating with Alaska voters. The results, drawn from a survey of 303 state voters, was conducted by Morning Consult, an online politics and business company.

Kevin Harun, a former spokesman for the Alaska Democratic Party and now Arctic program director for Pacific Environment, described Walker as "more conservative than I am. But I trust him to act in the best interest of the Alaskan people."

"I can’t say that about some of our past governors," Harun said.

Changing the dividend

While Walker holds fast to his goal of completing a natural gas export project within the next nine years, he has also taken center stage in addressing the state’s looming fiscal crisis.

In December, the governor won widespread praise for developing a comprehensive fiscal package that would cut state programs, increase revenues and change the way Alaska’s oil money is used within the state (EnergyWire, Dec. 10, 2015).

Since the plan went to the Legislature, however, Alaska’s Republican leaders have focused on making deeper cuts to the state’s social programs and adopting fewer taxes on industry than Walker proposed.

The Legislature has not yet tackled the most radical piece of Walker’s plan that would replumb the state’s financial structure. The governor’s staff estimates that move would cut the state’s budget deficit by $3 billion.

Currently, Alaska underwrites state general fund programs by tapping its North Slope oil royalties and production tax revenues, as well as its gas industry’s property and corporate income taxes. A portion of the royalty revenues also go into the state Permanent Fund, created in 1976 to save oil money for future generations of Alaskans.

Over the years, the Permanent Fund has grown as oil funds were reinvested by an independent state corporation. Part of those investment earnings are distributed each year to Alaska residents through a Permanent Fund dividend check.

Funding state operations with oil revenue worked well as long as oil and gas prices remained high. But with prices now crashing, Walker is proposing a complex plan that would include using a portion of the Permanent Fund earnings to help pay for the budget. Under that plan, future annual dividends would be tied to the state’s annual oil revenues.

Meanwhile, two state Republican lawmakers have introduced alternative approaches for using the Permanent Fund to pay for state general programs. Those separate proposals are sponsored by state Sen. Lesil McGuire and state Rep. Mike Hawker, both of whom are not running for re-election.

Walker said he’s open to negotiations over details of the budget package. "The fact that we’re having this discussion is a very good thing," he said. "We’re not wedded to one [plan] versus the other."

"What we’re trying to do is take the volatility of oil [prices] out of our budget and put that volatility over into the permanent fund," he said.

Credit ratings go negative

While the political debate heats up in Juneau, Alaska’s massive budget deficit is taking its toll on the state’s financial standing. Early this month, the nation’s top credit rating firms downgraded Alaska’s bond ratings from AAA to AA plus, or placed the state on a negative investment outlook.

Prior to those announcements, Walker and the state’s top financial officials flew to New York City in an unsuccessful attempt at persuading Moody’s, Standard & Poor’s and Fitch Ratings to retain a higher rating for the state.

Walker said the financial analysts were encouraged by his plan to restructure the state’s budget system and wipe out the deficit. But they "questioned whether or not it would be passed in its entirety by the Legislature. We said we believe it will be. And they said: Show us."

With the Alaska Legislature’s 90-day session more than halfway over, pressure is increasing for lawmakers to provide funding for the state’s programs and to consider potential new revenue sources.

In the coming days, the state House and Senate are expected to adopt funding bills for fiscal 2017. The proposals will include more dramatic program cuts than Walker suggested. The next step will be considering new sources of revenue.

But as negotiations continue, the politically sensitive budget issues could be affected by Alaska’s November legislative elections. Many state lawmakers are up for re-election, which could give them second thoughts about supporting higher or new taxes.

As a result, some suggest that many of the governor’s proposed tax hikes, particularly his plan for a personal income tax, are not likely to be included in the final budget bill. They say examining all of Walker’s budget package could take several years.

"This is a multiyear process, I think everyone knows that," state Sen. Mike Dunleavy (R) said at a news conference Monday. "If anyone thinks you can solve this issue in one year, in 90 days, they’re fooling themselves."

The governor acknowledges that parts of his budget plan are "not politically comfortable. But it’s fiscally responsible."

"I don’t like taxes," Walker asserted. "There are pieces of the plan that I don’t particularly like. … [But] if we do nothing, the Permanent Fund program goes away entirely. It’s reached a time in Alaska’s history where we can no longer live exclusively off of our resources."