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Home My WebLink AboutThe Alpetco Petrochemical Proposal- An Economic Impact Analysis 1978PTL 002 INSTITUTE OF SOCIAL AND ECONOMIC RESEARCH UNIVERSITY OF ALASKA Anchorage ° Fairbanks ° Juneau 5.28 THE ALPETCO PETROCHEMICAL PROPOSAL: AN ECONOMIC IMPACT ANALYSIS A Report to the Alaska State Legislature by Scott Goldsmith and Lee Huskey Institute of Social and Economic Research University of Alaska Anchorage — Fairbanks - Juneau April 1978 ln THE ALPETCO PETROCHEMICAL PROPOSAL: AN _ ECONOMIC IMPACT ANALYSIS Table of Contents EXECUTIVE SUMMARY I. Il. III. INTRODUCTION: THE SCOPE OF THE ANALYSIS THE ALASKAN ECONOMY: THE BASE CASE II.A. MAP Model II.B. Base Case Assumptions II.B.1. Petroleum activity II.B.2. Non-petroleum basic sector activity II.B.3. State fiscal assumptions II.B.4. Employment and migration II.C. The Alaskan Economy: Base Case Projection II.C.1. Economics and demographics II.C.2. State government II.C.3. Local government II.C.4. Regional distribution of base case growth THE ALPETCO PETROCHEMICAL PROPOSAL: ECONOMIC IMPACT ANALYSIS III.A. Alpetco Proposal Description III.B. Alpetco Assumptions for Impact Analysis III.C. Economic Impact III.C.1. Aggregate economic and demographic impact III.C.2. State government ILIL.C.3. Local government III.C.4. Regional impacts II-1 II-3 II-3 II-6 II-7 II-8 II-9 TI-9 II-16 II-23 II-25 III-2 III-4 III-6 III-6 III-15 III-26 III-29 IV. SENSITIVITY OF THE RESULTS TO THE ALPETCO PROJECT AND BASE CASE ASSUMPTIONS IV.A. IV.B. Iv.c. IV.D. IV.E. IV.F. IV.G. V. SENSITIVITY OF THE RESULTS TO THE STRUCTURE OF THE MODEL V.A. V.B. V.C. V.D. V.E. APPENDICES Introduction Sensitivity to Alpetco Revenue Assumptions Sensitivity to In-Kind Price of Royalty Crude Sensitivity to Alpetco Employment Assumptions Sensitivity to Alpetco Construction Employment Wage and Salary Leakage Sensitivity to Assumptions About the Timing of Alcan Construction Sensitivity to the Regional Locations of Alpetco Employment Introduction Sensitivity to the Induced Migration Response Sensitivity to the Induced Change in State Expenditures Sensitivity to Combined Effects of Migration and State Expenditures Summary A. Base Case Exogenous Variable Assumptions B. Basic Alpetco Scenario Assumptions BIBLIOGRAPHY Iv-1 Iv-2 Iv-9 Iv-13 IV-26 Iv-35 Iv-48 v-1 v-2 vV-9 v-17 V-23 B-1 THE ALPETCO PETROCHEMICAL PROPOSAL: AN ECONOMIC IMPACT ANALYSIS Executive Summary A. Impact Results Based upon the employment and revenue projections developed by Alpetco, the construction and operation of the facility they propose would have a significant impact on the Alaskan economy in both the short and long run. The direct employment associated with the construction phase of the project would be 3,500 on an annual average basis for the years 1981, 1982, and 1983. Plant operations employment would annually average 1,925 beginning in 1984. When operational, the facility would generate substantial state revenues. For example, in 1990 Alpetco would increase revenues by $30.6 million in state corporate income taxes, $27.4 million in local property taxes, and $4.2 million in state gross receipts taxes (in 1977 dollars). “ The total impact on the Alaskan economy would exceed the direct impact by a considerable margin in several dimensions. Based upon a continuation of past historical relationships among important economic variables in the economy, the following types of impact may be expected as a result of the successful implementation of the Alpetco project as proposed. (Table i.) Employment (EM99) - Total employment growth is a multiple of Alpetco employment. The peak impact occurs in the final construction year at 22.3 thousand. After the construction phase, the long-run impact declines to 8.2 thousand by 1990. The large employment impact is the combined Table i THE ECONOMIC IMPACTS OF THE ALPETCO PROPOSAL EMO? FOF FUNKE C REVGE SMF FUNII 1979 1.906 16906 1980 1 3 ALG? ll ~32.009 290,375) “144.477 308.207 =164| 99 ~BOP.46P fil 83,859 22) “GS 1 548 ‘ 194460 8.721 24,996 “FGI. 8.095 ~20,168 7 GAS 8.036 8.196 EM99 = total employment (thousand) POP = total population (thousand) PINRPC = real per capita personal income (1967 US $) REVGF = state general fund revenues (million $) SIMP state general fund revenues minus general fund expenditures (million $) FUND the permanent fund and general fund (million $) Note: Variables are measured as the difference between the case with Alpetco and the case without Alpetco. tT iii result of the high incomes in construction and petrochemical manufactur- ing, the rapid growth in the support sectors of the economy in response to an increase in basic employment, population increase in response to new employment opportunities, and expansion of state and local govern- ment in response to population, price, and income increases. Population (POP) - Population growth accelerates as a result of Alpetco as employment opportunities and personal income increases gener- ate additional net inmigration to Alaska. During construction, the population impact peaks at 36.7 thousand and then falls to 25.2 thousand in the long run (1990). Real Personal Income Per Capita (PINRPC) - Because of the high level of construction wage rates, real personal income per capita expands significantly during the Alpetco construction phase. The peak of $308 (a 7 percent increase) is not sustained during operations, however, because the population increase and the rapid expansion of lower wage industries (trade and services) result in a marginally negative impact in the long run (less than 1 percent). State Government Revenues (REVGF) - Two major types of general fund revenue respond asymmetrically to the Alpetco proposal. Endogenous state revenues increase in response to population and personal income growth. Fund earnings, however, respond negatively because the increased demand for public services indirectly generated by Alpetco requires that a larger proportion of petroleum revenues be spent on current government expenditures and a smaller proportion saved. The net impact is positive, but by 1986 the total revenue impact is less than the direct Alpetco revenue impact (corporate and gross receipts tax) indicating a negative net impact on indirect revenue generation. Net State Fiscal Impact (SIMP) - State government expenditures in- crease as population, the price level, and personal income increase as a result of the Alpetco project. The revenues directly and indirectly generated by the Alpetco project are insufficient to cover the cost of these new expenditures. Petroleum revenues which would otherwise be deposited in the permanent fund or saved in the general fund must be used to cover a large portion of the increase er expenditures. The difference between revenues and expenditures generated by the project is thus negative. In the peak revenue year of 1983, the net fiscal impact of $ - 165 million is three times larger than revenues generated of $68.8 million. In the long run, the net fiscal impact is $ - 58.9 million (1990) and larger than revenues generated. State Government Funds (FUND) - Because of the increased demand on petroleum revenues generated by additional state government expenditures, fund balances do not grow as rapidly with Alpetco. The difference is $1,002.7 million in 1990, which is 7 percent of the fund at that time. Local Government - Local government is better able to take advan- tage of the capital intensive nature of the petrochemical complex than state government because of the local property tax. A positive net fiscal impact results at the local level because of this, although it appears only after completion of the project. The combined state and local government fiscal impacts remain negative. Regional Distribution of Impact - The facility is assumed to be located at a site in Southcentral Alaska. Because Anchorage is the trade and service center for the state, a significant proportion of the induced employment, population, and personal income impacts will occur in Anchorage. B. Sensitivity of Results to Assumptions The basic results are sensitive to the assumptions underlying the analysis. Tables iii-vi at the end of the summary compare the basic results for important variables (employment, population, real per capita personal income, and state fiscal impact) with results obtained by chang- ing key assumptions. The basic findings are summarized as follows: Alpetco Revenues (ALS1_ER) - If corporate income taxes are only 50 percent of those assumed by Alpetco, the results are to significantly reduce total state revenues and the fiscal balance on current account. Lower corporate taxes accelerate use of petroleum revenues for current operations and adversely affect the level of state funds. vi i Price of In-Kind Royalty Oil - If the in-kind taking of royalty oil has a negative impact on the return to the state for its royalty oil, the impact will be similar to a reduction in expectations of corporate taxes. A reduction in the wellhead value of 6 percent (1990) below the in-value price would result in the elimination of any positive revenue impact from the Alpetco proposal. The negative net fiscal impact at the state level implies the necessity of a premium on the in-kind royalty price in order to produce a neutral net fiscal impact. Alpetco Employment (ALS2_ER) - If plant operating employment is 20 percent less than estimated by Alpetco, the aggregate economic im- pacts are correspondingly reduced. Employment, population, and personal income are all proportionately lower. The state and local fiscal impacts are positive because revenues do not decline as much as expenditures. The net fiscal impact at the state level remains significantly negative. Leakage of Personal Income (ALS8_ER) - If 50 percent of the wages and salaries paid to Alpetco construction workers leave the state directly, the instate aggregate impacts would be reduced during construction but by a much smaller percentage than 50 percent. Employment would be 24 percent lower in 1983 and population, 19 percent. Fiscal impact in the short run would be negligible. In the long run, the lower popu- lation improves the state fiscal situation somewhat and marginally higher personal incomes per capita result in slightly more rapid growth in the economy during the operational phase of the refinery. vii Coincidence of Large Construction Projects - If the Alpetco refinery is not built during the same time period as the Alcan gas pipeline be- cause of a delay in the Alcan, two types of effect result. Inflationary pressure on prices is moderated and the project impacts a somewhat smaller economy in terms of employment and personal income. The net impacts are to increase economic growth in the long run and to make the state net fiscal impact calculation somewhat more negative. The results are relatively insensitive to testing this assumption. Induced Migration (ALS5_ER) - If the Alpetco project did not increase migration into the state, all the jobs created by the project would go to Alaskans. The expansion of the economy would be somewhat less than in the unconstrained case in terms of employment and personal income. Real per capita personal income would increase substantially. The state net fiscal impact would be negatively affected because state expenditures, expanding in response to per capita personal income growth, would increase more than revenues which would increase mainly from the personal income tax. Induced State Spending (ALS6_ER) - If state spending were to remain at its non-impact level in the presence of the Alpetco project, the ef- fect on both economic growth and the state fiscal position would be substantial. The employment impact in the long run would be reduced by 35 percent and population by 31 percent (1990). All the revenues which Alpetco would generate directly and indirectly would be a direct improve- ment in the state fiscal position. In addition, petroleum revenues viii could be put into the permanent fund at a faster rate than if there were no Alpetco project and fund earnings as a result would be higher. The net fiscal impact would be positive in all years. In 1990, it would be $142.5 million. Real per capita state expenditures would be 11 percent lower than the base case in 1984 and 2 percent lower in 1990. Combination of Induced Migration and State Spending (ALS7-ER) - Constraining both migration and state spending reduce the employment impact more than constraining either migration or state spending sepa- rately. Employment in 1990 is 40 percent less’ than with induced migration and state spending. The state fiscal impact is significantly positive in all years but not as much as when only state expenditures are constrained. In this case, the state cannot take advantage of the revenues which popu- lation growth would generate. To summarize the sensitivity analysis, the assumptions directly concerning the size and timing of the Alpetco project have sensitivities which are as expected. The sensitivities concerning specific components of the structure of the model used in this analysis are significant. The model structure is based upon the assumption that relationships observed in the past will hold in the future, for example, the relationship between state expenditures and personal income. These relationships could change as a result of normal structural change or because of specific government policies. The basic impact case should be interpreted as embodying past relationships. The sensitivity analyses where the induced effects are ix constrained should be interpreted as defining the limit which structural change or state policy could possibly have on impacts. Cc. A Final Note Finally, this analysis has highlighted one important point concern- ing state government revenues and expenditures. Because the permanent fund and the balance in the general fund are projected to be quite’ large in the 1980s, earnings on these balances will be a significant source of state revenues. A change in the rate at which these balances grow thus implies a change in state revenues in future years. Any activity, such as the construction and operation of a large petrochemical facility, which differentially impacts state expenditures and revenues from non- petroleum sources will cause the rate of growth of the fund balances to change. If expenditures exceed revenues, the growth will be slowed and if the reverse occurs, growth in the balances will accelerate. This impact on revenues from fund balances is an effect (positive or negative) which is not generally pointed out in impact analyses. It can, however, be very important. Table ii shows the change in the amount of revenues from petroleum sources available for additions to the permanent and general funds (PFSUP) if the Alpetco project were constructed. On the left is the basic Alpetco case (AL2_ER) in which the net fiscal impact on state government is negative. Additions to the fund balances are significantly less than would be the case were the project not built. In sharp contrast, on the right is the case where ‘ Table ii ALPETCO INDUCED CHANGES IN REVENUES AVAILABLE FOR ADDITIONS TO BALANCES IN GENERAL AND PERMANENT FUND (million $) AL2QLER ALSS6_ER 1.906 1.904 “64576 10.8833 -27,338 30-371 ~112.469 54.934 ~144.99 666189 -221.881 ~142.006 ey os ~64.95 “58.613 111.158 1989 ~57 366 126.47 1990 ~S8. 893 142.525 1995 O. Os 2000 O. Oo. I AL2_ER difference between no Alpetco and Alpetco with expenditure growth ALS6_ER = difference between no Alpetco and Alpetco without expenditure growth xi state expenditures are constrained to remain at the level they maintained assuming no Alpetco project (ALS6_ER). Additions to the funds in this case are significantly positive in all years. Since these amounts are cumulative, it can be easily seen that substantial earnings from fund balances are foregone in the example on the left, while nearly as signifi- cant an increase in the level of earnings occurs in the other case. Thus, looking only at the direct project revenues and those revenues induced in the usual fashion, such as through the personal income tax, ignores this important effect. Table iii ALPETCO EMPLOYMENT IMPACT UNDER ALTERNATIVE ASSUMPTIONS (thousands) ALEK ALSSWER ALS 7 LK L979 1.203 1.423 16494 1.423 1980 4s 064 ADAG 4.404 4.313 193i ! 14.016 12.119 11.937 L982 19. O88 13.549 13.247 1983 14. ee 1984 &e L98S 4e LPaS 1 = : ae 3 198? 8,095 OFS 97 1988 76 P4d PAS 198? 8.036 a. O36 a B44 1990 Be LPS wae 2 PSO L99S 2000 AL2_ER ALS1_ER ALS2_ER ALS8_ER 92634 basic assumptions corporate taxes reduced 50 percent operating employment reduced 20 percent 50 percent of construction wages bypasses state economy ALS5_ER ALS6_ER ALS7_ER ae 4. 3o? j reer 38 induced migration held at zero induced state expenditures held at zero both induced migration and state expenditures held at zero TIX 1979 1°80 198t 1982 1983 L984 L985 1986 1987 1988 L989 1990 199% 2000 AL2_ER ALSI_ER ALS2_ER ALS8_ER = Table iv ALPETCO POPULATION IMPACT UNDER ALTERNATIVE ASSUMPTIONS (thousands) ALSLOER ALS2.ER ALSSOER ALSSOER ALS SWE ALS ZOEK 16944 14944 16918 1.546 O. Le P44 oO. 7915 FeOls G6 972 + 64h e129 Os 20.21 20.21 é . 16.083 L7 es Oo. 29.948 29 948 24 29S 35674? 344749 APs B47 4. ; 3 31-333 27213 O-¢ 17.071 Oe 26.562 24.089 0. 15.969 Os aa, B76 23.059 O-» 16-192 Os 3.013 0+ 16.509 O06 34312 O- 146.782 O- 816 23479 17.064 2207 20 428 basic assumptions corporate taxes reduced 50 percent operating employment reduced 20 percent 50 percent of construction wages bypasses state economy ALS5 ER ALS6_ER ALS7_ER 244204 Hon 17.29% induced migration held at zero induced state expenditures held at zero both induced migration and state expenditures held at zero TEEX 1979 1980 1989 1990 2000 AL2_ER ALS1_ER ALS2_ER ALS8_ER uuu Table v ALPETCO IMPACT ON REAL PER CAPITA PERSONAL INCOME UNDER ALTERNATIVE ASSUMPTIONS (1967 US $) AL ER ALS? WER 39. O84 39.74 34695 39.084 534695 ‘ 109, 985 171.4358 102.666 154. B71 977 46207. 2 Le Sb 414, POs Loe F568 ASG, O71 308.2 : : 46346703 oo. 7050 147.941, 19. 605 196d +93 “AZ LOD L14+633 wn? 718 918 = 194, 934 117.672 $3 34.863 189.605 | L18.641 732 B71 175.926 rela 433 26047 18.28 176.512 1 : ; 178.23 31,305 316 188.879 29449 149.899 ~4A0 2363 106797 basic assumptions ALS5_ER = induced migration held at zero corporate taxes reduced 50 percent ALS6_ER = induced state expenditures held at zero operating employment reduced 20 percent ALS7_ER = both induced migration and state 50 percent of construction wages bypasses expenditures held at zero state economy ATX Table vi ALPETCO IMPACT ON STATE CURRENT ACCOUNT UNDER ALTERNATIVE ASSUMPTIONS (million $) AL ER ALG 1 WER AL SER ALSBOER ALSSOER AL SS ER ALS7 ER 1979 14906 1.904 1.883 Lee? O° LPO 0.°? 1980 “66574 “be 778 “bs AG4 ~“G+044 P2307 10.883 7453S 1981 “27.338 “27.4652 ~27,138 24.606 3564S 30.371 20.614 1982 ~L12.469 g wile. 22 cet ? oi “125.839 G46 934 41.268 1983 ~164,.99 ~ 179 156 66+:169 AD, 1984 / 1-881 Le: 2294642 1 47.242 1985 ~142.006 “142.019 1042 “125.116 ~L49.9B85 316461 1986 “89.527 “101.54 ~784206 ~BO.944 “93.39 56 +396 1987 mh, 957 “86.011 “90 +637 “CIP ¢ 274 74 G58 776 74 1988 344613 ~B4.942 r bs7ae 1989 72366 “B7 PO? 1.9.90 1998 3000 ~94.08 eee 401 8.898 248.666 4072576 a, 926 AL2_ER = basic assumptions ALS5_ER = induced migration held at zero ALS1_ ER = corporate taxes reduced 50 percent ALS6_ER = induced state expenditures held at zero ALS2_ER = operating employment reduced 20 percent ALS7_ER = both induced migration and state ALS8_ER = 50 percent of construction wages bypasses expenditures held at zero state economy Ax i, Introduction: The Scope of the Analysis This report presents the results of an economic impact analysis of the Alpetco petrochemical refinery proposal on the Alaskan economy. The analysis compares two projections of the Alaskan economy--one in which there is no petrochemical facility constructed and one in which the Alpetco petrochemical refinery is constructed and operated essentially as outlined by Alpetco. Output of the analysis consists of estimates of employment, popula- tion, and income generated by the project as well as revenues produced at the state and local levels and government expenditures induced by the economic growth. Estimates of these important economic variables will facilitate the evaluation of the desirability of supporting this project from the point of view of the state. Time constraints prevented the investigation of several additional types of impact which should be important in the ultimate decision con- cerning Alpetco. These include the environmental impact, the impact on the Alaskan market for petroleum products, and the economic impact of the project on the specific community in which it would be located. For- tunately, these questions have at least been posed in other reports. See the References for a list of pertinent memoranda. I-2 One important question which has not been addressed but which must be taken inte account in an evaluation of project impacts is the prob- ability that the project will be successfully completed and operated as proposed. If the final form of the project differs from that proposed, the economic impacts could be considerably different. The probability of successful project implementation is a function of the overall feasibility of the proposal--a question beyond the scope of this analysis. For that reason, the impact analysis presented here was done on the assumption that the project would be completed as speci- fied. However, alternative sets of assumptions were employed in sensi- tivity analyses of the basic results which reflect alternative final proj- ect design assumptions. This technique allows one to assess the range of variability of the economic impacts to changes in the basic characteris— tics of the project being analyzed without having to specify an exact set of characteristics as being most probable. The reader decides which set of characteristics in terms of employment and revenues in his judgment is most likely, and this determines a set of economic impacts. This economic impact analysis should not substitute for or be con- fused with a benefit-cost analysis of the Alpetco project. It traces out a set of economic impacts but does not evaluate those impacts against a set of objectives. To cite an important example, the description of the impact on state expenditures of the Alpetco project is an important re- sult of this analysis. That impact is predicated upon the reasonable I-3 assumption of a continuation of past experience. The description of the impact on state expenditures does not allow one to determine either whether the well-being of the average Alaskan has increased or declined as a result of the impact, or how important that impact should be con- sidered relative to the other dimensions of change occurring in the economy. The former could only be done with a model of much greater complexity than is presently available, while the latter could only be done if an objective set of criteria were available to allow one to decide which impacts would weigh most heavily in the decision. A set of objectives ostensibly exists but at present it is not operational. A policy state- ment by the Alaska Royalty Oil and Gas Development Advisory Board dated May 5 and 6, 1977, states that royalty oil and gas disposition should occur, in such a manner to maximize net benefits to the state. These net benefits include not only price, but also the various eco- nomic, social, and environmental ramifications, including employment, local training, Alaskan ownership, secondary effects, tax base, and many other factors. One would not expect or desire that the analysis of such a wide- reaching and complex phenomenon as a large-scale development project in a small state would ever be reducible to a formula, but it is certainly possible to develop more specific and consistent objectives for evaluation. At the same time, it should be possible to specify the impacts of proposed I-4 projects in greater detail. For example, the dollar cost to the state government because of the large unemployment problem should be estimated. The savings which would result from a reduction in unemployment could thus be calculated and a better understanding of the impact of a reduc— tion in the unemployment rate gained, at least from the viewpoint of the state budget. As the opportunities increase for the state of Alaska to become actively involved in large projects affecting Alaska, more attention should be addressed to the tasks of defining criteria for judging the value of projects and of identifying the impacts of the projects themselves. Ii. The Alaskan Economy~-The Base Case This Section presents a description of the Alaskan economy projected to the year 2000. It is against the background of this base case that the economic impact of the Alpetco project is measured. The model used for all projections is briefly described, followed by the important as- sumptions underlying the analysis. Finally, the base case projection is presented in some detail. The sensitivity of the Alpetco impact analysis to some of the important assumptions underlying the base case will be examined in Section V. II.A. MAP Model The base case projection, Alpetco impact analysis, and all sensitivity analyses were made using the Man-in-the-Arctic (MAP) econometric models of the Alaskan economy. The two model versions, one statewide and another which divides the state into seven economically-defined regions, employ historic Alaskan data in a system of equations to project the growth of the economy. The model structure is discussed elsewhere, so only a brief description of its four basic components is presented here. A scenario submodel generates estimates of activities in the basic sectors of the economy where resource availability, markets external to tSe6 David T. Kresge, "Alaska's Growth to 1990," Alaska Review of Business and Economic Conditions, January 1976; and David T. Kresge and Daniel A. Seiver, "Planning for a Resource-Rich Region: The Case of Alaska," American Economic Association Papers and Proceedings, May 1978, forthcoming. II-2 Alaska, and federal policies determine the level of output and employment. The petroleum component of the basic sectors is most important because of both its size and potential variability. The scenario model generates estimates of employment and state revenues directly attributable to petro- leum activity. Other sectors of the economy where the level of output or employment is independently estimated are federal government, including military, agriculture-forestry-fisheries, and manufacturing. Construction employment is partially determined in this model component and partially in the economic submodel. The economic submodel determines employment in the support sectors, and wages and salaries, wage rates, and output for all sectors of the economy. In the regional model, a separate set of equations exists for each region. Personal income and the Alaskan relative price level are also calculated. The fiscal submodel provides estimates of all components of state and local revenues and expenditures. Revenues are generated on the basis of existing statutes, while state expenditure determination is a major policy variable of the model. In this analysis, the growth of expendi- tures is directly linked to changes in population, price levels, and personal income. The permanent fund is a component of the fiscal model. The demographic submodel provides not only a total population esti- mate but also an age-sex distribution. The population changes over time not only as a result of natural increase but also as a result of migra- tion into and out of the state. II-3 Numerous links between the submodels result in a complete descrip- tion of the structure of the Alaskan economy and allow analyses that simultaneously take into account economic, demographic, and fiscal im- pacts of change. Ii.B. Base Case Assumptions In order to project the Alaskan economy using the MAP model, it is necessary to make assumptions about the levels of those variables which are not determined by the model itself and about the relationships among certain variables. A large degree of judgment enters into the determina- tion of these assumptions and, therefore, they are discussed in some detail. The most important assumptions in the context of this analysis concern the level of petroleum activity, other basic sector activity, state fiscal behavior, and the relationship among employment, unemploy- ment, and migration into the state. Changing the assumptions regarding the levels of basic activity will affect the base case projection but will not differentially impact the Alpetco case results. Different assumptions regarding fiscal behav- ior or migratory response will affect the impact results and, thus, these cases are examined in more detail in Section V. II.B.1. Petroleum activity A modest amount of petroleum-related activity is assumed in this base case. Production on state-owned lands is confined to the Prudhoe II-4 Bay and Cook Inlet regions and occurs out of existing reserves. State revenues thus generated consist of royalties and production taxes at existing rates, as well as petroleum property tax receipts and corporate income taxes on petroleum producers. For royalty and tax purposes, the wellhead value of Prudhoe Bay oil is assumed to be $7.00 per barrel in 19777 and subsequently to escalate at 5 percent annually. Peak production of Prudhoe Bay oil is 1.7 million barrels per day. (Appendix A provides a complete listing of the components of petroleum activity determination.) The pipeline transporting Prudhoe Bay gas to the lower 48 (Alcan) is constructed between 1980 and 1984 with significant revenues accruing to the state beginning in 1984. A wellhead value of $1/thousand cubic feet is assumed for royalty and tax purposes. Peak production is assumed to be approximately 2.4 billion cubic feet daily. All gas is transported outside the state for processing, and gas royalties are taken in value. Exploratory activity occurs in other potential areas around the state including Prudhoe Bay, the Beaufort Sea, the Gulf of Alaska, and the Lower Cook Inlet. A joint federal-state lease sale in the Beaufort Sea area results in $250 million in state bonuses in fiscal year 1980. None of this activity leads to petroleum production on state lands which results in state revenues. 2s . : . 7 7 This is to maintain consistency with the assumptions made by Alpetco. Li) Alaska Native Claims Settlement Act payments are netted out of roy- alty ee to the state, and the reserves tax credit is netted out of production taxes. These obligations are paid off in fiscal years 1980 and 1983, respectively. Prudhoe Bay royalties and taxes are adjusted downward because of the pipeline startup problems experienced in fiscal year 1978. Under these assumptions, petroleum revenues peak in 1986 at $2 billion and then begin to decline as Prudhoe Bay production begins to diminish. The same pattern is observable for those petroleum revenues--royalties and bonuses--from which permanent fund contributions derive. Petroleum em- ployment, the major component of the mining sector, peaks in 1982 at approximately 7 thousand and then very gradually declines to about 5.5 thousand by 2000. Using these assumptions, it would not be possible for the state to sustain sales of 150 thousand barrels of royalty oil daily to Alpetco through 2003. It is assumed that the requirements of the Alpetco project, over and above those provided by state royalty oil, will be derived from other sources in such a way that state revenues from petroleum royalties and taxes and from the Alpetco facility itself will not be affected. Thus, it is possible to concentrate on the Alpetco impact on employment and the state fiscal position based upon the successful implementation of the Alpetco proposal. II-6 II.B.2. Non-petroleum basic sector activity Construction employment generated in addition to the normal process of growth of the Alaskan economy is confined to the Alcan project in the early 1980s. There is no allowance for construction activity related to a capital move, large-scale hydroelectric projects, or other activities, the size and timing of which are too uncertain to speculate about in this analysis. The mining sector is dominated by petroleum and, thus, the relatively stable employment level assumed for petroleum applies for mining in total. Employment in the agriculture-forestry-fisheries sector of the economy is assumed to grow rapidly during the last part of this century at a 6 percent annual rate. This is assumed to be the joint result of financial state involvement in this sector, the 200-mile limit, and Native Corporation activity. This growth rate is significantly in excess of the historical trend. Employment in manufacturing continues its historic trend, increasing at approximately 3 percent annually. The federal government presence in the state, as measured by employ— ment, is assumed to remain constant at its present level. This is. con- sistent with the historical trend of a declining military presence offset by an increasing level of civilian employment. II-7 IIL.B.3. State fiscal assumptions State revenues derive from four basic sources under the assumptions of continuation of past relationships and existing statutes. Petroleum revenues are dependent upon production and wellhead values of oil and gas. Endogenous revenues are directly linked to the level of economic activity within the Alaskan economy as reflected by the level of income and popula- tion. Fund earnings derive from the special state funds, the most import- ant of which is the permanent fund which generates substantial earnings that are automatically deposited into the general fund. Finally, federal transfers are related to the general price level and the Alaskan population. State government expenditures are divided into the operating and the capital budgets, and the former grows somewhat more rapidly than the latter. Growth in both budgets occurs directly in proportion to the growth in population and the Alaskan relative price index. The operating budget grows also in direct proportion to the growth in real per capita income, while the capital budget grows only one-half as fast as real per capita income. As a result, the ratio between state expenditures and total state personal income will be moderately declining over time. This is obviously only one possible assumption which can be made concerning state expenditure growth. The historical pattern of Alaskan state expenditures does not lend itself to extrapolation into the future because of the particular circumstances experienced since statehood. However, other states under normal conditions tend to exhibit a pattern of constant proportionality between state expenditures and personal incomes. II-8 Projections of the structure of employment of the national economy also reflect a rapidly growing state and local government sector. Thus, the "expenditure rule" employed here has an empirical justification. The Alaska permanent fund is combined with the renewable resources permanent fund and receives 30 percent of petroleum bonuses and royalties. In addition, all excess general fund revenues are deposited into the per- manent fund on a temporary basis. Thus, they earn the higher 7 percent rate assumed for the permanent fund but remain available for financing state government operations when necessary. The principal of the perma- nent fund is invested in conservative investments which do not of them- selves stimulate economic activity within the state. II.B.4. Employment and migration Historically, the unemployment rate in Alaska has hovered in the 8 to 10 percent range over a period of rapid economy change and growth. This suggests a severe structural problem which will not be alleviated simply by the creation of jobs. This historical pattern is reflected in the demographic component of the model. As new job opportunities become available, the unemployment rate is not impacted. The new jobs are taken by two groups. A portion are filled by new entrants into the job market from the resident popula-— tion. The remainder are filled by new migrants to the state. These new migrants increase the resident population. II-9 This "open border" assumption is important to the determination of the magnitude of the Alpetco impact, and the model sensitivity to this assumption will be analyzed in Section V. II.C. The Alaskan Economy--Base Case Projection Important variables from the base case projection employing the fore- going assumptions are presented in the following tables. A discussion of the results can conveniently be divided into four sections--economics and demographics, state government financial position, local government financial position, and regional distribution of growth. II.C.1. Economics and demographics The basic aggregate measures of economic activity for the projected Alaskan economy are shown in Table II.1. Between 1977 and 2000, total state employment (EM99) doubles, growing from 169 thousand to 350 thou- sand, an annual growth rate of 3.2 percent. For the most part, growth is steady, following the pattern of growth in the basic sectors, except that the influence of the construction phase of the Alcan is in evidence in the early 1980s. During that time, employment first increases rapidly but then essentially remains at a constant level for a period of three years, after pipeline completion. Population (POP) does not expand as rapidly as employment, although the average annual growth rate of 2.5 percent results in a population of 543 thousand in 1990 and 722 thousand by 2000. Rapid growth occurs when employment growth is strong, and a pause, although no outright decline, follows the Alcan pipeline completion. EM99 POP PI II-10 Table II.1. AGGREGATE ECONOMIC VARIABLES - BASE CASE EMS? L?7?7 180.864 1978 177.856 L979 180.51? L?8O 190.642 LSet 207.39 1982 217.804 1983 2 347 1984 1985 1986 19S? 1983 233.565 L989 241.734 1990 249,417 LPP. L992 1993 L994 1995 : LPPS 307.632 LP97 SL7 6841 L993 327.826 L999 338.751 2000 349.134 total employment (thousands) population (thousands) personal income (million $) FOF 263 414. 414,159 418.389 432.982 AS? SL 476.744 473.78? PY 3944.82 S877 294 4124.52 4732.27 S840.11 6487.05 6357 264 O1,85 AOS. Ot 506.321 S14. P08 3? ¢ +009 Y729.55 . 10604.6 7.509 11603. S71-266 12595.3 S86.659 L3PSS.6 LS067.1 14684,5 poem 4 L8245.7 199478 24249 681.246 FOL? 721.81 II-11 Personal income (PIL) growth occurs at a 8.5 percent average annual rate over the projection period, resulting from a combination of employ— ment and wage growth. Personal income increases annually except in 1978 and 1983, years succeeding large construction projects. The growth of the Alaskan economy results in structural change as indicated by the detailed employment variables shown in Table II.2. Total employment can be divided into three categories--primary (EMNS), support (EMSP), and government (EMG9). Primary consists of mining, manu- facturing, agriculture-forestry-fisheries, construction, and miscellaneous employment. The support sectors are transport, communication, public utilities, trade, finance, and service employment. Government employment is the sum of federal, state, and local. The percentage of total employ- ment accounted for by each of these three major components is also indi- cated in Table II.2 (primary = EMNSP, support = EMSPP, government = EMG9P). By examining the changing percentages of total employment accounted for by each sector over time, one sees that the support sector is growing relatively more important in the Alaskan economy. It increases from 34 percent of total employment in 1977 to 52 percent by 2000. By con- trast, employment growth in both the primary and government sectors is slower, such that each accounts for a declining percentage of employment over time. This trend is more pronounced in the government sector which accounted for 41 percent of employment in 1977 but is projected to account for only 25 percent in 2000. The decline in the primary sector is less pronounced. In contrast to 25 percent of employment in 1977, it accounts for 23 percent in 2000. 197? 1973 1979 1980 193. 1 Y Q 2 2 L983 1934 198s L986 L987 198s L989 L990 LPPd L992 L993 LPO4 199% LPPS LE9? 1998 L999 2000 EM99 EMSP EMSPP EMG9 EMG9P EMNS EMSNP Hout wo aon EMP? 180.864 127 OGG 180.5 190,642 207 639 217.804 4y SQ? ? 848 Table II.2. THE STRUCTURE OF EMPLOYMENT - BASE CASE EMSF 61.134 9.902 63. 69.523 73.682 84.58 BRL.PP4 84.11 87.314 PO s4D? Pay PF. 148.019 152,83 L599. 999 144.887 174.666 181,934 total employment (thousands) transport, communications, public utilities, trade, finance, and service employment (thousands) EMSP/EM99 EMSEEF EMG? 0» oO. Oo. government employment at all levels (thousands) EMG9/EM99 P3979 FASBSP 744 Ae? 73.809 79,298 80.618 81,094 81.4694 82.408 83.439 en? APG EMGOP 0.409 9-419 O41 0.387 O+ S62 . A497 54, 709 SGé.212 vis oe? 0.309 0.303 0.295 0.287 66.545 os 8.896 71163 736367 753635 73.082 80.464 mining, manufacturing, agriculture-forestry-fisheries, construction and miscellaneous employment (thousands) EMNS/EM99 - @T-Il. II-13 These changing proportions are the natural result of two factors. The first is the maturation of the Alaskan economy as it increases in size. As the economy grows, a larger proportion of the support services necessary for the primary industries and the population will be provided locally. Secondly, over time the national economy is becoming more service oriented, and this trend is reflected in the structure of the Alaskan economy as well. The components of population change are shown in Table II.3. Natural increase (NINCTOT), which is the excess of births over deaths, results in population growth of between 1.5 and 1.7 percent annually, depending upon the age-sex population distribution. The other component of population change is net migration (MIGNET), which is the excess of inmigration over outmigration. MIGNET increases as employment opportunities increase and declines as opportunities diminish. The largest increase, over double the natural rate, occurs during the peak Alcan pipeline construction year of 1981. Net outmigration occurs for several years after the completion of the large oil and gas pipeline projects. Real personal income per capita (PINRPC) and the Alaskan relative price index (RPI) are shown in Table II.4 along with personal income (PI). Although personal income is increasing at 8.5 percent annually, much of the inerease is the result of employment and price increases. As a result, real personal income increases at a 2.6 percent average annual rate. Note that it increases rapidly during the Alcan pipeline construction POP NINCTOT MIGNET Note: POP(t) II-14 Table II.3. COMPONENTS OF POPULATION CHANGE--BASE CASE POF NINCTOT 414.263 414.159 418,889 432.9382 457 631 6. PAG APS. 7&? 431.694 498.939? 516.906 530.009 2,957 ws YOL.81 population (thousands) net migration (thousands) natural increase (thousands) 7.835 8,009 7eAPt = 5 7.252 7eG1S 8.28 8.63 8.15? 7sFGS 74643 7eS71 2 eSP? Ze 691 my 4 Cd eP Lo 8.123 68.402 8.62 oo oe ¥ 9.264 PL PPE 10.13 10.464 10.771 MIG = PoP(t-1) + NINCTOT (t) + MIGNET (t) Wf BAP 26.34; ~O.175 wee POA 6.815 17.004 10,959 “6.683 ~ Seb) 7088 Gel 7h Li.338 8.919 8.808 8.512 P.dél 8.944 TI-15 Table I1.4. INCOMES AND PRICES - BASE CASE Pi PINREC RPI 1977 3944.82 3597.24 253.02 1973 3877.94 3565.37 260.52 1979 cone 3656.18 268,582 1980 4782427 3899.3 279.531 193d 3840.11 4202.11 293,188 1982 6487.05 4334.02 304.763 1783 6359.64 4251.47 311,81 1984 6601.85 4 L 320,064 1985 70461463 AS7G,14 330.11 1936 7568.19 447166 S40. G48 1987 8177.32 4588.25 35145 1988 BS76. 4717.97 365.959 1989 9729.55 4870.45 376-917 1990 q 10604.6 S007 36 390.052 1991 1 2408 404. 004 1992 Fae 1775 432.68 1994 443.24 1995 2 465,209 1996 5893. 3g ABLL79? Seo7 6039.64 499.733 1998 6181.07 916.129 LO99 6328.47 534.29 2000 6472.36 suse 755 PI personal income (million $) PINRPC = real per capita personal income (deflated by RPI) RPI = Alaskan relative price index (1967US = 100) II-16 period: and then declines temporarily as a result of the high but tran- sitory level of pipeline construction wages. Real personal income per capita is deflated by the index RPI which represents the change in the Alaskan price level. The index takes a value of 100 in 1967 for the lower 48 average price level. Thus in 1977, the Alaskan price level was 153 percent above the 1967 average level in the lower 48. The relative price index grows at an average rate of 3.5 per- cent, which is less than the rate of 5 percent assumed for the national price index.. Thus, implicit in the simulation is a gradual reduction in the differential between the cost of living in urban Alaska and the lower 48. This is a continuation of an observed historical trend. II.C.2. State government State government revenues to the general fund (REVGF) derive from petroleum (RP99), endogenous sources (RENS) such as the personal income tax, income from the permanent fund (IPF1), and from federal transfers (RFDSN). The contribution to total revenues from each of these four sources is shown in Table II.5. General fund revenues grow rapidly over the next decade, at 12 percent annually, and reach $3.45 billion by 1986. After that time, however, a decline in petroleum revenues occurs and this causes total revenues to cease increasing altogether. Between 1987 and 2000, the decline in petroleum revenues (and in later years of per- manent fund interest) is not quite offset by growth in endogenous revenues 31 state and local government variables are measured on a fiscal year basis. II-17 Table IIL.5. COMPONENTS OF STATE REVENUES - BASE CASE RE RPO? RENS IPFA RFISN L9?? 364.943 O. 229.624 1978 SLB. OF 0.148 2976536 1979 4 4 323, Pa. PhS 303.649 1980 1942.34 343.673 39.726 324,945 1964 21046 49 383.816 zo 0468 347.401 1982 2387.82 433.005 1 368.71 1°83 2573.7 460.104 381.516 1984 3073.5 AGA LS ; ; 346504 1985 32916 2023, 451.8864 373.2 oF 412.827 1986 3450.59 2029. SO9.4 490,744 431.445 1937 3399.72 L8id. 540+: SOL. AS? AN2 «066 198s $318.14 1S77. 39 B56 474.542 1989 3250.9 L349. +139 499.909 1290 3211.47 LL?9, : S26. 639. S13? 1027, 360138 3180 Be. 94 66 ti 2° POLS 620.257 sh 657.225 EPP L477 742.548 78B.294 837.033 f : 889.975 1485.88 446.29 945.84 41.78 136.01 REVGF = general fund revenues (million $) RP99 = revenues derived from petroleum (million $) RENS = revenues derived from endogenous sources, personal income tax, etc. (million $) IPFl = income from the permanent fund (million $) RFDSN = transfers from federal government (million $) II-18 and federal transfers. Revenues in 2000 are $3.14 billion in nominal dollars, a significant decline in inflation-corrected dollars from the previous decade. Total petroleum revenues, including corporate tax payments, supply an increasing amount to the general fund through 1986. After that time, they decline in absolute value and in relative importance. Endogenous revenues supply a smaller proportion of income in the initial years of the simulation but grow continuously after an initial post oil pipeline decline. The average annual growth rate of this component of revenues after 1977 is 7.3 percent. They overtake petroleum revenues in importance in 1993 and become the most important revenue source in 1994, surpassing permanent fund earnings in that year. The permanent fund, because it contains essentially all state funds in excess of those necessary for current account and liquidity, generates a large amount of earnings in the late 1980s and early 1990s. For a period of seven years between 1987 and 1994, fund earnings supply more income to the state than endogenous revenues. The decline in fund earnings is as rapid as their growth and is a lagged reflection of the secular trend in petroleum revenues. The final component of general fund revenues is federal transfers which grow as population increases but at a more rapid rate of 6.3 per- cent on an annual average basis. Like endogenous revenues, they decline in importance during the 1980s when petroleum revenues and permanent fund ares earnings grow more rapidly. In the 1990s, they become more important, however, as the rapidly increasing sources of revenues of the 1980s de~ cline in absolute terms. Since federal transfers are restricted revenues and thus not available for all categories of expenditures even though they are part of the general fund, their continuing increase is not indicative of an increasing ability of state government to fund general programs. State expenditures and fund balances are shown in Table II.6. Current account expenditures (EXCUR) and capital account expenditures (EXCAP) increase with population, prices, and personal income, the former at a 8.9 percent annual rate and the latter at a 7.1 percent rate, because capital expenditures are targeted to grow less rapidly. Real state gov- ernment expenditures per capita (E99SRPC) show a much more modest rate of growth because of the effects of population and price increase. Between 1977 and 2000, the rate of increase of government expenditures in real per capita terms is 2.3 percent annually. The balance in the permanent plus general funds (FUND) rises rapidly and continuously through the 1980s as the permanent fund receives signi- ficant petroleum revenues. A plateau of approximately $14 billion is reached and maintained for four years. Subsequently, the funds begin to rapidly decline as permanent fund contributions in excess of the statutory percentage are withdrawn to finance state government operations. By the end of the simulation period, the fund balance has declined to $4.54 billion and is being drawn down at the rate of $2.66 billion annually. II-20 Table II.6. STATE EXPENDITURES AND BALANCES - BASE CASE EXCUR E99SRPC FUND FUNTIREC 1977 270.326 ? 76 639.729 1°73 80. 1051.94 750.448 LP79 90. 1076.96 .2 3 1116.09 1980 305-979 1064.97 2070657 1710.76 L?si pan oe 1086+; 2895.42 2158.56 1782 oP FP 2S 7S 1983 1984 1985 1986 LPB? 1988 L978? S72.41 é S335.85 1990 616.547 1342 ell 6355.3 ee 661.764 1344.7 6134.02 1992 712.4697 1401.41 14149,8 SP LG9 7S 1993 763.42 1422.31 14134,7 S563 6h 1994 320.82 1444.49 139m¢ 1995 886.045 14é?.83 : LOPS 264. OS SL: 3 3992 £06 Raa “ S35161 1998 2659.8 1630.9: S38. 1137.61 EXCUR = current expenditures (million $) EXCAP = capital expenditures (million $) E99SRPC = real per capita state expenditures (deflated by RPI) FUND = balance of general plus permanent funds (million $) FUNDRPC = real per capita fund balance (deflated by RPI) i] II-21 Although the fund reaches a maximum in 1992, in real per capita terms (FUNDRPC) the fund peaks three years earlier, in 1989, at $6,386 in terms of 1967 U.S. dollars. By 2000, it has fallen to $1,138 which is little more than the present real per capita value of the fund of $640. The state fiscal position over time can be monitored by the variables presented in Table II.7. SIMP is the simple difference between total general fund revenues and general fund expenditures. The pattern which SIMP traces reflects the independent paths of simulated Alaska state revenues and expenditures. In the early 1980s through 1986, revenues grow more rapidly than expenditures so that the surplus on current ac-— count grows to a maximum of $1.59 billion. Thereafter, expenditure growth rapidly overtakes revenues, which remain essentially constant, and by 1993 a current account deficit develops which grows to $2.65 billion by 2000. RENSRAT is the proportion of state personal income which is collected as endogenous state government revenues. Most important of these revenues, but not the only one, is the personal income tax. This category includes all pevense sources, except federal transfers, the receipts of which are responsive to growth in population and personal income in the state. The slight downward trend in this proportion over time is indicative of the fact that the structure of government revenues in Alaska does not respond proportionately to an increase in economic activity. EXBITES, in contrast, is the ratio of state government expenditures to state personal income. This ratio declines gradually over time, II-22 Table II.7. INDICATORS OF STATE FISCAL POSITION BASE CASE SIMPF RENSRAT EXBITES VIABL2 1977 0.098 0.748 L978 0,082 0.458 1979 0,078 0,636 1780 0,072 0,633 L981 0,066 O41 881.842 O.087 0.568 903.1 0.072 O.539 0.07 0 3 0.549 0.048 0.247 0.551 0.067 0.248 0.545 0.066 0.243 0.54 0,065 0.24 0.533 0.944 0.237 0.524 C 0.514 2509 O05 02495 0.49 0.484 G.475 0.4? 0.465 0.462 0.459 SIMP = general fund revenues minus general fund expenditures (million $) RENSRAT = endogenous revenues as a percentage of personal income (percent) EXBITES = state total expenditures as a percentage of personal income (percent) VIABL2 = non-petroleum revenues (not including permanent fund. earnings) as a percentage of general fund expenditures (percent) II-23 except during construction peaks, indicating that state government activity is becoming relatively less important over time. VIABL2 is the percentage of general fund expenditures provided by non-petroleum sources of revenue. Non-petroleum revenues include endo- genous revenues and federal transfers. Petroleum revenues include not only production taxes, royalties, and bonuses but also property taxes, corporate income taxes of petroleum companies, and interest on the per- manent fund, which is ultimately related to petroleum. In 1978, this percentage is 66 and it falls fairly steadily throughout the simulation period until by 2000, only 46 percent of general fund expenditures are financed out of non-petroleum revenues. Since by that time the level of petroleum revenues is less than 10 percent of total revenues, this implies that 44 percent of expenditures must be financed out of draw- downs of the fund balance. II.C.3. Local government In Table I1I.8, the basic indicators of local government finances during the simulation period are shown. Local government revenues (R99L) consist primarily of local property tax receipts and transfers from state government. As a result, the level of revenues is largely insulated from fluctuations caused by the production declines associated with petroleum. Local revenues increase at 9.5 percent on an annual average basis, assuming existing tax rates and transfer mechanisms. II-24 Table I1.8. LOCAL GOVERNMENT FISCAL INDICATORS BASE CASE RIEL E9OL EXBITEL 1977 $25.5 L978 614 Oot? 1 0.173 LP?e 539.401 1980 681.119 7 s a . 881.75 L062 i LISS.i LL7O4 i 1089.5 20.4 DE 1315.43 1265. 44 apie 374.06 14960: PS Os 164 Oel 1992 0.187 L993 ; 1994 LOSS 1994 L997 04166 1999 3714.38 0.164 1999 4044,27 0.164 2000 : 0.167 R9OL = total revenues (million $) E99L = total expenditures (million $) EXBITEL = total expenditures/personal income II-25 Total local government expenditures (E99L) grow at an average annual rate of 8.3 percent. This rapid growth is reflective of both a national trend toward increasing local government and an historically observed rapid growth in Alaska in recent years. Local government expenditures include both the operating budget financed out of revenues and the capi- tal budget largely financed from bond sales. Thus, the total need not balance with revenues. EXBITEL is the ratio of local government expenditures to personal income. This ratio remains almost constant at 17 percent throughout the simulation period, although it dips to 14.5 percent during the Alcan con- struction years. II.C.4. Regional distribution of base case growth The regional economies grow for the same reasons as the state eco- nomy. Changes in exogenous employment, personal income, and state ex- penditures lead to growth in the endogenous sectors within each region. The growth response in each region will vary because of differences in economic structure. Larger economies provide more of their own goods and services, and so import less from outside the region. Because of this, larger regions will have larger multipliers and greater endogenous growth, given an equal change in growth-causing factors. Larger regions may also serve as service centers for smaller regions and export goods and services. Because of this, larger regions may grow without any change in exogenous factors within the region. Tables I1.9 and II.10 II-26 Table II.9. REGIONAL DISTRIBUTION OF BASE CASE EMPLOYMENT 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 (percent of total) Southcentral Anchorage Rest of State 11.5 45.3 43.2 10.9 47.4 41.7 10.8 48.0 41.2 10.6 47.8 41.6 10.2 47.4 42.4 10.2 48.3 41.5 10.7 50.1 39.2 10.7 50.7 38.6 10.6 51.3 38.1 10.4 52.0 37.6 10.3 52.7 37.0 10.2 53.5 36.3 10.1 54.4 35.5 9.9 55.4 34.7 II-27 Table II.10. REGIONAL DISTRIBUTION OF BASE CASE PERSONAL INCOME 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 (percent of total) Southcentral Anchorage Rest_of State 11.7 42.9 45.4 10.5 47.0 42.5 10.5 47.7 41.8 10.2 46.4 43.4 9.9 44.5 45.6 9.9 45.6 44.5 10.5 48.8 40.7 10.5 49.5 40.0 10.5 50.0 39.5 10.4 50.6 39.0 10.2 51.2 38.6 10.1 51.8 38.1 10.0 52.6 37.4 9.8 53.4 36.8 II-28 show the regional distribution of the growth in employment and personal income. (See Figure I for the regional demarcation.) In all years of the simulation, the employment in Anchorage and the Southcentral region accounts for more than half of the employment in the state. Anchorage employment grows faster than the employment growth in the rest of the state between 1977 and 1990, and it increases its share of total state employment from 45.3 percent in 1977 to 55.4 per- cent in 2000. This reflects the fact that Anchorage is a service center for the entire state. The Southcentral region experiences a slower growth rate than the state as a whole; and between 1977 and 2000, its share of total employment falls from 11.5 percent to 9.9 percent. The shares of both Anchorage and the Southcentral region fall during the construction of the Alcan pipeline because of the increase in construction employment in the rest of the state. The distribution of personal income follows the same pattern as employment; Anchorage increases its share of total state personal income and the share of the Southcentral region declines. As with employment, their share of state employment falls during the construction of the Alcan. The share of state personal income is less than the share of employment in most years of the period for both Anchorage and the Southcentral region. This relationship is a result of the differences in the employment mix in the different regions of the state. Figure I MAP OF ALASKA / 8 9 10 A : ALASKA REGIONS Northwest | 1 Interior 8 6 airbanks c D SCALE 7 Bene ie eer ert sa IP oy Oe Southwest (part) a ai < | e a "2 8 oy Le \ 6Z-I1 III. The Alpetco Petrochemical Proposal: Economic Impact Analysis This Section presents the results of a simulation of the Alaskan economy assuming that the Alpetco petrochemical project is built and operated according to the proposal presented to the Alaska Royalty Oil and Gas Development Advisory Board. The analysis takes, as given, most of the employment and revenue projections in the most recent documents presented to the Board and does not critically evaluate their reasonable- ness or probability of actual implementation. The following Section will examine the sensitivity of the results of this analysis to some of the employment and revenue estimates made by Alpetco. This Section begins with a brief description of the Alpetco pro- posal, presents the basic estimates of the Alpetco proposal used in this analysis, and then discusses the economic impact of the Alpetco petro- chemical facility on the Alaskan economy. The impact analysis is divided into four parts. They deal with aggregate economic and demographic impact, state fiscal impact, local fiscal impact, and regional .economic impact, respectively. III-2 IIL.A. Alpetco Proposal Description! The Alaska Petrochemical Company (Alpetco) is owned by three parent companies--Alaska Interstate Company (60 percent), Barbour Oil Company (20 percent), and Alaska Consolidated Shipping, Inc., (20 percent). Alaska Consolidated Shipping, Inc., is, in turn, composed of six Native Regional Corporations (51 percent) and Seatrain Lines, Inc., (49 percent). Alpetco has proposed to construct a 150,000 barrel per day petrochemical facility in Alaska using as feedstock up to 85 percent of Prudhoe Bay royalty oil and 70 percent of other royalty crude as necessary to make up any shortfall. The project design is based upon a core refinery which would produce basic aromatic and olefin feedstocks, as well as approximately 30,000 bar- rels of petroleum products daily for potential instate consumption. The exact nature and scope of intermediate petrochemicals produced from the basic feedstocks is dependent upon the requirements of Alpetco's customers. A typical configuration suggested would include, in addition to the aro- matics and olefins plants, low density polyethylene, high density poly- ethylene, polyprophylene, and styrene manufacture (Alpetco Case LE-1). All of these products would be marketed outside of Alaska. This section and the next are based upon the following presentations to the Alaska Royalty Oil and Gas Development Advisory Board: 1) "Update and Restatement of Alpetco's Proposal to the State of Alaska," February 1978; 2) "Outline of Alpetco's Presentation," February 21, 1978; 3) "A Proposal for the Purchase of Alaska State Royalty Crude Oil and Construc— tion of a Petrochemical Refinery Complex in Alaska," October 15, 1977; and information submitted by letter from Alpetco to the Institute of Social and Economic Research on March 13, 1978. I1I-3 The marketing of products, because of the nature of the financing method proposed, requires that purchasers of the petrochemicals enter into long-term contracts which are irrevocable and at a minimum provide for debt service even if, for some reason,’ the facility does not produce products for delivery to purchasers. This is necessary because Alpetco proposes to finance the project using "project financing" which involves matching the customers’ sales contracts with the long-term crude oil purchase contract with the state and, thus, obviates the necessity of equity financing. The Alaskan location for the proposed facility has not been deter- mined, although the Kenai Peninsula and Valdez are being investigated. Transport of crude oil before completion of the refinery and of all products would be handled by the Alaska Consolidated Shipping arm of the corporation. Construction and operation of the facility would involve a consider- able labor force, and Alpetco proposes to train and hire Alaskans for as many jobs as possible. Revenues generated directly by the facility would consist of the local property tax, the state corporate income tax, and the state gross receipts tax. Since Alpetco proposes to purchase royalty crude at the average wellhead price of all Prudhoe Bay produc- tion, there would presumably be no revenue impact on state royalties of the sale to Alpetco as compared to the present arrangement where the state takes its royalty in value. ILI-4 ‘Construction of the facility would commence when purchase contracts. have been signed and financing secured. A series of benchmarks has been proposed by which the state can gauge the progress of Alpetco toward its goal. The most important is the commitment to invest $1.5 billion with- in 72 months, The full project cost is estimated between $2.5 - $3.5 billion. ITi.B. Alpetco Assumptions for Impact Analysis With minor exceptions, the assumptions used in the Alpetco impact analysis come directly from the presentations of Alpetco to the Alaska Royalty Oil and Gas Development Advisory Board and subsequent communica- tions with Alpetco. Thus, the analysis assumes with certainty that the project is completed as planned. All variables involving Alpetco and their sources are summarized in Appendix B. Construction of the plant is assumed to take place at a site in Southcentral Alaska during a five-year period between 1979 and 1983. Three peak construction employment years occur in 1981, 1982, and 1983, when average annual work force is 3,500 direct employment. Construction labor will be paid the average Alaskan construction labor wage and will not receive the exceptional wage and salary payments associated with the construction of the oil pipeline. The work force will be housed locally. Operating employment will be at an annual average of 1,925, starting in 1984 when the plant is in full operation, and 50 prior to that time. ILI-5 Since the average Alaskan manufacturing wage rate is far below the ex- pected average wage for the petrochemical plant, an average wage rate of $30,000 annually in 1977 dollars is assumed. This dollar amount, like all others, is allowed to increase at a 5 percent annual rate to account for inflation and make the data compatible with the MAP model in which most variables are in nominal dollars. Employment involved in the shipping arm of Alpetco is not separately included as an input to the analysis. Since the royalty crude a is presently being transported out of the state in ships, the only changes involved if Alpetco were to handle the shipping would be in terms of direct tax revenues to the state and increased incomes to resident Alaskans em- ployed in the shipping operation. Because all profits from the shipping operation accrue to Alpetco, the profits are captured in the revenue as- sumptions. Because there is no guarantee that present resident Alaskans would indeed obtain the shipping jobs, it appears reasonable to assume that those jobs would be filled in an open labor market and that the mix of residences of the shipping work force would correspond to that of the existing work force transporting Alaskan crude oil. The value added of the plant will be a substantial amount and is computed simply as the difference between the price of products sold and the price of crude oil purchased. III-6 Direct revenues are derived from three sources. The largest in early years is the local property tax. A tax rate of 10 mills is assumed and the assessed value of the plant is assumed to increase at 5 percent annually. In 1977 dollars, the assumed $2.5 billion facility would thus generate $25 million annually in local property taxes. The state government directly receives revenues through the corporate income tax and the gross receipts tax. The corporate income tax is cal- culated at the statutory rate of 9.4 percent of net income. In the first full year of operation and after loss carryforwards, this amounts to about $25 million in 1977 dollars. Receipts from the gross receipts tax are calculated at .25 percent of gross revenues and are about 15 percent as large as corporate taxes during most years of full operation. The state is assumed to receive the same return on its royalty oil by taking it in kind and selling it to Alpetco, as it would receive by taking it in value from the producers. The net revenue impact of this difference is zero. III.C. Economic Impact TII.C.1. Aggregate economic and demographic impact The impact on employment (EM99), population (POP), and personal income (PI) of the Alpetco proposal, as described above, is shown in Table III.1. Reflecting the rapid increase in construction employment during the project construction phase, total employment shows a rapid ILI-7 Table III.1. IMPACT OF ALPETCO ON AGGREGATE ECONOMIC VARIABLES EM? POR Py LPP? Os O. 1978 0. Os LPPe Lapa P1L.844 L980 5.083 0: eure 14.287 20,24 574109 19, 29.943 1 986 Leo? 2O9 Leas PaPag LPS? 8.038 90 805.0 830.598 2000 EM99 = total employment (thousands) PoP population (thousands) PL = personal income (million $) Note: All variables measured as the difference from the base case. III-8 increase over the base case and peaks in 1983 at 22.3 thousand in excess of the base. After completion of construction, the operations phase of the project involves a smaller work force, and the employment increment over the base case rapidly declines and approaches a long-run equilibrium level of employment approximately 8 thousand in excess of the base case. The population impact follows an identical pattern of rapid increase during the project construction years, followed by a relative decline after the beginning of the operations phase. The relative population decline is not nearly as pronounced as that of employment. In the peak construction year of 1983, the population impact is 36.7 thousand people, 1.65 times the employment impact; while in the long run, the impact level approaches an equilibrium of about 25 thousand, 3.08 times the long-run employment impact. The larger relative population impact in the long run is attributable to a lag in the adjustment of the labor force to employ- ment opportunities in the state. Personal income growth above the base case is rapid and, as with the other aggregate variables, peaks above the base case in 1983 at $1.17 bil- lion. It subsequently declines by nearly two-thirds before again begin- ning to rise. This latter increase is attributable to the fact that per- sonal income is here measured in nominal dollars which are increasing over time with inflation. III-9 Compared to the economy without the Alpetco project (Table II.1), in the peak year of 1983, employment is 10.4 percent greater, population is 7.7 percent greater, and personal income is 18.4 percent greater. After the construction peak, the relative impact declines so that in 1990 the level of employment exceeds the base case by 3.3 percent, population by 4.6 percent, and personal income by 4.9 percent. The Alpetco project has resulted in a larger economy in terms of employment, population, and total personal income. The significant increase in total employment over and above the employment directly attributable to the Alpetco work force is the result of several factors. First, the multiplier effect of the incomes of the Alpetco employees being spent in the Alaskan economy generates demand in other sectors of the economy which results in job creation in those sec- tors. This impact is large because the wages and salaries paid in the construction industry and in the petrochemicals manufacturing industry are relatively high. In 1985, for example, the nominal average wage rate in the Alaskan economy is projected to be $31,595, while in construction it is $66,287, more than twice the average; and it is $44,324 in petro- chemicals manufacturing, 40 percent greater than the statewide average. These relatively high wage rates result in high incomes and large incre- ments to total instate demand for goods and services. The increase in employment is affected by the stage of development of the Alaskan economy. As previously indicated, the structure of the III-10 economy, in terms of employment, is shifting toward the support sectors as total employment expands. The Alpetco project accelerates the ex- pansion of the support sectors of the economy, and this results in an employment impact more heavily weighted toward support sector employment than would be expected if all sectors of the economy grew proportionately. This is illustrated by Table III.2 where the employment impact is disaggregated into its component parts. Recall from Table II.2 that in the early 1980s support sector employment (EMSP) in the base case is approximately 39 percent of total employment. As a percentage of impact employment, it is much larger. In 1983, the peak employment impact year, it is 57 percent of total impact employment and later, in 1990, it is 54 percent. A third source of growth in employment is indicated in Table III.2 by the increase in government employment at the state and local levels (EMG9). Government employment over the base case is 4.6 thousand in 1984, falls rapidly, and then gradually declines so that in 1990 it is .9 thousand above the base case. This increase is the result not only of increased demands for government services directly resulting from the Alpetco work force but also from the population associated with the employment indirectly resulting from the project. Finally, the population has increased as a result of the job creation and, as noted, this population requires state and local government services. III-11 Table III.2. IMPACT OF ALPETCO ON STRUCTURE OF EMPLOYMENT EMSF EMNS EM99 = total employment (thousands) EMSP = transport, communications, public utilities, trade, finance, and service employment (thousands) EMG = government employment at all levels (thousands) EMNS = mining, manufacturing, agriculture-forestry-fisheries, construction, and miscellaneous employment (thousands) Note: All variables measured as the difference from the base case. ILI-12 The economic impact results are sensitive to the assumptions of the underlying model structure concerning migratory response to changing Alaskan. employment opportunities and the response of government expenditures to changes in aggregate economic and demographic variables. In Section V, the sensitivity of the results to these assumptions is examined in detail. The components of population change are indicated in Table III.3. There is a significant increase in the rate of net migration (MIGNET) into Alaska during the Alpetco construction years, while the reverse is true after 1983 when a slight reduction in average per capita disposable income below the base case contributes to outmigration. Population remains above the base case by about 25 thousand in spite of this, and there is a slight decline in the work force ratio from the base case. In the base case, the work force as a percentage of population increases from 42 percent to 47 percent over the simulation period, reflecting an increasing labor force participation rate. The slight long-run decline in real per capita personal income (PINRPC) is contrasted with the increase in total personal income (PI) in Table II1.4, Real per capita personal income increases by 7 percent over the base case in the peak year of 1983 because of the high construc tion wage rates. Subsequently, the expansion of the support sector with lower wage rates and the slight decrease in the percentage of the population in the work force result in a decline in this variable below the base case. By 1990, the level is 1 percent below the base case. Il1I-13 Table III.3. IMPACT OF ALPETCO ON COMPONENTS OF POPULATION CHANGE POF NINCTOT ? 9?) 1978 1979 Lao POP = population (thousands) NINCTOT = natural increase (thousands) MIGNET = net migration (thousands) Note: All variables measured as the difference from the base case. *ased eseq ay} WOLJ DUSTSTJTP ey. se poAnsesau SaTqeTseA [TV :9I0N Idd "S'*N OF Idd FO OF}LI ivad (OOT = SNL96T) BASPIV Toy Xepuy edtad eaATIeTeEA = Ida (Ida 4q paretTyep) swoout [Teuoszed eqtdeo aed Teel = OdUNIa (§ UOTTTTW) ewoout Teuosied = Id FO0*O 2O0*O £0070 Boe es 26 T GOL EE PERT 84S OL8 Sf toy EPL TG £4 TTOtO £ TEE oor BS4T TTOto BET Or SGP *Oer £86T ETO*O OtG*2- See arr PBST or°O SOS *46T POTtets S8é6t E58 ° 23 PT Zao Pest é e* SOL LET ESTT £E4T 8e0*O LE O6E HOt OEOT eBet ELO%O ELE 607492 TSat 600°C £BEO*OTT Tet 2ee O84T £00°O ¥BOT6E pee *Té 6L4T *O ‘OQ ‘oO BLéT *O ‘0 *9O L£L4T Gad OdYN Ted Id Sd0Idd AGNV ANOONI NO OOLAdTV AO LOVdWI “y° ITIL oTqdeL 9T-lit III-15 Also contributing to the marginally lower level of real per capita personal income is a somewhat higher Alaskan price level (RPI) than in the base case, resulting from an upward price movement during Alpetco construction years, This price rise also impacts wage rates but to a lesser degree so that the net effect is a slight reduction in real wage rates. The price index in later years moves back toward the rate of increase projected in the base case but remains at a somewhat higher level throughout the period. This is reflected in PRAT, which is the ratio of the Alaskan and U.S. price indices. The difference in this measure from the base case is only 1 percent after 1990. III.C.2. State government General fund revenues (REVGF) increase as a result of the Alpetco project as shown in Table III.5. In 1983, revenues peak at $68.8 million in excess of the base case, a 2.7 percent increase. After construction, the impact declines to $18.1 million in 1985, but then it begins to grow again. In 1990, it is $41.9 million. The various components of state general fund revenues do not all respond positively to the Alpetco proj- ect, however. Petroleum revenues (RP99) are unaffected. Endogenous revenues (RENS) increase substantially and after 1984, the amount of posi- tive impact exceeds the positive impact on total general fund revenues. The other component of revenues which is increasing is federal trans- fers (RFDSN) which increase with the growth in population. The growth in these two components of revenues is partially offset by a negative impact III-16 Table III.5. IMPACT OF ALPETCO ON COMPONENTS OF STATE REVENUES REVGF RENS TPF A RFDSN LO?? Os Os Os O- Le7s O-« Os Os O- LEPe 1.806 O- O96) 0.845 ; 11.843 Os 72904 3.505 SEP Oo. 224307 10.409 5.3582 Os 45.899 15.924 68.824 Os 20.152 S4.1e% oO, 17.744 18.06 Os 15.53 23.844 Os 15.044 31.729 Oe 15.318 34,674 Os LS.897 386] Os 146.456 Oe L?.484 Ge 18.426 Os 0 23.604 0 24e4ud Os 25.154 REVGF = general fund revenues (million $) RP99 = revenues derived from petroleum (million $) RENS = revenues derived from endogenous sources such as personal income tax, etc. (million $) IPFl = income from the permanent fund (million $) RFDSN transfers from the federal government (million $) Note: All variables measured as the difference from the base case. III-17 on permanent fund earnings (IPF1). The permanent fund balance is lower in the Alpetco case because of a lower contribution rate to the fund and a subsequently lower level of earnings. The lower revenues from this source partially offsets increases in the two other components of reve- nues so that the net revenue effect remains positive. In Table IIL.6, the important components which comprise endogenous state revenues (RENS). are displayed. From this, it is possible to see the types of revenues generated directly and indirectly by the Alpetco project. Direct revenues from Alpetco are the corporate income tax (RTCSX) and the gross receipts tax (RIBSX). In the peak construction years, they do not contribute significantly to total endogenous revenues--5.3 percent of the total. During the operations phase, the percentage increases signi- ficantly. In 1990, of $90.5 million in endogenous revenues, $65.7 million (or 72.6 percent) come directly from Alpetco. Of indirect revenues, the personal income tax (RTIS) is the most significant. This revenue source is most important in 1983 when it is $24.3 million. After the construction phase of the project, this source of revenue declines in the late 1980s but then begins a slow increase in the 1990s. In 1990, it contributes $10.1 million, or 11.2 percent of the total increase in endogenous revenues. Both corporate income taxes (RTCTS) and gross receipt taxes (RTBS) increase by slightly more than the direct impact of Alpetco, with the percent increase being larger for the gross receipts tax. Several smaller Table III.6. - IMPACT OF ALPETCO ON INDIVIDUAL COMPONENTS OF STATE ENDOGENOUS REVENUES Po RY OSS RTOTS RT BSX RTE 0% Oe Oo. Oe Oe O- Oe 0+ O94] Oo, 0.006 0.76? 72 9O4 1.4 1.497 Be 224307 243 3.359 Pe e4e33 Gel 21.317 8. 13.34 33 1O,244 Be 9.258 8 Sol?? Ps Pye 9 10.09 ) 10,782 11.563 73 4 92 ‘ 4s | Pad PL LOs t 14.4682 RENS = total endogenous revenues (million $) RTBSX = Alpetco business license taxes (million $) RT98 = taxes net of petroleum production (million $) RTBS = total business license taxes (million $) RTCSX = Alpetco corporate income taxes (million $) RTIS = personal income taxes (million $) RTCTS = total corporate income taxes (million $) Note: All variables measured as the difference from the base case. 8T-III ILI-19 sources of revenue, not included in the table, also contribute to the growth in endogenous revenues above the base case. Comparison with the preceeding table indicates that the increase in the largest revenue item, the corporate income tax, is nearly offset by the decline in the level of permanent fund earnings so that the net in- crease in revenues is composed primarily of increases in federal transfers, the personal income tax, the gross receipts tax, and miscellaneous small revenue items. State expenditures for both current expenditures (EXCUR) and capital expenditures (EXCAP) shown in Table III.7 increase substantially over the base case. The level of both operating and capital expenditures increases with population, prices, and real per capita income so that the change is not so much a projection of the additional cost of state government services as it is of the probable impact on state expendi- tures if the change is consistent with the historical pattern of ex- penditure growth, The bulk of the increase occurs in the operating budget. In 1984 it is $242 million or 16.5 percent higher than the base case. As in the Alyeska pipeline experience, a portion of the increase is due to popula- tion, some to the more rapid increase in prices, and a portion to the increase in real income. In later years, the difference from the base case diminishes and in 1990, the Alpetco case budget exceeds the base by $85 million, which is only 3.8 percent. III-20 Table III.7. IMPACT OF ALPETCO ON STATE EXPENDITURES FUND FUNDREC EXCUR = current expenditures (million $) EXCAP = capital expenditures (million $) E99SRPC = real per capita state expenditures (deflated by RPI) FUND = balance of general plus permanent funds (million $) FUNDRPC = real per capita fund balance (deflated by RPI) Note: All variables measured as the difference from the base case. TII-21 Capital expenditure growth follows the same general pattern, al- though it is not as responsive to changes in real personal income. In the peak year of 1984, capital expenditures exceed the base case by 13.4 percent at $58 million. By 1990, the difference is only 4.7 percent. In spite of these substantial increases in capital and operating expenditures, real per capita state expenditures (E99SRPC) exhibit a mixed pattern. For four years during the construction phase of the project, real per capita expenditures increase; but initially and in all later years, the opposite is true. During the 1990s, the impact level averages about $20 lower than the base case annually. This is only 2 percent of real per capita expenditures in 1990 and a smaller propor- tion in later years. In contrast to the quite marginal reduction in the level of real per capita state expenditures, there is a significant negative impact on the combined totals of the general and permanent funds (FUND). In these simulations, the permanent fund administers all state government funds in excess of those necessary for year-to-year operations. Since expen- diture growth exceeds the increase in revenues from the base case, con- tributions of otherwise excess revenues to the permanent fund must be somewhat less than in the base case. This somewhat reduced contribution rate results in a lower fund balance, which is increasingly reduced with time. There is a large reduction in early years as expenditure growth exceeds that of revenues III-22 by a substantial amount. The annual rate of reduction is later reduced but not eliminated. By 1990, the fund balances are $1.00 billion lower than in the base case, a reduction of 7.4 percent. By 2000, the reduction has reached $1.65 billion, which is 36.5 percent of a much smaller fund bal- ances base of $4.54 billion. This reduction in the amount in the fund balances as a result of the Alpetco project is also significant in real per capita terms (FUNDRPC). The combination of the financing of increased expenditures out of poten- tial permanent fund increments, increased population, and a higher price level results in a fund balance in real per capita terms substantially lower than the base case. In 1990, it is $785 less, or 12.4 percent. The difference continues to increase over time. The net result of the increase in state government revenues and state government expenditures is shown in Table III.8 where the impact on the general fund current account of the changes resulting from the Alpetco project is indicated by the variable SIMP. It is the change in general fund revenues minus the change in general fund expenditures. In every year of the project, except the first, it is negative by a sig- nificant amount, reflecting the more rapid growth in state expenditures than growth in state revenues. The difference between revenues and expenditures, if negative as in this case, indicates a deficit which must be financed by alternative means. In this case, contributions to the permanent fund are reduced. As noted above, the negative impact is ILI-23 Table III.8. IMPACT OF ALPETCO ON GENERAL FUND CURRENT ACCOUNT 1977 1978 Lory 1980 LPai SIMP = general fund revenues minus general fund expenditures (million $) Note: All variables measured as the difference from the base case. ILI-24 more critical during and directly subsequent to the peak construction years as population, price, and income increases put pressure on expenditures, when the only significant revenue source is personal income tax receipts. Later revenue growth is more rapid while the increase in expenditures is more moderate, A comparison of the SIMP values with the increment to general fund revenues from Table III.5 is interesting. In every year between 1982 and 1997, the negative value of SIMP exceeds the positive impact of Alpetco on general fund revenues. This indicates that the revenues generated by the changes in the economy resulting from the Alpetco project would need to be at least twice their estimated amount to avoid a negative net fiscal impact. A final indicator of the impact of the Alpetco project on the state fiscal position is shown in Table III.9 which compares the percentage of revenues generated from non—-petroleum sources in the base case (ALL) and the Alpetco case (AL2). As expected, a larger proportion of total reve- nues derive from non-petroleum production related sources if the Alpetco project is part of the economy. The difference, as indicated in the final columns of the table, is small but not insignificant. It is clear, however, that the Alpetco project can only have a marginal effect on developing state government independence from petroleum revenues. . The same pattern of increasing dependence from petroleum revenues occurs in the Alpetco case as in the base case. It can also be argued that the revenues generated by Alpetco are not really independent of the production of petroleum, since they derive indirectly from it. ILI-25 Table III.9. IMPACT OF ALPETCO ON STATE GOVERNMENT FISCAL INDEPENDENCE FROM PETROLEUM REVENUES base case percentage of total general fund revenues from ALL = non-petroleum sources (percent) AL2 = Alpetco case percentage of total general fund revenues from non-petroleum sources (percent) AL2_ER = AL2 ~ ALL I1L1-26 III.C.3. Local government Both local government revenues (R99L) and local government expendi- tures (E99L) will increase as a result of the Alpetco project. Impact values for these variables, as well as the net effect of changes in these two variables, are shown in Table III.10. Revenues grow rapidly during construction years, decline somewhat as the operations phase of the proj- ect commences, and then begin to grow again. Expenditures follow the same general pattern, with a somewhat higher peak during construction years, a sharper post-construction decline, and a more moderate rate of increase thereafter. Thus, the net impact on local government finances is strongly positive in all years except those of the peak construction phase. During that period, the negative fiscal impact ranges between $12.9 and $19.7 million, but by 1990 the positive impact is $53 million. The fiscal impact on local government, given the estimated property tax receipts that the $2.5 - 3.5 billion facility would generate, thus, appear more favorable than the state impacts.” Table III.11 shows the combined fiscal impact of Alpetco on state and local government (SLIMP). After the initial construction phase, the negative impact declines and eventually becomes positive in the late 1990s. On balance, however, the impact remains negative. ohis abstracts from the potentially serious problem of non-coincidence of taxing authority and service requirements at the local level caused by the coexistence of city and borough governments in some areas. RIIL E99L LIMP Note: III-27 Table III.10. IMPACT OF ALPETCO ON LOCAL GOVERNMENT FISCAL POSITION 0.678 0.243 “1? oy Q local government revenues (million $) local government expenditures (million $) local government revenues minus expenditures (million $) All variables measured as the difference from the base case. ILI-28 Table III.11. IMPACT OF ALPETCO ON COMBINED STATE AND LOCAL CURRENT ACCOUNTS SLIMP = state and local general fund revenues minus general fund expenditures (million $) Note: All variables measured as the difference from the base case. II1I-29 The major components of the growth in local government revenues are shown in Table III.12. The most important in the long run is the property tax generated by the $2.5 billion facility itself (RTPLX), but this be- comes an important revenue source only upon completion of construction. In early years, total property taxes (RITPL) increase more rapidly than Alpetco taxes and automatic transfers from state to local government (RTSL) also increase substantially. In later years, Alpetco property. tax revenues become the largest component of the total increase in property taxes, and transfers from state to local government grow much more slowly. III.C.4. Regional impacts The direct employment associated with both the construction and operation of the Alpetco project is located in the Southcentral region. This project will have both direct and secondary impacts on this region, since the increased exogenous employment will generate increased demand for. goods and services in the region. ‘The Alpetco project will also affect the economy of other regions. There are two ways other regions will be affected by the Alpetco project. First, the increase in govern- ment expenditures because of the Alpetco project will increase government expenditures in each region of the state. This is the only way Alpetco impacts are transmitted to most other regions. Secondly, increases in the economies of the Southcentral region and other regions will lead to growth in the Anchorage economy. Since Anchorage serves as a service center to most of the state, increases in the demand for goods and services in the Southcentral region will lead to economic impacts in Anchorage. III-30 Table III.12, IMPACT OF ALPETCO ON COMPONENTS OF LOCAL GOVERNMENT REVENUES L1i2.?8 164 R99L = total local government revenues (million $) RTPLX = Alpetco property tax revenues (million $) RTPL = total property tax revenues (million $) RTSL = transfers from state to local government (million $) Note: All variables measured as the difference from the base case. ILI-31 Tables II1.13 shows the regional distribution of the impacts of the Alpetco project on employment for Anchorage, the Southcentral region, and the remainder of the state. The majority of the employment impact of the Alpetco project occurs in the Southcentral region and Anchorage. By 1990, almost 90 percent of the employment impact is located in these regions. Prior to the final year of construction of the Alcan project, more of the impact takes place in the Southcentral region than in Anchorage. In 1982, 43.0 percent of the employment impact is in the Southcentral region and 40.3 percent of the impact occurs in Anchorage. By 1990, 61.2 percent of the impact is in Anchorage and only 29.8 percent is in the Southcentral region. Anchorage's share of the employment impact grows continually throughout the simulation period. The share of the Southcentral region falls until completion of construction, then rises slightly between 1984 and 1990. The personal income impact of Alpetco follows much the same pattern as employment, with the majority of the impact occurring in the Southcentral region and Anchorage. Personal income will be more concentrated in the Southcentral region than is employment. This is a result of the composi- tion of employment in each region. The construction and manufacturing employment in the Southcentral region have higher wages than the support employment in Anchorage, so the personal income impact will be propor- tionately less than the employment impact on Anchorage. III-32 Table III. 13. REGIONAL DISTRIBUTION OF ALPETCO EMPLOYMENT IMPACT 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 (percent of t otal) Southcentral Anchorage Rest of State 65.4 32.8 1.3 57.6 33.8 8.6 57.1 33.7 9.2 43.0 40.3 16.7 38.0 44.0 18.0 2:6 55.4) 23.0 26.9 55.8 17.3 30.3 56.4 13.3 32.4 56.6 11.0 31.5 58.4 10.1 30.8 59.7 9.5 29.8 61.2 9.0 IV. Sensitivity of the Results to the Alpetco Project and Base Case Assumptions IV.A. Introduction The assumptions which form the basis for both the base case and Alpetco scenarios are subject to error. Knowledge of future events and the future levels of many significant exogenous variables is uncertain. Because these events are important for projecting the future levels of economic activity in the state, some assumption about them needs to be made. For example, employment levels on the Alcan gasline project and the timing of its construction are unknown, but because this project will have major effects on the economy, it cannot be ignored and an assumption about the levels of Alcan construction employment must be made. Because of this uncertainty, it is necessary to investigate the extent to which the major findings of Section III are sensitive to some of the principal assumptions. By using the MAP model to make projec- tions under varying assumptions, the sensitivity of the results in Section III to these assumptions can be examined. Sensitivity analysis _ conducted in this way not only provides an idea of the importance of certain assumptions to the results, but it will also provide decision makers with an idea of the possible range of impacts from this profect. In this Section, the effect of altering several major assumptions will be examined. The first assumption examined concerns the level of state revenue generated by the Alpetco project. The effect of a reduc- tion in these revenues on the economic impact of Alpetco is examined. Second, the sensitivity of certain results to the in-kind price of Alaskan royalty crude will be investigated. The third assumption tested concerns the level of operating employment assumed for the Alpetco project. By making projections with assumed lower levels of Alpetco operating employment, the effect of this assumption on the impact of the Alpetco project is examined. Closely related, the impact of a significant wage leakage out of the economy, as occurred during Alyeska construction, is discussed. The next sensitivity analysis concerns the timing of the Alcan gasline construction. The effect of delaying the construction of the gasline until after the completion of the Alpetco project is examined. The final assumption tested concerns the regional location of Alpetco employment. IV.B. Sensitivity to Alpetco Revenue Assumptions The level of revenues received by the state from the Alpetco project is subject to some uncertainty. The revenues could differ from those used to describe the Alpetco project for a number of reasons. Changes in the structure of state tax laws could affect the flow of revenues to the state. More importantly, the state revenues, particularly corporate taxes, depend upon the level of revenues and operating expenses forecast by Alpetco. Any changes in these from the forecast levels will affect the revenues received by the state. To test the sensitivity of the impact generated by Alpetco to the level of these revenues, we examined the case in which Iv-3 corporate taxes (RTICSX) are half the level estimated by Alpetco. Table IV.1 compares the level of corporate taxes assumed in Section III and the level assumed in this sensitivity test. A reduction in the level of corporate taxes provided by the Alpetco project affects only the state fiscal sector. The change in these taxes is assumed not to affect the level of demand for goods and services generated by the economy. The level of real disposable personal income and state expenditures which are the major determinants of state eco- nomic growth are not affected by the tax reduction. The major effects of reducing corporate taxes are reduced general fund revenues, a greater negative impact on the general fund current account, and a greater negative impact on the permanent and general fund balances. Table IV.2 shows the effect of the reduced direct Alpetco revenues on the total revenue impact of the project. By 2000, total general fund revenues (REVGF) are approximately $117 million less than in the regular Alpetco case. The reduction in the level of corporate taxes causes the Alpetco project to have a negative impact on revenues by 2000; total general fund revenues would be approximately $21 million less than in the base case if the Alpetco project took place with the reduced level of corporate taxes. Even with the reduced corporate taxes, the revenue impact of Alpetco is positive until 1996 when total general fund revenues would be about $1 million less than in the base case. Iv-4 Table IV.1. CORPORATE TAXES FROM THE ALPETCO PROJECT (millions of dollars) PET AST2 AST2_ER 1977 0. 1978 0. a nt 1979 O. a lt * * 2 O26 0.3 ~0.3 1982 O.5 0.25 are 1983 0 ie 0.25 1984 li ee 0628 1985 O. A 1986 24, 12. 1987 40.4 20.2 1768 47.2 23.6 1989 Soe 26.3 LPO S77 oF 29,9 ce 63.2 31.6 ace 68.8 34.4 1993 75. 37.5 lh 7947 39.8 1995 ? arn ae 43.5 1996 94.4 760 iG : 47.2 1997 102.3 my 5 ae wie d 1998 11d. 55.5 ited 120.4 60.2 = 129.9 6S. PET = Alpetco tax assumptions AST2 = corporate taxes assumed 50 percent less AST2_ER difference between these cases L977 1978 1979? 1980 L931 L982 L933 1984 1985 LP86 LPS? 198s LPB? 1990 L9P1 L992 1?93 1994 L995 L996 LES? 1998 L999 2000 Iv-5 Table IV.2. EFFECTS ON GENERAL FUND REVENUE OF REDUCED ALPETCO TAXES REVGF TPF L RTCSX oO. Os O. Oo. O. oO. Oo. 0. Oo, -0.2 O. “O62 ~O,.314 ~0.014 0.3 ~0,.286 ~O0.036 ~O.25 -0,306 “0.056 ~O.25 0-923 ~O.O077 Le -O,013 ~O.013 oO. “12.014 -~O,014 “12. ~21.055 ~O.855 -20.2 “25.929 “2.329 “23.6 ~30.544 “4,144 ~26.4 ~35.182 “6.282 ~28.9 ~40.345 ~B.745 “S166 “AG PEP “11.569 ~34.4 ~G2.287 ~14,087 ~37.5 ~58 +346 “17.747 ~3P.F “66.031 “21.831 4345 ~7?4.354 ~26+453 ~47 62 ~83,558 ~31.658 ~S1.2 “P3707 ~37 6507 OSS “104.967 ~44,066 -60.2 ~Li?.014 ~S1.414 ~64 9 REVGF = general fund revenues (million $) interest on the permanent fund (million $) RTCSX = corporate taxes Note: Measured as difference from the Alpetco Case. IV-6 The reason for this negative impact can be seen by examining both the direct and indirect effects of the reduced level of corporate taxes on revenues. Table IV.2 illustrates these effects. The direct effect on revenues results because corporate taxes (RTCSX) are reduced by 50 percent. By reducing the level of revenues, this tax reduction also reduces the amount which is put into the fund balances. Table IV.3 shows that the fund balances (FUND) are as much as $861.5 million less because of the reduced taxes. The lower level in the fund balances results in a reduc- tion in the interest earned on the funds; interest earned on the permanent fund is $51.4 million less by 2000 in the Alpetco case with reduced taxes than in the regular Alpetco case. The reduction in the permanent fund and the resulting reduction in the interest earned on it increases the magnitude of an impact of the Alpetco project which was found even with higher corporate taxes. Even though revenues from these sources are reduced, expenditures of the State government remain at the levels found in the regular Alpetco case. Because of this, development of the Alpetco project with the lower level of corporate taxes increases the negative impact found on the cur— rent account of the general fund (SIMP). Table IV.4 compares the impact on the current account of the general fund under each revenue assumption. By 2000, the negative impact in the lower revenue case is almost four times the impact of Alpetco development with higher revenues. This effect is not surprising since the level of expenditures does not change between cases. The impact of the Alpetco project on the current account of the Iv-7 Table IV.3. EFFECT OF REDUCED CORPORATE TAXES ON FUND BALANCES PF BAL GFRAL FUNI V7 ie, 0. Oy O. 19783 O. Os oO. 1979 Oo. oO. Oo. 1980 ~0.2 oO. “O12 L981 ~O.S14 oO. “O.514 1982 -0.8 On -0.8 1983 “1,106 0. “1.105 1984 ~O.184 oO. ~O.184 L935 ~O.195 0. 204195. 1986 “12.211 O. w1L2s211 L?S?7 ~33.2466 Oo. “3352466 1988 ~“SP.19S Oo. 39 19S 1989 “BP. 73E oO. ~89.738 L990 “124.922 oO. “124,922 1991 “165.266 O. “165.2646 L992 3 “10, “211,238 L99S =10. 263.523 1994 ~10, ~321.871 1995 ~10, ~387.902 1996 “LO. “462.254 1997 “LO. “S45. : 1993 “10, “63965 L999 “10, ~74A4,4B4 2000 “0,001 ~-861.496 ~961,497 PFBAL = permanent fund balance (million $) GFBAL = general fund balance (million $) FUND sum of the fund balances (million $) Notes: Measured as change from Alpetco Case. In 2000, the supplementary contributions to the permanent fund have been exhausted and deficits on current account are financed by drawing down the general fund. Iv-8 Table IV.4. EFFECT ON GENERAL FUND CURRENT ACCOUNT OF REDUCED ALPETCO CORPORATE TAXES AL2_ER ALSILER 1977 oO. Oo. 1978 Oo. "Oe Lao 1.906 1,906 1980 “63576 “bs 775 1981 ~27 +338 ~27+652 19€ ~112.469 “112.754 1982 “164.99 “165.296 1984 221.831 ~220,958 1985 ~142.006 ~142.019 1986 89.527 ~101.54 1987 ~b4.957 “86,011 1988 ~S8.613 ~B84.542 1989 574366 -87.,909 1990 ~SE.8?3 94.08 -~60,989 ~101.333 ~64.103 ~110,072 ~66.987 “119.273 1994 726607 130.954 1995 ~?&s37 ~142.401 1996 ~85.173 “159.526 1997 “676739 ~1351.296 LPP8B 58.454 -152.161 L999 -157.123 2000 ~48,413 “165.144 AL2_ER ALS1_ER Alpetco assumptions Alpetco with reduced corporate taxes ou Note: Measured as change from the base case. Iv-9 general fund is negative in both Alpetco cases, but the negative impact is much greater in the lower revenue case. The reduction in corporate taxes assumed in this sensitivity test is large. The increased negative impacts associated with it would be expected, since expenditures remain the same while revenues are reduced. This experiment does emphasize an important effect of this type of development project. Since its contribution to state revenues derives primarily from one source, its impact on the state fiscal position is quite sensitive to changes in the level of revenues from that source. IV.C. Sensitivity to In-Kind Price of Royalty Crude In the basic analysis, the wellhead price which the state receives on its royalty oil is unaffected by the decision to take the oil in-kind and sell it to Alpetco rather than to take it in-value directly from the producers. The Alpetco proposal states that this will be the case. However, there is some probability that the in-kind price would be lower than the in-value price and this possibility should be commented upon. A lower price for in-kind oil could result from either of two causes. First, it may happen that in order to ensure project profitability, a sub- sidy may be required to Alpetco in the form of a price reduction on the oil that it purchases. This Alaskan cost disadvantage subsidy could easily amount to the equivalent of $1 or $2 per barrel. A second cause could be the manner in which Alpetco would receive and market the royalty erude it takes from the state prior to the completion of the refinery. Iv-10 If Alpetco were to attempt to market its royalty crude on the West Coast and this resulted in a reduction in price at the West Coast refineries, the basis for the calculation of wellhead price at Prudhoe Bay would be modified, reducing the price of not only the crude marketed on the West Coast by the oil companies but also the average wellhead price used to determine the price of sales to Alpetco. This reduction would ultimately affect not only state royalties, but also production taxes based on the wellhead value of all Prudhoe Bay crude. The sensitivity of the economic impact of Alpetco to a lower royalty oil price is qualitatively similar to the previous case in which cor- porate taxes were assumed to be reduced. Another way to look at the sensitivity on the economic impact of a reduction in the in-value price relative to the in-kind price is to calculate the size of the royalty oil subsidy which would be just equivalent to the total state revenues which the Alpetco project would generate. This calculation is made on a per barrel basis in Table IV.5. Considering only the tax revenue to the state directly attributable to the Alpetco project, during construction a subsidy of only 3¢ to 6¢ per barrel of royalty oil would cancel out the direct revenues generated lone potential loss to the state because of this marketing procedure has been estimated to be between $25 and $87 million in 1980, depending upon market conditions on the West Coast and assuming pipeline through- put of 1.2 million barrels daily. The analysis is based upon an unpub- lished memorandum by Dr. Arlon Tussing. Iv-11 by the project.” After operations. begin, direct revenues are higher, so the subsidy could be higher and still permit positive net revenues. In 1990, the canceling subsidy is $1.20 based upon a wellhead value of $13.23, or 9 percent. In 2000, it is $2.61 based upon a wellhead value of $21.49, or 12 percent. The pattern changes somewhat if total revenues are considered. This is because in early years, the total positive revenue impact exceeds that of the direct revenues generated by Alpetco, while in later years, the reduced level of earnings of the permanent fund results in lower total revenues. As a result, the subsidy which would eliminate the total positive revenue impact is considerably less than the direct revenue equivalent subsidy for all years after 1985. In 1990, it is $.76 and in 2000, $1.76. These represent 6 percent and 8 percent of the well- head price, respectively. Table IV.5 concerns only the equivalent subsidy to eliminate a positive state revenue impact. Since the net fiscal impact, given the growth of state expenditures, is negative, the subsidy to eliminate the negative fiscal impact is actually negative. That is, to obtain a neutral net fiscal impact, the state must obtain a premium on its in-value sale of royalty oil to Alpetco. 2ohis analysis assumes pipeline throughput of 1.2 million barrels daily. Higher throughput would imply a lower canceling subsidy. Iv-12 Table IV.5, STATE ROYALTY OIL PRICE SUBSIDIES WHICH WOULD ELIMINATE STATE REVENUES GENERATED BY ALPETCO Subsidy Equivalent Alpetco Impact per Barrel of State Revenues Royalty Crude _ (million $) ($/barrel) direct? total direct? total 1977 0 0 0 0 1978 0 0 0 0 1979 0 1.9 0 03 1980 1.8 11.5 -03 21 1981 2.9 32.4 -05 259 1982 2.9 59.6 -05 1.09 1983 3.1 68.8 -06 1.26 1984 1.9 54.2 03 -99 1985 5.8 18.1 -il -33 1986 30.5 23.8 56 -43 1987 47.2 31.7 - 86 - 58 1988 54.4 34.7 99 63 1989 60.3 38.1 1.10 -70 1990 65.7 41.9 1.20 -77 1991 71.5 46.3 1.31 85 1992 77.5 51.3 1.42 94 1993 84.2 56.9 1.54 1.04 1994 89.3 61.3 1.63 1.12 1995 97.1 68.6 1.77 1.25 1996 105.0 73.1 1.92 1. 34 1997 113.4 73.0 2.07 1.33 1998 122.7 78.3 2.24 1.43 1999 132.7 86.4 2.42 1.58 2000 142.8 95.4 2.61 1.74 corporate income tax and gross receipts tax Note: Assumes 1.2 million barrels daily of pipeline throughput. Iv-13 Iv.D. Sensitivity to Alpetco Employment Assumptions A significant determinant of the Alpetco project's impact on the state economy is the level of operations employment associated with the project. The level of operations employment associated with the project is subject to the same type of uncertainty as the level of state revenues. The operations employment could be subject to changes if the level of out- put or types of products of the project change. Operations employment would also be affected by a change in the production process; choice of a more capital intensive production process would mean a smaller level of operations employment would be needed to produce the projected level of output. The sensitivity of the impacts of the Alpetco project found in Section III to the assumed level of operations employment is tested by examining the effect of reducing the level of operations employment to 80 percent of the employment assumed in Section III. Tables IV.6 through IV.11 compare the relative impacts of these two Alpetco cases, Alpetco high which was discussed in Section III and Alpetco low with operations employment at 80 percent of those levels. Table IV.6 compares the level of operations employment assumed in each case. Because the direct employment impact is less in the Alpetco low case, the secondary impacts of the Alpetco project on the state's economy will also be lower. Since direct operations employment is lower in this sce- nario, the increase in personal income resulting from the project will be lower. Because of this, the demand for goods and services generated by the Alpetco low scenario will be lower than in the high scenario, and Iv-14 Table IV.6. ALPETCO PROJECT OPERATIONS EMPLOYMENT (thousands of employees) Per ASTS ASTS_ER aye Oo. O» 1978 oO. 0. 1979 0.04 ~“Q.01 1930 0.04 0,01 1981 0.04 -O0.01 1982 0.04 -0.01 1983 0,04 ~O.01 1984 1.54 ~0.335 1985 1.54 ~0,385 1786 1.54 ~O,385 1987 1.54 -0.385 1988 1.54 -0,385 1989 1.54 -0.385 1990 1.54 “0,385 S77t 1.54 ~O.385 1992 1.54 Oe oo 1993 1.54 “0,385 Poa 1.54 0.385 1995 1.54 ~O.385 LOPS 1.65 -0.385 1997 1.54 ~0.384 1998 1.54 0.385 L999 1.54 ~0.385 2000 1.54 -0.385 PET = Alpetco employment assumptions AST3 = operations employment assumed 20 percent less AST3 ER = difference between these cases IV-15 the growth of the endogenous sector of the economy will not be as great. Tables IV.7 and IV.8 illustrate this effect. Total employment (EM99) is less in the Alpetco low scenario throughout the period. By 1990, the total employment impact of the Alpetco low case is 1,752 less than in the Alpetco high case. The relative effect of this reduction in total employment is comparable to the relative difference in direct employ- ment. Throughout the period, direct operations employment in the low case is 80 percent of the levels assumed in Section III. By 2000, the impact of total employment generated by Alpetco in the low case is 77 percent of the impact in the high case. The lower levels of employment impact are reflected in lower levels of population impact. Changes in employment and disposable real person- al income affect population changes through their effects on migration. Table IV.7 shows the effect of the lower levels of operations employment on population (POP) and net migration (MIGNET) impacts of Alpetco. The population impact of the Alpetco low case is less than the high case throughout the period. By 2000, the impact is lower by 4,538 people; the impact of the Alpetco low scenario is 82 percent of the impact in the high case by 2000. In 1984, the first year of production, the popu- lation impact with low operations employment is 96 percent of the impact in the high operations employment case. Throughout the remainder of the period, the impact in the low case becomes a smaller proportion of the population impact found in Section III. Iv-16 Table IV.7 EFFECT ON AGGREGATE INDICATORS OF REDUCED ALPETCO OPERATIONS EMPLOYMENT EMS? FOF MIGNET PI L977 O. Oe O. 0. 1978 O. Oo, O« O. L979 -0.02 0.026 “04026 -~0.75 17980 ~0203 —-0.042 ~O.015 1,152 £93) |) ~0,034 -0,053 ~0,008 -1,.398 1982 ~O,036 0,06 “0,004 ~1.578 1983 ~0.037 0.065 -0.003 -1.472 1984 -0,838 “1.112 ~1.044 ~ 39.995 1985 -l.s2a as eae —-0+604 ~60.535 1984 ~1L24A7 -2.199 “0.345 ~72.816 1987 -1.555 ~2.526 -0.231 ~81,883 1988 ~1162? ~2.811 -O0.183 ~9O.176 1989 11672 ~3.074 “0.157 -98.504 LPO rele oe -3.327 “0,145 -107.414 £974 ~1,816 ~3.579 ~O0+143 ~-117-391 L992 1,865 ~3.8246 ~“O.,137 ~-128,008 1993 ~1.955 ~4.068 -0,13 ~139.508 1994 ~2,034 ~4.317 -0.138 -153.098 Lees wee lS “4,585 “O,155 ~-169.344 LOPS ~1.848 ~4.382 0.318 -158.113 teo7 ~1.785 ~4A S74 O,107|-159.3¢ L998 ~1.763 4.426 0,033 ~-165.5 LEP? ~1L.774 4.509 -0.003 -175.32 2000 “1.748 4.538 0.049 -182.52 EM99 = total employment (thousands of employees) POP = total population (thousands of people) MIGNET = net migration (thousands of people) PI = personal income (million $) Note: Measured as change from the Alpetco Case. Iv-17 Table IV.8. EFFECT OF REDUCED ALPETCO OPERATIONS EMPLOYMENT ON REAL DISPOSABLE PERSONAL INCOME DEIR RPT 197? 0. O. 1978 Oo. Os 197? ~0,.185 ~0.007 1980 “0.284 ~O.O01 1981 0,295 ~O.O011 1982 -0.322 ~O,011 1°83 “0.332 ~O,012 1984 “75917 ~O.277 1985 ~11.614 ~O.429 1984 ~13.523 0.509 L987 ~14.709 ~O.553 1983 ~15.623 ~0.584 198? “16.451 0.606 1990 “17.273 ~0+63 LPPL “18.197 “0.654 1992 “19.109 ~O0.4681 L993 ~20.077 “0.708 1994 Lei7. ~0.734 1995 22502 ~0.764 1996 “20.325 “0.669 1997 “1LGL777 0.64 1998 ~1L9.789 0.633 1999 ~20.218 ~0.638 2000 ~20.274 ~0.63 DPIR = disposable real personal income (million $) RPI = relative price index Note: Measured as change from the Alpetco Case. Iv-18 The personal income impact of the low employment case is also less than the impacts found. in Section III. By 2000, the personal income in- pact of Alpetco is $182.5 million less with the low employment assumption. Personal income impact is reduced about 22 percent by 2000. Throughout the period of construction (1979-83), the effect of the reduced operations employment is small; the personal income impact is less than $2 million smaller because of the lower employment. After construction, the differ- ence increases significantly, increasing from $1.7 million to $40.0 mil- lion between 1983 and 1984. Table IV.8 shows that the same pattern is repeated with disposable real personal income (DPIR). Disposable real personal income differs from personal income for two reasons: taxes are removed and changes in the level of prices are accounted for. The impact of the Alpetco low scenario on DPIR is less throughout the period; it follows the same pattern as the personal income impact with a large differ- ence following the end of construction. By 2000, the impact on DPIR of the Alpetco low scenario is $20.3 million less than in the Alpetco high case. This is less of a difference than in the personal income impacts because the rise in prices associated with Alpetco low development is less than in the Alpetco high case. The reduction in the assumed level of operations employment also affects the state fiscal sector. Unlike reducing corporate taxes, the lower levels of operations employment will affect both revenues and expen- ditures. Table IV.9 shows the effect of the lower level of production employment on major fiscal indicators. The impact on the general fund Iv-19 revenues (REVGF) is at first less than in the high employment case. This difference in the revenue impact between the two cases at first increases, then is reduced beginning in 1987. After 1993, the general fund revenue impact of the low employment case is greater than the impact in the high employment case. By 2000, the general fund revenue impact of the Alpetco low case is $18.4 million greater than in the high case. This effect on revenues is influenced in an important way by the relative pattern of expenditures between the two cases. State expendi- tures (E99S) are lower in the Alpetco low case than in the high case throughout the period; this is shown in Table IV.9. The difference between these cases is smaller throughout the construction period and increases throughout the period of operations. Expenditure differences result from differences in population, price levels, and disposable per capita income in the two cases. By 2000, the impact of the low employ— ment case on expenditures is $47.2 million less than the high case. In all years after the first year of operation, the reduction in expenditure impact as a result of the lower levels of Alpetco operations employment is much greater than the reduction in the revenue impact. This differ- ence has a positive effect on the fund balances (FUND). After 1979, the impact of Alpetco development on the fund balances is greater with the low employment case than with the high employment case. By 2000, the fund balances would be $516.9 million greater with the lower level of operations employment than with the higher level. The fund balances are Iv-20 Table IV.9. EFFECT ON STATE FISCAL VARIABLES OF REDUCED ALPETCO OPERATIONS EMPLOYMENT REVGF E99S E99OSRPG FUNII L977 Oo. oO. O. 1978 Or Oo. 0. Le?79 “0,023 0,094 ~0,023 1980 ~0.067 -0.024 0.099 L?S. -0,083 -0,058 0.299 1982 ~0,.085 02046 0.548 L983 ~0,081 ~0.035 0.844 1984 -1.12 347354 0.125 18s ~3.32 -O,.555 7209 1986 ~4,097 ~2.248 18.41 1987 ~4,14 “26762 32.73 1983 ~3.824 24747 49.598 198? ~3B.294 ~2,.565 69.008 L990 ~24608 24232 91,113 1991 ~1.784 1.948 116.184 i972 -~O,.819 ~1.4646 144.598 LOPS 0.339 ~34.7146 “1-436 176-687 1994 1.664 ~37.741 ~1.189 212.844 L995 3,127: 481.219 “O29 SF 253.629 LE9S8 5.448 ~45 344 “2.122 300.488 LES? 9.108 ~A2.633 04743 348.445 L998 12.173 ~42,988 -0.125 399.75 1999 15.184 ~4A4AS&B 0.188 455.582 2000 18,412 “AZ LAPP? 9.204 S16 s921 REVGF = general fund revenues (million $) E99S = total expenditures (million $) E99SRPC = real per capita expenditures (million $) FUND = sum of permanent and general fund balances (million $) Note: Measured as change from the Alpetco Case. Iv-21 greater in this case because the reduction in expenditures is greater than the reduction in revenues, which allows the fund balances to be built up. The larger positive impact on the fund balances which results from the lower levels of operations employment is responsible for the pattern of revenues found in this case. Table IV.10 shows those revenues which differ between the two Alpetco cases. Taxes (RT98) and federal transfers (RFDSN) are affected by the level of personal income and population, and the impact of Alpetco on these is less in the low employment case than in the high, since both the personal income and population impacts are lower. The Alpetco low case has the opposite effect on revenues generated from the interest earned on the permanent fund balance. Here the revenue impact is greater than in the high case between 1981 and 2000. Before 1992, the absolute value of the reduction in the impacts on taxes and transfers is greater than the absolute value of the increase in the im- pacts on permanent fund interest revenues. After 1992, the permanent fund interest revenue impacts are greater than the other revenue effects and the net revenue impacts become larger. This revenue effect results from the larger fund balances impact of the Alpetco case with lower operations employment. The Alpetco development with lower levels of operations employment improves the state's fiscal picture relative to Alpetco development with higher operations employment. The Alpetco project still has negative 1977 1978 1979 1980 1981 1982 1983 i984 1985 1986 1987 1988 198? 1990 L991 1992 1993 L994 L9°S LOS 1997 1998 1999 2000 RT98 RTIS IPF1 RFDSN nouow IVv-22 Table Iv.10 EFFECT ON STATE REVENUES OF REDUCED ALPETCO OPERATIONS EMPLOYMENT RTP RTIS 0. Q. oO. Oo. -O.01 ~0,008 -0.034 0.022 0.047 ~0,029 ~0,055 ~0.033 ~O.041 ~0,035 ~0,527 ~“Os.415 ~1.727 ~1.089 ~2,405 ~1L.451 ~2.813 “1667 -3.124 ~1,835 “3.41 ~L.P86 ~3.705 ~2,139 -4.025 ~2.304 ~4.38 ~2.433 “44756 20675 “5.174 ~2.888 “5.673 -3.14 “S297? “3.175 “3.626 ~3.018 “32698 “3.039 “3.928 ~$.15 ~6.242 “3.273 total taxes (million $) personal income taxes (million $) 6.021 0.938 0.059 0.009 0.495 1.289 2.291 3.472 4.831 6.378 8.133 10,122 12.368 14.899 17.754 21,034 24,391 27-4982 31.89 permanent fund interest (million $) federal transfers (million $) Note: Measured as change from the Alpetco Case. RFOSN IV-23 impacts on the state's fiscal picture when measured in terms of the general fund current account. The impact on general fund revenues minus general fund expenditures (SIMP) is shown in Table Iv.11. Only in the last two years of the period (1999 and 2000) is the impact of Alpetco low positive. Throughout most of the simulation period, the impact of the Alpetco project is still negative. However, after 1984, the negative impact of the Alpetco project on the general fund current account is less with lower operations employment than in the case in Section III. Table IV.12 shows that lower employment has the same effect on the local governments. Local revenues minus local expenditures (LIMP) are greater in all but two years in the Alpetco low case. The overall effect of the Alpetco project with lower levels of operations employment is complex. The reduction of operations employ- ment associated with the low Alpetco project assumptions will lower the impact on the state's economy measured by growth in total employment, population, and personal income. However, the negative impact on the state's fiscal sector is less than in the high operations employment case. Toward the end of the period, the impact on the current account of the general fund, while negative, is less so than in the high case, and by 2000 the impact on this general fund current account is positive. This effect is a result of the lower rate at which the fund balances are drawn down in the low case and the higher levels of permanent fund interest revenues which result. AL2_ER ALS2_ER tow IV-24 Table IV.11. EFFECT OF REDUCED ALPETCO OPERATIONS EMPLOYMENT ON GENERAL FUND CURRENT ACCOUNT 1977 Os 1978 Oo, 1979 1.906 -112.449 ~164.99 ~221,.881 ~142.006 -89,.52 ~64.957 ~S8.613 ~S7 346 ~S8.898 I ~60.939 1992 ~64,103 1993 “Gs 98? 1994 . Lees 3 Dg -85.173 ~674739 ~S8.454 iy “32.156 2000 -48,.13 Alpetco assumptions Al. ~27.138 112.22 164.695 a 598 135.042 -78.206 -50.637 ~41.742 ~37.95 ~346.792 “35.916 “35.69 -34.904 ~3Bb449 ~35.588 ~38.314 “19,779 “7149 36676 13.208 Alpetco with reduced operations employment Iv-25 Table IV.12. EFFECT OF LOWER ALPETCO OPERATIONS EMPLOYMENT ON LOCAL GOVERNMENT REEL ESOL LIMF 1977 oO. Oe O. 197 QO, oO. Oo. 1979 “0,006 Os ~0.006 1980 ~O.093 ~O.135 0.042 1981 “O.146 0.205 0.059 1982 ~O,183 ~“O.245 . 0.063 1983 0.209 ~O.2R7S 0,066 19384 “O.G4] Oe 29S ~O.248 1985 ~O+453 “76375 1-923 1986 -8.3 24782 1987 ~10.139 3.143 L?S8E “11.62 3.284 1989 “13.044 “16.382 3.338 1990 ~14.542 “17.871 3.329 LPS) “16.165 “19.445 34301 1992 “18.9002 “21.251 0 3.249 1993 “19.977 | 3.174 L994 ~22.182 2225 3,043 1995 “24.776 “27.653 2.878 1994 “27 SPL ~$0.562 2971 1997 ~26+675 “2B. 1.925 1998 27.525 -28.819 1.294 1999 : ~29,992 O.779 2000 ~31.453 ~$1.785 0.332 R9OL = total local government revenues (million $) E99L = total local government expenditures (million $) LIMP = local revenues minus local expenditures (million $) Note: Measured as change from the Alpetco case. IV-26 IV.E. Sensitivity to Construction Wage Leakage The impact of the employment associated with the Alpetco project results from the spending of the income earned on the project in the Alaskan economy. These expenditures affect the demand for goods and services and the level of employment in the endogenous sector. It is possible that not all of the income earned on the project will be spent in the Alaskan economy. Wage leakages occur when wages earned in the state are sent directly out of the state without entering the economy. Experience during the construction of the Trans—Alaska Pipeline has shown that with major construction projects, this wage leakage effect is a real possibility. Because of this, the sensitivity of the results in Section III to the assumption that there is no direct wage leakage needs to be tested. This section will examine the sensitivity of the results to this assumption by comparing the results in Section III to a case in which it is assumed that 50 percent of the wages earned on construction of the Alpetco project are sent directly out of the state. The effect of a reduction in the level of income generated during the construction phase of the Alpetco project which is spent in the state will be to lessen the impact of the project on the state economy during the construction period. The reduced income will reduce the demand for goods and services and the expansion of the endogenous sector. Table IV.13 shows that this effect occurs. The total employment (EM99) impact of Alpetco is less during construction because of the wage IV-27 Table IV.13. EFFECT OF INCOME LEAKAGE ON THE IMPACT OF THE ALPETCO PROJECT EM?9 FOF * MIGNET FI L977 Oo. 0. oO 1978 Os oO. oO. 1979 -0.378 -0.378 ~9 047 1980 ~1,369 —~O0.972 ~34.957 1981 ~4,127 “2.69 “116.586 1982 “31672 “1,345 -161.719 1983 ~ bs 903 “O1972 191,951 1984 ~3,82 36376 “82.562 1985 ~2+473 1.453 ~$4.559 L98S ~1.838 0.661 ~13.863 1987 “L496 0.332 ~4.82 0 L988 ~1.273 O.194 -0.8656 1989 Thee 0.137 1.516 1990 ~“O.95 0.109 26945 Le9d ~O.815 0.092 349465 1992 ~0,493 0.079 4.836 1993 -0.5469 0.083 6.352 1994 ~O0.459 0,07 7469 1995 “0.355 0.0466 8.754 1996 -0.272 0.043 9.547 1997 ~O.194 0.046 10.547 1998 ~0.121 0.045 11.773 1999 ~0.052 0.042 13.09 2000 0.011 0.039 14,555 EM99 == total employment (thousands) POP = total population (thousands) MIGNET = net migration (thousands) PI = personal income (million $) Note: Measured as change from Alpetco case. Iv-28 leakage. The employment impact is less by 4,539 at its peak in 1983; this reduces the overall employment impact by 20 percent. After the final year of construction in 1983, the difference between the two cases narrows until 1987 when the employment impact of the wage leakage case is only 12 employees less than the regular case. After 1987, the employ- ment impact of the wage leakage case is slightly greater than in the regular Alpetco case. By 2000, the employment impact is 260 or 3.5 per- cent greater in the wage leakage case. The larger impact results pri- marily from the differential effect on prices of the two cases. The relative price index (RPI) increases less during the construction phase of the project in the wage leakage case. Because of this, the relative price index (see Table IV.14) is less throughout the simulation period in the wage leakage case. The direct income impacts in both cases will be the same once the operations phase begins, so the real income impact will be greater in the wage leakage case. This leads to a greater sec- ondary expansion of the economy and a greater employment impact. The population (POP) impact of the wage leakage case is smaller than the regular Alpetco case until the final year of the period. At its peak in 1983, the employment impact is 6,903 less in the wage leak- age case; this reduces the population impact of Alpetco by 18.8 percent. After this peak, the difference is reduced throughout the remainder of the period until in 1999 the population impact is only .2 percent less in the wage leakage case. By 2000, the population impact is 11 people Iv-29 Table IV.14. EFFECT OF INCOME LEAKAGE ON THE REAL DIPOSABLE PERSONAL. INCOME DP IR RET 1977 | oO. Os 1978 oO. oO. 1979 “2.137 -0.105 1980 ~758 ~0:367 i981 - ~24,011 ~1.05 1982 ~S1.905 ~1.325 1983 ~37.198 ~15566 1984 15.653 ~0.732 1985 ~b6193 ~0.357 1986 “BL197 “0.198 1987 -O.502 ~O.13 LPBE 0.277 ~O,103 1989 0.671 ~0.092 990 0.938 -0.087 1994 1.143 ~0.086 2 1.266 ~0.086 1.494 -0.083 1.663 ~0.083 1.841 ~0.084 1.949 ~0.087 1997 2.077 ~0.09 1993 2.227 ~0,092 LE99 2.378 “0,094 2000 2.529 “0.096 DPIR RPI real disposable personal income (million $) relative price index Note: Measured as change from Alpetco case. Iv-30 greater in the wage leakage case. This effect is primarily a result of migration (MIGNET) which is greater in the wage leakage case after the final year of construction. Personal income (PI) follows the same pattern as the employment impact. The personal income impact is less in the wage leakage case until 1988. In 1983, the personal income impact is $192 million less in the wage leakage case. By 2000, the personal income impact of the wage leakage case is $14.6 million greater. The reduction in disposable per- sonal income (DPIR) in the construction phase is not so great in the wage leakage case as the effect on personal income, since the price level is also less in this case. The leakage of a portion of the Alpetco generated incomes during the construction phase also affects the state fiscal sector. Table IV.15 illustrates the fiscal sector impact. The impact on general fund reve- nues (REVGF) is less in the wage leakage case until the second year of operations in 1984. At the peak employment impact in 1984, the impact on general fund revenues is $14.1 million less than in the regular Alpetco case. After 1984, the wage leakage case affects revenues greater than the regular case. The difference between the cases is greatest in 1996 when the impact on general fund revenues is $8.2 million greater in the wage leakage case. After 1996, the differential is gradually reduced. During construction, state expenditures (E99S) are also reduced. In 1984, state expenditures are $49.1 million less in the wage leakage case. REVGF E99S E99SRPC FUND Iv-31 Table IV.15. EFFECT OF INCOME LEAKAGE ON STATE FISCAL SECTOR IMPACT 1977 1978 1979 19890 i981 1982 1983 1984 19°85 1786 198? 1983 1989 1990 aes 1992 1993 1994 L995 1996 yyy. 1LP98 1999 2000 iouou wu 0+023 3.764 56497 6377 8.898 76256 7531 7+748 76934 8.103 B.1P6 8.223 8.159 8.036 7.833 7558 E99S ~2.517 “9.279 29.05 ~40,422 ~49,11 “18.777 “Se PLS 0.071 2.798 44294 3+ 336 6.198 general fund revenue (million $) total state expenditures (million $) real per capita state expenditures fund balance (million $) EV9ISREC 0. oO. 1.379 2.642 66526 0.073 ~0.822 ~16.743 ~3.57 1.927 4,033 4.759 491 4,998 4.78 467? 4 ADS 4,397 4.268 4.281 4.182 4.118 4.062 4.039 FUND O. O- -0.307 0225 25957 17.641 40.48 74.242 91.133 99.715 104.699 108.047 110,531 112.414 113.773 114.582 114.848 114,34 112.977 110,523 107.09 102.488 96.551 89.044 1V-32 The expenditure impact of Alpetco is less in the wage leakage case until 1986; by 2000, the expenditure impact is $15.7 greater in the wage leak- age case. The differential impact between revenues and expenditures results in the fund balance (FUND) being greater in the wage leakage case after the first year of the period. The difference in the fund balance between these cases is as great as $114.8 million by 1993. After this, the dif- ference begins to decline; by 2000, the fund balance is $89 million greater in the wage leakage case. The larger fund balance is respon- sible for the pattern of revenue impacts. Table IV.16 shows the effect on revenues of the wage leakage case. Until 1989, both non-petroleum tax revenues (RT98) and federal transfers are less in this case. The interest earned on the permanent fund (IPF1) is greater in all but the first year as a result of the larger fund balance in this case. After 1985, the increase in the permanent fund earnings is greater than the reduction in the other revenues, so the net effect is to increase revenues. After 1989, the revenues from taxes are also greater in the wage leakage case because of the greater level of economic activity. The effect on the state fiscal sector can also be seen by comparing the impact of Alpetco on the general fund current account shown in Table IV.17. The difference between general fund revenues and general fund expenditures (SIMP) is negatively impacted by Alpetco in each case. The impact on SIMP displays the same fluctuating pattern as the impact IV-33 Table IV.16. EFFECT OF INCOME LEAKAGE ON STATE REVENUES RT?S RTIS TPFL RFISN 1977 O- O. oO. oO. 1973 Os O. Oo. O- 1979 ~O,123 ~0,095 O. -O.184 L980 ~O.813 ~O+478 ~0,02) ~0.4685 L981 -2.755 “1.613 9 -2,125 1982 ~4.207 ~3.043 ~3.014 1983 ~FLP1LS ~3.863 ~3.785 19s ~7 33) ~3.152 “2.168 198 ~2.588 ~1.31 ~1.445 1986 -1.044 -0,504 ~L.id 1987 ~O,381 ~“O.159 -0,935 1988 -O.091 -0.009 7329 -0,824 1989 0,044 0.059 F563 ~0.737 1990 O.119 0.094 7273? ~O,658 1991 0.168 O.116 7°B869 9 -O.055 1992 / 0.206 0.132 7 +9h4 ~O.517 1993 0.244 0.151 8.0281 ~0,438 L994 Oe 299 8.04 ~0,368 1995S 0.34 8.004 LPS 74908 1997 7+736 1998 7Fe4APS -O,112 1999 7Fel74 ~0,052 2000 64758 0.011 RT98 = total non-petroleum taxes (million $) RTIS = personal income taxes (million $) IPFl = interest earnings on permanent fund (million $) RFDSN = federal transfers (million $) Note: Measured as change from Alpetco case. IV-34 Table IV.17. EFFECT OF INCOME LEAKAGE ON GENERAL FUND CURRENT ACCOUNT ALZ_ER ALSS_ER L977 Oe | O-. 1978 Os Os 1979 1-906 1.599 1980 ~6.574 -6.044 L981 -27.333 -24.604 1982 ~112.469 ~97 785 1983 -164.9 -142,.152 1984 —~221.881 ~188.116 198s ~142,006 ~L25.116 178s -89.527 ~BO.944 198? ~64,957 “SP P74 1983 ~38.613 “55.263 Leb? ~57 2366 ~54.88 1990 ~S8,.898 ~S7.016 L?9L ~69.989 ~S9.628 1992 -64.103 “63.276 LPPS ~66 298? “66.725 1994 ~72.607 “73.113 LOPS -7&+37 -77.738 1996 ~85.173 ~87.629 L997 ~$7 4739 ~7islé? 1993 -58.454 ~63,055 1999 ~S2.156 “38.095 2000 -43.13 “55.639 AL2_ER ALS8_ER Alpetco assumptions Alpetco with personal income leakage ou Note: Measured as change from the base case. Iv-35 on the other variables. The negative impact is smaller in the wage leakage case until 1993 when the impact is similar in each case. After this, the negative impact in the wage leakage case is greater than in the regular Alpetco case. The overall effect of reducing the direct income impact of Alpetco through wage leakages is to reduce the short-run level of economic activity and increase the long-run level over the regular Alpetco case. The wage leakage case also had a fluctuating impact on the state fiscal sector. The effect of the reduced economic activity is to reduce state expenditures more than revenues, This reduces the drawdown of the per- manent fund which increases permanent fund earnings. This effect further increases revenues. As the economic activity increases, expenditures also increase until by 1994 the increase is greater than the revenue increase, causing the fund balances to be reduced. IV.F. Sensitivity to Assumptions about the Timing of Alcan Construction One of the major events assumed in the base case is the construction of the Alcan gasline. This has considerable impact on the economy, directly increasing average annual construction employment by almost 5,000 in its peak year. There is uncertainty centering upon both the level of employment and the timing of Alcan. The assumption which is considered in this sensitivity test concerns the timing of construction. The Alcan is assumed in Section III to be constructed between 1980 and 1983, which is the same period the Alpetco project is constructed. IV-36 The fact that two major construction projects occur simultaneously may affect the impacts from the Alpetco project. We will test the effect of the timing of the Alcan project on the impacts generated by the Alpetco project by postponing the Alcan construction. Table IV.18 compares the levels of exogenous construction employment in each case. In the Alpetco case examined in Section III, exogenous construction employment reaches a peak of 8,500 in 1981 with both the Alcan and the Alpetco projects under construction. By delaying the Alcan construction until 1984, the peak exogenous employment is reduced to 5,000 in the second year of Alcan construction, but there is exogenous construction employment until 1987. The effect of this difference on the impact of the Alpetco project is examined below. Tables IV.19 and IV.20 examine the effect of the timing of the Alcan construction on the impacts of the Alpetco project. The pattern of impacts of the major variables is similar in both cases with larger impacts occur- ring during the construction phase (between 1980 and 1984). The impact on total employment (EM99) is larger in the case where Alcan construction is postponed, although the difference is not great. By 2000, the Alpetco impact with the delayed Alcan is 9.2 percent greater than the impact found in Section III. At its height in 1983, the employment impact in the de- layed Alcan case is only 1.4 percent greater than in the regular case. This result may seem implausible at first. The larger economy associated with the simultaneous construction of both projects should, one would think, lead to greater secondary increases associated with the Alpetco employment 1977 1?78 1979 1980 1981 1982 1983 1984 1985 1°86 1987 1988 1989 1990 L9PL 1992 LOPS 1994 L99S 1996 L997 L998 1999 2000 PET ASRL ASRL_ER nouou Iv-37 Table IV.18. EXOGENOUS CONSTRUCTION EMPLOYMENT (thousands of employees) PET ASR1 5677S 36775 0.9 0.9 0.75 0.75 2.893 1.3 8.493 3-5 7833 365 36765 3.5 Oo. 1.598 oO. 4.993 Oo. 4.333 QO. 0.265 Oo. O- O- Oo. Oo. Oe Oe oO. oO. Os Oe oR 0. 0. Os oO. Oo. Oe O- Oo, 0. O. Oe oO. Oe oO, Alcan construction beginning in 1980 Alcan construction beginning in 1984 difference between the cases ASR1L_ER O. IV-38 increases. There are two effects taking place during this period. First, the scale effects account for the greater impact of the delayed Alcan case after 1984, since the economy is larger in this case than in the regular Alcan case. The second effect involves the impact of prices on personal income. The level of disposable real personal income (DPIR) determines the level of demand and the growth of the endogenous sectors of the economy; it is sensitive to the price level. The impact of con- structing the Alpetco project simultaneously with the Alcan is to in- crease inflation more than in the case when the Alpetco project is constructed alone. This effect on prices reduces disposable real per- sonal income and the level of demand and the secondary effects of the expansion relatively in the simultaneous construction case. Comparing Tables IV.19 and IV.20, one can see that this effect is at work between 1980 and 1984, since the impact on disposable real personal income in the simultaneous construction case is less than in the delayed Alcan case even though the impact on personal income is greater. During the con- struction period, the inflation impact is greater than the scale effect, leading to greater employment impacts from Alpetco in the case where the Alcan is delayed until 1984. The relative population impacts follow the same pattern as the employ- ment impacts. The total population (POP) impact is greater throughout the period in the delayed Alcan case. By 2000, the impact in this case is 26,483 which is 6.1 percent greater than in the simultaneous construc- tion case, At its peak in 1983, the population impacts only differ by 2.2 percent. Iv-39 Table IV.19. IMPACT OF ALPETCO ON MAJOR VARIABLES (ALCAN CONSTRUCTION IN 1980) FOF EMS9 PI 1977 Oe 19783 0. 1979 712844 19380 247.141 L981 PS? 1LOF 1982 1020.05 1983 L167,77 1984 697.416 1985 S12.164 1786 y 448.848 1987 24.509 440.5935 1788 24.585 456.371 198? 24.889 436.73 1990 25.234 522.66 LPP dL 2566461 866-383 LP?2 26,081 612.32 1993 24.582 B.P7S 664,082 1994 27.115 9.285 F2E AST 1995 27.781 9.684 P99 P4aL LP99S 26.187 8.33 739.1463 L997 25.59 7-861 737 +668 L978 2 Fe &97 762.18 1999 25.265 76693 803,055 2000 24.965 76508 830,598 POP total population (thousands of people) 18.289 39+142 168.589 215.18 2414206 136.522 97.74 82.994 78.881 78.639 80.742 83.33 B4.947 90.371 94ALE9A 99.052 104,744 93.144 89.556 88.811 90.071 89.503 EM99 = total employment (thousands of employees) PI = personal income (million $) DPIR = real disposable personal income (million 1967 $) Note: Measured as change from the base case. Iv-40 Table IV.20. IMPACT OF ALPETCO ON MAJOR VARIABLES (ALCAN CONSTRUCTION IN 1984) FOP EM99 FT DPIR 1977 0. Oo. 0. oO. 1978 Oo. Oo oO. QO. 1979 1.944 16494 71.844 18.289 1980 7045 Se112 245. oa w9+314 1981 20.403 14.44 734228 168.152 19°82 30.578 19.891 994, 004 216.173 1983 3745469 22.558 1159.7 242.815 1984 32.201 15.455 705.844 138.693 fone 27.593 10.96 3384512 101.395 198 25.934 9.205 480,163 87.352 1987 25-+418 8.574 461,316 82.693 1988 25.457 Bo 409 473.254 82.347 1989 25.783 8.51 803.578 84.682 1990 26.188 8.493 9405922 87.539 1991 26-681 B96 586.738 91.6497 1992 27.4172 9.2351 635.289 95.28 1993 274747 P 561 692.047 100, 1994 28.357 9.904 735.789 104,766 1995 29,112 10.345 835.3598 110.959 1996 27,922 8.967 7726172 99.244 1997 26.953 8.498 771.824 95.763 LP98 264742 8.349 799 083 95.268 1999 26.731 8.366 843.301 96.878 2000 26.483 8.195 874.117 9665 POP = total population (thousands of people) EM99 = total employment (thousands of employees) PI = personal income (million $) DPIR = real disposable personal income (million 1967 $) Note: Measured as change from the base case. IV-41 Delaying the Alcan construction has a negative effect on the fiscal sectors of the state. Tables IV.21 through IV.25 illustrate this impact. After 1986, the impact on general fund revenue (REVGF) is less when Alcan is delayed than when it is constructed at the same time as the Alpetco project. Because of the factors discussed above, the economy expands more rapidly in the delayed Alcan case. This more rapid expansion of the economy results in a greater increase in expenditures (E99S) in the delayed Alcan case than in the simultaneous construction case. The im- pact on state expenditures is $204.9 million by 2000 in the delayed Alcan case, which is $41.8 million greater than the impact shown in Section III. This differential impact on expenditures and revenues leads to a greater drawdown of the fund balances (FUND) in the delayed Alcan case. In the delayed Alcan case, the fund balances decline by $2093.5 million by 2000 relative to the base case. When Alpetco and the Alcan are constructed simultaneously, the impact of Alpetco on the fund balances is about 78 percent of this amount. The greater reduction in the fund balances affects fund revenues. With a greater decrease in the fund balances, the interest earned on the permanent fund is less in the delayed Alcan case. This effect on this important source of revenues determines the differential impact on general fund revenues. Examination of Tables IV.23 and IV.24 shows that for all other sources of revenue, the impact of Alpetco with the delayed Alcan is greater than the Alpetco impact in the simultaneous construction case. Throughout most of the period, the reduction caused by Alpetco on the permanent fund earnings is greater in the delayed case. (This pattern Iv-42 Table IV.21. FISCAL SECTOR IMPACTS OF ALPETCO (ALCAN CONSTRUCTION BEGINNING IN 1980) REVGF Eg?S E99SRFC FUND Le77 QO. O. O- O. 1978 oO. QO. oO. O. 1979 1.706 oO ~7e12 1.6906 19380 11.543 19.561 ~8.01 ~4.&7 1981 32.389 64.618 ~18.109 ~32,.009 1932 S?.582 86.271 R4AL777 -144. 477 1°83 69.824 a 35.012 -309.46? 19384 4.197 : 83.279 ~S31.348 1985 : 18.06 176.769 24.563 -673.355 1986 23.846 126,351 1.62 ~76RB79 LPB? 31,729 108.46 ~12.433 -827,.836 1°83 34.594 105.001 ~“1L6+939 ~G86.449 LPB? 38.413 107.562 “18.929 —-943.816 LEO 41.877 113.537 “20-27 -1002.71 LPPd 4A&s 3S? 120.864 ~20,887 -1063.7 1972 51.268 129.829 ~21.511 -1127.8 LOPS GG e947 139,348 ~“2B1+674 ~1194.8 LP94 61.329 150.459 ~“RB1L679 -1257.4 Lees 68.593 162.703 ~RBL.775 -1343.77 LEPS 73.062 L77.A7? ~15.494 ~1429.95 L997 F26974 158,883 “21.821 -1496.469 Le93 7B.278 154.949 ~24,375 -1555.14 LES? 84.371 157.258 “25.392 -1607.3 2000 93.433 163,098 “25.058 -1655.43 REVGF = general fund revenues (million $) E99S = total state expenditures (million $) E99SRPC = real per capita state expenditures FUND = sum of the fund balances (million $) Note: Measured as change from the base case. IV-43 Table IV. 22. FISCAL SECTOR IMPACTS OF ALPETCO (ALCAN CONSTRUCTION BEGINNING IN 1984) REVGF E99S ES9SRPFC FUND 1977 O. OQ. Oo. O. 1°78 Oo. Oo. O. Oo. 1979 14906 Oo. -7.12 1.906 1980 11.56 19.561 ~8.468 “4,654 L981 32.394 65.484 “19.897 -32.995 1982 994187 191.904 31.628 ~-151.217 1983 674979 260.343 46.354 23.176 1984 53.414 304,596 88.8283 550.008 1985 17.948 186.455 28.738 ~-701.281 1986 23.895 141.603 16743 -804,957 1987 30.874 125.999 “10.473 -887.012 1983 324199 121.724 “12.836 ~963.4699 1989 . 34.221 124,579 “13.555 ~1040.89 1LE9O 366666 131.803 “14.246 -1122.15 1991 39.703 140.718 “14.542 ~1209.42 1992 43.061 151.573 ~“L4.951 -1301,17 1993 AGA PSL 163.091 ~L4.992 ~1400.46 1994 49.338 175.456 “14,903 ~-1509.5 1995 54.332 191.297 “14.932 -1627, 1996 S6e15 209.176 “B.2592 ~1758.89 1997 52.847 192.277 1878.19 1998 54.705 190.68 —1993.85 aaye 59.055 195.828 “18.165 -2109.465 2000 173.531 204.941 “174709 ~-2119.1 REVGF = general fund revenues (million $) E99S = total state expenditures (million $) E99SRPC = real per capita state expenditures FUND = sum of the fund balances (million $) Note: Measured as change from the base case. RT98 RTIS IPF1l RFDSN Note: 1977 1978 1979 1980 1?8t 1982 1983 1984 1985 1986 1987 1988 Les? 1990 1991 1992 1993 1994 1995 L994 1997 1998 1999 2000 i} Ml Measured as change from the base case. IV-44 Table IV.23. REVENUE IMPACTS OF ALPETCO (ALCAN CONSTRUCTION BEGINNING IN 1980) RT?8 35.537 44,643 41.681 30.044 48,855 $3417 70.648 77+164 83.648 903737 98.275 106.62 113.654 123.649 132.796 139.266 148.464 159.564 170.923 total taxes (million $) personal income taxes (million $) earnings on the permanent fund (million $) federal transfers (million $) RTIS oO. oO. 0.769 36549 10,927 19.802 24,33 21.317 13.31 10,244 9.258 Y.T77 9.529 10,09 10.782 11.563 12.436 13.42 14. 14.42% 13.75 13.753 14.197 14,682 ~21.663 ~37 +194 ~47.135 ~53+402 57.948 ~62,.052 “66.067 ~7O.19 “FAAS? ~78.948 ~83.635 ~88.713 ~94.064 -100.026 ~104.748 ~108.86 “112.51 RFOSN 15.53 15.046 15.313 15.897 16.4656 17-486 18-426 19.413 20,515 21.711 23.09 224603 226946 23.604 24.476 25.154 Iv-45 Table IV.24. REVENUE IMPACTS OF ALPETCO (ALCAN CONSTRUCTION BEGINNING IN 1984) RT938 RTIS IPF. ED A7 Oo. O- 1978 Oo. Oo. 1979 0.961 0.749 1980 6,939 3.547 1981 18.842 10,312 1982 35.028 19.563 1983 44,016 24,189 1984 41.455 21,354 1983S 30,47 13.555 L996 49.875 10.67 ~4P 09 193? 64.743 9.694 56.347 193ea 71.474 9.517 ~62.091 1989 77.868 9.846 ~87 459 1990 84.341 es “72.863 1971 91,507 11.15 ~73,551 1P92 99,128 ee “84,59 1993 107.574 12.902 ~P1.082 1994 114.722 13.942 “98, 1995 124.35 15.143 7105-685 17996 134.11 15.239 L999? 140.573 14.36 L993 156.024 14.39 L9?9 161.043 14.881 ~139.569 2000 172.526 15.416 0.001 RT98 = total non-petroleum taxes (million $) RTIS = personal income taxes (million $) IPFl = earnings on the permanent fund (million $) RFDSN = federal transfers (million $) Note: Measured as change from the base case. RFDSN 1é. 248 20.598 18.23 16.137 15:674 15.887 16.46 17.257 224706 24.197 23.755 24.166 24.919 25.896 26.68 Iv-46 is reversed at the end of the simulation only because the withdrawable balances in the permanent fund have been eliminated in the delayed Alcan case.) Another measure of the effect on the fiscal impact of Alpetco of delaying the Alcan construction can be seen by examining the relative impacts of the Alpetco project on the general fund current account as measured by the difference between general fund revenues and general fund expenditures (SIMP). Table IV.25 compares the effect on the impact of delaying the Alcan. In all but the year 2000, the negative impact of the Alpetco project is greater when the Alcan is delayed. By 1999, the delayed Alcan impact is over two times the other case. Delaying the construction of the Alcan gasline increases the impact on the major economic variables of the Alpetco project. Both the popula- tion and employment impacts are greater throughout the period. The delay leads to greater negative impacts on the state's fiscal sector. The nega- tive impact on the current account of the general fund is greater. The drawdown on the permanent fund which results is also greater in the case where Alcan construction is delayed. This has the effect of reduc- ing the earnings from the permanent fund and further accentuating the drawdown of the fund balance. Iv-47 Table IV.25. EFFECT OF ALCAN TIMING ON GENERAL FUND CURRENT ACCOUNT ALCAN CONSTRUCTION ALCAN CONSTRUCTION 1980 ; 1984 SIMF SIMF L977 Oo. alli 1977 oO. 1978 o> 1978 O> 1979 1.906 1979 1.906 1980 ~&s 576 1980 ~6.559 1984 27.338 198 “28.341 1982 ~L12-449 1982 “118.222 1°83 ~1L64,99 1983 i Fd 26 1784 ~221.891 1984 ~2246,832 198s ~142.008 | L985 ~toles7o 1786 ~89.527 ' 1986 “103.678 1987 “GAGS? 1987 ~82.06 i983 ~SE. 4135 1988 -76s4638 198? W574 366 LES? PF eAPL 1990 ~S8,89S 1LE9O ~O1.257 199) “50.989 L991 ~BS.272 1992 ~64,103 1P?2 “92.744 1993 66.987 L993 ~99 289 1994 272660? LPP4 ~1LO9.03& “1995 ~76.37 1995 ~117.501 1995 “OS. 173 LP9S -131.889 199? ~&7 2739 1997 ~L1LP.293 1998S -38.454 1998 ~1L15.566 L999 ~G2.156 1999 “115.8 2000 ~4ABS 1S 2000 —~9.4 49 SIMP = general fund revenues minus general fund expenditures (million $) Note: Measured as change from the base case. Iv-48 IV.G. Sensitivity to the Regional Location of Alpetco Employment In Section III, all of the Alpetco construction and operations employ- ment was assumed to reside in the Southcentral region. Past experience provides a counter-example for this; development of oil fields and major construction projects have had headquarters employment located in Anchorage. Depending on the location of the Alpetco project within the Southcentral region, some direct Alpetco employment may reside in Anchorage. Because there is uncertainty concerning the location of the Alpetco employment, the importance of this assumption to the impacts found in Section III should be examined. In this section, we will compare the impacts found in Section III with the impacts found from the Alpetco project when the employment is allocated between Anchorage and the Southcentral region as shown in Table IV.26 where 25 percent of employment is assumed to reside - in the Anchorage region. Only the location of Alpetco employment is assumed to differ between these cases. When only the location of Alpetco employment is assumed different, the regional impacts of Alpetco differ. Table IV.27 shows the change in employment impacts of these altered regional allocation of employment assumptions. The change increases the employment impact in Anchorage and reduces it in the Southcentral region. In 1979, the Anchorage em- ployment impact is increased by 81.2 percent, while the Alpetco impact in the Southcentral region is decreased by 24.8 percent. By 1990, the increase in the Anchorage impact is only 20.4 percent, while the decrease in the Southcentral region is 21.3 percent. The reduction in direct LOCATION OF ALPETCO EMPLOYMENT IN SENSITIVITY ANALYSIS 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Iv-49 Table IV.26. Construction Southcentral Anchorage 338 112 975 325 2,625 875 2,625 875 2,625 875 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Operations Southcentral Anchorage 37 13 37 13 37 13 37 13 37 13 1,444 481 1,444 481 1,444 481 1,444 481 1,444 481 1,444 481 1,444 481 (percentage changes in level of regional impact) 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 IVv-50 Table Iv.27. EFFECT OF THE LOCATION OF EMPLOYMENT ON THE ALPETCO EMPLOYMENT IMPACT Southcentral Anchorage ++ tetet tett+ 81.2 69.2 72.2 41.8 32.8 13.4 19.0 21.8 22.5 22.2 21.7 20.4 State ++ t++ttt wonnne t+etet aAraANW oo . . W © anooFf DAnNwWON IvV-51 construction employment in 1981 accounts for 47 percent of the change in the Southcentral impact; the increase in direct employment accounts for only 28 percent of the change in impact in Anchorage. By 1990, the reduc— tion of direct project employment accounts for 77 percent of the change in impact in Southcentral, and the increase in direct employment accounts for only 24 percent of the change in Anchorage. These differential impacts are a result of the higher multipliers found in the Anchorage region. More of the increased demand for goods and services can be met in Anchor- age than in the Southcentral region, so that the increased demand associated with this Alpetco employment has a greater impact on Anchorage. Because of these differential secondary effects, shifting some of the Alpetco employment to Anchorage has the effect of increasing the statewide employ- ment impact of Alpetco. By 1990, the employment impact of the Alpetco project is increased by almost 10 percent because of the locational change of 25 percent of Alpetco employment to Anchorage. Table IV.28 shows that personal income experiences the same pattern of effects as employment. (percentage changes in level of regional impact) 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Iv-52 Table Iv.28. EFFECT OF THE LOCATION OF EMPLOYMENT ON THE ALPETCO PERSONAL INCOME IMPACT Southcentral Anchorage ++ tee et tetett 49.3 47.4 52.0 33.3 26.0 12.3 17.2 n ct o ct oO teetst WNHNN WW tt eet NN UU . uw UPWAO Nr @oOUN V. Sensitivity of the Results to the Structure of the Model V.A. Introduction The estimated impacts of the Alpetco project have been shown to be affected by the assumptions made about the exogenous variables in both the base case and Alpetco case. The use of an econometric model to esti- mate impacts of major changes in the economy provides another set of as— sumptions on which the results are based. The structure relationships describing the economy are assumed to remain constant through the period in which the simulations are made. These relationships describe the reaction of the economy to changes in the exogenous variables. The assumptions described by the structure of the model are subject to less uncertainty than those which describe the future levels of exoge- nous variables. One potential area of variability lies in the assumption that the economy will react to the increased employment, income, and state revenues generated by the Alpetco project as it does to changes in these variables generated by other exogenous sectors. In this Section, we will examine the sensitivity of the impacts found in Section III to two of these responses. _This Section will examine the importance of induced increases in state expenditures and the induced increase in migration to the impacts of the Alpetco project. v-2 V.B. Sensitivity to the Induced Migration Response Population grows because of natural increase, when births exceed deaths, and through inmigration. Migration is the link between the growth of the economy and the growth in the population. Migration into Alaska is affected by changes in employment in the state and changes in the level of Alaska real per capita disposable personal income relative to the U.S. as a whole. The Alpetco project, because it affects these variables, will affect migration. This induced migration leads to in- creases in state expenditures and further growth in the economy. The main question concerning this induced effect is whether it is as strong in response to major short-run increases in these variables as historically. We cannot answer this question, but we can test the importance of the induced migration to the results found in Section III. We will test, this effect by making the extreme assumption that there is no migratory response to the Alpetco project; that is, total migration with the Alpetco project will be assumed to be the same as in the base case. Table V.1 illustrates the effect of constraining migration on the aggregate indicators of total employment (EM99), population (POP), and personal income (p1).+ The employment impact is less in this case throughout the period. The important point is that the reduction in employment from the basic Alpetco case is relatively small. By 2000, ~ Because the elimination of the migration equation changes the simultaneity of the MAP model, slight differences between cases result which are attributable to the model solution algorithm rather than sub- stantive differences. Table V.1. EFFECT ON AGGREGATE INDICATORS OF HOLDING MIGRATION TO BASE CASE LEVELS EMS? POF Fit 1977 ~O.015 0. 0.514 1978 0.003 Oo, “0.032 1979 ~0.072 ~1.944 ~S.414 1980 -O.137 ~7.015 “5-793 1981 ~0,271 -20.21 j 047 1982 ~O,476 29.963 Bes 1983 -O.71 —-36.749 “352914 1984 -0.84 31.333 ~37.738 19835 -O,.805 —-26.562 ~40.883 L986 ~0.B807 —~24.896 ~44,18 1987 -0,806 ~24,.509 ~4& 059 1988 -0.825 —24,585 ~50.55 1989 -0.845 -24,.889 “34,262 1990 ~O.873 25.234 59.4654 LOL ~O.966 25.661 ~69 895 1992 -1,036 -26.081 ~79 ADS 1993 ~1.162 -24.582 “P93 .94S 1994 “1.294 27,115 -141.41 1995 1.411 ~27,781 ~-127.504 L996 mi eid —26.187 ~-100,918 L997 ~0.827 ~25.59 “94.371 1998 ~O.741 are ee) ~95.023 L999 ~0.773 25.265 -103,246 2000 “0.669 —~24.966 100,105 EM99 = total employment (thousands of employees) POP = total population (thousands of people) PI = personal income (million $) Note: Measured as change from the Alpetco Case. v-4 the employment impact of Alpetco without induced migration is only 669 less than the regular Alpetco case. This is a reduction of 8.9 percent in the employment impact of Alpetco. During the 1980s, the reduction is between 7 and 8 percent. The effect of holding migration constant is to eliminate the population impact of the Alpetco project. With no change in migration, there will also be no change in natural increase occurring during the period. The effect on the personal income impact. of holding migration at its base case level reflects the changes in employment which result. The personal income impact of Alpetco is somewhat less when induced migration is eliminated. By 2000, the personal income impact of the Alpetco project would be $100.1 million less if induced migration was eliminated; this is a reduction of 12.1 percent in the impact of Alpetco. The effect on the real disposable personal income (DPIR) impact is com- parable (see Table V.2). The elimination of the migration induced by the Alpetco project af- fects state reyenues and expenditures disproportionately. The effects on these variables are shown in Table V.3. The impact on general fund revenues (REVGF) is reduced considerably because of the constraint on migration. In 2000, the increased revenues which result from Alpetco are $45.0 million less with the elimination of induced migration. This reduces the impact by almost 48 percent. The impact is reduced by more that 60 percent in 1990, being $26.1 million less than the impact with Table V.2. EFFECT ON REAL DISPOSABLE PERSONAL INCOME OF HOLDING MIGRATION TO BASE CASE LEVELS DPIR RET L977 0,159 Oo. 1978 ~O0,021 0,002 1979 / ~O.987 0,086 1980 -1.955 -0.065 1984 ~4,391 ~O.114 1982 ~F 6603 ~O.187 1983 ~10.602 “O,294 1984 ~LO.477 -0.33 1985 ~LOVSF? “O34 L986 ~10.592 ~O, 371 1987 ~10.709 ~O.3P2 1988 ~11.027 0.425 1989 ~11.434 0.447 L990 ~11.834 L994 “13.197 1992 : ~14.047 1993 ~“L5.789 1994 ~17,434 L995 ~19.093 1996 ~14.804 LOD? ~13.603 1998 “12.974 0.652 LPO -13.52 ~0,4688 2000 “12.47 “0.678 DPIR = real disposable personal income (million 1967 US $) RPI = relative price index Note: Measured as change from the Alpetco Case. Table V.3. EFFECT ON STATE FISCAL VARIABLES OF HOLDING MIGRATION TO BASE CASE LEVELS REYGF E?9S E99SRFEC FUND 1977 Oo OQ; i Oo. Oo. 1978 0.016 0. “0.009 0.015 1979 “1,006 Oo. ee a —~O.9P1 1980 ~3.829 ~1.477 16.161 rie oA aoe 1981 “11.102 “3,333 45.188 12,813 1982 -17-361 “8,079 7FO47PAD “26.184 1983 ~224782 “15,329 91.194 ~40.348 1°84 1.618 ~22,.515 F3+103 “48.113 1985 “20,018 | -19,3698 57.4504 ~Sh2094 1786 -20.422 “17.954 33+369 ~G4.961 1987 21.471 “18.097 51.98 ~F4,.559 1988 24766 so 92+173 ~85,.199 1989 “24,412 ~19.784 G22 28 “96.547 1990 “26.113 ~20.982 “108,834 1991 -28.122 Pd 3 B33 i ee 1992 “30.424 “25,401 4s 441 “135.258 1993 -32.86 ~28.016 84.748 -148.93 1994 ~35.661 ~31.899 4.748 ~162.254 1995 ~38.4687 ~3h.43 S449 ~-174.906 1996 ~39.235 40.668 502408 ~184,828 1997 oases ~S2P9PS SO+.P14 ~201.602 1998 ~40.339 ~30,.805 50.928 eeeehL7 L999 ~42.569 ~SO.a07, 30+644 ~245.449 2000 ~45,027 “32.145 49.552 -270.2464 REVGF = general fund revenues (million $) E99S = total expenditures (million $) E99SRPC = real per capita state expenditures FUND = sum of fund balances (million $) Note: Measured as change from the Alpetco Case. migration. The influence on expenditures is not so great. The total state expenditures impact (E99S) is $32.1 million less by 2000 because of the elimination of the migration effect. In 1990, the expenditure impact is only reduced by $21.0 million. This is because personal in- come per capita, one of the determinations of state expenditure growth, is higher if there is no induced migration. As a result, real expendi- tures per capita significantly increase (E99SRPC). This differential effect on the revenue and expenditure impacts results in a reduction in the level of the fund balances (FUND) as a result of the constraint on migration. In the case with no induced migration, the fund balances are reduced by greater amounts than in the regular Alpetco case. By 2000, the reduction in the fund balances as a result of the Alpetco project is 16.3 percent greater when migration is eliminated. Table V.4 shows the effect of no induced migration on state revenues. Total non-petroleum taxes (RT98) and federal transfers (RFDSN) are lower in this case because their determinants, personal income and population, are lower. The elimination of any increase in population associated with Alpetco completely eliminates federal transfers as a source of additional revenues. The reduction of the fund balances below the levels associated with the Alpetco project with induced migration also reduces the impact on earnings on the permanent fund below the levels found in Section III. These revenue reductions cause further decreases in the fund balances which reduce the earnings on these balances even more. 1977 L978 1979 19380 1°81 1982 L?83 1987 1988 198? LE9O 1991 1992 1993 1°98 L999 2000 RT98 Table V.4. EFFECT ON REVENUES OF HOLDING MIGRATION TO BASE CASE LEVELS RT9S -0.004 0.012 ~0.063 ~O.211 “0.383 0.567 ~O.919 “1.126 “1.082 “1.315 ~1.432 ~1.492 “1.631 ~1,.738 “1,956 24304 “2.67 ~3,221 “3.812 ~3.903 “3.05 -~2.876 ~2eP4l -3,.132 RTIS 0.007 ~O.014 0.017 0,185 0.377 0.413 0.318 0,183 0.031 ~O.031 ~0.053 -O,098 -~O.13 0 -O8. 0.533 “06775 “1,022 ~O.888 ~O,.514 0.385 —~O.413 ~O.409 “7.618 ~B.54 ~9.468 ~10,.425 ~11.358 ~12.244 ~12.938 ~14.113 “15.549 ~17.183 total non-petroleum taxes (million $) RTIS IPFL RFDSN Note: personal income taxes (million permanent fund interest (million $) federal transfers (million $) $) Measured as change from the Alpetco Case. RFOSN Os 0,003 ~0.943 ~3.502 ~10,401 “15.919 ~20.15 ~L7.7A4l1 -15.529 “15.045 “15.317 “15.896 “146.652 17.482 “18.421 “19.407 -20.51 “21.705 ~23.08 “22-596 “22.937 “23.597 ~2B4.4&?7 “25.145 The final measure of the effect of eliminating induced migration on the state's fiscal sector is shown in'Table V.5. The impact of the Alpetco project on the current account of the general fund is negative. Elimina-— tion of the population response to Alpetco increases this negative im- pact. The negative impact on the difference between general fund reve- nues and expenditures (SIMP) in 2000 is over 50 percent greater when the population impact is eliminated. v.C. The Sensitivity of the Results to the Induced Change in State Expenditures Generally speaking, increased economic activity leads to increases in the level of state expenditures. It is possible that state govern— ment would not respond to changes in the level of economic activity resulting from the Alpetco project. We will test the importance of induced state expenditures on the impacts of the Alpetco project by examining the extreme case where there is no state expenditure response to the Alpetco project. State expenditures will be held at their base case levels. This constraint on state expenditures has two effects. First, the induced effect of state expenditures on economic growth will be eliminated so that the impact on the level of economic activity will be less when Alpetco generates no state expenditure increase. Secondly, with the Coneteasie ||| Phe Alpetco project should positively impact the state's fiscal sector. The Alpetco project produces positive impacts on revenues in any event and, because of the constraint, there will be no increase in state expenditures over the base levels. v-10 Table V.5. EFFECT OF HOLDING MIGRATION TO BASE CASE LEVELS ON GENERAL FUND CURRENT ACCOUNT AL2@OER ALSS_ER 1977 0. ~O-+ L978 O. 0,015 1979 1.906 OF? 1980 ~&6576 ~9 307 1981 27.338 ~36.43 1982 -112.469 125.839 1983 ~164.99 “179.156 1984 ~221.88) “229.642 1985 -142.004 “149.985 L?84 -89.527 “98.39 L987 ~64,957 ~74.553 1988 ~58.613 69.254 LPB9 ~S7 +366 “68.715 1990 ~S8.898 ~71.185 LPPL ~G0.989 74,148 L992 ~64.103 ‘7 3 1993 ~666987 “80.662 1994 -72.607 ~85.935 L895 ~7b 637 -89.029 LPPS ~B5.173 ~P5.09S 1997 -67 4739 ~84,.51 L998 ~S8.454 “78.96 1999 -~G2.156 W752 S06 2000 ~48.13 F209 26 AL2_ER ALS5_ER Alpetco case Alpetco case with no induced migration nou Note: Measured as change from the base case. v-11 The total employment (EM99) impact, as shown in Table V.6, is less when state expenditures are held constant. By 2000, the employment impact is 2,358 less than the impact in the unconstrained Alpetco case. El iwination of induced state expenditures decreases the impact on total employment of the Alpetco project by 31 percent. The effect on the population (POP) impact is similar to the effect on employment. By 2000, the population impact is 7,615, or 31 percent less than the impact in the unconstrained case. The effect on the personal income (PI) impact of the Alpetco proj- ect follows the pattern of the employment effect. By 2000, personal income is $257.9 million less than in the regular Alpetco case with its induced state expenditure effect. As with employment and population, the personal income impact also experiences its largest differences during the construction period. In 1984, the personal income impact is $410.9 million less because of the constraint on state expenditures. Table V.7 shows that real disposable personal income (DPIR) follows the same pattern as personal income impact. The largest difference between the two Alpetco cases occurs in 1984, when the impact of the Alpetco project on real disposable personal income would be $79.7 million less if state expenditures did not increase. The effect of the elimination of the state expenditure impact of Alpetco on the state's fiscal sector is shown in Table V.8. Total state expenditures (E99S) are equal to their base case levels. Be- ginning in 1984, the impact on the general fund revenues (REVGF) is V-12 Table V.6. EFFECT ON AGGREGATE INDICATORS OF HOLDING STATE EXPENDITURES TO BASE CASE LEVELS EM?? FOF MIGNET FI L977 O- Oe O. Oo. 1978 Os oO. O- 0. 1979 Os Os 0-6 O- 1980 -0.68 -0.886 ~0.886 ~23.937 1981 ~2,168 “R931 ~R.O01 ~85.523 1982 “32945 “8.174 Se OPP BAD LPT? 1983 ~8,123 ~11.489 ~S3s1LP -349.953 1984 ~9 239 “14.262 “2.042 ~410.93 1935 +734 ~“LO.SP4 4.275 ~264.484 1986 -3.843 ~8.705 2-247 189.613 1987 ~3.125 ~8. 0.928 161.641 1988 24 BIS -7.803 0.358 ~-157.379 19a? “2.832 ~7 825 O.11 ~164-.30? 1990 2.881 7.939 0.004 -176.66 1991 “2.973 ~B. 10? ~O0,.0358 193,051 1992 ~3.O9? ~8. 312 “0,093 -211.914 LEPS ~3.24 ~8.547 “QO,121 ~233.703 LPP4 ~3.401 ~S,B519 ~O.152 9.414 L9PS ~3.599 “9,155 “O.209 290.902 1994 © ~3s19S “8.719 0.575 -276.402 L997 ~E4 749 “8.19 ~252.555 1998 “2.534 ~PsGOS ~24Gb.5 LE99 2.453 ~FeP72 ~252.434 2000 ~2.358 “72615 -2E7.934 EM99 = total employment (thousands of employees) POP = total population (thousands of people) MIGNET = net migration (thousands of people) PL = personal income (million $) Note: Measured as change from the Alpetco Case. V-13 Table V.7. EFFECT ON REAL DISPOSABLE PERSONAL INCOME OF HOLDING STATE EXPENDITURES TO BASE CASE LEVELS DP IR RPI 1977. oO. oO. 1978 oO. oO. 1979 Oo. Oo. i 1980 ~5,.354 ~O,847 | 1981 “1726461 “O75? 1982 “49 679 “1.999 1983 ~68.55 ~2.764 1984 “79.785 ~3. 333 1985 ~H0.006 ~2,125 1986 “34,592 ! 1987 28.743 -1,225 igs “26.988 ~Lsd4l i 1989 ~B7.169 ~L.12 1970 ~28.1 “1.152 LPP 4 ~29 593 ~LsAPi 1992 ~31. 258 ~1,244 1993 ~33.231 ~1.301 L994 ~B5.416 ~1.363 1L9?S ~38.166 ~1.432 1996 ~34.989 ~1,.289 1997 ~30.877 ~1.129 1998 “28.97 ~1.056 LEE? “28.4604 ~1.03 2000 “28.119 “1,001 DPIR = real disposable personal income (million 1967 US $) RPI = relative price index Note: Measured as change from Alpetco Case. v-14 Table V.8. EFFECT ON STATE FISCAL VARIABLES OF HOLDING STATE EXPENDITURES TO BASE CASE LEVELS REVGF E99S ES 9SREC FUND 1977 O- Oo, oO» Os L973 QO. Os 0. Oo. 1979 Oo. Oo. oO. O- 1980 —-O.7355 ~19,561 “12.783 17.459 1981 2-331 ~64.618 ~36,423 752169 L982 “32637 7186. 271 ~93. 183 242.571 1983 -3,936 9 AZ3.727 1984 34648 737 O12 L?85 26.853 ~176.789 944A. 902 19°86 47.945 ~-126.351 1107.15 198? 63.035 -108.46 1267.85 1988 75-423 -105.001 1437.62 1989 87,248 ~-107.562 a 4S 1790 99.454 -113.537 1991 112.572 -120.86 1992 126.828 -129,82¢9 28, 81 a L993 142.482 ~-139.348 -28.897 1994 IS¢9.615 -150.459 =2 ? 1993 178.356 -162.703 34 FE 1 1996 200.016 -177.477 “$1,689 3535.86 1997 226.346 -159.883 ~24.84 3904.82 1993 253.245 -154.949 22.045 4296.82 L999 280.752 -157.258 “20.677 4718.27 2000 SO?.815 -163.098 “2023872 S173.97 REVGF = general fund revenues (million $) E99S = total expenditures (million $) E99SRPC = real per capita expenditures (1947 US $) } FUND = sum of permanent and general fund balances (million $) Note: Measured as change from the Alpetco Case. v-15 positive because of the expenditure constraint. By the end of the period, this difference is substantial; in 2000, the impact of the Alpetco project is greater by $309.8 million, or over 225 percent be- cause of the constraint on expenditures. This effect is primarily a result of the differential impact on the fund balances between the two cases. The fund balance (FUND) impacts of the. expenditure-constrained Alpetco case is larger throughout the impact period. By 2000, the fund balance is $5.2 billion greater in the constrained case. This provides a positive fund balance impact of $3.5 billion in 2000, compared to a negative fund balance impact of $1.7 billion which results when state expenditures increase as a result of the Alpetco project. The positive fund balance impact has major effects on the differ- ential effect on revenues between these cases. Table V.9 examines the relative effects of the expenditure constraint on different revenue sources. The total non-petroleum taxes (RT98) and federal transfers (RFDSN) impacts are less when the induced increase in state expenditures from the Alpetco project are eliminated. This is because the major determinants of these revenues, personal income and population, are also reduced because of the expenditure constraints. These differences are small; the major difference between the cases is in the earnings from the permanent fund balance. With no increase in state expenditures, the impact of the Alpetco project on the permanent fund balance is positive throughout the period. This results in positive impacts on the permanent fund earnings (IPF1). By 2000, the Alpetco project has a L977 1978 1979 1980 1?81 i?&2 1985 1986 1°87 1983 LPB? LEPO 1991 LP92 1993 L994 LP9S 1996 L997? 1993 LES? 2000 RT98 RTIS IPFL RFDSN Note: nououdu V-16 Table V.9. EFFECT ON STATE REVENUES OF HOLDING STATE EXPENDITURES TO BASE CASE LEVELS “14.492 “14.181 9.238 ~6.838 -&.033 3285 ~&s244 “6.712 “76319 “8.011 ~3.823 “9s 7B4 “10.457 ~9.734 “9.015 “B.875 9.067 ~3.525 ~G6.52 ~B8. 549 “7.615 “4.979 “3.725 ~3, 305 -3.275 “3.428 ~3.48 “31994 “4.36 ~4.78 ~S. 261 ~3-428 “499 “4,13 “4,543 “4,595 total taxes (million $) personal income taxes (million $) permanent fund interest (million $) federal transfers (million $) IPFA O. 1.222 5.262 14.93 33.161 26991 66.143 7 fed 88.749 100.633 113.502 127.601 143.083 160.134 178.187 198.847 221.599 246.81 272.637 300.077 329.579 Measured as change from the Alpetco Case. RFIISN Oe O. O. ~0.443 ~1-S1 “4.343 ~&.408& ~B.072 ~6e193 “226 “3.001 ~5 6047 “S237 “3 eSOL “S823 ~66188 “Oe 597 -7.062 ~7eG1 ~7 6526 ~7 +346 ~7 2366 -7 653 “7673 vV-17 positive impact on the permanent fund earnings of $329.6 million when expenditures are constrained, compared to a negative impact of $112.5 mil- lion when expenditures are not constrained. After 1983, the absolute value of the positive impact on the permanent fund earnings is greater than the absolute value of the negative impact on the other revenues and general fund revenues are positive. Table V.10 indicates the relative effect of eliminating any increase in state expenditures induced by Alpetco on the current account.of the general fund. The impact of Alpetco with no increase in state expenditures is to increase general fund revenues more than expenditures and make this difference (SIMP) positive. In the unconstrained Alpetco case, the impact is negative throughout the period. V.D. The Sensitivity of Results in Both Induced Migration and State Expenditures It is worthwhile to examine one final sensitivity case in which both the level of state expenditures and the amount of net migration are held constant in the presence of the Alpetco project. This case is interesting because the combined effect of holding both of these variables constant is not the simple total of the individual effects. There are significant interactions between these two variables. In Table V.11, one sees that a significant reduction in impact em- ployment (EM99) results if state expenditures and migration are assumed to remain unchanged at their base case levels. The reduction in effect v-18 Table V.10. EFFECT OF HOLDING STATE EXPENDITURES AT BASE CASE LEVELS ON GENERAL FUND CURRENT ACCOUNT AL2_ER ALS6ER 1977 oO. O- 1978 oO. 0. 1979 1.906 1.906 1980 ~6:576 10,883 L951 ~27.338 30.371 1982 ~L12.449 34.934 1983 “LEAS? 65-149 1984 “221.9881 61.406 1985 ~142.006 45.885 1984 “89.527 F2stea 19°87 ~ GAPS? 95.742 1988 “8.613 L1li.ise 1989 “57 +366 126.47 LP?O ~8 89S 142.525 Led 60.989 160-188 1992 ~64.103 179.474 L9?S 66 98? 200.905 1994 724807 222-2538 L995 ~76.37 248.686 1996 “85.173 274.98 1997 301,224 1998 333.546 1999 369.283 2000 407.576 AL2_ER = Alpetco case ALS6 ER = Alpetco case with no induced increase in state expenditures Note: Measured as change from the base case. vV-19 is only slightly larger than if only the level of state expenditures were held constant, indicating that a significant amount of the induced migra- tion results from the increased level of government expenditures. Population (POP) and net migration (MIGNET) are unchanged from the base case so that their entries in Table V.11 indicate their respective differences from the basic Alpetco simulation, as well as the basic Alpetco simulation results themselves. The larger relative decline in population implies that in this case, the employment rate or the labor force parti- cipation rate, or both, are increasing relative to the no Alpetco case. The lower level of employment implies a reduction in personal in- come (PI) of similar magnitude from the full impact Alpetco case. Since the population is smaller, however, and the employment rate has increased, personal income per capita is higher than in either the base case or the full impact Alpetco case. General fund revenues (REVGF) are initially negatively affected by the state expenditure and migration constraints as shown in Table V.12. After the construction phase of the project, revenue generation is in- creased as a result of the constraint. Table V.13 indicates the major components of the change in general fund revenues. Federal transfers (RFDSN) and non-petroleum taxes (RT98) being lower because of a lower population account for the initial negative general fund revenue effect. In 1985, the growth in permanent fund interest (IPF1) becomes significant enough to overcome the effect of revenues lost because of smaller population. v-20 Table V.11. EFFECT ON AGGREGATE INDICATORS OF HOLDING STATE EXPENDITURES AND MIGRATION TO BASE CASE LEVELS 1977 1978 1979 1980 L981 1982 1°83 1984 L985 1986 1987 1°83 1989 1990 1991 1992 L993 1994 L995 1996 1997 1998 1999 2000 EM99 POP MIGNET PL i u EMS? -0,015 0.003 -0.072 “0.771 2655 ~6.267 ~B.406 “9.576 ~6,055 ~4.16 ~3.462 -3.24 “3.195 “Sead? ~3.41i ~3.552 ~3+761 ~3.984 ~4,198 “345 -3,.053 -2.845 -2.759 ~2,+619 -29, 963 ~346+749 ~31.333 -~?6.54 2 -24.896 24.509 —-24,585 ~24,88? 25.234 ~-25.661 -26,081 -24,.582 ~27,115 ~27.781 ~24,187 29007 ~25.33 “25.265 ~24.,966 total employment (thousands) total population (thousands) net migration (thousands) personal income (million $) MIGNET Oo. O. ~1.944 “4972 “12.85 ~B.78 “S411 6.99 3+ 906 2.436 0.986 0.432 0.151 0.077 ~0.027 -0.03 “O11 ~O.144 -O.27 2.008 0.914 0.542 0,332 0.562 Note: Measured as change from the Alpetco case. EY 0.514 0.032 ~3.414 ~27. ibe ~9S, 555 “264. el ~3463.215 ~418.586 “281.98 ~205.551 ~182.348 —Gi«77s ~189.586 ~204.859 HE27 APS ~250.441 ~250.68 “315.875 “352.293 ~318.527 ~29B,109 H~2Fh PAS ~SOS.F02 ~312.344 EFFECT ON STATE FISCAL VARIBLES OF HOLDING STATE EXPENDITURES AND MIGRATION TO BASE CASE LEVELS V-21 Table V.12. ES9SREC Oe “0,009 Seli 2+182 2.86 ~42.105 ~54. 701 ~92,362 ~31.63 “S429 3.40? 9933 11,895 13.171 13.827 14.398 14.463 14.728 14.844 9.386 15.843 18.452 19.508 19.321 REVGF E9?s L977 O- Oe 19738 0.016 oO. Le79 ~1.006 O- 1930 “4,113 ~19.561 1981 ~11,841 ~44,4618 1°52 “18.488 -186.271 1983 ~20,01 -253+982 1984 “7siSS -300,.372 1985 13.337 ~-176.749? 1986 3265 ~126+3351 1937 43.974 -108.46 1933 S6+427 -105,001 1989 66.187 ~107.562 LPPO 76-315 -113.537 LEPL 87.013 ~-120,.86 1992 98,554 -129.829 1993 111.292 139,348 LE94 L25-036 150.459 1993 140.084 -162.703 1996 159.53 “177.477 1997 183.24 ~158.883 1998S 206.294 ~154,.949 LEO? 229.572 -157.258 2000 0413 -163,098 REVGF = general fund revenues (million $) E99S = total expenditures (million $) E99SRPC = real per capita expenditures (1967 US $) FUND = Note: Measured as change from the Alpetco case. FUND oO. 0.015 ~O.991 13.038 50.99 214.727 428.719 697.84 871.309 1017.23 1159.94 1309.73 1471.45 1648.59 1842.98 2055.96 2292.23 2551.26 2836.36 3154.18 3478.2 3821.27 4189.42 4587.45 sum of permanent and general fund balances (million $) V-22 Table V.13. EFFECT ON STATE REVENUES OF HOLDING STATE EXPENDITURES AND MIGRATION TO BASE CASE LEVELS RT?S RTIS IPF AL RFIISN 1977 ~0.004 oO. 0. Oo, 1978 0,012 0.007 Oo. -0.003 i979 ~0.063 ~0,014 0,001 ~0.943 1980 -O.496 -0.222 -0.089 -3,502 1981 71987 -0.966 0.913 ~10,401 1?82 5-695 ~3.172 4.269 -15.919 1983 “11.489 “52078 15.031 -20.15 1934 “LAL &74 ~7 +866 30,01 ~17.7421 1985 ~14,.358 Sees 48.849 ~15,529 1986 ee ae ~4.748 0.991 ~15,.045 1987 ~7 e334 ~3.489 71.206 =15.317 1988 ~S+659 -~3.108 81.196 ~15.896 i 1989 -6+474 ~3.096 91.481 -16.4652 1990 ~bs975 ~3.243 103.001 ~17.482 1991 “FSG? ~3.549 115.401 -18.421 1992 ~B.371 ~3.925 129,008 -19.409 1993 9,235 4.375 143.987 -20.51 1994 ~10.347 ~4.929 159.754 “21.705 1995 “11.613 ~“SsS25 177.888 ~23.08 199S ~12.144 ~SeS1 197.844 “22.596 1997 -10.917 ~4.878 220.092 -22.937 1993 ~10.332 -4.529 242.774 -23.597 1999 ~10,328 “4.498 266+789 ~24 467 , 2000 ~10.547 ~4.6543 292.559 ~25.145 | RT98 = total non—-petroleum taxes (million $) RTIS = personal income tax (million $) IPFl = permanent fund interest (million $) RFDSN = federal transfers (million $) Note: Measured as changes from the Alpetco case. V-23 Permanent fund interest is lower in this instance than in the ex- penditure-constrained Alpetco case. This is because the lower population is generating less state revenue so that a smaller amount of petroleum revenues can be placed in the permanent fund to earn interest. The net impact on the current account of state government is shown in Table V.14. The net fiscal impact of Alpetco, assuming no induced migration and no induced state expenditures, is positive in all years. As in the case where induced state expenditures are not allowed, the positive fiscal impact greatly exceeds the revenues generated by the project. This is because the absence of an increase in state expendi- tures allows the permanent fund balance to be larger than otherwise and its earnings to be correspondingly larger. V.E. Summary These sensitivity analysis results have shown that the projected economic impact of the Alpetco project is very sensitive to the under- lying assumptions regarding induced migration and state spending. The more important of the two is state spending. If state spending does not increase as population, prices, and in- comes rise in response to the Alpetco project, the aggregate economic impact is reduced by about one-third because of the direct and multiplier effects of the increase in state government employment. State expendi- tures per capita will decline, but the current account of state government V-24 Table V.14. EFFECT ON GENERAL FUND CURRENT ACCOUNT OF HOLDING STATE EXPENDITURES AND MIGRATION TO BASE CASE LEVELS (million $) AL2_ER ALS?7_ER 1977 : Oo. —O- 1978 0. 0,015 1979 1.906 0.9 1980 6.576 7 ASS 1981 ~2/ +205 20.614 1982 ~112.469 41.268 1983 ~164.99 4D, 1984 ~221.881 47 +242 1985 “142.006 31.461 1986 ~B9 527 364396 1987 ~64.957 774754 1988 58.4613 91.172 1989 “574366 104.352 1990 ~58.89S 118,245 1991 ~50.989 133.404 1992 ~64.103 149,875 L993 ~66.987 168.284 L994 -72.4607 186.42 1993S -76.37 208.724 1996 7OS.i7- 232.646 1997 ~67,739 256-287 1998 58.454 284,418 LOY, 52.156 315.994 2000 ~48.13 3AP.B9S AL2_ER ALS7_ER Alpetco case Alpetco case with no induced state expenditures and no induced migration uu will show a significant improvement as state revenues increase. The increase in revenues allows the permanent fund to grow larger and retards its eventual decline so that the total revenue impact is a significant multiple of the direct impact. If, in addition to the elimination of induced spending, there is no inmigration in response to Alpetco, the qualitative impacts are un- changed. Employment is Saroreone less because migration is prohibited and revenues are also somewhat reduced. This results in a slightly smaller positive net fiscal impact than in the case with a constraint only on the level of state spending. If only population increase is constrained through the migration equation, the employment impact of Alpetco is only about 90 percent of the unconstrained case. Personal income increases with the employment increase, and this causes an increase in state expenditures per capita. Given the particular state expenditures function used in this analysis, the increase in personal income causes state expenditures to increase so rapidly that the net fiscal impact on state government is more nega- tive than it would have been had there been no migratory constraint. The difference in this case is that state expenditures per capita have significantly increased. Now if the state expenditure constraint is re-imposed, the net fiscal position of the state improves, while expenditures per capita decline. V-26 The amount of economic growth, as reflected by employment, declines by over 25 percent. These constraints on migration and state spending are obviously unrealistic, because there would be increases in migration and state expenditures of some magnitude if Alpetco were built. These constraints merely set bounds on the impact levels which might be approached if aggressive state government policies could be employed to limit induced effects. Without well-thought-out policies, however, the pattern of induced effects is likely to follow the historical trends. APPENDIX A BASE CASE EXOGENOUS VARIABLE ASSUMPTIONS A.I. - Total Petroleum Revenues Total Recurring Petroleum Revenues - Total Petroleum Revenues (RP8S) Includes production taxes and royalties from Prudhoe Bay and Cook Inlet petroleum as well as petroleum property taxes. The total is reduced by the amounts paid out for the reserves tax refund and for the Alaska Native Claims Settlement Act. Petroleum royalties and bonus sale receipts from Which Permanent Fund - from Prudhoe Bay, Cook Inlet, and Beaufort Contributions Derive Sea. (RP7S) RFE SS RFE ?S 19783 A7P. 239. L979 79?» SOL+ 1980 929. 841. 198. 1221. 623. 1982 1375. 694, Table A.1. | 1983 1459. 724. 1984 1877. 894, STATE PETROLEUM REVENUES 1985 1962, O37, 1934 1990, 935+ 1987 1791, 837.5 1988 1561. 721. 1989 1350, 616. 1990 1173. s2Be 1991 1023, 456. 1992 89S. BPG. 1993 7BP.s B47 es 1994 EP?» 308. 1995 G19. 273+ 1996 SG2 + ZAG. 1997 4624 207% 1998 386. 173. 1999 318. 146. 2000 258. 123. RP8S = total recurring petroleum revenues RP7S total petroleum revenues from which permanent fund contributions derive A.II. Prudhoe Bay Oil Production - Wellhead Price - Royalties - Production Tax - Based upon Legislative Affairs model of Prudhoe Bay field development using the agreed upon Management Schedule. Field capacity is 8 billion barrels and pipeline capacity 1.7 million barrels/day at peak. Based upon Alpetco assumption cf $7.00/barrel well- head value in 1977 dollars and escalated at 5 percent annually subsequently. Calculated as 12.5 percent of the wellhead value of production. This is reduced for 1978 to maintain consistency with the projections of Legislative Affairs Agency which appear in their memorandum of September 15, 1977. There, the impact on production of the explosion at pump station #8 is calculated. Calculated at 12 percent of the non-royalty portion of the oil (.875). Adjusted downward in 1978 for the impact of the explosion at pump station #8. Table A.2. PRUDHOE BAY OIL REVENUES Production Wellhead Total Million Price Wellhead Value Royalties Production Tax Year Barrels $/Barrel Million $ Million $ Million $ 1978 343.2 7.35 1,616* 202* 171* 1979 483.6 7.70 3,724 465 391 1980 547.6 8.12 4,446 555 466 1981 547.6 8.54 4,676 584 490 1982 584.0 8.96 5,232 654 549 1983 584.0 9.38 5,477 684 575 1984 620.6 9.87 6,125 765 643 1985 620.6 10.36 6,429 803 675 1986 589.0 10.85 6,390 798 670 1987 491.6 11.41 5,609 701 588 1988 391.8 11.97 4,689 586 492 1989 307.0 12.60 3,868 483 406 1990 240.6 13.23 3,183 397 334 1991 188.4 13.86 2,611 326 274 1992 147.6 14.56 2,149 268 225 1993 115.8 15.26 1,767 220 185 1994 90.6 16.03 1,452 181 152 1995 71.0 16.87 1,197 149 125 1996 55.6 17.71 984 123 103 1997 43.6 18.55 808 101 84 1998 34.2 19.53 667 83 69 1999 26.8 20.51 549 68 57 2000 21.0 21.49 451 56 47 *adjusted for Pump Station #8 blowout A.III. Prudhoe Bay Gas Production - Wellhead Price - Royalties - Production Tax — Department of Revenue estimate through 1985, then author's estimate with 15 percent decline commencing in 1997. Constant value of $1.00/mcf assumed by author. Calculated at 12.5 percent of wellhead value. Calculated at 12 percent of the non-royalty portion of the oil. oy Table A.3. PRUDHOE BAY GAS REVENUES Production Wellhead Billion Value Royalties Production Tax Year Cubic Feet Million $ Million $ Million $ 1978 3.9 4 0 0 1979 5.1 5 0 0 1980 5.9 6 0 0 1981 28 28 2 2 1982 43 43 5 4 1983 50 50 6 5 1984 780 780 97 81 1985 830 830 103 87 1986 870 870 108 91.35 1987 870 870 108 91.35 1988 870 870 108 91.35 1989 870 870 108 91.35 1990 870 870 108 91.35 1991 870 870 .- 108 91.35 1992 870 870 108 91.35 1993 870 870 108 91.35 1994 870 870 108 91.35 1995 870 870 108 91.35 1996 870 870 108 91.35 1997 740 740 92 77 1998 629 : 629 78 66 1999 534 534 66 56 2000 454 454 56 47 A.IV. Cook Inlet Petroleum Revenues Oil Royalties - Oil Production Tax - Gas Royalties - Gas Production Tax —- Through 1985 from Legislative Affairs Agency memorandum of July 14, 1977. Subsequent figures assume an annual 6 percent decline rate in value of oil. Through 1985 from Legislative Affairs Agency memorandum of July 14, 1977. Subsequent figures author's estimate based upon decline in produc— tivity of average well below taxable rate in 1989. Based upon production estimate to 1985 from Department of Revenue, Revenue Journal, Vol 1, No. 2, October 1976. Thereafter, declining be- ginning in 1989 by 10 percent annually with cumulative production between 1977 and 2000 of 5,761 billion cubic feet. 1977 royalties is author's estimate and subsequent years bear same ratio to production. Author's estimate for 1977 and, subsequently, the same ratio to production. COOK INLET PETROLEUM REVENUES Table A.4. Oil oil Gas Gas Royalties Production Taxes Royalties Production Taxes Year Million $ Million $ Million $ Million $ 1978 33.1 16.3 4.4 2.3 1979 31.3 14.4 5.4 2.8 1980 29.5 12.7 6.9 3.6 1981 27.9 10.9 8.3 4.4 1982 26.4 9.1 9.0 4.6 1983 24.6 7.3 9.1 4.7 1984 22.9 5.5 9.3 4.8 1985 21.2 3.7 9.4 4.9 1986 19.9 3 9.4 4.9 1987 18.7 2 9.4 4.9 1988 17.6 1 9.4 4.9 1989 16.5 0 8.5 4.4 1990 15.5 0 7.7 3.9 1991 14.6 0 6.9 3.5 1992 13.7 0 6.2 3.2 1993 12.9 0 5.6 2.9 1994 12.0 0 5.0 2.6 1995 11.4 0 4.5 2.3 1996 10.7 0 4.1 2.1 1997 10.0 0 3.7 1.9 1998 9.4 0 3.3 1.7 1999 8.9 0 3.0 1.5 2000 8.3 0 2.6 1.4 A.V. Miscellaneous Petroleum Related Revenues Pipeline Property Taxes — Through 1985, based upon Department of Revenue, State Bonuses — Reserves Tax - Alaska Native Claims Settlement Act Payment — (ANCSA) Corporate Income Tax - Alaska's Oil and Gas Tax Structure, February 1977, page IV, 23, modified by assumption of later construction of Alcan gas pipeline. Subsequently, taxes decline by 5 percent annually. This is based upon a maximum tax for Alyeska of $168 million and for Alcan of $185 million derived from Department of Revenue figures. The method of determination of pipe- line value for tax purposes has not yet been agreed upon. During construction, value is based upon cost of capital in place (construction financing not included). Three methods with sig- nificantly different revenue implications are being considered for the valuation of pipelines during the operations phase--original cost, income, and market value. A Beaufort Sea lease sale in the fall of 1979 generates $250 million in state revenues in fiscal year 1980. This is assumed to be repaid out of production tax receipts from Prudhoe Bay at a 50 percent rate until the entire $499 million is repaid. Calculated as 2 percent of Prudhoe Bay oil royalties until $493.1 million outstanding obligation is paid. To 1985 from Legislative Affairs’ memorandum of July 14, 1977. Subsequent values are author's estimate. Basis for the rapid de- cline is a Legislative Affairs' memorandum dated June 1, 1976, which indicated total corporate taxes paid on Cook Inlet production between 1956 and 1974 were $2.057 million. Peak production from Cook Inlet was 70 to 80 million barrels annually. MISCELLANEOUS PETROLEUM RELATED VARIABLES Table A.5. Petroleum Related Pipeline State Reserves ANCSA Corporate Property Taxes Bonuses Tax Payments Income Taxes Year Million $ Million $ Million $ Million $ Million $ 1978 168 0 (85.5) (32.3) 46.0 1979 159 0 (195.5) (74.4) 51.0 1980 163 250 (218.1) (88.8) 54.0 1981 184 0 0 (93.4) 55.0 1982 219 0 0 (104.6) 56.0 1983 243 0 0 (99.6) 58.0 1984 249 0 0 0 59.0 1985 254 0 0 0 60.0 1986 286 0 0 0 61.0 1987 268 0 0 0 39.0 1988 251 0 0 0 25.0 1989 233 0 0 0 16.0 1990 216 0 0 0 10.0 1991 198 0 0 0 6.0 1992 180 0 0 0 4.0 1993 163 0 0 0 3.0 1994 145 0 0 0 2.0 1995 128 0 0 0 1.0 1996 110 0 0 0 0 1997 92 0 0 0 0 1998 75 0 0 0 0 1999 57 0 0 0 0 2000 40 0 0 0 0 A.VI. Exogenous Employment Construction Employment - Mining Employment - (including petroleum) Agriculture-Forestry- Fishery Employment - Manufacturing Employment —- Federal Government Employment - A-10 The Alcan pipeline is constructed over a four-year period between calendar years 1980 and 1983. Operation of the line begins in fiscal year 1984. Exploratory petroleum activity occurs in the Gulf of Alaska, Lower Cook Inlet, and Beaufort Sea areas. No commercial discoveries occur. Non-petroleum mining employment, a very small component of this sector, remains constant throughout the period of analysis. Stimulated by the 200 mile limit, Native Corporation activity, and state involvement employment in this sector grows at 6 percent annually. Manufacturing employment increases at an annual rate of approximately 3 percent annually, consistent with the historical pattern. The level of employment by the Federal government, including both military and civilian is assumed to remain constant throughout the period of analysis. Modest civilian employment increases are offset by a decline in military employment which reflects the historical pattern. A-11 Table A.6. EXOGENOUS . EMPLOYMENT (thousands) ECONXL EMF? EMA? EMM? EMGF 1978 0.9 4.5 1.5 11.145 42.5 L979 0.3 4.8 1.4 11.548 42.5 1980 1.598 6-1 1.7 11.964 42.5 1981 ALPS 6.7 1.8 12.358 42.5 1982 4,333 GF 1-9 12.751 42.5 1983 0.265 647 2+ 13.144 42.5 1984 Oo. 4:6 2-1 13.55 42.5 L985 Os 646 2.43 13.969 42.5 L986 oO 6.4 2.4 14.412 42.5 L987 Oe 663 2.5 14.878 42.5 1988 oO. 43 247 15.375 42.5 1989 Oo. &.4 29 15.897 42.5 LEFO : oO. 43 3s 16.454 42.5 1994 Oo. 442 3+2 17.009 4245 L992 O. Se? 3:4 17.576 42.5 L99S Oe Se? 3-4 19.149 42.5 LOA Oo. Se? 3.8 18.746 42.5 1799S O- Se? 4, 19.354 42.5 LP9S O- Se? 4.3 19.995 42.5 L997 0. 537 4.5 20.629 42.5 1998 Oo. Se7 4.8 21.299 42.5 L999 0+ Se? Sel 21.991 42.5 2000 oO. 57 5.4 22-695 42.5 ECONX1 = construction EMP9 = mining (including petroleum) EMA9 = agriculture-forestry-fisheries EMM9 = manufacturing EMGF federal government APPENDIX B BASIC ALPETCO SCENARIO ASSUMPTIONS B.I. Revenue Assumptions State Corporate Income Tax - (RTCSX) State Gross Receipts Tax (RTBSX) Local Property Tax (RTPLX) Taken from Alpetco pro forma financial pro- jections statement of March 10, 1978, adjusted for 5 percent annual price inflation after 1977. All earnings are taxed in Alaska at 9.4 percent. It is assumed that tax loss carryforwards and carrybacks are utilized as appropriate. This results in an effective tax rate of -1, 0, and 7 percent in 1984, 1985, and 1986, respectively. Taken from Alpetco pro forma financial pro- jections statement of March 10, 1978, adjusted for 5 percent annual price inflation after 1977. The rate for this tax is .25 percent of annual gross revenues. Taken from Alpetco pro forma financial pro- jections statement of March 10, 1978, adjusted for 5 percent annual price inflation after 1977. The rate employed is 1 percent of capital cost excluding capitalized interest. B.2. Employment, Output, and Wage Rate Assumptions Construction Employment (ECONX2) Annual Average Wage for Construction Employment Operating Employment (EMMX) Annual Average Wage for Operating Employment (WRM9X) Value Added of Plant (XXMX) According to a private correspondence with Alpetco dated March 10, 1978, Brown and Root estimate average annual construction employ- ment at 3,500 to 4,000 with a payroll of $200 million in 1977 dollars ($20/manhour). Total manhours of labor over the 5-year con- struction period were estimated at 35 million. The authors allocated $600 million of the $700 million labor bill (35 million man- hours x $20 hour) to the three peak con- struction years of 1981, 1982, and 1983. 3,500 average annual employment was used for the peak construction years. The remain- ing $100 million was arbitrarily allocated between 1979 and 1980. Employment in these years was calculated based on the ratio of employment to labor bill in the peak employ- ment years. Generated by the econometric model and, thus, not included in table. Taken from "Outline of Alpetco's Presentation," which accompanied the final presentation before the Alaska Royalty Oil and Gas Development Advisory Board on February 21, 1978. Wages assumed to be 75 percent of labor bill taken from Alpetco pro forma financial projec- tions statement of March 10, 1978. Numbers are adjusted for 5 percent annual price in- flation after 1977. (Average annual wage in 1977 dollars is $30,000.) Total revenues minus feedstocks. Taken from Alpetco pro forma financial projections state- ment of March 10, 1978. Value added in 1977 dollars from statement deflated at 5 percent annually to obtain 1958 constant dollar value. L978 1979 L980 19S. LE L983 1984 L983 1986 198? 1988 1939 1990 1991 1992 195 L994 LESS 1996 1997 1993 LES? 2000 RICSX = RIBSX = RTCSX 0. O- Or4 O66 O.8 Oo. 790? 87. O44 102.3 state corporate income tax (million $) state gross receipts tax (million $) RTPLX = local property tax (million $) Table B.1. BASIC ALPETCO SCENARIO ASSUMPTIONS RTEBSX RTPLX O. O46 365 10.4 18.6 8. 3 8.7 942 946 10.4 10.6 11, : 9043 ECONX2 EMMX WRM9X XXMK ms Thre ? IX2 EMMX WRMOX XXMX O- SASOO, O- O.4S 33075. Oe 1.3 Seas, 1S. 36S 236 36 23, 365 oo. Oo. 1866 Oe BG. O+ 4086 Os 408, Oo. 408. O. 408. 0. 408, O- 408. Oe 408. Oo. 408, Oe 408. Os 408. O+ 408. O- 408. O06 Pe 408 - O06 20 £ 408. Os L925 92146, 408. construction employment (thousands) operating employment (thousands) annual average wage for operating employment ($) value added of plant (million 1958 $) €-a