Political Transitions in Alaska and the FY 2010 Budget

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1 INTRODUCTION Political Transitions in Alaska and the FY 2010 Budget Jerry McBeath University of Alaska Fairbanks This report discusses the factors behind the Alaska FY 2010 budget. It treats the Alaska economy in 2008 and 2009, demographic changes, and important movements in state politics, with a special focus on the national rise of one Alaska political leader Governor Sarah Palin and the fall of another, Senator Ted Stevens. The 2008 elections brought slight changes in the composition of the state legislature and a large change in the state s congressional delegation. The report continues a focus on issues affecting Alaska s future revenue stream the natural gas pipeline and its reputation, the state s predator control policy. The next section of the report introduces the governor s operating, supplemental, and capital budget requests, their revision and adoption by the legislature. Legislators paid less attention to the expenditure than the revenue side of budgets, and in the short 90-day session wrangled with the governor over federal stimulus funding, and whether it had strings. The final section analyzes state revenues and spending planned for FY THE ALASKA ECONOMY IN 2008 AND 2009 From the start of the state s fiscal year on July 1, 2008 (FY 09) to the end of the fiscal year, the Alaska economy experienced extreme volatility in oil prices, but because of surplus revenues saved in previous years, Alaska was in better economic shape than most other states. Because the state is primarily dependent on royalties and taxes collected from oil/gas production, we focus on changes in oil prices before considering other resource sectors. Oil Prices. At the start of FY 09, oil prices had peaked at $147/barrel, a nearly 100 percent increase in just one year (Anchorage Daily News [ADN], 7/12/08). By early March, 2009, prices had dropped to less than $43/barrel, a precipitous change and a larger than 100 percent decline in less than one year. Yet during this period, the oil markets registered the largest single-day price gain in history (Fairbanks Daily News-Miner (FDNM], 9/23/08), as prices increased $ In late December 2009 they fell to the lowest level during the year, some $28.27/barrel (FDNM, 12/21/08). By late June 2009, oil prices were in the $65-69/bbl range. There were a few other upward spurts in prices, but for Alaska public finance, the news was mostly bad, prompting questions about the accuracy of the state Department of Revenue s forecasts. The global recession significantly reduced demand for oil, and the economic slowdown led to a glut in world oil supplies early in Variability in price can be attributed primarily to the slowness of OPEC to cut production. In late November 2008, the cartel declined to reduce production, when the price of oil had dropped by two-thirds (FDNM, 12/1/08). It was not until AK-1

2 late January that OPEC slashed production by 3 million barrels a day in order to stabilize prices (FDNM, 1/26/09). Changes in the value of the dollar also added to oil price volatility. Oil/Gas Production Prospects and Problems. The enactment of the new and stiff petroleum production tax in 2007 (see McBeath, 2008 and 2009, and McBeath et al., 2008) elicited threats from multinational oil companies that they would reduce their investment. However, until late in 2008, ExxonMobil, BP, and ConocoPhillips (the primary oil multinationals active in Alaska) continued exploration and development work. As late as early December 2008, BP announced that it was budgeting more than $1 billion for Alaska projects (ADN, 12/7/08). The majors reported huge profits in the third quarter (FDNM, 11/3/08), and ConocoPhillips registered $2.3 billion in profits from Alaska operations in 2008 (but paid an even higher amount, $3.4 billion, in non-income taxes [ABR, 3/24/09, p. 6]). Then, as the recession worsened, the producers indicated they would be cutting back on their investments. For example, ConocoPhillips announced it would be cutting 4 percent of its Alaska workforce and 18 percent of its capital spending in the state (some $2.8 billion). The jobs of 1,300 workers were at risk (FDNM, 1/18/09 and 3/5/09). The Flint Hills Refinery in North Pole neared bankruptcy and invited the state to buy it out (FDNM, 12/11/08). It shut down one of three refining units in March (FDNM, 3/14/09). Notwithstanding these projected (and real) cutbacks, the state revenue department s spring forecast, based on information provided by companies working in the state, was rosy. This report projected increases in the oil industry s capital investment from $2.2 billion in FY 09 to $3.0 billion in FY 10. Operating expenses were projected to increase from $2.2 billion in FY 09 to $2.4 billion in FY 10. The revenue department attributed the likely increases to the state s investment tax credit and incentive program (DOR, spring forecast; also AER, 4/15/09, pp. 1-2). Although no new oil finds were reported in this period, the natural gas frontier looked good. Anadarko, a small oil/gas producer, announced that its work on the Gubik gas field was quite promising. Scientists stated that the Alaska North Slope had huge deposits of frozen natural gas. In their judgment, the supply was about 85 trillion cubic feet, more than two times larger than the earlier reported total of 35 trillion cubic feet of accessible natural gas (FDNM, 11/13/08). The state and ExxonMobil have had a running dispute over Exxon s leases of natural gas deposits in Pt. Thompson. The state claims that the company failed in its obligation to develop the leases; it took the company to court, and ultimately cancelled several of the leases. Exxon alleged it spent $800 million on development of infrastructure at Pt. Thompson and was in full compliance with lease terms (FDNM, 9/30/08). Finally, early in 2009, the state allowed Exxon to proceed in development of two of the leases in this huge gas field, once regarded as a critical piece of the state s plan to market North Slope natural gas (FDNM, 1/28/09). ExxonMobil drilled the first well in the gas cycling and condensate project before mid-year (AER, 6/18/09). The Fraser Institute s Global Petroleum Survey 2009 contained unsettling news for oil and gas development prospects in Alaska. This survey of 577 respondents assessed barriers to investment in oil and gas exploration and production in various jurisdictions. Alaska (onshore) AK-2

3 ranked 78 th of the 143 jurisdictions evaluated, somewhat below the median globally (as it had been placed the previous year). Only two US states, California and Colorado, ranked lower. Table 1 indicates the percentage of respondents believing that, in the question area, Alaska s policy was a mild or a strong deterrent to investment, or the company would not invest due to this criterion: Table 1. Alaska s Perceived Investment Climate, 2009 Criterion Percentage 1. Fiscal terms 33 % 2. Taxation regime 26 % 4. Cost of regulatory compliance 56 % 5. Regulatory uncertainty 41 % 6. Environmental regulation 73 % 7. Local processing requirements 26 % 8. Labor regulations 30 % 9. Local public infrastructure 43 % 13. Labor availability 50 % 14. Aboriginal land claims 48 % 15. Political stability 17 % 16. Security 5 % Source: Fraser Institute, 2009, selected pages, appendix. The majority of respondents with negative views thought that the Alaska regulation or practice was only a mild deterrent to investment, and Alaska did score higher than oil rich regions of the Middle East, Africa, and Latin America. Nevertheless, the state s rankings had declined, report authors opine, because of increasingly costly fiscal terms and tax rates after revision to the production tax in 2007 (Fraser, p. 10). Increased scrutiny of oil company adherence to environmental rules after the massive 2006 North Slope oil spill probably played a role as well. Finally, the corruption scandals of certainly influenced company assessments. The only respondent to comment specifically about Alaska said: Notoriously corrupt government. Essentially a Third World country. (Fraser, p. 31) Alaskans hope this is an unrepresentative comment. Other Natural Resource Production. News from other sectors of the Alaska economy in 2008 and 2009 was mixed. The mineral industry sector performed reasonably well. In 2007, product value reached a record high of $4 billion. Mineral exploration and development spending remained strong in Exploration spending totaled $328 million, about the same as the previous year. Work on mines in construction totaled $380 million, a 19 percent increase over the previous year. Minerals-related employment increased to 4,334 jobs. However, the value of mineral production declined about 29 percent, to $2.4 billion, because of falling base metal prices (AER, 6/8/09). This influenced the value of Alaska exports, which dropped to $3.6 billion (but this was still the fourth highest year on record [ADN, 4/5/09].) AK-3

4 In previous reports we have mentioned mineral discoveries, but the most significant was in early International Town Hill Mines, a member of the Cardero Group, announced a world class discovery near Livengood, 70 miles north of Fairbanks. This was one of the largest gold mine discoveries in the last decade (FDNM, 1/30/09). Alaska s coal deposits are world class too, and environmentally preferable because of their low sulfur content. The state s primary producer is Usibelli Coal Mine. Its surface mines near Healy in interior Alaska supply in-state users and an active export trade to South Korea and other Pacific locations. In mid-2009, the firm expanded its estimate of coal reserves from 50 million to 700 million tons on property already permitted for exploration and development. Of the 700 million ton figure, some 450 million are proven reserves and 250 million probable. Using surface mining techniques, and just in this region (North Slope resources are reputed to be at least as large), Alaska has hundreds of years of coal availability (FDNM, 6/25/09). Fisheries are the largest employer among Alaska s natural resource producers, and in 2008 they did reasonably well. The total value of the Alaska fishery in 2008 was $1.4 billion, a reduction from the $1.6 billion total in the previous year (FDNM, 12/27/08). Development of forest products did not change importantly for this year, and the industry remains depressed. Tourism employs nearly four times as many Alaskans as the fisheries, but its profit trajectory is closely aligned with national trend lines. In 2008, fewer tourists visited Alaska because fuel prices were so high. The global economic recession made projections for 2009 quite bleak. The large tour companies and operators of attraction sites predicted that visits would decline on average 30 percent because of the recession. Altogether, state taxes on all natural resource exports except oil/gas (specifically including the fisheries business tax, fish landing tax, mining tax, business license tax, and general corporate tax) supplied no more than three percent of the state s tax revenue in 2008 (DOR, Fall Revenue Forecast, 36). These sectors produce many jobs but make a marginal contribution to the state s revenue stream. Alaska s geostrategic significance is greater than that of any other state (with the possible exception of Hawaii), and military spending contributes to state fiscal health. For most of his 40 years in the US Senate, Ted Stevens served as chair or ranking member of the defense appropriations subcommittee of Senate Appropriations, and through the regular spending process or earmarks, insured a constant flow of dollars to support construction. Leftover spending authority guarantees robust military construction seasons in 2009 and 2010, which will assist the state in dealing with the national economic downturn (FDNM, 2/2/09). Alaska s vast territory provides bountiful training space for the military, and in 2009 the army proposed adding 2,300 additional soldiers to Fort Wainwright near Fairbanks (FDNM, 5/6/09). However, election of a Democratic administration threatened a reduction to the National Missile Defense facilities in Alaska, and the congressional delegation was quick to defend them and guard against cuts (ADN, 2/3/09). Return on Investments. The Alaska Permanent Fund (PF) is the second major point of the state s economy, and it contributes to economic growth primarily through the distribution of AK-4

5 earnings to residents in the form of annual Permanent Fund Dividends (PFDs). In September 2008 the state issued PFDs of $2,069 to each eligible resident (ADN, 9/10/08), the highest amount since the inception of the program in In addition, an energy rebate of $1,200 was added to each check. Because most Alaskans spend their PFDs soon after receiving them and on consumer goods, the multiplier effect induced a bounce in the state economy. However, the high check total also benefited the federal treasury, as the IRS claimed from 10 to 30 percent of the value of the checks. The PF s corpus suffered along with other investments in the early stages of the global recession. In October 2007, the fund s value was $40.4 billion, but it lost 25 percent of the value by late 2008 (In late September it had dropped to $30 billion and then climbed to $33 billion by early November [FDNM, 11/4/08]). By the close of FY 09, the PF s value was about $33 billion. This dramatic reduction occasioned concerns as to whether PFDs would be issued in 2009, a concern which state officials and the APFC executive director were quick to counter with guarantees that the state protocol insured that each resident s take from investment earnings averaged from the previous five years. Nevertheless, projections for future years looked bleak: 2009-$1.512; 2010-$844; 2011-$144; 2012-$345; and 2013-$68 (ADN, 3/13/09). The state s chief rainy day account, the Constitutional Budget Reserve (CBR), established in 1990, also suffered investment losses of about $1.5 billion. The balance of the fund at the end of 2008 was $6.8 billion, some $1.2 billion less than anticipated (ABR, 2/12/09, 2). Managers of the stock portfolio in the Department of Revenue invested aggressively when oil prices were high, and that part of the CBR lost 29 percent of its value in the meltdown. This prompted a few legislators to question the department s management of state assets. (A legislative review found that Revenue Commissioner Galvin had acted within his authority, at the legislature s discretion, when making investments [ADN, 4/8/09]). The overall losses reduced the ability of the state to absorb large operating budget deficits. (In addition to the CBR, the state has another $2 billion in special funds, available for appropriation.) Nevertheless, the current amount in the CBR is expected to be sufficient to cover projected deficits in FY 09 and FY 10, leaving the state until FY 11 or FY 12 to develop a sustainable funding plan. This estimate, like those in previous reports, is based on oil prices that are too volatile to permit projections beyond two-three years. ALASKA DEMOGRAPHICS In most respects, Alaska s population characteristics in resembled those of previous years. The population stood at 683,478 in 2008, with two-thirds living in cities and the remainder in rural areas. The gender, racial, and age ratios were unchanged. Per capita income, at $38,138, had grown about 2 percent but the poverty rate (9.8 percent) was high for a rich state (USDA, ERS, 12/15/08). Rural Alaska holds more unemployed Alaskans and those most likely to fall beneath the poverty line. Alaska has the 49 th highest death rate for children from 1 to 14 years of age (FDNM, 8/26/08), and a disproportionate number of these deaths occur in rural areas. Another dismal statistic the worst high school dropout rate in the nation (some 38 percent of 9 th graders AK-5

6 are not expected to graduate (ADN, 11/17/08) is skewed because of the serious and seemingly intractable problems of rural education. A majority of the Alaska Native population (at 16.5 percent, the state s largest minority group) still resides in rural Alaska. Earlier reports suggested an increased out-migration of Natives from rural areas. Research reported in indicated that the village exodus was a bit overstated, because school enrollments have not changed much (FDNM, 12/15/08). Yet the overall population was growing more slowly than in urban areas (AER, 6/29/09). The disparity of life circumstances between rural (and especially Native) Alaska and cities remains nearly as great after 50 years of statehood as it was in territorial days. State policies, such as the recent emphasis on energy assistance, mostly have worked at the problems from the periphery. RECESSION AND THE ALASKA ECONOMY The global and national economic crisis had a less serious impact on the Alaska economy than those of other states. The state unemployment rate rose to the highest level since 2004 in October, some 7.4 percent, and.9 percent higher than the national rate then, yet 3,000 new workers joined the workforce in 2008 (FDNM, 2/17/09). In Alaska s cities the unemployment rate falls below the national average (5.9 percent in Anchorage and Fairbanks; 5.3 percent in Juneau); in rural areas it is much higher than the national rate (12.9 percent in the Yukon- Koyukuk census area; 13.7 percent in Skagway-Hoonah-Angoon in Southeast; 13.1 percent in the Bethel area; and 17.7 percent in the Wade Hampton census area of western Alaska [Alaska Economic Trends, 12/08]). The state housing foreclosure rate was among the lowest of the American states, although it doubled in 2009 from the previous year. The Fairbanks economy suffered somewhat from closure of one Flint Hills refinery, as the Anchorage economy declined due, among other factors, to declines in air cargo shipments (ADN, 6/1/09). As mentioned, a large number of construction projects statewide, both military and civilian commercial, cushioned the state somewhat against job losses. The state s high rate of government employment and the large multiplier effects of government wages, salaries and PFDs spent in-state, were additional bulwarks against a severe recession. Nevertheless, by May 2008, the state labor department reported that there were fewer jobs than a year earlier, representing the first major decline since the late 1980s state recession. The unemployment rate from May through June 2009 was 8.4 percent, compared to the federal rate of 9.4 percent (ADN, 6/12/09 and FDNM, 7/13/09). Most of the job losses were in the tourism and hospitality sectors. AK-6

7 ALASKA STATE POLITICS Alaska s story in 2008 had more political than economic characters in the lead. We begin with corruption and abuse of power cases, feature the state s most newsworthy leaders of 2008, and then treat the primary and general elections. Corruption Cases, State and Federal. Of the seven legislators who were FBI suspects in the VECO corruption and bribery imbroglio, two had been convicted (Kott, Kohrine) and one (Weyrauch) awaited trial by the end of In early 2008, state senator John Cowdery was indicted on the charge that he had attempted to buy the vote of another senator (Donny Olson, the only Democrat on the list, and the only legislator who was completely exonerated). Late in the year Cowdery pled guilty, but held onto his seat in the Senate until his term expired (ADN, 12/20/08, 12/21/08). Then in March 2009, Beverly Masek, a former House member from Mat- Su, pled guilty to charges that she had held up the PPT proposal in committee in exchange for a $4,000 bribe from Bill Allen, then VECO CEO (FDNM, 3/12/09). She faced months in jail (ADN, 3/14/09). The remaining unindicted suspect is former Senate President Ben Stevens, son of former Senator Ted Stevens. The VECO case affected Ted Stevens (as discussed below). It also touched Congressman Don Young, who has not yet been indicted. The change of administration in the US Department of Justice, discussed further below, made additional convictions unlikely. A federal judge ordered the return of Kott and Kohrine from federal prison to Anchorage for new bail hearings, after charges against Ted Stevens were dropped (ADN, 6/11/09). Abuse of Power: Troopergate. In early 2008, Governor Palin fired the Public Safety Commissioner, Walt Monegan, explaining that he had been slow to increase the number of state troopers in rural Alaska, one of her campaign pledges. In July, Andrew Halcro, a third party (Republican Independent) candidate in the 2006 gubernatorial election, accused Palin of abusing her executive authority, saying she fired the commissioner because he had refused to fire or seriously reprimand the governor s ex-brother-in-law, Trooper Scott Wooten. Wooten had been accused of using a tazer on his stepson, carrying an open container in his state vehicle, and shooting a moose out of season, among other charges. More to the point, he had been involved in a bitter divorce and child custody proceedings with the governor s sister and had allegedly threatened her and her father. After Halcro s blogs heated the media, members of the Legislative Council (a bipartisan group that handles urgent legislative business between sessions) called for an investigation. The governor said she had not abused her powers of office, had nothing to hide, and welcomed an investigation. Palin s selection as the Republican vice presidential candidate in late August transformed what at the time seemed a low-key inquiry into a partisan battle. The Legislative Council hired an investigator and promised to report findings before the November election (ADN, 9/2/08). Senator Hollis French, an Anchorage Democrat, was impolitic in remarking it would be an October surprise. The governor hired her own attorney while distancing herself from the legislative investigation. Instead, she asked the State Personnel Board (composed of gubernatorial appointees) to conduct an investigation for the executive branch. Republican AK-7

8 legislators sued to stop the probe into what by then was called Troopergate, questioning its impartiality (FDNM, 9/17/08). Initially, the governor, her spouse Todd Palin, and seven state officials resisted legislative subpoenas (FDNM, 9/12/08). By early October, all but Palin had given depositions, with the governor deposing 10 days after the Legislative Council s report (FDNM, 10/22/08). The 236- page report concluded that Governor Palin had abused her power, and that Todd Palin, with unprecedented access (sitting in cabinet meetings, conferring with aides and commissioners) had interfered with state personnel procedures. However, the report did not call for impeachment of the governor, and it recommended no penalties, reprimands, or punishment for the state officials involved (FDNM, 10/11/08). Finally, on election eve, the personnel board found that the governor had violated no ethics laws when she fired the commissioner (ADN, 11/4/08). It is difficult to say what if any impact Troopergate had on the Palin vice presidential candidacy. In Alaska, it ended the governor s long honeymoon with the legislature, reduced her popularity somewhat, and raised an interesting separation of power issue on the relationship between Alaska s strong governor and strong legislature. A clear casualty of Troopergate was Attorney General Talis Colberg. He had resolutely defended Governor Palin throughout the inquiry, and had been criticized by Democrats and a few Republicans for being less than neutral and objective in establishing the state s position. In February 2009 he resigned, saying it was in the best interests of the state to move on (FDNM, 2/20/09). The governor then appointed Wayne Anthony Ross to the position. Ross had run twice unsuccessfully for governor (in Republican primaries), but chaired Palin s Anchorage election committee in During confirmation hearings Ross, a flamboyant Anchorage attorney, was grilled by Democratic legislators for his identification with NRA positions, support for the death penalty, opposition to government-provided family services, and gay rights (he called gays immoral and degenerate ). In a negative vote of 35 to 23, the legislature declined to confirm Ross s appointment; this was the first occasion since statehood when legislators objected to a governor s appointment to the executive branch (ADN, 4/12/09). Thereupon the governor selected Daniel Sullivan, a former US Assistant Secretary of State and law clerk in the Ninth Circuit (FDNM, 6/17/09), an appointment which the legislature seems likely to confirm at the start of its 2010 session. The National Ascent of Governor Palin. As a Republican governor, Sarah Palin was on the long list of VP candidates when John McCain clinched the presidential nomination. Hillary Clinton s loss to Obama in the Democratic primaries raised Palin s salience, but her greatest value to the McCain campaign most likely was her conservative stance on social issues and appeal to religious conservatives who formed the largest single voter base in the Republican Party. Nevertheless, her selection, announced at a campaign rally in Ohio on August 29, 2008, surprised the nation and divided it between those who thought McCain was bold and those who believed him to be reckless. Palin initially energized the campaign, raised McCain s poll numbers, and throughout fortified the conservative and religious Republicans who had been lukewarm toward McCain. When scripted, she excited audiences, as at the Ohio rally where she popularized hockey moms, AK-8

9 and in her acceptance speech at the Republican National Convention. When well-prepped, as she was for the vice presidential debate with Joe Biden, she stood her ground with folksy charm (deliciously captured by Tina Fey on Saturday Night Live). On the campaign trail she connected well to individuals as well as large groups and, on occasion, rivaled Obama s star power. On the other hand, interviews with the media (especially Charlie Gibson and Katie Couric) revealed a shallow knowledge base (New York Times [NYT], 10/31/08). As the campaign progressed, she became a polarizing figure, for example by attacking Obama as a wealth spreader (i.e., socialist) and of palling around with terrorists. Intense (and many observers said unfair) media scrutiny exposed contradictions. She had accepted the Bridges to Nowhere money, not turned it back to Congress and she had taken most of the earmarks the congressional delegation placed in the federal budget, while campaigning against them. The investigation of her behavior as governor raised issues of impropriety. She charged the state $18,000 in per diem for working out of her Wasilla home instead of from the governor s mansion in Juneau and she billed the state $7,000 for her children s travel to events where their presence was not required. And then there was the $150,000 expenditure of the campaign on her clothes. By the end of the campaign, Palin had nearly become a caricature. Palin s campaign changed the political atmosphere and dynamics in Alaska. Once applauded for her bipartisan approach with the legislature, on her return she was criticized for being polarizing (Washington Post, 2/18/09). She showed traits of pettiness and vindictiveness most Alaskans had not seen her display. She denounced critics of her campaign style as cowards and jerks (FDNM, 11/8/08). When the Legislative Council chair Kim Elton (who shepherded the Troopergate investigation) took the Alaska Affairs post in the Interior Department, she said: Sen. Elton pledged his allegiance to President Obama last summer (FDNM, 3/4/09). Then she engaged in a shooting match with Senate Democrats over Elton s replacement. First, she appointed Ben Grussendorf, but Democrats rejected him because he was a registered Republican and not the first person on their list (who was Beth Kertulla, minority leader of the House [ADN, 4/2/09]). Then she appointed Joe Nelson, a political unknown, whom Democrats also rejected. Finally, as the session s close drew near, and with involvement of Juneau s Mayor Bruce Botelho, Palin appointed Dennis Egan, son of Alaska s first governor Bill Egan and former Juneau mayor, and the legislature did confirm him (FDNM, 4/20/09). Governor Palin remained popular with Alaskans on her return to the state after her national election defeat, but her focus was not solely on the governorship. She was showered with requests for interviews and celebrity offers (HarperCollins signed her to a multi-million dollar book deal). She was invited to speak at high profile events, such as the Republican Congressional fundraiser in Washington, DC. She established a political action committee (SarahPAC) to raise her credibility in the party while reducing conflicts when traveling to political events outside Alaska, and by mid-year the PAC had raised more than $1 million (FDNM, 7/14/09 and 8/1/09). The first session of the 26 th Legislature, reported on below, was considerably more challenging for the governor than the two sessions of the 25 th. Legislators contested her AK-9

10 appointments, bickered with her over federal stimulus funding, and wondered whether she was sufficiently engaged in her job when she left the state before the end of the session to address an anti-abortion group dinner in Indiana (FDNM, 4/15/09 and ADN, 4/17/09). Several critics filed ethics complaints against her. Many were frivolous, such as the charge that by wearing a cap with the Arctic Cat logo at the Iron Dog Race, she was violating her oath of office (FDNM, 3/26/09). She complained about the financial burden of defending herself against critics, for which her family paid $500,000 (ADN, 7/10/09). When her supporters established the Alaska Fund Trust to pay legal defense charges (FDNM, 4/25/09), that too was questioned. An investigator for the State Personnel Board said there was probable cause for ethics violations and use of her position for gain by authorizing creation of the trust (ADN, 7/22/09). And some national media commentary was over the edge, for example David Letterman s crude comment about Palin s daughter (FDNM, 6/12/09). Still, Alaskans were surprised when Governor Palin announced her resignation on July 3 rd. In a rambling, 14-minute address, parts of which she repeated in her valedictory at the swearing-in ceremony for new governor Sean Parnell on July 26, she complained about unfair media attacks, frivolous ethics charges, and said she didn t want to be a lame duck governor for the rest of her term (FDNM, 7/4/09; 7/27/09). Also, she said she wanted to help campaign for candidates and issues she believed in. Palin s future actions will define whether any of these factors was a sufficient motivation for her to resign 16 months before the end of her term. While she has left the Alaska political stage, she remains a vibrant albeit erratic force in US national politics. The Fall of Senator Stevens. Unlike Governor Palin s power transition, Senator Stevens reflected more tragedy than comedy. He without doubt is the most effective political leader Alaska has had in its 50 years of statehood. Stevens was the longest serving Republican senator (1968 to 2008), and served alternately as chair or ranking member of Senate committees on appropriations, commerce, and rules. On a per capita basis, he brought more federal dollars to his constituents than any other member of Congress in recent memory. He authored important national legislation, such as the Magnuson-Stevens Fisheries Conservation Act, and played leading roles in all significant laws affecting Alaska, such as ANCSA and ANILCA. Stevens mistake (which he admitted) was in trusting Bill Allen, the VECO CEO and political insider at the vortex of the Alaska corruption investigations by the FBI. In mid-2007, the FBI investigation led to a raid on Stevens Girdwood home (the first time a sitting US senator s home had been searched). The following year, Stevens was indicted on seven counts of failing to disclose the receipt of gifts from Bill Allen, from 1999 to The total value of gifts most of which were extensive renovations to Stevens home, which he did not pay for was modest, around $250,000. Nevertheless, these were felony charges. The investigation suggested that Stevens might be vulnerable politically, and Mark Begich, the Anchorage mayor, with strong urging from the Democratic National Committee and Democratic senators, entered the race. In previous elections, Stevens won with more than 70 percent of the general election vote. Rarely did he have credible opponents in the primary or general election contest. In the 2008 August primary, he faced former Anchorage First National Bank President, Dave Cuddy, AK-10

11 and Vic Vikers. Each spent nearly $1 million rare in a primary contest. Vikers, called a carpetbagger (he had lived in Alaska less than one year), focused on the indictment, calling Stevens unethical and corrupt. Stevens won the primary with 63 percent of the vote, but the general election prospect was daunting. He believed himself to be innocent of the charges and asked for a speedy trial expecting to be exonerated ending before the November general election. However, the district court judge Emmet Sullivan ruled against a trial in Anchorage and held it in Washington, DC instead. Thus, for most of the general election campaign, Stevens was in DC and Begich was campaigning around the state. The trial lasted from late September to late October. The prosecution produced abundant evidence of the renovations and other gifts, and that Stevens had not paid for them. Also, the prosecutors presented damning tapes of phone calls between Stevens and Allen; in one, Stevens told Allen to lie low, stick it out, and that at the worst they might spend some time in jail (ADN, 10/7/08). The Stevens defense team produced political celebrities and Senate friends to testify to his character, including Colin Powell, Orrin Hatch, and Daniel Inouye. Perhaps misguidedly, Stevens testified in his own defense, and lashed out at the prosecution (FDNM, 10/18/08) in a combative manner usually reserved for critics of Alaska s interests in the Senate. The chief prosecutor, Brenda Morris, told the mostly African-American jury (many of whom thought all DC politicians were corrupt) to evaluate him as a man, not a senator (ADN, 10/22/08). Stevens attorneys complained to the judge that the prosecution had not shared vital information in the discovery process. For this and other reasons, they requested a mistrial, which the judge denied. There also were irregularities in jury deliberations an outburst from one juror, claims of exhaustion, and a juror who went AWOL. (She claimed she needed to leave for a few days to attend her father s funeral; in fact, she had traveled to California to place bets on a horse race.) On October 27, one week before the election, the jury found Stevens guilty on all seven counts (ADN, 10/28/08). Stevens returned to Alaska to supportive rallies orchestrated by his campaign, but the damage had been done. His opponent said little about the conviction in the campaign, but the Democratic Senate Campaign Committee poured more than $1 million into TV ads criticizing Stevens corrupt acts. Stevens told supporters Alaska needs me and asked voters to remember what he had done for the state. Had the campaign been longer, this final plea likely would have produced a victory. As it was, on the evening of election day, Stevens led Begich by 3,700 votes. Yet more than 80,000 early, questioned, and absentee votes remained to be counted. These votes favored Begich, and when the count was final, Stevens lost by 3,500 votes, the second closest Senate race in the nation (see McBeath & Lovecraft, 2009). Stevens defense challenged the justice of the trial and outcome, and his appeal did prevail. Even Judge Sullivan recognized problems with the prosecution and jury. In February 2009, the judge held Brenda Morris and another prosecutor in contempt of court (FDNM, 2/14/09; NYT, 2/11/09). Then new US Attorney General Eric Holder announced (on April Fool s Day, no less) that the Department of Justice had found new evidence of prosecutorial AK-11

12 misconduct, and that the convictions should be voided. He remarked that prosecutors had concealed from Stevens lawyers notes from a 2008 interview with Bill Allen raising doubts about the charges and cost of the repairs, just $80,000 (NYT, 4/2/09; ADN, 4/2/09; FDNM, 4/2/09). The following week Judge Sullivan dismissed all convictions and asked for a criminal investigation of lead prosecutors (FDNM, 4/8/09). The response to this news was overwhelmingly supportive. Governor Palin even asked Mark Begich to resign so that a special election could be held (to fill the seat with a Republican). For some analysts and jurors, though, doubt remained about Stevens innocence; he regularly received gifts he did not report (FDNM, 4/12/09). While Stevens likely will resurrect his reputation as a stellar legislator in his remaining years, the state already suffers from his absence in the Senate (NYT, 12/22/08). As noted below, the $787 billion economic stimulus package did not include a waiver, providing funding for communities less populous than 200,000 and with more than 5,000 residents, which Stevens and his staff typically included. This means that smaller communities such as Fairbanks will fail to benefit from stimulus road construction. Too, the Congress repealed a provision authored by Stevens, which guaranteed federal funding for erosion control in coastal villages and for glacial damage (ADN, 4/19/09). And much less funding was authorized for the Denali Commission, a project initiated by Stevens to improve infrastructure in Alaska s villages. The Alaska August 2008 Primaries. The late August primary election had few competitive races for the legislature, but competition in both the US House and Senate primaries for the Republican candidates sparked a larger than normal turnout. Four ballot propositions crowded the primary ballot. Not greatly controversial were measures to publicly fund state elections and to establish a gaming commission (which would crack open the door for legalized gambling in the state). Socially liberal groups touted the advantages of both, but majorities opposed each. Two measures were controversial. One sought to overturn the state s predator control policy, which allows aerial hunting/killing of wolves and bears threatening moose and caribou. Some outside animal rights groups funded advertising in support of this proposal, but it did not gain support of primary voters. The most controversial measure was titled the clean water initiative. The issue concerned the Pebble Mine near Dillingham in southwest Alaska, a large deposit of gold, silver, and other scarce metals, the exploitation of which potentially threatens the rich Bristol Bay salmon fishery. National environmental groups raised between $7 and $15 million to support this ballot proposition (FDNM, 8/28/08). (In complaints to the Alaska Public Offices Commission, companies alleged that contributions, including those of a rich realtor whose lodge abutted the mine, had not been properly disclosed [FDNM, 4/19/09]). In-state mining organizations and some multinational mining corporations raised $3 million, and provided arguments appealing to Alaskans, who typically fear that stringent environmental regulations will stifle economic development. The measure lost in a 44 to 56 percent count (ADN, 8/27/08). Only one incumbent lost to a primary opponent, while the others sailed through to the general election. As mentioned, Senator Stevens, facing two well-funded primary opponents and under indictment on felony charges, won his primary race with 63 percent of the vote. However, AK-12

13 Congressman Don Young had a tough race. Lieutenant Governor Sean Parnell, with the blessing of Governor Palin, filed for the seat at the state Republican Convention. Parnell, an Anchorage Republican with nearly a decade of state legislative experience, offered himself as the clean government candidate, implicitly focusing on Young s long involvement with Bill Allen, his receipt of thousands in VECO campaign dollars over many years, and his role in the Bridges to Nowhere embarrassment. In , Young chaired the House Infrastructure and Transportation Committee, which included the bridges in the renewal of national transportation funding. In that session, he also directed federal dollars to a Florida highway interchange, benefiting a real estate developer who had contributed $40,000 to his campaign committee. (Both the VECO and Florida episodes figure in the ongoing FBI investigation of Young.) Parnell gained support from the Club for Growth, which lampooned Young for larding the federal budget with road pork (ADN, 8/18/08). The national Democratic Party ran ads against both Young and Parnell, curiously accusing them of out-of-control spending (ADN, 8/22/08). Parnell did not develop any excitement in his campaign and sent inconsistent messages about federal earmarks (FDNM, 8/14/08). Alaskans, like residents of the other states, love earmarks designated for their state while opposing them in general, and Young s position came closest to this norm. The election ended in a dead heat, raising interesting speculation about what would happen if Palin became the vice president and Parnell the congressman. Who would govern Alaska then? (Statute left this to the attorney general until a special election could be held.) After counting absentee and questioned ballots, Young won narrowly, by 304 votes. The 2008 General Elections. The general election featured, for Alaska, high interest and competitive races for federal office. The Obama campaign established five field offices in Alaska, more than any Democratic presidential candidate did in the previous forty years. McCain had a 15 point lead in early October, and both campaigns were still actively recruiting volunteers (FDNM, 10/18/08). McCain was not popular with Republican voters (he d finished fourth in the presidential primary) because of his opposition to opening ANWR to oil/gas exploration and his environmental policies. Governor Palin, notwithstanding the Anchorage Daily News s endorsement of Obama (saying Palin was too risky, 10/27/08) clearly helped the ticket in her home state, and the Republicans won with nearly 60 percent of the vote (compared to 38 percent for Obama/Biden). The Begich-Stevens race was, as mentioned, the most competitive in the state. It attracted about $10 million in funding, the most expensive Senate race in state history. Congressman Don Young faced Ethan Berkowitz in the general election. Berkowitz, an Anchorage Democrat, had served 10 years in the state House and was the minority leader in 2006 when he joined Tony Knowles to campaign against Palin and Parnell in the governor s race. (He had started a gubernatorial campaign of his own; then, he ran in that year s primary as a candidate for lieutenant governor.) At the start of the race, the House outcome seemed likely to be a tossup, but Young campaigned throughout the state and effectively stressed what his 35 years of incumbency had brought to Alaska. He also dismissed the ongoing FBI investigation as unlikely to lead to an indictment. Young won 50 percent of the vote (Berkowitz garnered 45 percent), showing the continued value of incumbency in a noncompetitive state. AK-13

14 The high interest presidential and congressional races drew attention (and dollars) away from legislative races. These were less competitive than in prior years. Of 50 seats (one-half the 20-member Senate and all 40 House seats), only 10 were competitive, meaning that winning candidates had less than 55 percent of the district votes. Republicans won 22 House seats initially and then picked up another seat when incumbent Mike Kelly, a Republican from Fairbanks (who had outraged constituents by calling the energy rebate morphine and suggesting that battered women ought to have known what they were getting into) squeaked by his opponent with a 4-vote margin. The parties divided the Senate evenly. Organization of the 26 th Alaska Legislature. Republicans had sufficient votes to organize the House, but they added four Democrats from the rural (bush) caucus, giving them a working majority of 27. Kenai Republican Mike Chennault became Speaker. The Senate retained the bipartisan working group format of the 25 th legislature. Former Senate president Lyda Green, an outspoken critic of Governor Palin, declined to run for re-election, and Kodiak Republican Gary Stevens replaced her. This coalition, however, had 10 Democrats and 6 Republicans and was dominated by the Democrats. The Republican minority had only 4 members too few to gain a seat on the important finance committee. The strength of the Democratic majority virtually guaranteed that no socially conservative legislation such as restrictions on abortion or endorsement of the death penalty would pass this body. MAJOR CURRENT ISSUES We will discuss three issues influencing the budget process. Unlike previous years, we will not treat the Arctic National Wildlife Refuge (ANWR) at length. Notwithstanding Governor Palin s occasional championing of oil/gas development in ANWR, both John McCain and Barack Obama opposed it. The continued control of Congress by Democrats, who also oppose its opening for exploration and production, insures that ANWR will not be developed in the near term. We also comment on the state s congressional delegation. Natural Gas Pipeline. At the start of FY09, before oil/gas prices plummeted, Alaska had two natural gas pipeline plans. Under the Alaska Gasline Inducement Act (AGIA), the state contracted with TransCanada to build the 2,000 mile line from the Alaska North Slope to the Mid-West. The legislature agreed to the governor s proposal to spend $500 million on preconstruction costs, and the state formally licensed TransCanada in late 2008 (FDNM, 12/6/08). However, TransCanada owns no natural gas. Meanwhile, BP and ConocoPhillips, two of the gas producers, formed a consortium called Denali Ltd to build a pipeline, but Denali lacks state authorization. It made some headway nonetheless, and in February awarded a contract for a gas treatment facility on the North Slope, projected to cost $5-6 billion (FDNM, 2/11/09). Which company would proceed to construct the pipeline became a moot question as the global economic crisis depressed natural gas prices. Early in the legislative session, Ed Kelly, Vice President of Wood Mackenzie, a global energy consulting firm, advised lawmakers that the economic crisis had cut the demand for Alaska natural gas (ADN, 1/25/09). Too, the AGIA became controversial as first, Republican legislator Jay Ramras asked for a review of the legislation because of the sour natural gas market (FDNM, 3/14/09, 3/19/09); and then former AK-14

15 Governor Frank Murkowski attacked Palin s AGIA approach because it had not aligned all the players (FDNM, 6/2/09; ADN, 6/4/09). A hopeful development was Exxon s announcement in June that it was forming a partnership with TransCanada on the gas line (FDNM, 6/12/09; ABR, 6/15/09). (Exxon has the largest gas holdings of the three majors, including about two-thirds of the gas leases in the Pt. Thompson field.) The partnership of Exxon and TransCanada falls short of a guarantee by the producer to ship its gas through the line. All producers have insisted that the state establish fiscal terms and taxes on gas production that are certain and stable, before the projected 2010 open season (FDNM, 6/24/09). In-state use of Alaska s natural gas also has become an important issue. Late in the previous session, Governor Palin announced a public-private partnership to construct a small diameter line to serve the interior and southcentral regions. (The main source of gas for home and commercial use is Cook Inlet, and supplies are running low.) The vice presidential campaign interrupted the governor s planning, and legislators indicated some impatience over lack of progress. By the second month of the session, the governor introduced two proposals aimed at in-state gas development (FDNM, 2/28/09), to be ready for use by The private gas marketing firm Enstar proposed to construct the bullet line, but building infrastructure for the line, financing it, and working out an arrangement of public-private partnership are all obstacles. The legislature did grant the governor $7 million of the $9 million she sought for in-state gas line analysis and planning (ADN, 4/22/09). Outer-Continental Shelf (OCS) Drilling. Development of the state s natural gas resources is now primarily in the hands of the state government and private industry. Development of oil and gas resources in the Alaska OCS, on the other hand, is strongly influenced by federal action. Shell Oil returned to Alaska in 2005 to develop leases it owned in the Beaufort Sea. This OCS area is a habitat for polar bears, and the 2008 decision by Interior Secretary Kempthorne to list this species as endangered under the Endangered Species Act won praise from environmentalists and blame from industry and the state (which sued Interior over this issue). When Shell proceeded to conduct seismic tests, environmental groups sued in the Ninth Circuit to order drilling stopped; the court ordered a review (FDNM, 11/21/08). Thereupon, Shell cancelled its 2009 drilling program, hemorrhaging 700 jobs (ADN, 12/11/08). Under protest from the company and the state, the Ninth Circuit vacated its previous decision (FDNM, 2/9/09), and then reversed itself, ending the Alaska OCS drilling plan because the Bush administration had not studied potential environmental impacts (ADN, 4/17/09). The conflict over OCS development seems likely to continue now that the Interior Department is under a new Democratic leader. Wolf Control. The state s predator control policy continues to provoke opposition from national animal rights organizations. During the primary campaign, opponents of the policy alleged that the Fish & Game Department covered up its killing of 14 wolf pups (allowed under the state program), so that the action would not influence the ballot measure challenging the predator control program. During Governor Palin s campaign for the vice presidency, animal rights organizations criticized her for the state policy. After the election, Defenders of Wildlife used actress Ashley Judd in a publicity campaign targeting Palin and the state policy (FDNM, 2/5/09). People for the Ethical Treatment of Animals (PETA) continued its campaign against the state s handling of wolf issues, and expanded its charges to include Fort Wainwright army AK-15