Alaska's Construction Spending Forecast 2018


Civilian federal spending in Alaska, most of which funnels through state and local government, fluctuates little from year to year and thus tends to stabilize the size of the construction budget. Military-related spending is more variable and in recent years has been growing, largely due to the Missile Defense program and most recently the assignment of two F-35 fighter plane squadrons to Eielson Air Force Base outside Fairbanks.

Local and state government spending — particularly state — will continue to contract. But since the state capital budget now consists almost entirely of the match required for the state to get federal transportation funds, it is close to bottoming out. The unexpended funds from prior year capital appropriations are almost entirely gone. By contrast, local government spending remains relatively stable.

The non-petroleum basic sectors of mining, tourism, seafood and air cargo are expanding, thanks to the strength of the national economy, and that growth will be reflected in modest increases in construction spending in these sectors.

Construction in the rest of the private economy will suffer another year of contraction because of the continued poor performance of the state economy. Alaska’s population declined in 2017, and the current recession is expected to continue into 2018.

As in past years, some firms are reluctant to reveal their investment plans because they don’t want to alert competitors; also, some have not completed their 2018 planning. Large projects often span two or more years, so estimating “cash on the street” in any year is always difficult because the construction pipeline never flows in a completely predictable fashion. Tracing the path of federal spending coming into Alaska without double counting

is also a challenge, and, because of the complexity of the state capital budget, it is always difficult to follow all the flows of state money into the economy.

We are confident in the overall pattern of the forecast — but as always, some surprises can be expected as the year progresses.

 

PRIVATELY FINANCED CONSTRUCTION

Petroleum: $2.55 billion

The outlook for petroleum-related construction spending in 2018 is brighter than in the past two years. There will be an upturn toward the end of 2018, during the winter season, due to a number of factors. Those include favorable federal and state policy, recent discoveries, a large inventory of projects, price recovery and cost-cutting.

Perhaps the most significant recent federal policy change affecting Alaska is the decision to open the 1002 region of the Arctic National Wildlife Refuge (ANWR) to exploration. That decision — along with the opening of federal offshore lands (OCS) to leasing — will not immediately lead to spending, but it does demonstrate a renewed federal interest in the petroleum industry in Alaska. Of more immediate effect is the possibility that the area within the National Petroleum Reserve- Alaska (NPR-A) open to exploration will increase. Production has already begun there, and a new report from the U.S. Geological Survey concludes there may be much more recoverable oil in NPR-A than previously thought.

Exploratory work is proceeding at three North Slope sites where potentially huge discoveries in the Nanushuk formation have recently been announced. If these prospects prove economic, they will result in billions of new capital investments in the coming years. The largest, but most challenging because of its remote location, is a discovery by Caelus at Smith Bay.

Repsol, in partnership with Armstrong (and Oil Search), is investigating a large discovery at its Pikka unit. And ConocoPhillips will be studying a 2017 discovery called Willow, west of its existing projects in NPR-A.

When the price of oil collapsed in 2014, a number of North Slope projects under development were postponed as producers waited for improved market conditions. Now that the oil price has increased and costs in the oil patch have fallen — estimates for the North Slope range up to 40 percent for oil production — producers will be moving forward with some of these projects. (For example, ENI recently received a federal permit to drill offshore in the federal OCS at Nikaitchuq North, and Brooks Range Petroleum is moving forward to develop the Mustang field.)

In addition, in the past few years a number of firms, particularly those active in Cook Inlet, came to depend on receiving cash from the state government’s tax credits. But the fiscal situation of the state slowed the payment of those credits, and some of these companies (Furie in the Kitchen Lites unit and Blue Crest Energy in the Cosmopolitan unit) were forced to suspend operations for lack of funds. The state has now proposed a bond sale to pay the $900 million of outstanding credits this year. If that happens, it will provide a boost, particularly in Cook Inlet.

Finally, production has increased for the past three years (fiscal years) in a row. That may partly be the result of the new state production tax. But cost-cutting and the introduction of new technologies — particularly at the legacy fields at Prudhoe Bay, Kuparuk and Alpine — have also been important factors.

 

Mining: $239 million

Spending by the mining industry — on exploration and development as well as maintaining and upgrading existing mines — will be higher than last year as the industry worldwide continues to rebound from several years of low activity.

Spending by the six major mines currently in operation will be about the same as last year, as producers make new investments to increase efficiency and to develop new reserves to extend mine life. For example, Teck Cominco, buoyed by the rise in the price of zinc, is exploring a new deposit at the Red Dog mine, one of the world’s largest zinc producers.

Spending for drilling and other site work will be higher this year at the several large prospects under various stages of development, including the upper Kobuk mineral prospect and the Bokan rare-metals prospect in Southeast. The three largest prospects are still in various stages of preconstruction work (Donlin Creek, Pebble and Livengood).

 

Other Basic Industries: $110 million

Alaska’s other important basic industries — tourism, seafood, air cargo and timber — are generally healthy and expanding. As a result, their spending on construction will be higher this year.

Spending on new hotels, including several in Anchorage, will be in response to the continued growth in the number of tourists visiting the state, although the boom in construction may be winding down.

At least two replacement or expansion seafood processing plants have been announced for this year for Southwest Alaska. Several infrastructure improvements will also be made to deal with problems stemming from the unexpected huge salmon runs in 2017.

Alaska Airlines will continue its $100-million program, upgrading its terminal facilities throughout the state and completing construction of its new hangar in Anchorage.

 

Utilities: $539 million

Utility spending will be up slightly this year.

Although there are no new large projects anticipated for the major electric utilities, they continue to spend on maintenance and upgrades of existing facilities. GVEA (Golden Valley Electric Association) is finishing work on its Healy 2 unit.

Utility spending on renewable energy projects continues. Upgrades to the Terror Lake project in Kodiak and Bradley Lake are ongoing, but the expansion of the Fire Island wind farm near Anchorage is on hold. Other smaller projects across the state are still funded by the state Renewable Energy Fund, but no new money is being added to that program.

No significant expenditure related to gas utilities is projected, as development of the gas distribution system for Fairbanks awaits a final financing plan from AIDEA. Telecommunications spending will be a little higher this year, as firms make expenditures to improve quality of service.

 

Hospitals and Health Care: $275 million

Hospitals and health-care facilities will continue to spend on expansions and upgrades this year, but at a slower rate as some large projects are completed. No new large projects have been announced for the large public or private hospitals in the state. Some hospitals are expanding facilities for drug-related health problems.

Work is also continuing on the new YKHC (Yukon Kuskokwim Health Corporation) hospital and outpatient clinic in Bethel, which have a total price tag of $287 million.

Health-care facilities continue to proliferate, as the population ages and federal funds for health care grow.

 

Other Commercial: $125 million

Commercial construction spending consists primarily of office buildings, retail space and warehousing. The level of spending from year to year can be influenced by a few large projects, like an office tower or warehouse, as well as the current and projected health of the economy.

Market indicators such as vacancy rates and turnover are relatively healthy, but the outlook is fragile.

We expect the pace of commercial construction will slow again this year, primarily because of weakness in the economy. That weakness is reflected in the continued decline in employment (forecast at 0.5 percent for 2018), more people leaving Alaska than moving in and flat personal income. Also compounding the situation is uncertainty about the state government’s ability to successfully deal with the deficit. One large project currently under development is a new $40 million warehouse for Odom, near the airport in Anchorage.

 

Residential: $225 million

In spite of the Alaska recession, the residential market is relatively healthy, as measured by prices and loan activity. Part of that is because less new stock has been added to the market in the last several years. Due to the continued drop in employment and out-migration of population, we expect residential construction this year to again be lower than last year. Projects with public funding will be less sensitive to these economic trends.

The strongest market will continue to be the Mat-Su Borough, since it is the only area continuing to see population growth.

An increase in population is anticipated for the Fairbanks area, associated with the deployment of two F-35 squadrons to Eielson Air Force Base, but deployment will not begin until the end of the year. In addition, potential private housing developers are adopting a cautious investment approach, in part due to recent Congressional attempts to close the base.

 

PUBLICLY FINANCED CONSTRUCTION

National Defense: $630 million

Defense spending will again be higher in 2018, fueled by spending for infrastructure for the F-35 bed-down and the Missile Defense System.

Most of the Corps of Engineers budget for MILCON (military spending for facilities on bases) will be allocated toward these two activities. The F-35 bed-down involves several large projects totaling about $500 million, construction of many of which will get underway this year. With ongoing projects, this is likely to be the biggest year for work at Eielson Air Force Base near Fairbanks, where the F-35s will be located.

Missile defense work will be split between two sites at Fort Greely and Clear. Fort Greely is where the Mission Control Facility is under construction. Clear is where the Long-Range Discriminant Radar (LRDR) facility will be located. Congress recently approved the addition of another field of missile silos at Fort Greely, but that will not be under construction for several years.

MILCON spending also includes sustainment, restoration and modernization (SRM) work at all the military bases.

Spending on the civilian and other interagency programs of the Corps of Engineers will be similar to that of past years. This spending typically funds Corps of Engineer projects for other federal agencies like NOAA, FAA and the BLM and projects done in cooperation with Alaska communities, such as harbor improvements.

The environmental program budget of the Corps of Engineers, including FUDS (Formerly Used Defense Sites), varies from year to year, but is expected to be somewhat higher this year. This program includes cleanup of hazardous substances and contaminants at former defense sites, as well as on current Army and Air Force installations.

 

Transportation — Highways and Roads: $667 million

A majority of funding for highways (including the Marine Highway System) comes as grants from the federal government under a program known as the Fixing America’s Surface Transportation Act (FAST Act), which became law at the end of 2015. This law requires a state match for receipt of the federal funds. Some federal funds also go directly to Alaska Native tribal organization for transportation projects.

In addition, the state augments federal funds for highway and road construction with an annual capital appropriation to the Department of Transportation and Public Facilities.

Also, in some years the state Department of Commerce, Community, and Economic Development (DCCED) distributes grants to local governments for road construction, but little has been appropriated for grants through DCCED since 2013.

Finally, the state also periodically sells general obligation bonds to support road construction as well as other infrastructure projects. The most recent bond package was approved in 2012.

It can take considerable time for transportation appropriations to become cash on the street, so state funds from past capital budgets and bond sales are still contributing to current spending. Consequently, the level of spending this year will be a little higher than last. Also contributing to the increase is the reobligation and repurposing of some previously unexpended funds.

These funds will pay for major projects throughout the state on the Sterling, Seward, Parks, and Glenn highways, as well as many other projects.

 

Transportation — Airports, Ports and Harbors, Railroad: $387 Million

Federal funds, mainly from the Federal Aviation Administration’s AIP (Airport Improvement Program), provide the bulk of funding for airport improvements both at the large international airports in Anchorage and Fairbanks and the many smaller state-owned airports across the state. This continues to be a stable source of funding that is augmented by revenue bonds and other local sources. A runway improvement project is scheduled for Anchorage, and other smaller projects are scattered throughout the state.

Spending related to ports and harbors will also be about the same as the previous year. Work on the redevelopment of the Port of Anchorage will be slow, and there will be no money to continue development of the Point McKenzie rail extension.

Spending from a combination of federal funding, state general funds, the transportation bond package, tourist-related fees and local sources will underwrite projects throughout the state, including significant activity at Dutch Harbor, Skagway, Valdez, Juneau and Wrangell.

The Alaska Railroad’s capital budget will be significantly higher this year, funded through a combination of federal grants, cash flow and revenue bonds. The railroad is moving forward with the PTC (Positive Train Control) system, mandated by the federal government.

 

Education: $235 Million

Spending for education comes mostly from state government, and it will again be lower this year.

Direct state funding of urban and rural schools will be about the same as the previous year but consist of renovations and upgrades without any new schools under construction. A number of rural schools are still awaiting construction, but they are unlikely to move forward this year.

The legislature’s moratorium continues on the decades-old practice of reimbursing municipalities for a share of the debt they incur to build new and repair existing schools. That has more than doubled the price of new schools for urban school districts. This extra cost, combined with the absence of population growth, has meant no urban districts are building new schools.

Funding for schools also comes from the proceeds of local bonds in urban areas such as Anchorage, Mat-Su and the North Slope Borough. This source of funds is relatively stable and pays mostly for renovations and upgrades to existing facilities.

There will be little University of Alaska construction spending on buildings on either main campus this year. The only large project will be completion of the new power plant in Fairbanks; the new engineering building there is now complete.

 

Other Federal: $270 million

Although the largest categories of federal construction spending in Alaska are transportation grants (highways and airports) and national defense, there are several other sources of federal spending that contribute to construction activity. The largest of these is a series of grants that support housing and safe water programs in the state — and because these grants have been stable over the years, other federal spending has tended to be constant from year to year, as will be the case in 2018.

Most of the funding for the state-administered Village Safe Water program for rural sanitation comes from federal sources, including the Environmental Protection Agency and the Indian Health Service. With the state contribution, it is expected to be constant this year. Other types of federal grants to the state fund armories and veterans’ facilities, among other things.

The federal government also provides construction grants to Alaska tribes, nonprofit organizations, and local governments across the state. Alaska Native nonprofit corporations, housing authorities and health care providers receive most of this money. The largest of these programs in Alaska is NAHASDA (the Native American Housing Assistance and Self-Determination Act), which provides assistance for housing construction in Alaska Native communities, through grants to federally recognized tribes and Alaska Native housing authorities statewide.

Direct procurement by federal agencies like the Department of the Interior (National Park Service, U.S. Fish and Wildlife Service, and Bureau of Land Management), the Postal Service, the Department of Agriculture and NOAA (the National Oceanic and Atmospheric Administration) also provides funding for construction each year.

 

Other State and Local: $310 million

State and local government capital spending — excluding transportation (roads, airports, ports and railroad), education, health and energy — will again be lower this year. Many projects have been funded in recent years through grants from the Department of Commerce, Community, and Economic Development to local governments and nonprofits throughout the state. These funds have mostly been expended.

The state capital budget now consists mainly of the match necessary for federal transportation funding for roads and airports. It also has a small amount for facilities maintenance, but the backlog of deferred maintenance, estimated at about $1.8 billion (primarily buildings and including the University of Alaska), continues to grow.

The governor has proposed to augment the regular capital budget for the next three years with a special appropriation funded by a temporary payroll tax (the Alaska Economic Recovery Act). It is estimated this tax would provide $800 million over a three-year period that would leverage a total of $1.4 billion in capital spending to be used primarily for deferred maintenance. Because funding this program would require a new, although temporary

tax, its implementation cannot be assured. And if it were implemented, the construction spending it produced would only begin to hit the street toward the end of this year.

Local government capital spending, from general funds and bonds as well as enterprise funds, direct federal grants and foundations tends to be stable from year to year. A large share of this spending is for water and sewer facilities, which this year will include a new water treatment facility at North Pole, but it also includes other construction, such as buildings, libraries, museums, recreational facilities and solid waste facilities.

 

CONSTRUCTION IN THE OVERALL ECONOMY

Construction spending is one of the important contributors to overall economic activity in Alaska. Annual wage and salary employment in the construction industry in 2017 was about 15 thousand workers, with average annual pay of $75,000, exceeded only by petroleum and mining. But that figure doesn’t include the “hidden” construction workers employed in other industries such as oil and gas, mining, utilities and government (force account workers). In addition, it does not account for the large number of self-employed construction workers — estimated to be about 9,000 in 2011.

Construction spending generates activity in many industries that supply inputs to the construction process. These “backward linkages” include, for example, sand and gravel purchases (mining), equipment purchase and leasing (wholesale trade), design and administration (business services), and construction finance and management (finance).

The payrolls and profits from this construction activity support businesses in every community in the state. As this income is spent and circulates through local economies, it generates jobs in businesses as diverse as restaurants, dentist’s offices and furniture stores.

 

Excerpts from “2018 Alaska Construction Spending Forecast”

Presented by Scott Goldsmith and AGC of Alaska Executive Director John MacKinnon

 

By Scott Goldsmith and Linda Leask

Institute of Social and Economic Research, University of Alaska Anchorage