Borough steels for end of Agrium

Fertilizer plant shutdown will have many effects on Kenai Peninsula's economy

Posted: Tuesday, February 08, 2005

Lost jobs, shrinking property and sales tax revenues, business losses and other ripple effects coursing through the fabric of the Kenai Peninsula Borough's economy may all be expected from the closure next fall of Agrium USA's Nikiski fertilizer plant.

Wrestling with an unsettling array of plausible consequences, borough officials are considering steps to mitigate the impact of plant closure — including imposing higher property taxes, adjusting the sales tax, adding new user fees such as a bed tax currently under consideration and spending cuts that could result in fewer borough employees and shorter hours.

Agrium provided a hint of things to come in June 2003 when it downsized nitrogen operations and laid off 65 workers representing $5 million in annual payroll.

An April 2004 study commissioned by Agrium and written by the McDowell Group looked closely at the expected fallout of Agrium's departure. The study predicted an immediate loss of 230 jobs — some of the highest paying in the borough with an average annual salary of more than $80,000. As a result, the average monthly wage in the borough will decline 1.9 percent.

McDowell went further. Employing so-called economic "payroll multiplier factors" in an attempt to quantify the extended effects of the existence of those Agrium jobs, the analysts estimated Agrium actually creates a total of 580 jobs with a $35 million payroll in the borough alone, and 685 jobs and a payroll of $42 million statewide.

Citing Alaska Department of Labor data, however, McDowell said the "worst-case scenario associated with the Agrium plant closure" might be avoided if the slow but steady boroughwide job growth rate (1.5 percent annually) of the past five years continued.

The plant closure will mean an immediate loss of $2 million in property tax revenues, the report said. That's 5 percent of the borough's total property tax revenue. Such a loss would be expected to impact services.

"Either the borough would be forced to make significant cuts in services or other property owners would make up for the Agrium-related loss through higher tax payments," the McDowell Group said.

Other direct effects of the plant closure will include loss of sales to local businesses and contributions to nonprofits. In 2003, Agrium spent $77 million purchasing goods and services from 384 Alaska businesses, while another $195,000 went to nonprofits, McDowell said.

Local housing and real estate markets could see some weakening, the study predicted, though McDowell tempered that judgment by saying other factors — numbers of houses going on the market, interest rates and job growth elsewhere in the economy — could mitigate any impacts in that sector.

The plant closure also might be expected to have an effect on natural gas production in Cook Inlet. Unocal currently supplies Agrium's gas feedstock. According to the McDowell study, currently there is no industrial market outlet for that gas.

Roxanne Sinz, spokesperson for Unocal, said Monday that the amount of remaining gas is only a fraction of the volume needed to meet Agrium's requirements.

"Unocal has no immediate market for that gas," she confirmed.

Assembly member Chris Moss, of Homer, said concrete discussions have yet to occur at the assembly level, primarily because the Agrium situation had been up in the air until the company's closure announcement in December. Until then, the core dilemma facing the fertilizer producer was securing a long-term, low-cost gas supply. Unocal, under contract to supply gas to Agrium, declared late last fall that it would no longer deliver the commodity at the current price after this year. The loss of that cheap gas led directly to Agrium's decision to close the plant, according to corporate sources.

Moss, chair of the assembly's Finance Committee, said the assembly and the borough had "dropped the ball" last year by not initiating serious steps to cut spending and raise revenue that might have left the borough better prepared for the bad news.

"We took the rosy outlook," he said. "We had a substantial reserve account to ease the transition, but we didn't raise taxes or cut the budget. We did nothing of substance. We took it all out of the reserve account (to balance the budget). It was similar to what the state does."

This year, Moss said the borough faces exactly the same problems, only exacerbated by rising insurance and retirement costs — and now, the closure of a whole industrial plant.

The picture is not all black, however, Moss said. State analysts, for instance, have often pointed to the borough's diverse economy as a healthy buffer against boom and bust cycles. Further, the borough is acting to promote more gas development and exploration is ongoing, especially on the lower Kenai Peninsula, where efforts are beginning to pay off.

But Moss cautioned that even given a bigger pool of available gas, producers aren't likely to be willing to part with it at a price low enough to lure a value-adding industry into the void left by Agrium. Gas product manufacturers are more likely to head elsewhere in the world in search of cheaper gas feedstock, Moss said. Those business realities are simply out of the borough government's hands.

That virtually dictates an intensive examination of spending practices and revenue streams the government can control — services and taxes.

Assembly member Betty Glick, of Kenai, has proposed an 8 percent bed tax on hotel and motel accommodations. That ordinance starts a series of public hearings March 1. The borough also will look at raising the property tax and consider cuts in services, which may translate into cuts in personnel, Moss said.

Assembly President Gary Superman represents the district likely to feel the closure of Agrium most directly insofar as lost tax revenues are concerned. The Nikiski area includes three important service areas — the Nikiski Senior Service Area, the North Peninsula Recreation Service Area and the Nikiski Fire Service Area, all of which rely on the rich property tax base of the peninsula's oil and gas industry. Their boards are writing fiscal year 2006 budgets now.

"They're anticipating the initial impacts already," Superman said. "They are doing what they can to pull back in and try to keep things trimmed to minimal. I don't see any tax increases this year, but the real impact won't be felt until next year."

Superman said he thought some of the McDowell Group's numbers were a bit liberal. For instance, he said of the $77 million spent locally, some $60 million purchased gas. Whether that money actually flowed into the economy isn't clear, he said. He also suggested that the impact on school enrollment might be less than predicted by McDowell.

"What concerns me more is the loss of jobs," he said, adding that the central peninsula may feel those reverberations more than Nikiski because many Agrium employees live in the Kenai-Soldotna area rather than out north.

Scott Holt, borough director of finance, said the closure of the Agrium plant would impact borough services across the board, possibly including a reassessment of the borough's long-standing practice of funding schools to the maximum level allowed by state law.

While much of the borough may experience relatively minor effects, Agrium's closure could hit Nikiski hard, Holt said.

"The amount each individual taxpayer is paying is underwritten by the large tax payers," Holt said. "They (residential property owners) will be substantially impacted."

The administration is looking at the whole scope of possible approaches to mitigating the effects of plant closure, Holt said. That could include raising property and sales taxes and instituting new fees, where appropriate. The borough has implemented a policy of not replacing personnel when jobs are vacated unless refilling that job can be specifically justified.

"Nothing is being left on the table," he said.

The assembly has asked the administration to examine the effects of a 5 percent across-the-board budget cut. A report could be ready for the assembly by March 1, Holt said.

As serious as the situation may be, Superman cautioned against wild speculation. For instance, he's heard talk that ConocoPhillips "is next." The company's export license is up for renewal in 2009, so it is possible that plant might close, too.

"But I don't know how probable that is," he said, adding that with current gas exploration and discovery, Phillips could just as easily remain in place.

The borough has weathered such economic storms before, Superman said, pointing to the general statewide downturn of the late 1980s as an example.

"We are definitely in a trough right now," he said. "But I see no reason for expecting this will turn into a rustbelt. There are a lot of resources left onshore and offshore. My hope is that after Agrium leaves — and BP (experimental gas-to-liquid plant) is about done — that that might be the end of the bleeding. That's the best we could hope for right now."

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