Borough prepares for plant shutdown

Kenai residents may face higher property taxes

Posted: Monday, February 14, 2005

KENAI - Lost jobs, shrinking property and sales tax revenues, business losses and other ripple effects on the Kenai Peninsula Borough's economy are expected when Agrium USA's Nikiski fertilizer plant closes in the fall.

Wrestling with an unsettling array of possible consequences, borough officials are considering steps to deal with the effects of the plant closure including imposing higher property taxes, adjusting the sales tax, adding new taxes and making 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 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, and 685 jobs and a payroll of $42 million statewide.

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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 borough-wide job growth rate of 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 affect 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 minimize some effects 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 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 said.

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 the same problems, exacerbated by rising insurance and retirement costs and now, the closure of the plant.

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

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, who represents the Nikiski area, 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.

Scott Holt, borough director of finance, said the closure of the Agrium plant would affect 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.

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