The-Role-of-Metal-Mining-in-the-Alaska-Economy

Metal mining played a very important part in the original European settlement of Alaska, and, more recently, revenues from North Slope oil development have played a very important role i

The Role of Metal Mining in the Alaskan Economy

a report prepared for theSoutheast Alaska Conservation Council

Northern Alaska Environmental Center

by

THOMAS MICHAEL POWER

Professor of EconomicsEconomics DepartmentUniversity of MontanaMissoula, Montana 59812

406 243 4586

tom.power@mso.umt.edu

February 2002

Note: The affiliation of the author is provided only for identification This is not an

official publication of the University of Montana This report was prepared by the author

as an independent economic consultant The conclusions reached are solely the

responsibility of the author and do not necessarily reflect the position of the University ofMontana, its Economics Department, or either the Southeast Alaska Conservation Council or the Northern Alaska Environmental Center

1 Introduction and Summary

This report explores the role that metal mining currently plays in the Alaskan economy and the economies of the Fairbanks and Juneau areas Metal mining played a very important part in the original European settlement of Alaska, and, more recently,

revenues from North Slope oil development have played a very important role in the development of the modern Alaskan economy Because of these important historical roles of mineral development, it is often assumed that the future development of the Alaskan economy will also depend on the further development of the State’s metal deposits This report investigates the factual basis of metal mining’s assumed

importance in Alaska’s economic future

The analysis contained in this report supports the following conclusions:

1 Metal mining is directly responsible for only about one-half of one percent of

Alaskan jobs and personal income: about 2,000 of Alaska’s 400,000 jobs and $87million of Alaska’s $18.6 billion of personal income in the year 2000 Even after applying any reasonable “multiplier” to these numbers, metal mining would

continue to provide only a small sliver of total Alaskan jobs and income

2 In the “mining dependent” cities of Fairbanks and Juneau, metal mining is directly

responsible for about one and two percent of total jobs, respectively

3 This very modest role of metal mining is often obscured by exaggerated

estimates of metal mining’s impact built around double and triple counting or counting value that is not created in Alaska Such exaggerated estimates of impacts ignore basic economic accounting rules established almost a century ago

4 Because of its capital and land intensive nature and relatively modest use of

labor, the payroll associated with Alaska metal mining represents only about 8 percent of the $1.1 billion value of metal mine production

5 During the 1990s, while the real value of metal production in Alaska rose 83

percent, from about $600 million to $1.1 billion, metal mine payroll rose only 5 percent

6 Although metal mining, because of its capital intensity, contributes significantly to

local governments’ property tax bases, its contribution to total local government revenues, including all revenue sources, is much smaller The Fort Knox Mine contributes about one percent of the total revenues received by local

governments in the Fairbanks-North Star Borough The Greens Creek Mine contributes about one-half of one percent of the revenues received by local governments in the City and Borough of Juneau

7 Mine license taxes and production royalties on state owned minerals yield only a

few million dollars each to total state revenues that total almost $6 billion even without counting the revenue flows into the Permanent Fund Together these twosources of revenue from metal mining contribute less than one-tenth of one percent of total Alaskan government revenues

8 Despite the high wages paid in metal mining, that industry is not usually

associated with prosperous communities across the nation because (1.) metal

commodity prices are unstable, causing instability in employment and payroll; (2.)the life of a contemporary metal mine tends to be relatively short, 5 to 15 years; (3.) the labor needs of metal mining operations are constantly falling as

technological change displaces workers; only constant expansion of mine

production can offset this; and (4.) environmental damage associated with metal mining discourages people and businesses from locating near mining operations

9 Inadequate reclamation laws and reclamation bonding requirements can leave

state governments with large reclamation financial obligations and near

permanent damage to the natural environment Both have negative long-term economic impacts

10 The popular economic base approach to thinking about the Alaskan economy

that focuses on the assumed special role of oil production and transportation, mining, other natural resource industries, manufacturing, and the federal

government as key economic drivers is incomplete and inadequate It cannot explain the ways in which the Alaskan economy has been changing For

instance, during the 1990s while employment in these key sectors declined 25 percent, employment in other sectors expanded 25 percent While real income from these sectors declined 7 percent, income from other sectors expanded by

31 percent The Alaskan economy is more diverse and resilient than the popular economic base view suggests

11 In Alaska, across the western United States, and in many regions of the nation,

high quality natural landscapes have become an increasingly important source oflocal economic vitality Because people care where they live, and act on those preferences, and economic activity follows those residential choices, the

attractiveness of communities and landscapes has become an increasingly important part of a local area’s economic base To the extent that metal mining activities threaten this, they can undermine rather than enhance the local

economic base

These conclusions about the limited role of expanded metal mining in supporting the ongoing economic development of Alaska are not new In 1969 the Institute of Social, Economic and Government Research at the University of Alaska at Fairbanks published

a report on “Mining and Public Policy in Alaska: Mineral Policy, the Public Lands and Economic Development.”1 That report also concluded that mineral development had limited capacity to support economic development because the mineral industries were becoming less and less labor intensive and were playing a steadily shrinking role in the overall economy That earlier report also pointed out that mineral developments in isolated areas were unlikely to stimulate economic development in the area surroundingthe mineral site because very few of the mineral development expenditures would flow through the local economy Finally, that report emphasized that while the role of mineralproduction in the overall economy was shrinking, natural amenities such as clear water and air, open space, wildlife, and outdoor recreation opportunities were playing an increasingly important role in the determination of economic well-being The relative economic values associated with the natural landscape were shifting from extractive

1 Mining and Public Policy in Alaska: Mineral Policy, Public Lands and Economic Development, Arlon R Tussing and Gregg K Erickson, SEG Report No 21, June 1969.

toward non-consumptive natural resource values Over thirty years later, all of these points remain very important when it comes to the crafting of rational natural resource policy in Alaska

2 The Relative Importance of Alaska Metal Mining

A Metal Mining in the State Economy

Because the discovery of gold and the “gold rush” that followed is so important in

explaining the European settlement of Alaska, it is natural to see metal mining as a vital part of Alaska’s economic base As the Fairbanks’ University Park Elementary students put it on their website: “If it weren’t for gold, we wouldn’t even be here.”

The resources and economic activities that supported Alaska’s economic development

in centuries and decades past are important in understanding the state’s history, but they are unlikely to be a very good guide to the current and future economy of Alaska Successful economies change and develop Those that stay stuck in their early

developmental history are likely to stagnate and fail “More of the same” is rarely a prescription for the development and/or maintenance of a prosperous economy That is the reason that mining, timber, and agricultural towns are rarely vital, prosperous

economies For the last two decades, it has been rural counties that are mining and farming dependent whose economies have lagged the most.2 For example, the timber-dependent counties of northern Maine, the mining counties of Appalachia and copper towns of the West, and the farm counties of the Great Plains have all seen ongoing economic depression and population loss

If we look at just from where Alaskan residents receive their money income and where they are employed, the role of metal mining appears to be relatively minor, a small sliver

in comparison to the overall economy In 1999 (the last year with complete data) only about 1 in 200 jobs and dollars of personal income flowed directly from metal mining activities in Alaska See Figures 1 and 2 3

2The Revised ERS County Typology: An Overview, Peggy J Cook and Karen L Mizer, Rural

Development Research Report No 89, Economic Research Service, USDA, December, 1994, pp 8-9;

“Economic Geography of the Heartland,” Alan D Barkema, Center for the Study of Rural America,

Federal Reserve Bank of Kansas City, presentation to the Beyond Agriculture: New Policies for Rural America National Conference Westin Crown Center Hotel Kansas City April 27- 28, 2000, p 15.

3 Figures 1 and 2 are primarily based on the Regional Economic Information System data of the Bureau

of Economic Analysis, US Department of Commerce The estimate of tourism employment and income is based on “Visitor Industry Economic Impact Study, “ May 1999, McDowell Group, Prepared under Alaska Visitor Statistics Program for State of Alaska Division of Tourism.Also see Alaska Visitor Arrivals Summer

1999 McDowell Group, 2000 http://www.dced.state.ak.us/cbd/toubus/pub/impact99.pdf “Other mineral production” is primarily oil and gas production (96 percent), but coal, gravel, and other mineral extraction are also included.

Figure 2: Sources of Alaksan Jobs, 1999

Trade, Services

& Finance

47.5%

Tourism 4.4%

Other Mineral Production 2.2%

Manufacturing &

Other 8.4%

Metal Mining 0.5%

Construction, Transportation &

Public Utilities 13.2%

Manufactuing and Other 4.2%

Other mineral production

4.1%

Although there was some growth over the last two decades in the relative importance ofmetal mining as a source of jobs and income, it has remained a very small part of the overall Alaskan economy See Figure 3.

B Metal Mining and Local Economies

In some Alaska communities, metal mining has been more important than in others Because Alaska is such a huge state, it is possible that averaging metal mining payrolls

and jobs over the whole state has the impact of hiding the local economic impacts of

metal mining In general this is not the case Table 1 shows the estimated metal miningemployment in various Alaskan communities Even focusing on individual regional economies within Alaska, metal mining provides only one to two percent of total jobs.4

The obvious exception shown in Table1 is the Northwest Arctic Borough where metal mining represents 15 percent of total employment This high percentage of employment

is tied to two factors First, the mine is located in one of the more remote and lightly settled areas of Alaska Second, a significant part of the population is not in the

4 Table 1 is based on the Alaskan Labor Market Reports and includes only employment covered by the unemployment insurance program The self-employed and those working for very small firms are not included The federal government’s Regional Economic Information System estimates total employment including those not counted in the “covered” employment The different employment data sources can provide slightly different estimates of the relative importance of various industries.

Figure 3: Metal Mining and Other Jobs in Alaska

Jobs outside of Metal Mining

Metal Mining Jobs

commercial labor force and therefore is not counted when the percentage of total

employment is calculated Almost 90 percent of the population is Alaska Native and most continue to engage in traditional subsistence activities Only 55 percent of those over 16 seek paid employment For the state as a whole 72 percent of this group seek paid employment In addition, of those who seek paid employment about 16 percent donot find it The unemployment rate in the NW Arctic Borough is regularly twice that in the state as a whole, and it often has the highest unemployment rate in the state The combination of those who do not seek paid employment and those who do but cannot find it total over half of the potential adult workforce.5 That is, there are more working age adults who do not work for pay than those who hold paid jobs As a result, the percentage of the potential workforce employed by the Red Dog mine is exaggerated by

as much as a factor of two In any case, the Red Dog mine, as Table 1 indicates, is a dramatic exception to the pattern found elsewhere in Alaska

It should be clear that whatever the historical importance of metal mining was, it is not now playing a dominant or significant role in the state or the larger urban areas’

economies

5 “Northwest Arctic Borough,” Neal Fried and Brigitta Windisch-Cole, Alaska Economic Trends,

19(1):3-9, January 19919(1):3-9, Alaska Department of Labor.

State Total Metal Mining 1,185 274,570 0.4%

Source: The Alaskan Labor Market Report

Employment The Number and Location of Metal Mining Jobs in Alaska, 1999

Table 1

In judging the impact of metal mining on Alaskan residents, it is also important to

determine whether the mining jobs that are created go to residents or whether they are filled by in-migrants Because of concern about whether the higher paid jobs that are created in Alaska are being filled by current Alaska residents, the state government collects data on the residency of employees For metal mining that data indicates that for the larger established metal mines that are in active production, about one in six employees are non-residents As time passes, the percentage of miners that are non-residents declines For metal mining operations that are in the exploration and

development stages, between a quarter and a third of the employees are non-residents.See Table 2 When mining jobs are filled by outsiders migrating in, the positive

economic impact of the mine on the existing local economy is reduced In addition the pressure on the community to expand infrastructure and services to serve the new workers and their families increases

3 Mis-Measuring Local Economic Impacts

A Sales Value, Value Added, and Local Income

The economic impacts that matter most to local residents are impacts on jobs and incomes Yet local economic impacts are often measured in quite different terms that produce a bigger number but tell us little about how that economic activity contributed tothe well being of Alaskans For instance, local economic impacts are often measured interms of changes in the total dollar volume of business or by the overall level of local spending Because all local businesses import from outside the local economy

substantial amounts of what they sell, much of the dollar volume of sales does not flow

to local residents but, instead, quickly leaves the local economy to support incomes andjobs in distant manufacturing and trade centers The volume of that spending tells us nothing about local jobs and incomes That is why we do not describe the national economy in these terms Similarly, depending on how sophisticated the local economy

1997-99

Source: Residency Analysis of Alaskan Workers by Firm, 1999 Alaska Dept of Labor and Worker

Development,Research and Analysis, February, 2001.

Percentage of Employees Who Were Non-Residents

Percentage of Alaska Metal Mine Employees Who Were Non-Residents

Table 2

is, dollars spent in one business move to other local businesses that supply goods and services to local businesses Counting all of those transactions can lead to double or triple counting of the value that is actually being produced locally and the income that residents earn That too is why specific economic accounting rules were adopted for evaluating the overall performance of the national economy that prohibits such

misleading double counting Measuring economic activity in terms of the total value added by economic activity within the local economy (gross state product or gross domestic product) avoids both of these problems But even with that measure the impact on residents can be exaggerated because often a significant part of that value added, for instance the value of petroleum produced on the North Slope, does not stay

in Alaska but flows to the stockholders of the oil companies, most of whom live outside

of Alaska There are appropriate uses for data on gross state product, but measuring local economic impacts is not one of them Use of total volume of sales is also an inappropriate measure of local impacts Local impacts should be measured in terms of direct benefits to Alaskans That is the reason for using the jobs filled by Alaskan residents, the dollar earnings of Alaskan residents, and net government revenues that exceed the costs of necessary mine-related government services

Consider one economic consulting firm’s description of the economic impact of the Fort Knox Mine outside of Fairbanks The McDowell Group concluded that: “All told, mine spending has a $107 million impact on the Fairbanks economy, including direct and indirect payroll and local spending on goods and services Over 1,200 Fairbanks residents are either directly or indirectly dependent on the mine.” 6

In 1999 the Fairbanks Borough had about 40,000 wage and salary jobs receiving aggregate pay of about $1.3 billion Interpreted literally, the described “impact” of the Fort Knox Mine on this economy was clearly significant But the mine directly employed

an average of 260 workers and had a payroll of $13.3 million These direct, factual, impacts are only a tiny fraction, one-fifth for jobs and one-eighth for payroll, of the impacts estimated by the McDowell Group

McDowell gets the larger numbers by doing two things First, it applies a “multiplier” to the direct impact to account for the spending associated with the mine and its workers The payroll was multiplied by 1.5 and employment by 2.2.7 This brings the “direct and indirect” payroll and employment to $20 million and 570 jobs Still well below the

McDowell impact estimates To that payroll is added $87 million in “local spending” to bring the total to the $107 million in claimed total impacts But the impact of that local spending on payroll and employment had already been accounted for by using the multipliers The $87 million does not represent new income earned by Fairbanks residents It is a measure of gross dollar flows through the economy whose impact has already been accounted for As a result, the $107 million “local impact” figure is actuallyover five times larger than any reasonable estimate of local impact Finally, the 1,200

6 Economic Impact of the Fort Knox Mine on the Fairbanks North Star Borough, McDowell Group, February 1, 1999, p 1; True North Mining Project Economic Impact Study, prepared for Fairbanks Gold Mining Company, January 2001, by McDowell Group, Inc., Juneau, Alaska, p 3.

7 If one is going to use multipliers, these multipliers are within the reasonable range for a relatively small

and isolated city.

Fairbanks residents are not all workers; they are the workers and members of their

families who are likely to “depend” on other economic activities in addition to the Fort Knox mine

B The Payroll Associated with Alaska Metal Mine Production

The difference between the gross value of metal mine production and the part of that value that actually becomes pay for Alaskan residents is huge In 1999 only 8 percent

of the total value of metal mine production in Alaska was actually paid out to workers in Alaska.8 Forty-four percent of the gross value of metal mine production was not value created in Alaska at all but value associated with machinery, material, managerial supervision etc imported into Alaska The remaining 48 percent of the gross value of the metal mine products may or may not have flowed to Alaskans depending on who owned the mineral rights, loaned the capital, or invested in the mining company stocks

If those were non-residents, that portion of the value created (almost half) did not stay inAlaska either See Figure 4 Finally, about a fifth of the employees of metal mining companies in Alaska are non-residents Depending on where these workers families arelocated, this may reduce the small fraction of total sales value that is paid as wages thatcirculate within the Alaskan economy Even before exaggerations associated with estimated multiplier impacts, the impact analysis could be off by 12 fold ($8 in payroll out of each $100 in mineral value produced)

8 US BEA Gross State Product and Personal Income Statistics for 1999 The Economic Census data for

1997 also showed that only 7.75 percent of the value added in metal mining in Alaska went to wages; EC97N21S-GS, pp 7-12, US Census Bureau, April 11, 2001.

Between 1992 and 1999 the real value of metal mine production in Alaska increased by

83 percent but metal mining payroll hardly increased at all (+5 percent) The expansion

in metal mining was not significantly expanding the benefits to Alaska workers Clearly one cannot use the gross value of metal mine production to describe the impact of mining on the Alaskan economy See Figure 5

Figure 4 Disposition of the Gross Value of Alaska Metal Mining Production, 1999

AK Payroll 8%

AK[?] Payroll 48%

Non-Non-AK Value

44%

In Figures 4 and 5 the question mark in the label “AK Non-Payroll Value” refers to the fact that the value of the metals created in Alaskan metal mines that does not flow to workers as payroll is likely to flow out of the state as profits, interest, depreciation, and other returns associated with the capital invested in the mine It is value created by economic activity in Alaska but a substantial portion of it does not flow to Alaskan residents.

The data for individual mines show the same pattern Only a small part of the total dollar value produced by the mine is paid out as payroll For the Red Dog Mine, the world’s largest operating lead-zinc mine, for instance, in 1999 about 7 percent of total mine revenues of almost $400 million, or $27 million, was paid out to Alaskan

employees In addition to the local payroll, Red Dog also makes royalty payments to NANA Regional Corporation Between 1988 and 1998 those averaged $3 million per year At the same time about $163 million was returned to investors as depreciation, interest, or profit Red Dog is operated by Teck Cominco Ltd., a Canadian company with operations and stockholders worldwide

The Fort Knox Mine near Fairbanks is operated by Kinross Gold Corporation, another Canadian company with operations on five continents About 14 percent of the dollar value of its production in 1999 was paid out in payrolls

Figure 5: Disposition of the Real Value of Alaskan Metal Mine Production

AK (?) Payroll Value

Non-The Greens Creek Mine near Juneau is operated by a Rio Tinto subsidiary, Kennecott Minerals Rio Tinto is the world’s largest mining company, operating on six continents Itowns about 70 percent of Greens Creek The other 30 percent is owned by Hecla Mining Company that is headquartered in Idaho but also operates in Mexico and South America Because of the complex ownership, revenues and payroll can only be

approximated It appears that in 1999 about 23 percent of total revenues were paid out

in payroll See Table 3.9 For this group of three large mines about one out of every 10 dollars of metal value sold was paid out to workers

4 Metal Mining’s Impact on Local and State Governments

A Local Governments as Partners in Metal Mining: Impacts on Government

RevenuesEven when the contribution metal mining makes to total payroll and total jobs is quite small, state and local governments often come to a quite different conclusion about the relative “economic” importance of metal mining This may be tied to the ways in which metal mining contributes to government revenues Because modern metal mining is a capital-intensive industrial operation that involves large investments in site preparation and equipment, a metal mine can represent a significant part of a local government’s property tax base The Fort Knox Mine in the Fairbanks area, for instance, involved

9 Red Dog information comes from a presentation made to the 1999 Alaskan Economic Summit on behalf

of Dr N B Keevil, President and CEO of Teck Corporation, operators of the Pogo Project in central Alaska near Delta Junction; and Mr D A Thompson, President and CEO of Cominco Ltd., partner with NANA in the Red Dog Mine near Kotzebue, byDr N B Keevil and D A Thompson Feb 9, 1999, Juneau, Alaska; Cominco 2000 Annual Report pp 39, 50, & 51 were also used The Fort Knox data came from the Kinross Gold Corporation 2000 Annual Report, pp 8, 9, & 48 as well as the McDowell Group analysis of socioeconomic impacts The Greens Creek data came from State of Alaska data on

employment and earnings in metal mining in Juneau Borough and Hecla Mining Company 2000 SEC 10K Report, p 11

Mine Gross Alaskan % of Revenue Depreciation,

Revenue Payroll Going to Depletion,

Payroll Amortization,

Interest, and Operating Profit

$373 million in capital construction costs.10 The assessed value of the mine’s property was $243 million in 2001, adding about 6 percent to the total assessed value of property

in the Fairbanks North Star Borough and about 10 percent to the value of property outside of the cities.11 Only the Alyeska pipeline was a larger property tax payer.12 Similarly, the Greens Creek Mining Company is the largest property tax payer in the Cityand Borough of Juneau, four times larger than the next largest taxpayer Its assessed value of $77 million represented almost 4 percent of the Borough’s total assessed property value.13

Clearly metal mines can contribute to a local government’s property tax base in a way that is more than proportional to the jobs and payroll they generate This can make local governments almost a partner in the successful opening and operation of a metal mine

This, however, is an incomplete way of looking at the contribution that metal mines make to local government finances Property taxes are just one source of revenue for local government agencies In general, those property taxes represent a relatively smallportion of all local government agency revenues

Fairbanks North Star Borough, for instance, had total revenues in fiscal year 2000/2001

of $90 million but only $57 million or 63 percent came from property taxes.14 Within the geographic area of the Borough there are also the cities of Fairbanks and North Pole

In addition, there is the Fairbanks North Star School District Each of these other local governments levies its own taxes, obtains other revenues, and operates within its own budget The Borough levies local taxes in support of the school district, but the school district also receives funds from the state and federal government The 1997 Census ofGovernments provides information on the revenues and expenditures of all units of localgovernment combined within the boundaries of the Fairbanks North Star Borough Property taxes represented 18.8 percent of total revenues received by local

governments in the Fairbanks area.15 In that setting, even the Fort Knox Mine’s six percent of the property tax base represented only about one percent of total local

government revenues in the Fairbanks area (6% of 18.8% = 1.1%)

The City and Borough of Juneau, unlike the City of Fairbanks and the Fairbanks North Star Borough, operate as a unified government In the year 2000, it had operating revenues of $152 million, only $26 million or about a sixth of which came from property taxes.16 Local sales and excise taxes, user fees, interest, state and federal support provided the rest of the revenues The Juneau schools are supported by local taxes levied by the City and Borough of Juneau but also receive funds from other sources The 1997 Census of Governments indicated that only 13.5 percent of total local

10 McDowell Group, op cit p 3.

11 Fairbanks Community Research Quarterly, 24(2), Summer 2001, p 18.

12 Comprehensive Annual Financial Report for Fiscal Year Ended June 20, 2000, p 223, Table XII.

13 Comprehensive Annual Financial Report, Fiscal Year Ended June 30, 2000, p 201, Table 12.

14 Fairbanks North Star Borough, FY2001-2002 Budget, Revenue Summary, p 23.

15 U.S Census website; 1997 Census of Governments, County Area Finance & Employment FastFacts.

16 City and Borough of Juneau, FY02 Revised Budget, Summary of Operating Revenues by Source, p.30.

government revenues in the area of the City and Borough of Juneau came from

property taxes The Greens Creek Mine’s 4 percent of the local property taxes

represented only about one-half of one percent of total local government revenues (4%

of 13.5% = 0.54%)

In addition, the local taxes paid by metal mining companies are not “pure revenue” or

“pure benefit” to local government units Taxes are levied to cover the costs of services that local governments provide to businesses and citizens Metal mining operations consume local government services, directly or indirectly, and therefore impose costs onlocal governments Mines rely on roads as well as police, fire, and other emergency services Their employees also require local government services including education for their children and the basic urban infrastructure that supports the local economy Because metal mines both pay taxes to and impose costs on local government

agencies, the net fiscal benefit they confer on local governments is substantially less than the total tax dollars they contribute to total local government revenues

Looking at all units of local government in evaluating the tax contribution of metal mining

is appropriate if one is trying to understand the role of that particular type of economic activity and those particular companies in supporting all local government activities Butsome local government units are more dependent on property tax revenues that others For that reason, one can expect some local government units to perceive a higher level

of dependence on metal mining than the data above indicates As the data above

indicated, the Fairbanks North Star relied on property taxes for 63 percent of its

revenues but the City and Borough of Juneau relied on property taxes for only about 17 percent of its because the City and Borough operate as a unified government and makes heavier use of local sales and excise taxes

In calculating the impact of metal mining on local government fiscal balance, some haveincluded the tax payments made by workers and the businesses in which those workers

spend their wages Such a calculation assumes that if a particular mine were not

operating, the workers and their families would not reside in the area, would not own property there, and the commercial infrastructure would have to shrink proportionally because they would not be spending their wages locally The value of such a calculationdepends upon two questionable assumptions First, it assumes that these workers, residents, and businesses required no public services from local government and, as a result, the taxes they paid were not made to cover the costs of those services but were entirely “gifts” they made to the local governments Secondly, it assumes that all

changes in employment lead mechanically to changes in population The possibility, for instance, that residents act as entrepreneurs, creating jobs for themselves and their neighbors, is ignored Residents are assumed to be passive and helpless, waiting for anoutside company to come along and provide employment opportunities for them

Neither of these assumptions is economically appropriate and for that reason, extendingthe fiscal contribution of mining companies in this way is economically inappropriate

B Metal Mining’s Contribution to State Government Revenues

Metal mining operations pay a mining license tax to the State of Alaska, but that tax is reduced or offset in two ways First, the tax does not have to be paid for three and a halfyears after production begins and various tax credits against this tax are allowed for various types of investments that are made in the mine In fiscal year 2000 this mining tax generated net income (after tax credits) of $3.5 million Over the three years 1998-

2001 the net revenues from this tax averaged $2.1 million.17 The fiscal year 2001 state budget included revenues totaling $7.3 billion This total state revenue, however,

includes revenues that flow into the Permanent Fund If that $1.9 billion in Permanent Fund revenue is excluded, state revenues totaled $5.6 billion The average mining tax revenues over the previous three years represented less than four hundredths of one percent (0.038 percent) of annual state government revenues

In addition, all non-fuel mining that takes place on state-owned lands is required to pay the state a 3 percent of net income as a production royalty In calculating the royalty owed to the state, the costs of developing the mine, the costs of operating the mine, investment in upgrading the mine, and mine company overhead costs can all be

deducted from the value of the minerals produced In addition, a “non-cost,” the fact that the value of the mine declines as minerals are removed (“percentage depletion”) can also be treated as a cost and deducted As a result of the extensive allowed

deductions from the mineral value produced, many mines pay no royalty to the state For instance, the Fort Knox Mine, at the time it poured its millionth ounce of gold in September of 1999, had not yet had to pay any royalties to the State of Alaska because its deductions of “costs” allowed it to show no taxable “net income.” Across the state, in

1997, $13.7 million was paid under this royalty provision including $8.7 million that was paid to municipalities This too represents a very tiny portion of the total state and local government budgets

5 Metal Mining and Local Economic Development

Mineral production (generically referred to as “mining” in federal statistics) is the highestpaid major industry in the nation as well as in Alaska “Mining” includes oil and gas exploration and development as well as metal and coal extraction operations The high pay is all the more impressive given that mining jobs, in general, are blue-collar jobs that do not require a college education or advanced degree It is this high pay that makes mining jobs attractive to communities

Historically, mining often laid the basis for the original European settlement of relatively remote areas of North America including Alaska Often, however, that settlement was temporary, lasting only until the mineral deposit was exhausted and the miners moved

on, leaving behind “ghost towns.” Where mining activities persisted over several

decades, the commercial and civic infrastructure to support mining developed locally Local fortunes were earned and many of the cultural trappings of an opulent population also developed: opera houses, theaters, art museums, and up-scale retail stores But

17 Department of Revenue, Tax Division, FY 2000 Annual Report, p 38 and Table 2.

even in these permanent mining towns, prosperity rarely persisted The early mining towns that did persist and prosper, including Juneau and Fairbanks, successfully

diversified their economies away from primary reliance on metal mining That is clear from the very small percentage of total income and employment in these cities that now comes from metal mining Recall Table 1

Despite the high pay and enormous wealth associated with metal mining, it is rare to find a modern metal mining dependent community that is prosperous Continued

specialization in metal mining rarely leads to ongoing economic development.18 This anomaly is explained by the fact that community reliance on metal mining jobs also has significant economic drawbacks Mining jobs and payrolls tend to be unstable; they tend to support only very limited local economic development; and they are not likely to

be sources of additional economic activity Each of these drawbacks will be discussed

in turn

A Instability in Metal Mining and Smelting

As Alaska and many of its communities have experienced first hand over the last

several decades, metal mining jobs and payroll are quite unstable The metals

produced are sold on international markets in competition with other metal producers worldwide That competition, as with other commodities like wheat, oil, and seafood, can lead to over-production Reliance on the world economy also makes those prices vulnerable to economic downturns elsewhere in the world such as the “Asian Flu” of the 1990s.The profitability of any particular metal mining, processing, and refining

operation depends upon the international price of the commodity as well as the local costs of production International commodity prices can fluctuate widely, leading metal mines, mills, and smelting facilities to shut down when prices are low and bringing new producers and competitors online when prices are high Figure 6 shows the dramatic declines in inflation-adjusted (“real”) gold, silver, and copper prices over the last decade.Even when falling prices do not disrupt mining operations, the active life of modern gold mines is relatively short, 5 to 10 years.19 Figure 6 shows the change in metal prices over time by setting the prices in 1988 at 1.0 and then tracking how they fell relative to that reference point The declines to 0.4 represent a 60 percent decline in the price

18 This is not to say that metal mining dependent communities cannot escape that dependency Many previous “mining towns” have Juneau and Fairbanks, Alaska, Coeur d’Alene, Idaho, Helena, Montana, Park City, Utah, and Aspen, Colorado, are just a few examples of towns whose economies now are hardly tied at all to mining Breaking the dependency on this one industry has been crucial to these communities’ successes Of course there are also many mining towns that did not make that transition away from mining dependence and became “ghost towns.”

19 The Red Dog zinc and lead mine does not fit that gold mine pattern If zinc and lead prices stay high enough, Red Dog has reserves that would allow it to operate for many decades.

The result is wide cyclical fluctuations in the industry with regular layoffs The Greens Creek silver and gold mine outside of Juneau, for instance, opened in 1989 but shut down after a little more than four years of operation in 1993 because of low metal prices, laying off 250 workers It returned to operation in 1996 The Illinois Creek gold mine near Galena began operation in 1997 but suspended operations just two years later when falling metal prices forced the mining company into bankruptcy.20 The Nixon Fork gold mine near McGrath began operation in 1996 but also declared bankruptcy in

1999 due to low metal prices

This is not a situation that is unique to Alaska This same instability and decline are found throughout the western states and the nation as a whole In 1999 metal mining employment in the Mountain West region was down 70 percent from its level in 1980 and down 50 percent nationwide That is a loss of 22,000 and 50,000 metal mining jobs,respectively.21 If metal smelting employment were included in the total, the decline would be larger and steeper Problems have not only plagued gold mining, they have also curtailed silver and copper mining and smelting operations

20 In July 2000 some mining resumed at Illinois Creek under the administration of American Reclamation Group LLC That mining is part of a “mining to reclaim” operation under agreement with the State of Alaska that will finish processing ore stockpiles.

21 US Department of Commerce, Bureau of Economic Analysis, Regional Economic Information System, SA27 files, wage and salary employment.

Figure 6: Changes in Real Metal Prices 1988-2001

Source: US Geological Survey

The history of metal mining and metal ore processing over the last twenty years in the western states and the nation is one of instability and decline There is no evidence thatthat pattern will be reversed That pattern of economic disruption has a very negative impact on the economic development of the communities that come to depend upon these industries.

B The Economic Cost of Dependency on Metal Mining and Processing

When the income associated with an economic activity is not stable and reliable,

economic actors respond in ways that seek to protect themselves against that instability

In particular, if a community is quite dependent on an industry that has proved to be unstable in the past, investors will be very hesitant to risk their capital there Existing business owners will hesitate before investing in the upgrade or expansion of their businesses Workers will be hesitant to invest their limited savings in a home whose value may be threatened by a mine or smelter closing Even local government

agencies such as school boards will be hesitant to invest in new infrastructure for fear that a downturn will make it impossible to pay off the bonds that financed the public investments

When the economic activity on which the community depends also significantly

damages the natural environment, there is likely to be additional hesitancy to invest Ongoing degradation of air and water quality and damage to the surrounding natural landscape makes an area a less attractive place to live, work, and do business As a result, property values decline Study after study has documented the negative impact that pollution has on property values.22 People care where they live and are very carefulabout where they make what for most is the largest investment of their lives, the

investment in their homes

Economic instability and environmental degradation discourages local investments in communities that are overly dependent upon mining and mineral processing As a result economic development is retarded in mining and processing towns despite the high wages paid That is why it is hard to find prosperous mining towns Often the

22 “Stigma of Environmental Damage on Residential Property Values,” Gordon C Rausser, University of California at Berkeley, EPA Grant Number: R825995, August, 1998, final report available at

http://es/epa/gov/ncerqa/final/rausser.html Also see “Property Values, Stigma, and Superfund,” Working Paper prepared for US EPA, OERR, by Environmental Management Support Inc., July, 1999 Also see: Been, V 1994 "Locally Undesirable Land Uses in Minority Neighborhoods: Disproportionate Siting or

Market Dynamics?" Yale Law Journal 103:1383; Clark, D.E 1992 "Do Noxious Facilities Influence

Migration Rates? Evidence from a Countywide Model." Paper presented at the Annual Meeting of the Regional Science Association Int'l Marquette University Chicago, IL; Meyer, S.M 1992

"Environmentalism and Economic Prosperity: Testing the Environmental Impact Hypothesis." Project on Environmental Politics and Policy Massachusetts Institute of Technology; Blomquist, G.C et al., 1988.

"New Estimates of Quality of Life in Urban Areas." American Economic Review 78(1):89-108; Hoch, I

1978 "Variations in the Quality of Urban Life Among Cities and Regions." In L Wingo and A Evans,

Public Economics and the Quality of Life Johns Hopkins; Ullman, E 1954 "Amenities as a Factor in Regional Growth." Geographical Review 44:119-132; Harrison, David, Jr., and Daniel L Rubinfeld 1978.

``Hedonic Housing Prices and the Demand for Clean Air.'' Journal of Environmental Economics 5: 81-102; Mendelsohn, Robert, and Guy Orcutt 1979 ``An Empirical Analysis of Air Pollution.'' Journal of

Environmental Economics and Management 6: 85-106.

opposite is true; mining has come to be synonymous with under-development,

economic failure, and poverty as in Appalachia and the Ozarks and the mining “ghost towns” that are found throughout the West including Alaska and the Yukon.23

C The Limited Long Term Economic Potential of Metal Mining

The employment and income potential of metal mining in Alaska can be broken down into several different pieces: 1 the physical potential for new mining, 2 the economic potential for new mining, and 3 the long term potential associated with existing and newmines

1 Because of its huge size, remote location, and highly mineralized landscape, Alaska is often portrayed as a virtual “treasure trove” of commercial mineral potential.24 Physical presence of minerals, however, does not by itself represent feasibleeconomic opportunity Many other regions of the United States and the world also have high mineral potential that either has not been developed, was developed and

abandoned, or was developed but poverty, not prosperity, followed Most states in the

US have energy, metal, and other mineral potential, but, despite this “potential,” mining production has not become a significant part of the actual economy

2 It is not just the physical presence of minerals that matters but the economic characteristics of the deposits and the international markets into which they would be sold If a deposit has higher exploration, development, extraction, processing,and delivery costs than other deposits around the nation and the world, it is likely to remain undeveloped Only the most economically attractive mineral sites get

developed, not all sites In addition, as already discussed, commodity prices determine whether a deposit gets developed and, if developed, whether it continues to be mined For almost two decades mineral prices have been low and mineral development

discouraged This is no clear evidence that this economic situation will soon change

3 Even when mines are operating, the employment and income potential associated with them is likely to be either relatively short term and/or shrinking This is tied to two factors First, many modern metal mines operate for only five to ten years before exhausting the deposit For instance, counting not only the “proven” but also the

“probable” gold ore reserves and including the reserves associate with the recently permitted True North Mine as well as the Fort Knox Mine, at Kinross Gold Corporation’s

23 For instance, Dawson City had a population of over 30,000 people at the peak of the Klondike Gold Rush at the end of the 19 th century It now has a permanent population of about 2,000 and is mostly focused on seasonal tourism and placer mining Alaska’s McCarthy and Kennecott originally serviced the Kennecott Copper Company’s mining operations The area had a peak population of about 1,500 but now has only 35 permanent residents and is surrounded by the Wrangell-St Elias National Park

24 The Fraser Institute of British Columbia, for instance, annually polls mining companies operating in North and South America on the geological potential for mining in 35 political jurisdictions (Western states, Canadian provinces and Territories, and Central and South American nations) Using top ranked Nevada as a reference point scored at 100, other jurisdictions were rated for their mineral potential Alaska was tied for third with Quebec at a score of 94 just below Chile that scored 97 “Annual Survey of Mining Companies 1999/2000,” Vancouver, BC