State projects $2B investment loss

  • Alaska Department of Revenue Commissioner Randall Hoffbeck talks to reporters about the revenue forecast he released on March 21 in Juneau. His department projects nearly $300 million less in revenue in the current fiscal year and $600 million next year due to continued low oil prices. Photo/Rashah McChesney/AP

Not surprisingly, Alaska’s fiscal picture got worse with the March 21 release of the 2016 Spring Revenue Forecast.

Total state revenue for the 2016 fiscal year, which ends June 30, is now projected to be about $3.6 billion, down more than 60 percent from the $9.5 billion of income estimated in the Fall 2015 Revenue Forecast released last December.

The fall outlook for investment revenue had the state taking in $3.8 billion in fiscal year 2016, while the spring forecast expects the Fund to take a loss of just more than $2 billion for the year.

In the first two quarters of fiscal year 2016, or from last July 1 to Dec. 31, 2015, the Fund lost $1 billion according to reports released by the Permanent Fund Corporation Feb. 12.

The vast majority of the turnabout in the revenue forecast is attributable to poor financial market performance since the start of the New Year, which for the State of Alaska translates into lost income from Permanent Fund investments.

The Dow Jones Industrial Average lost 5.5 percent in January and is currently down nearly 3 percent from one year ago.

The Permanent Fund, which includes the principal of the Fund and the Earnings Reserve, ended fiscal year 2015 last June 30 with $55.9 billion in total assets and fell as low as the $48 billion range in January.

However, Revenue Commissioner Randy Hoffbeck noted in a press briefing that markets have been on the rebound even since the spring forecast was compiled.

In the most recent quarter ended Dec. 31, 2015, the Permanent Fund returned 2.1 percent, bringing the fiscal year-to-date return through two quarters to a loss of 2.2 percent according to reports released Feb. 12 by the Permanent Fund Corporation.

The Fund held $52.7 billion as of March 18, according to the Alaska Permanent Fund Corp.

Total state revenue was $8.5 billion in fiscal year 2015 and is expected to rebound near that amount to $8.2 billion in the 2017 fiscal year that starts July 1.

Unrestricted General Fund revenue for 2016 was also revised down by $277 million, to about $1.3 billion in the latest forecast, as lower-than-expected oil prices more than offset an upward bump in the state’s oil production projection. The spring estimate for the average price in fiscal year 2016, is $39.50 per barrel for Alaska North Slope crude, compared to the fall estimate of $49.50 per barrel.

The 2016 production estimate, on the other hand, increased about 3 percent from just more than 500,000 barrels per day in fall to 516,700 barrels per day in the latest calculation based on data provided by the producers, Hoffbeck said.

In 2017 production is expected to fall back to about 506,000 barrels per day. Unrestricted revenue will fall as well, according to the forecast, to just more than $1.2 billion on a price projection of about $40 per barrel for next fiscal year, which is $564 million less than the fall forecast.

Depending on how much is cut from the final state budget, if the lower 2017 revenue projection holds true it could increase the budget deficit that has been pegged at $3.5 billion to nearly $4 billion for next fiscal year.

Diminishing oil income has also diminished the state’s dependence on it as a revenue source from supplying nearly 90 percent of all unrestricted state funds in prior years to 55 percent to 60 percent going forward, according to Hoffbeck.

Long term, the Revenue Department expects oil to stabilize in the $60 per barrel range by 2021, which Hoffbeck said partially reflects the historical inflation-adjusted average price as well as the range where shale oil, which can be brought into production quickly, becomes profitable.

“It makes sense that $60 would be kind of a ceiling we would bump into on oil price,” he said.

The annual spring revenue forecast is typically released in early April, but Gov. Bill Walker said the preliminary forecast was released March 21 to better inform the Legislature and the public as major structural changes to how the state manages its money are contemplated during the last weeks of the legislative session.

“The more information that’s available sooner, the better,” Walker said during the press briefing.

The announcement comes as legislators are planning to tap into the Permanent Fund Earnings Reserve to bridge the current budget deficit. The last time the Fund lost money was during the Great Recession of 2009, when it lost $2 billion.

Elwood Brehmer can be reached at [email protected].

03/23/2016 - 3:31pm