Oil price collapse foreshadows huge deficits before PFD payments
What little financial wiggle room Alaska had to start the year has been squeezed out of the state’s fiscal picture and then some, according to the Legislature’s top budget analyst.
Legislative Finance Division Director Pat Pitney told members of the public policy group Commonwealth North during a March 27 videoconference that the State of Alaska is now facing significant annual deficits even before Permanent Fund dividends are paid for the foreseeable future.
Pitney summed up the impact of ongoing volatility in energy and financial markets as “declining lines” in the state’s revenue outlook.
Lawmakers will likely have to reconcile an additional $300 million added to the fiscal year 2020 deficit and could similarly be faced with yearly pre-PFD deficits of $300 million and growing down the road based on the current scenario, she said.
While many state officials and leaders of Alaska’s core industries are focused on the immediate health and economic impacts of the COVID-19 pandemic, the latest budget crunch is due to another reset of global oil markets that is only marginally linked to the worldwide health crisis.
Saudis and Russian officials were unable to strike a deal in early March to curb oil production in response to the sudden curtailment in demand stemming from suspended economic activity worldwide due to the response to the COVID-19 outbreak. The situation quickly devolved into a price war as Saudis leaders ordered more production on the premise their country can outlast Russia and other large producers dependent on oil revenue for a major share of their budgets.
The end result has been an approximate halving of oil prices over the past month.
The Department of Revenue’s official fall 2019 forecast pegged Alaska oil at $59 per barrel for the 2021 fiscal year, which starts July 1, with prices gradually rising with inflation in the out years.
Pitney told lawmakers earlier this month that Legislative Finance was basing its state revenue projections on a roughly $40 per barrel oil average for the next year-plus based on similarly priced Brent benchmark futures trades.
The additional $300 million shortfall this year is similarly based on $40 per barrel oil for the rest of the year, she noted. Based on those fundamentals, the final 2020 deficit is expected to be about $730 million, according to Legislative Finance officials.
The Energy Information Administration forecasted in mid-March that Brent benchmark crude — which Alaska oil follows closely — will average $43 per barrel in 2020 and return to $55 per barrel in 2021, but those projections could change along with the global response to COVID-19.
However, as of March 25 Alaska North Slope crude was selling for $26.73 per barrel, according to Department of Revenue figures.
CME Group, a Chicago-based firm comprised of four commodity exchanges, published Brent oil futures on March 30 of $22 per barrel for May, gradually rising to $37 by December.
The Department of Revenue typically publishes an update to their annual fall forecast in late March or early April to give lawmakers deliberating budgets more timely information on the state’s finances, but department officials have said they are holding off on publishing new numbers for now given the market volatility.
Many legislators who favor smaller dividend payments to help stabilize the state’s finances in-lieu of drastic budget cuts or new taxes have noted that the current budget had a surplus of more than $400 million based on oil in the low $60s per barrel and before paying PFDs.
That quickly evaporated with a cumulative $1.1 billion PFD appropriation and a $360 million supplemental budget to mainly pay for shortfalls in Medicaid and wildfire funding. The oil price collapse just takes more away from the revenue side of the ledger.
Under a longer-term projections by Legislative Finance, a slower oil market recovery to about $35 per barrel would cut annual state revenue by $700 million to $800 million per year.
The combination of very low oil prices and lower return projections for the Permanent Fund stemming from COVID-19 induced stock market declines the whole situation could end up costing the state up to $11 billion of lost revenue potential over the next decade, according to Pitney.
“Under a scenario with annual revenue going from $5.5 billion to $4.5 billion, irrespective of dividends we’d have high annual deficits,” she said.
Lawmakers recessed from the current legislative session shortly after the House approved a combined operating and capital budget bill shortly after midnight March 29. The Senate had previously approved the budget that had been negotiated in a conference committee.
The fiscal 2021 budget calls for spending approximately $4.7 billion in unrestricted general funds and is largely in line with the current budget on most agency items. However, it adds $30 million for K-12 education, $12.5 million for the University of Alaska, and $88 million in health system and disaster assistance funding for the state’s response to the COVID-19 pandemic.
The Legislature also approved nearly $17 million more for Alaska Marine Highway System operations than Gov. Mike Dunleavy requested in his budget and $19 million from the Vessel Replacement Fund to repair the currently laid up ferry Aurora that typically serves Prince William Sound communities.
The budget includes $680 million to pay dividends of $1,000 per person this fall, but a Senate proposal to pay a $1,000 PFD that would’ve provided a cash infusion to the state’s beleaguered economy was pulled out of the final budget that’s headed for Dunleavy’s desk.
The budget relies on a roughly $1.1 billion draw from the Constitutional Budget Reserve, the state’s last remaining savings account.
Dunleavy thanked legislators for quickly passing the budget in a statement from his office but said the missed an opportunity to help Alaskans by not approving a significantly larger PFD appropriation.
The governor had previously called on lawmakers to approve a supplemental spring PFD of $1,306 per Alaskan to make up for the difference between the $1,606 residents received last fall and the more than $2,900 dividends called for under the statutory dividend formula.
“The vast majority of economists worldwide, as well as the president of the United States, and almost every member of Congress understand how a quick injection of cash into the hands of workers will do more to stabilize the economy than any other approach at this time,” Dunleavy said in reference to the checks of up to $1,200 many Americans are set to receive from the federal stimulus package. “My administration will continue to work closely with Alaska’s congressional delegation and the White House on how to maximize the benefit of the federal emergency relief package here in Alaska.”
House Speaker Rep. Bryce Edgmon, I-Dillingham, wrote in a lengthy Facebook post March 30 that the sudden drop in oil prices and a roughly 10 percent decline in the value of the Permanent Fund in recent weeks forced the Legislature to make choices that will hopefully mitigate the long-term damage do the state’s finances — namely, approving a single, $1,000 PFD payment this fall.
“If the Legislature is able to return to session this year, I predict that the first order of business would be to take a second look at helping Alaskans who could be suffering even more than they are today,” Edgmon wrote, adding that while the choices were difficult this year, “next session will be worse” if oil prices don’t make a drastic recovery.
“When the Legislature convened this January, a budget surplus existed. But today it’s a faint memory, and in its place is a nearly $600 million hole. Next year could easily feature all at the same time: major budget cuts, attempts to impose new revenue measures and a zero PFD,” he wrote.
Pitney said Legislative Finance analysts expect the CBR to finish fiscal 2020 on June 30 with about $1.5 billion after starting the year with more than $2.1 billion. (The final deficit projections do not match the CBR draw due to mandated CBR deposits from court and tax settlements and modest investment returns during the year.)
Pitney, a former budget director for Gov. Bill Walker, said state officials need a minimum of approximately $600 million in the CBR to continue using it as a day-to-day cash management account. A CBR balance of less than $600 million would require Revenue officials to turn to the Permanent Fund’s Earnings Reserve Account to manage the state’s cash flow.
A rough calculation of current projections indicates the CBR could be down to approximately $500 million by the end of fiscal 2021.
As early as 2022 lawmakers would be faced with making a $350 million ad-hoc draw from the Permanent Fund to pay for state operations even before accounting for a PFD appropriation, according to Legislative Finance models.
Elwood Brehmer can be reached at [email protected].