Workers, families and retirees are not the only Alaskans squeezed by inflation, rising interest rates and tumbling investments.
The state is in the same tight spot. And it could get worse.
The price for Alaska North Slope crude oil was down to $86.57 a barrel as of last Friday, dropping a third from almost $128 in early June. U.S. benchmark West Texas Intermediate was even lower, at $78.74.
The stock market, where the Alaska Permanent Fund invests much of its money, as of Friday was down 20% from the start of the year. Bond and real estate values also are falling as rising interest rates, weakened consumer demand and other factors push the country closer to a recession.
The Permanent Fund’s total market value of principal and investment earnings fell more than $7 billion between Jan. 31 and Aug. 31, even before the stock market dropped an additional 6% in the first three weeks of September.
Managing state finances and public services is a lot easier when oil prices are high and investment returns at record levels. Not so easy when both are heading negative at the same time.
Permanent Fund earnings have provided the largest and most consistent source of revenue for the state budget since elected officials in 2018 accepted the fiscal reality that it was time to start using some of those earnings for public services. Oil revenues long ago stopped carrying the state, and legislators and governors had pretty much drained other savings accounts over the years to pay the bills.
But even the Permanent Fund has its limits. In fact, there are two limits.
First, no one can spend any of the principal — that is protected by the state constitution. The Legislature can spend much of the accumulated earnings to pay for dividends and public services. But it can’t spend what isn’t there, and that’s the second limit.
The uncommitted fund balance, as the spendable money is called, or the earnings reserve account by another name, was down to $3.6 billion as of Aug. 31. That’s what’s left after setting aside money to pay next year’s contribution to the state general fund for public services and dividends, and deducting an estimated amount for transfer into the principal to protect it against losing value to inflation.
That uncommitted fund balance cushion of $3.6 billion isn’t all that much when you realize stock and bond and real estate values could continue falling, cutting deeper into that number. And the cushion will be even thinner if oil prices continue to drop, leaving the state short of cash next year to pay for everything Alaskans need and want, especially their annual dividend.
If oil prices hang around the $80s through the end of the fiscal year next June 30, the state could be in a budget deficit, needing a supermajority of legislators to tap a limited “rainy day” savings account to cover the costs of public services and the big dividend payout Alaskans started receiving last week. It would not be optional — the dividend checks will have been cashed, and funding for schools and other public services will have been paid. Lawmakers will have little choice but to dip into the dwindling savings account, which was down to $1 billion as of Aug. 31.
The facts are lower oil prices could deplete the only sizable savings account left. The Permanent Fund’s market value is taking a nosedive and pulling the earnings reserve down on the dive. All the while candidates for state office are talking about all the good things they would spend more money on — particularly the dividend — and how they oppose any new taxes. It just doesn’t add up.
We have no fiscal plan, and that’s irresponsible.
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