Most Alaska state budget watchers follow oil prices, fully realizing that they can bounce around like a small plane on a windy day, creating that same stomach-churning queasiness when they drop.
The estimated difference between Alaska North Slope crude averaging $70 per barrel over the next fiscal year is $650 million less in state general fund revenue than at $80. That’s close to 10% of the general fund budget and enough to either leave a gaping hole in the spending plan or add some extra money to savings.
Oil down at $60 per barrel means an additional $500 million loss in state dollars.
It’s a lot of turbulence. And much like the pilot who can’t control the weather, the state is at the mercy of global oil markets.
Elected officials generally understand the volatility of oil prices, which determine the amount the state collects in taxes and royalties. But it’s a mistake to focus only on uncertain oil revenues and not pay equal attention to the single largest source of revenue for the state general fund — the annual draw on Alaska Permanent Fund earnings.
For the past five years, legislators and the governor have relied on a draw from the fund’s earnings to help pay for education, public services and the dividend as the state collects fewer oil dollars from declining North Slope production. That annual draw is limited by law to no more than 5% of the fund’s average market value over the preceding five years, leaving enough in the account to ensure that it keeps growing over time.
However, despite solid management and a diversified investment portfolio, the Alaska Permanent Fund can fly into turbulence, too. Such as the losses suffered in 2022 and a shaky start to 2023, the same as most other investment funds.
The Permanent Fund fell $8.26 billion in total asset value from Dec. 31, 2021, to March 31, 2023 (the latest available financial statement). It lost about 10% of its value during that time, sliding to $77.6 billion as of March 31. In time, the fund will recover from its losses and, according to the Alaska Permanent Fund Corp.’s latest projections, will reach close to $93 billion on June 30, 2032.
What matters to state budget writers, however, is that the painful period of losses drags down the annual draw. Throw a really bad year into the five-year market-value average and it reduces the amount transferred into the general fund.
By a lot.
The Permanent Fund Corp.’s Dec. 31, 2031, projections estimated the annual 5% draw for fiscal years 2024 through 2031 would send a total of $33.5 billion into the general fund for public services and dividends. The March 31, 2023, projection put that total at $30.4 billion, or $3.1 billion less over those eight years.
That’s an average of almost $400 million a year less for the state budget. The hit isn’t so much in the first couple of years, but then it grows.
The point being that legislators and the governor need to understand the uncertainty of more than just oil revenues. Investment dollars are not guaranteed, either.
It’s another reason why elected officials need to spread out the state’s revenue sources and think about general taxes. Alaska cannot live by oil and investments alone. Building in a third leg would add more stability to the budget table.
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