Alaska enters new age—extreme uncertainty
The Legislative Finance Division has prepared a bleak presentation for legislators Wednesday, attempting to update the state’s financial situation in the midst of unprecedented chaos for Alaska and the nation.
With the collapse in oil prices, a multi-billion-dollar loss in investments, the cancellation of cruise ship sailings, a shutdown of many businesses and the risks of a deadly pandemic, it’s hard to know where to begin.
This presentation for the House Finance Committee is a start. To make the best of a bad situation going forward, Alaskans need to know exactly where we stand.
The meeting starts at 10 a.m. and details on how to tune in are here.
Way back when, on April 6, the state predicted that oil prices would remain below $30 a barrel until the end of June and average $37 in the fiscal year that begins July 1. The state predicted that oil production would remain about the same,
In the two weeks since that forecast appeared, the oil situation has gotten a lot worse. The financial analysts for the Legislature, practicing the art of understatement, now say the April 6 report “may be optimistic on both price and production.”
“The price collapse this week is unprecedented,” they said and the investment reductions announced by the oil industry will lead to lower production in the future.
“The negative prices this week were primarily a reflection of a broken futures market, not the actual value of oil. True oil prices are still positive (for now),” the report to the finance committee says.
“Producers pay taxes on average values, not daily values. If the price were zero for the rest of FY20, the average value for the year would still be nearly $46 per barrel,” they said.
If oil prices and the production level are lower in the next fiscal year than envisioned in the April 6 report, the Constitutional Budget Reserve could be empty next winter or spring.
The end of the CBR means the state has to deal with its structural deficit. It could withdraw more than is sustainable from the Permanent Fund. Or the state could cut spending and increase taxes. A combination makes the most sense. None of it will be pleasant as the choices will all be difficult.
Taking more than a sustainable level out of the earnings reserve of the Permanent Fund creates risks. The legislative financial analysts say that every additional $1 billion removed from the account will increase future deficits by $50 million a year.
On Monday, a spokesman for Gov. Mike Dunleavy told the Fairbanks Daily News-Miner that "low oil prices and the budget deficit it created are nothing new” and that the Dunleavy will not consider taxes until cuts to services are considered.
The governor, on the run from the recall, has refused to say what he wants to do on the budget for months. He has only wanted to talk about paying higher dividends, though he still claims to support the cuts he backed a year ago and then abandoned. It’s a fantasy fiscal plan that didn’t add up even before the COVID-19 crisis disrupted everything.
We have entered a period of extreme uncertainty in Alaska. Nothing about this is simple. The governor has to put real options on the table.
