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Lisa

Brad Keithley’s chart of the week: A June revenue update

The Department of Revenue publishes two formal revenue updates each fiscal year. The first is the detailed Fall Revenue Sources Book, published in December in connection with the submission of the governor’s budget. The second is the Spring Revenue Forecast, published three months later, in March, as the Legislature comes to grips with the annual budget.

While the Department also publishes occasional updates, those have a more limited circulation and aren’t as widely used as a public source of data for changes in the state’s fiscal outlook.

So, as part of our Alaska Landmine “Chart of the Week” series, we are going to attempt to help fill in the 9-month gap between the Fall and Spring forecasts with two additional three-month looks in mid-June and mid-September.

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We Build Alaska

As with this initial one, each June update largely will focus on changes in oil prices and volumes, as well as Permanent Fund draw and PFD levels, from the preceding Spring Forecast.

In addition to a further update on those, the September updates – after the smoke clears from each session, including the governor’s vetoes (if any) – also will discuss any changes anticipated in future spending levels from those reflected in each Administration’s then most recent 10-year Plan.

Oil prices

As reflected in this year’s Spring Revenue Forecast, there was a substantial change in the outlook for oil prices in the three months from the time of the Fall 2021 Forecast. Between the Fall 2021 and Spring 2022 Forecasts, projected FY23, FY24 and FY25 oil prices jumped 42%, 20% and 21%, respectively.

While not as dramatic, there has been a similar change directionally in the applicable near term price levels from the time of the Spring 2022 Forecast to now.

As followers of our Facebook and Twitter feeds will know, each week on Friday we publish an analysis of the current prices prevailing in the futures markets and their impact on projected ANS oil price and state revenue levels over the same forward-looking period as used in the Fall and Spring Forecasts. (We calculate projected ANS price levels by adjusting the futures price for Brent by the ANS/Brent differential averaged over the most recent 30-day period.)

The most recent Friday chart, published earlier today, is this:

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DeMars

Currently, projected FY23, FY24 and FY25 ANS oil prices are up an additional 12%, 10% and 10%, respectively, over those reflected in the Spring 2022 Forecast.

Following the publication of this year’s Spring 2022 Forecast, some criticized the Dunleavy administration’s use of futures prices averaged over a 10-day as too limited, suggesting at the time that it provided an overly inflated estimate of the projected prices. Looking back from the perspective of the intervening three months it turns out that, if anything, the Dunleavy administration’s approach underestimated the trend in prices.

In order to provide some perspective, however, for purposes of these periodic updates we also will show the movement of prices over the intervening three months using the respective mid-month assessment of futures prices, and comparing the average of those mid-month prices against the most recent Forecast.

Here is what that approach looks like in chart form:

For those interested in the detail, here are the underlying numbers:

While, as expected in an upward sloping market, the average change isn’t quite as dramatic as using the most recent projections, except for the final two years – FY31 and FY32 – even the averages over the period are largely up from the price levels reflected in the Spring Forecast.

We should note that the difference between the Dunleavy administration’s projected prices for FY31 and FY32 and those included in our Friday assessments are entirely due to the difference in trending approaches.

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Blueprint

Reported futures prices for Brent – the foundation for both approaches – only go out to the end of calendar year 2029 – or the midpoint of FY30. The Dunleavy administration calculates its projected FY31 and FY32 prices by adjusting the last reported price for projected inflation. To capture the then-recent direction in pricing, we calculate ours by extending the trendline over the last three reported years. While there are differences, the results at this point are not dramatically different.

Oil volumes

As we’ve noted in previous columns, oil revenues are a function not only of oil price but also production levels.

Unlike oil price projections, the Dunleavy administration’s projections of production levels did not change significantly between the Fall 2021 and Spring 2022 Forecasts. The Spring 2022 Forecast projected a slight reduction in FY22 production levels (less than 1%) compared to the Fall 2021 Forecast, slight increases (less than 0.5%) from FY23 – FY26, and then slight reductions again (at most, 1.6%) from FY27 – FY31.

With two weeks remaining, the FY22 forecast is proving to be almost exactly on point. As reflected in our most recent “First Thursday Chart,” while lower in June as the North Slope fields appear to enter their annual maintenance turnaround, volumes on the year are still likely to average around 478 Mbd, within 1% of the Spring Forecast.

We don’t see anything in these numbers that cause us to question at this point the projections of production levels in future years contained in the Spring 2022 Forecast.

Traditional Revenues

Traditional (or “trad”) revenues are the combination of oil and other unrestricted general fund revenues (other than those derived from the POMV draw). Estimates of traditional revenues at various oil price levels can be calculated using the price sensitivity analysis prepared by the Department of Revenue (DOR) in connection with each Fall and Spring Forecast.

As followers of our Facebook and Twitter feeds will know, each Friday in connection with publishing our analysis of the current prices prevailing in the futures markets, we also publish an updated projection of future “trad” revenue levels, calculated based on the current futures prices using the most recent DOR price sensitivity analysis.

Our most recent projections, published earlier today, are these:

Again, for those interested in the detail, the numbers are here:

Because of the much stronger near term price levels currently prevailing in the futures market than reflected even in the Spring 2022 Forecast, our current projection of near term traditional revenues are significantly higher than even those projected in the Spring Forecast.

As the differences in oil price projections between those reflected in the current futures market and the Spring 2022 Forecast moderate over the period, so also do the differences in the projection of traditional revenues, with the relationship between the two sets of revenue projections inverting in the last two years of the forecast period due to the inversion also in the relationship between oil price projections.

Permanent Fund POMV Draw and PFD Levels

The Dunleavy administration publishes as part of its Fall and Spring Forecasts 10-year projections of percent of market value (POMV) draws from the Permanent Fund.

In the past, the Office of Management & Budget published as part of its annual “10-year Plan” projected statutory Permanent Fund Dividend (PFD) levels, important for purposes of calculating under current law the portion of the POMV draw remaining for government after distribution of the PFD. While the Dunleavy administration did not project such amounts this year, the Legislative Finance Division (LegFin) did as part of its annual “Overview of the Governor’s Request.”

Changes to these projections outside of the Fall and Spring Forecasts can be determined, with some calculations, from the projections published each month by the Permanent Fund Corporation (PFC) in its publicly available “History and Projections” summary. Based on the PFC’s most recent projections (for April), while the amounts projected in the Spring 2022 Forecast for the POMV draw remain the same, the amounts projected in LegFin’s Overview for PFD levels have changed slightly.

The following reflects the most recent projections for both, calculated from the PFC’s April 2022 “History and Projections” summary. The number at the top of each column is the projected total POMV draw under current law.

Total UGF Revenues (ex-PFD)

Total UGF revenues are traditional revenues, plus the portion of the POMV draw remaining for government after deducting the amount to be distributed as PFDs. For the purposes of these updates, we have prepared the projections of the portion of the POMV draw remaining for government running two different PFD approaches.

The first approach uses the PFD as calculated under current law (the “statutory PFD” approach); the amount available for government is the portion in red in the chart in the previous section.

The second approach uses the PFD as calculated under the POMV 50/50 approach proposed by Governor Mike Dunleavy (R – Alaska) and included as a recommendation in the legislature’s 2021 Fiscal Policy Working Group Final Report. The amount available for government is 50% of the total POMV draw.

The first chart below compares total UGF revenues – the combination of traditional revenues (in blue) plus the portion of the POMV remaining for government (gold) – projected in the Spring Forecast (left) with those projected in this update (right), both calculated using the statutory PFD approach:

The next chart compares total UGF revenues projected in this update calculated using the statutory PFD approach (left), with those projected in this update, calculated using POMV 50/50 (right).

Again, for those who prefer their data in spreadsheet form, here are the underlying numbers (with totals):

We anticipate some will argue that, at least in some years, Alaska will require more than those total revenues in order to cover “essential” government services.

But as we have made repeatedly clear in previous columns, it is better overall for both Alaska families and the Alaska economy to meet any additional revenue requirements through other revenue approaches – flat, income or sales taxes, for example – rather than through even deeper cuts to the PFD.

The bottom line is that, based on current futures prices, both near term traditional, and as a result of that, total UGF revenues are up even from the levels projected as recently as the Spring 2022 Forecast. While the differences decline over time, coming virtually even by FY27 and, indeed, slightly reversing in FY30 and FY31, the fact is the situation the state faces based on June 2022 futures prices is better than it was just 3 short months ago.

We encourage those interested in continuing to follow these developments to follow our weekly updates of various components on our Facebook and Twitter feeds, and to look for the next overall update in our mid-September posting on these pages.

Brad Keithley is the Managing Director of Alaskans for Sustainable Budgets, a project focused on developing and advocating for economically robust and durable state fiscal policies. You can follow the work of the project on its website, at @AK4SB on Twitter, on its Facebook page or by subscribing to its weekly podcast on Substack.

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