Last week in Part 1 of this two-part look at Governor Mike Dunleavy’s (R – Alaska) proposed FY24 Budget and 10-year Plan, we analyzed the proposed spending and deficit levels reflected in both. Largely due to understating the impact of inflation and the failure to include a factor for annual supplementals, we concluded that both the spending and deficit levels reflected in both the administration’s FY24 Budget and 10-year Plan are significantly understated.
We also analyzed the impact of including an additional factor to repay the Constitutional Budget Reserve (CBR) as ultimately required by Article 9, Section 17(d) of the Alaska Constitution, in this case amortized over a 15-year period. Reflecting the repayment drives current and future deficits even deeper.
This week we take a look at the proposed revenues included in both the FY24 Budget and 10-year Plan. Because they are related to revenues, we also look at the anticipated oil production levels included in both the FY24 Budget and 10-year Plan.
Revenues
The Dunleavy administration essentially proposes three revenue sources over the course of the 10-year Plan: traditional (oil and existing taxes), the portion of the annual percent of market value (POMV) draw from the Permanent Fund remaining after the distribution of the current law Permanent Fund Dividend (PFD), and so-called “new revenues.” (FY24 also includes $59 million in “Revenue Adjustments,” resulting from a combination of a final $11 million in COVID-related federal revenues unused during prior periods and $48 million in FY23 pre-paid K-12 funding.)
Averaged over the 10-year Plan, traditional revenues provide $2.92 billion (59% of the total), the portion of the POMV draw remaining after the PFD $1.24 billion (25%), and the proposed “new revenues” $790 million (16%).
The “new revenues” play an increasingly important role as the period develops, however. While they are projected to only contribute 6% of overall revenues in FY24, by FY27, just three years from now, they are projected to contribute three times as much, up to nearly 18% of overall revenues.
Because they play such a critical role in both the FY24 Budget and 10-year Plan, in evaluating the Dunleavy administration’s proposals it’s important to gauge the credibility of the projected “new revenues.” Unfortunately, there’s not much “there,” there.
Oddly given their significance, none of the administration’s FY24 budget documents discuss the source of its proposed “new revenues.” Indeed, in discussing the basis for the revenue assumptions behind the administration’s proposals, the 10-year plan – the only time a discussion of the proposed “new revenues’ appears in the formal budget documents – says only this:
The OMB 10‐year plan supplements the Department of Revenue official forecast by providing a target for potential new revenues.
…
To create long term stability in the delivery of government services, conversations must occur around new, stable, sources of revenue that support State programs without an imposition on Alaskan residents or businesses. Similarly State expenditures should consider the current and future needs of Alaskans and avoid intensifying the impacts of volatile revenues.
In four years, the succeeding Governor should not have to face the concern that state revenues could drop 20 percent over a single summer. The Dunleavy administration is committed to engaging in these conversations, advancing policies to resolve these issues, and put Alaska on a stable fiscal foundation.
In his press conference announcing the FY24 Budget and 10-year Plan, Governor Dunleavy provided only a bit more detail, attributing the “new revenue” to “carbon sequestration,” and claiming that it could provide “several hundred million dollars a year to over a billion dollars a year” in revenues.
But the administration has not backed that estimate up with any studies or further detail.
This is not the first time revenues from carbon sequestration have appeared in the Dunleavy administration’s fiscal documents. In the Department of Revenue (DOR)’s latest fiscal model published last February, for example, DOR specifically included “Register and Monetize Carbon Offset Credits” as one the state’s “Revenue Options.” It described the option in the same way as Governor Dunleavy, saying:
Option for the State to begin selling carbon offset credits to private entities. This would involve the State determining value of carbon offsets, creating an inventory and valuing oil/gas tax certificate credits using carbon offsets. Assumes effective date of 1/1/2002 for program start with first revenue in 1/1/2023.
But according to a “Policy Summary” produced by DOR in the same timeframe, the administration anticipated the step only raising “potential annual revenues $500k to $20M.” A related news article at the time said that the administration was “shopping for a consultant to estimate the potential for carbon credits on state lands … with the first report due by the end of the year [2022],” but to our knowledge no such report has yet been released.
As a result, it’s hard to give much credibility to the amounts stated in Governor Dunleavy’s proposed 10-year Plan.
What happens if such revenues fail to materialize in the amounts assumed in the 10-year Plan?
We’ve seen the result the last six years running on the state’s current course – the Legislature diverts revenues statutorily required to be distributed to Alaska families as PFDs to fund government instead. By failing to offer a realistic revenue alternative to the state’s looming deficits, Dunleavy is leaving the state in the same position, again.
What’s the impact on PFDs?
Using the data from the 10-year Plan, here’s the remaining PFD if a portion has to be diverted to take the place of the “New Revenues” included in the administration’s 10-year plan.
The cuts range from $300 million (12%) in FY24 to $900 million (29%) in FY32. Over the period, the required cuts average $770 million (22%).
As we explained in Part 1 of this series, however, that likely is not the end of it. Accounting for the additional impacts resulting from inflation and including a factor for supplementals, the actual deficits the state is facing are likely materially greater. Without alternative revenues to cover, the impact on PFDs would look like this:
In FY24, PFD cuts would almost double, from $300 million (12%) to $590 million (24%). By FY32, PFD cuts would grow from $900 million (29%) to nearly $1.5 billion (48%). Over the period, average cuts would increase from $770 million (22%) to $1.2 billion (43%).
The irony is that, instead of achieving the goal outlined in the FY24 10-year Plan of utilizing a source “of revenue that support[s] State programs without an imposition on Alaskan residents or businesses,” by failing to propose a realistic alternative, Dunleavy will have left the state with little choice but to use the revenue approach that, as we have explained in previous columns, instead has the “largest adverse impact” on both Alaska families and the overall Alaska economy – the exact opposite of the stated goal.
After explaining our view that the administration’s revenue approach is unrealistic, in a recent radio interview the host asked what we do instead.
We explained that, instead of utilizing a revenue approach that ultimately ends in deep PFD cuts, we would propose a “flat tax” which, while having some, would minimize the burden on Alaska residents by spreading the revenue requirement broadly to include both non-residents and those in the top 20% whose contributions are otherwise trivialized using PFD cuts.
Here is the difference in impact on Alaska families by income bracket between the two approaches in raising $1 billion in revenue:
Low through upper middle income – in other words, 80% of – Alaska families would pay less as a share of income using a flat tax than PFD cuts. Those in the top 20% would pay more, but no bracket would pay more as a share of income than the remaining 80% pay using PFD cuts. No Alaska family would pay more than 3% as a share of income under a flat tax, but 80% of Alaska families would pay more than 3% of income using PFD cuts.
It doesn’t take a rocket scientist to see which approach is better for the overwhelming majority of Alaska families and, through them, the overall Alaska economy.
Yet, by putting all of its eggs in a basket that even its own numbers from earlier this year admit is a “pie-in-the-sky” approach, the Dunleavy administration’s proposal is leaving Alaska state government with little choice but to adopt the worst approach for the overwhelming majority of Alaska families and through them, the overall Alaska economy.
Production Volume
Earlier this month we focused an entire column on FY23 Alaska North Slope (ANS) production volumes. After examining year-to-date production levels, we expressed concern that production was off track, and likely to undershoot the production – and thus, to the extent it depended on production – the revenue levels projected in the 2022 Spring Revenue Forecast.
The Fall 2022 Revenue Sources Book and updated FY23 revenue forecast validates those concerns by revising the FY23 ANS production forecast downward, from 502.3 thousand barrels per day (mbd) to 491.7 mbd.
To be honest, we think even that revised number likely overstates the end result. As reflected in our most recent “Thursday Charts,” on its current track production would need to average 506 mbd the remainder of the year to realize that level. Even thus far in December – a month that usually has among the highest production levels for the year – production has met or exceeded that level on only one day. If production has difficulty reaching that level in December, it’s highly unlikely to average that level over the remaining six months of the fiscal year.
But, given the recent nature of DOR’s revised forecast, we will wait a few weeks longer before diving into projected FY23 production levels – and their impact on projected revenue levels – again.
The Fall 2022 Revenue Sources Book and, through that, the Dunleavy administration’s 10-year Plan, also makes significant changes in projected production levels in future years. The following charts the various production forecasts over the last four years. The most recent, Fall ‘22 forecast is the solid line in salmon color. The previous Spring ‘22 forecast is in the solid brown line, and the previous Fall ‘21 forecast is in the teal, morse code-dashed line.
With the exception of FY28 and FY29, which appear largely to reflect a projected earlier start of major production from Santos’ Pikka Project, the projected volume levels are either the same as or below those reflected in the two previous forecasts.
Other than as noted above with respect to those projected for FY23, we have no current basis to question the volumes reflected in the revised, Fall ‘22 forecast. We would note for those hoping, however, that the projected volumes remain far below the levels which would be required to balance the budget from increased production alone.
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.