Last year, we began the practice of using columns in June and September to fill in gaps we believe exist in the Department of Revenue’s (DOR) regular cycle of state revenue forecasts. As we said at the time:
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.
As it has evolved, the June update focuses in depth on changes in the revenue outlook since the time of the Spring Revenue Forecast, while, like the administration’s Office of Management and Budget’s (OMB) annual 10-year plan, the September update looks at both projected revenues and spending as our and others’ thoughts on fiscal policy begin to turn away from the past session and focus instead on the upcoming session and fiscal year.
We published our earlier June 2023 revenue update here. This column contains the September update.
Revenues. As we discussed in last week’s column, near-term Alaska North Slope (ANS) oil prices are surging, and with them, projected FY2024, as well as FY2025 traditional revenues.
Here was our look at oil prices and traditional revenues at the time of the June update:
Projected FY2024 oil prices were $74 and traditional revenues at $2.78 billion; projected FY2025 prices were at $72 and traditional revenues at $2.66 billion. Both were relatively even with DOR’s Spring 2023 Revenue Forecast.
This, on the other hand, is the outlook based on current futures prices:
Compared to DOR’s Spring 2023 Revenue Forecast, projected FY2024 oil prices are up 27% to $93, with traditional revenues up 53% to $4.2 billion. Projected FY2025 oil prices are up 25% to $87, with traditional revenues up 42% to $3.6 billion.
(The reason that, as a percentage, revenues are up further than price is because, under Alaska’s progressive oil tax system, once past the minimum tax level, the higher the price per barrel, the greater the share of revenue per barrel received by the state. As a result, as prices rise to higher levels, the percentage impact on overall revenue is greater than the percentage impact on price.)
While the differences narrow between DOR’s Spring 2023 Forecast and our current projection farther out in time – five years out in FY2028, for example, currently projected oil prices are only 14%, and traditional revenues only 17% above the Spring Forecast for the same period – they never turn negative. Currently, projected prices and traditional revenues throughout the entire forecast period remain equal to or above both those included in DOR’s Spring 2023 Revenue Forecast and those we projected in our June revenue update.
While not anywhere near as large as the change in traditional revenues, the Permanent Fund Corporation’s (PFC) latest outlook as of the time we are writing this week’s column (July 2023) also projects different revenue flows to the state over the next ten years than those projected at the time we prepared our June revenue update.
Here was the outlook at the time of the Spring 2023 Revenue Forecast, our June revenue update and is currently for the statutory percent of market value (POMV) draw, the statutory Permanent Fund Dividend (PFD) and the portion of the POMV remaining for government under current law (after the deduction for the PFD):
With the sole exception of FY2024 – where POMV revenues available for government under current law (after the statutory PFD) are down slightly from the June revenue update – POMV revenues for government under current law are up throughout the period compared to both the Spring 2023 Revenue Forecast and the June revenue update.
Combining traditional and POMV-related revenues, here are the total UGF revenues available for government under current law at the time of the Spring 2023 Revenue Forecast, our June revenue update, and currently:
Led by the increase in oil prices, total revenues in this update are up significantly throughout the period compared to both the Spring 2023 Revenue Forecast and our June revenue update.
Based on last week’s column, in this and future updates, we will also include a chart incorporating another way of looking at current revenues available for budgeting purposes, by calculating traditional revenues on the basis of the 10-year rolling average historical oil price. Here are the results of that approach, compared to the Spring 2023 Revenue Forecast and June 2023 update.
While the 10-year averaging approach results in lower total revenues for budgeting purposes in the immediate future than in the June 2023 update, it results in roughly the same total revenues as the Spring 2023 Revenue Forecast from FY2024 through FY2026 and then higher projected total revenues for budgeting purposes than both the Spring 2023 Revenue Forecast and the June revenue update from FY2027 forward.
There is one additional note we should add to this discussion of revenues. Thus far in the current fiscal year, actual ANS production is running significantly – around 50 mbd (thousand barrels per day), or roughly 10% – below the levels projected in the Spring 2023 Revenue Forecast. Our most recent Thursday chart shows the results to date:
Using last year’s production curve as a baseline, by now, average year-to-date production should be in the neighborhood of 481 mbd. Instead, it’s running around 433 mbd. While shortfalls in production have nowhere near the impact on revenues as shortfalls in price, they nevertheless have some. If it persists, a shortfall of this size will become concerning.
Spending: As we discussed at length in a previous column, projected government spending levels are available from a number of sources. Over the course of the last session, however, we gradually gravitated to the “current law” baseline published by the Legislative Finance Division (LFD) as part of its “Overview of the Governor’s [FY24] Budget” as the most reliable.
The final FY2024 budget, as passed by the Legislature and signed by Governor Mike Dunleavy (R – Alaska), provides for approximately $5.08 in unrestricted general fund spending, with an additional $290 million held in reserve for supplementals and other unanticipated needs, for an estimated overall total of $5.37 billion. LFD’s “current law” baseline, on the other hand, projected final FY2024 spending of $5.34 billion, within 1% of the likely final amount.
LFD’s “current law” baseline projects FY2025 spending at $5.48 billion, an increase over FY2024 of roughly 2%.
Consistent with an approach outlined in a previous column, in our September update last year, we included within projected spending a line item for an annual amortized repayment of the outstanding Constitutional Budget Reserve (CBR) loan balance. We continue that approach here, using the same 15-year amortization period to recover the outstanding amount owed.
Here is our calculation of the amortization amount. As of the end of FY2023, the total amount owed to the CBR is $10.56 billion, the total in the column for “Cumulative Net Borrowing” in the following chart. A 15-year amortization of that amount is $690 million per year.
We compare in the chart below the spending totals, based on the LFD’s “current law” projections and adding the amortization for repayment of the CBR, to the Dunleavy administration’s previous estimates reflected in its FY2024 10-year plan and DOR’s Spring 2023 Fiscal Plan Model. Even without including the amount for repayment of the outstanding CBR loan balance, the spending levels projected by LFD substantially exceed those projected by the Dunleavy administration.
Over the nine-year period, the average annual spend projected by LFD is $5.90 billion. Adding the CBR amortization, the total amount is $6.59 billion.
The nine-year averages for the Dunleavy administration’s projections, on the other hand, are $4.96 billion (OMB) and $4.97 billion (DOR), 25% less than the amount including the CBR amortization, and 15% less than LFD’s projection even excluding the CBR amortization.
As we’ve come to appreciate them over the years, the spending levels reflected in the Dunleavy administration’s OMB and DOR forecasts aren’t really serious projections, as much as they are aspirational political statements designed to appease various parts of Dunleavy’s political base. Based on past experience, the LFD “Current Law UGF Baseline” much more closely reflects what the Legislature is likely to pass and the governor to sign following the completion of any given session.
Net. Although the budget outlook has improved from June, the state still remains far from escaping its fiscal hole.
Here’s the “best case” under current law, using traditional revenues calculated at currently projected futures prices instead of the 10-year historical average and excluding a factor for the repayment of the CBR.
Revenues exceed spending in only one year; the average over the nine-year period is a $1.36 billion deficit.
Compared to that, here, to us, is the more realistic, fully costed case, using traditional revenues calculated based on the rolling 10-year historical average oil price and including a factor for repayment of the CBR.
What it means. The plain meaning of the update is clear. While some believe the current spike in oil prices will bail the state out of its fiscal straits, the reality is it doesn’t even come close. Even using the “best case” assumptions – revenues based on current oil prices and no CBR amortization – the state barely breaks even in the current fiscal year and plunges right back into deep and growing deficits in the years following.
Using a more realistic, fully costed analysis, even the current year runs a deficit.
Legislative candidates already have started filing for the 2024 election. Given this budget outlook, candidates for state office this coming election cycle – especially those proposing increased spending – should be talking realistically about how they propose to pay for government in future years and, in particular, about who they propose to pay for the deficits.
To us, candidates who are vague on the issue or propose unrealistic solutions – like balancing the budget entirely through only spending cuts, substantially increased oil production, or substantially increased oil taxes (which were defeated overwhelmingly just three years ago) – should be rejected as unprepared to deal with the reality confronting the state.
So should candidates who propose to fill the gap only with more of the same – ever deeper PFD cuts that push even more of the burden disproportionately off on middle and lower-income (80% of) Alaska families. That includes both so-called “no tax” candidates, like current Senator Jesse Bjorkman (R – Nikiski), and those, like Senator Matt Claman (D – Anchorage), whose proposed fiscal plan is based on the “Yuppie version of fiscal responsibility,” i.e., using continued, deep PFD cuts to ensure that those in the top 20% and non-residents don’t have to pay taxes either now or in the future.
On the other hand, candidates who both talk about the situation the state faces realistically and propose balanced, equitable, and low-impact solutions – like those advanced by the Legislature’s bicameral and bipartisan 2021 Fiscal Policy Working Group – should be lauded for their insight, honesty and balance.
Frankly, given its comprehensive and balanced approach, it came as somewhat of a surprise that relatively few candidates incorporated the Fiscal Policy Working Group’s proposals into their campaign position in the last election cycle. Hopefully, that will change as candidates in the next election cycle responsibly confront the actual, ongoing reality of the state’s fiscal situation.
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.