Three months ago we published a “June revenue update,” as we explained there, to fill in a gap we believe exists in the Department of Revenue’s (DOR) regular cycle of state revenue forecasts.
We said then we also intended to publish a regular September budget update, which in addition to a further update on revenues, would “discuss any changes anticipated in future spending levels from those reflected in each administration’s then most recent 10-year Plan.”
Subsequently, after the end of the session in July, we did most of that work in putting together a post-session update of the 10-year outlook, reflecting the results of the budget developed during the session as well as Governor Mike Dunleavy’s (R – Alaska) subsequent vetoes.
The purpose of this week’s column is to roll all of that together in a forward looking update as attention should – especially in an election year – begin to take a hard turn away from past sessions and focus instead on FY24 and beyond.
Revenues. While as we explained earlier this month we differ from DOR about how much, we agree that the outlook for FY23, FY24 and forward “traditional” revenues has deteriorated, at least for the time being, from that reflected in DOR’s Spring 2022 Revenue Forecast.
Here was our look at oil prices and traditional revenues at the time of the June update:
Projected FY23 oil prices were at $113/bbl and traditional revenues at $5.9 billion; projected FY24 prices were at $99 and traditional revenues at $4.8 billion. Both were up materially from DOR’s Spring 2022 Revenue Forecast.
This, on the other hand, is the outlook based on current futures prices:
Compared to DOR’s Spring 2022 Forecast, instead of up as in June projected FY23 oil prices are down 7% to $94, with traditional revenues down 14% to $4.3 billion. Projected FY24 oil prices are down 7% to $84, with traditional revenues also down 15% to $3.5 billion.
(The reason that, as a percentage, revenues are down 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 decline from higher levels the percentage impact on overall revenue is greater than the percentage impact on price.)
While the differences narrow between DOR’s Spring 2022 Forecast and our current projection farther out in time – five years out in FY28, for example, currently projected oil prices are only 3%, and traditional revenues only 4% below the Spring Forecast – they never turn positive. Currently projected prices and traditional revenues throughout the entire forecast period remain below both those included in DOR’s Spring 2022 Revenue Forecast and those we projected in June.
While not anywhere near as large as the change in traditional revenues, the Permanent Fund Corporation’s (PFC) latest outlook (July 2022) 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 June revenue update:
Here is the outlook based on the PFC’s most recent projection:
While Percent of Market Value (POMV) revenues available for government under current law (after the Statutory PFD) are down slightly from FY23 to FY29, they are up slightly for FY31 and FY32. (Somewhat oddly, while the projections published by the PFC during FY22 included a projection for FY33, the PFC’s July 2022 “History & Projections” does not.)
Combining traditional and POMV-related revenues, here were total UGF revenues available to the state under both current law (ex-Statutory PFD) and Governor Dunleavy’s proposed POMV 50/50 approach in the June update (the title should be “June 2022,” not “June 2020”):
Here is the current outlook:
And in table form, here is how this September 2022 update compares to DOR’s original Spring 2022 Forecast for traditional and POMV-related revenues combined:
(For those having difficulty reading, recall that you can pop out any of our charts on the version of these columns published on our Substack page.)
Combined FY23 current law revenues are down 12%, and FY24 11%, from those projected in DOR’s Spring 2022 Revenue Forecast. The near term situation improves somewhat past that point, however. Combined 5-year (FY23 – 27) average current law revenues are down only 7% from those projected in DOR’s Spring 2022 Revenue Forecast.
Spending. While we had originally anticipated updating projected spending levels to reflect the outcome of the session – including Governor Dunleavy’s vetoes – in this, the September update, as indicated above we ended up doing that instead in our post-session July column.
The only additional updates needed at this point to the work we did then is for the change in market projected inflation rates – a subject we address in depth in an earlier column. At the time we prepared the July column the market forecast for interest rates was an annual average of 2.82% over the next five years, and 2.30% for the five years beyond that. The current outlook is for 2.51% over the next five years and 2.33% for the five years beyond that.
As we did in the July column, as part of this forecast we also have included a line item for an annual amortized repayment of the Constitutional Budget Reserve (CBR). We explained why we believe that is both appropriate and important in a previous column. In this update, we continue to use the 15-year amortization period proposed then.
Combined, here is projected Unrestricted General Fund (UGF) spending for FY24-32, updated from the July look for the change in inflation rates.
As a result of both the increase in base level spending included in the FY23 budget and higher inflation rates, the projection is materially above both that included in the Governor’s most recent 10-Year Plan (14.6%, on average) and the baseline included in DOR’s most recent Fiscal Model (15.2%, on average), both hi-lited on the chart in yellow.
Net. Even with near term inflation expectations moderating, with revenues lower the budget outlook is more challenging than in June. Here was the 10-year outlook in June, using Governor Dunleavy’s proposed POMV 50/50 approach to calculate revenues.
Here is the updated, September outlook, using the same revenue approach:
And here is the updated, September outlook, using the current law (Statutory PFD) revenue approach:
Under Governor Dunleavy’s proposed POMV 50/50 approach, the budget returns to deficits in FY26 without accounting for repayment of the CBR, and next year, FY24, if the repayment of the CBR is included, both one year earlier than in the June update.
Under the current law (Statutory PFD) revenue approach, the budget already is in deficit in the current year irrespective of whether the CBR repayment is included.
What it means. The plain meaning of the update is clear – after a (very) brief respite, the Alaska budget is on course to fall back into deficit sooner than projected in the Spring 2022 Revenue Forecast.
As a consequence, candidates for state office this 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 two 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 “no tax” candidates, like former Representative Dan Saddler, and those, like former Governor Bill Walker, 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% 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 has come as somewhat of a surprise that relatively few candidates have incorporated the Fiscal Policy Working Group’s proposals into their campaign position this election cycle. But the fact they stand out so distinctly does make them easier to identify and support as we head rapidly toward the last 45 days of the campaign.
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.