If it holds, Alaska’s new revenue forecast would shrink the deficit created by most new PFD proposals

For the past year, Alaska’s legislature and its governor have been fighting over the future of the Permanent Fund dividend, with disagreements hinging on how much money is available to pay for future dividends.

In May, Gov. Mike Dunleavy proposed a constitutional amendment that would guarantee dividend payments under a new formula, and if lawmakers and voters approve, fiscal year 2024 would be the first under that amendment.

But lawmakers have balked at the governor’s new formula, in large part because of the deficit it would create. They’ve proposed a constellation of alternate options, but none of those have garnered enough support to advance.

New long-term numbers may change that, but independent observers say there’s reason to be skeptical about the state’s numbers. The state’s forecast calls for oil’s value to rise with the level of inflation, while public trading markets expect oil’s value to fall.

“They’ve just gone into Never-Never Land,” said Brad Keithley, a longtime oil industry attorney and analyst.

[Related: As oil prices rise, Alaska predicts a billion-dollar windfall that could boost PFD payments]

In fiscal year 2024 — the budget that lawmakers will debate in spring 2023 — the state now expects $6.6 billion in revenue, up from the $5.4 billion that had been forecast previously.

Earlier this year, a bipartisan, bicameral group of legislators agreed on a series of budget assumptions. In fiscal year 2024, they expect the state to have about $7.5 billion in expenses.

That’s if the state’s spending on services rises by no more than 2% over the next three years and if the state were to follow the traditional dividend formula in state law.

For 34 years starting in 1982, the dividend was paid according to that formula. But toward the end of that period, thanks to slumping oil prices, the formula and state spending on services combined to create a multibillion-dollar deficit.

Following the traditional formula in FY24 would pay a dividend of about $4,001 to 647,381 recipients but would create a deficit of $1.8 billion using the state’s old estimate of revenue.

Under the new estimates, the deficit would be about $924 million. In context, that’s about as much as the state is spending this year on the University of Alaska, the judiciary, the Department of Public Safety, and the state prison system — combined.

In 2016, then-Gov. Bill Walker vetoed half of that year’s dividend payment and hundreds of millions of dollars in other spending. Since then, the Legislature has set the dividend each year by policy, instead of the formula.

While doing so is legal — the constitution gives the Legislature ultimate budget authority, regardless of formulas in law — it’s been controversial, and lawmakers have argued every year over how much the payment to Alaskans should be.

From 2017 through today, the Legislature’s policy has been to pay dividends using money left over after spending on services and construction. That figure has been boosted with money from the state’s savings accounts, but those are effectively exhausted.

If the Legislature’s current policy were followed during FY24, the 2023 dividend would be $2,557 per person, and there would be no deficit.

Dunleavy has said that writing a new dividend formula into the state constitution is necessary to avoid perennial debates over the amount of the PFD. While legislators could pay a dividend equivalent to Dunleavy’s plan before FY24, that year is the soonest a constitutionally guaranteed dividend could be paid because it would have to be approved in the 2022 election.

The projected dividend that year under Dunleavy’s plan is about $2,709.

Under the state’s prior revenue forecast, paying that dividend would have caused a deficit of about $1 billion. Under the new forecast, that deficit falls to about $100 million in FY24 and vanishes in subsequent years.

Because the dividend is guaranteed, that deficit would have to be filled by cutting services, overspending from the Permanent Fund, or new revenue.

Unless taxes also change, the size of the deficit or the dividend under any new formula will be heavily dependent upon the price of oil.

Before Friday’s revised revenue forecast, some lawmakers suggested that a statewide sales tax or income tax was a necessary prerequisite to cover the deficit created by a 50-50 dividend.

A 2% statewide sales tax similar to the one used by South Dakota would generate about $600 million per year, according to estimates provided by Sen. Mike Shower, R-Wasilla.

That alone would not close the gap at $63 per-barrel oil, but if present forecasts turn into reality, that kind of tax might no longer be necessary.

The problem, some lawmakers and independent observers say, is that oil is unreliable. What happens if prices abruptly drop?

“There’s so many factors when it comes to oil pricing, that projections are fine, but I wouldn’t swear by them, or, or base all your future budgets on them,” said Rep. Adam Wool, D-Fairbanks, who has proposed a PFD that would be partially funded by a state income tax.

Rep. Ivy Spohnholz, D-Anchorage and the chair of the House Ways and Means Committee, has led that committee in an analysis of various PFD plans during the past month.

“I think legislators are going to be looking at the revenue forecast with, you know, a skeptical eye to try to make sure that we’re not committing the state to something that we can’t afford,” she said.

Keithley said he’s skeptical already.

According to the revenue department, its estimate for FY22 (the current fiscal year) and FY23 (the budget that will be decided next spring) is based on the projections of international markets. But after that year, forecasters stop using the market forecast and instead presume that oil prices will simply rise with inflation.

“I think that’s just wrong,” Keithley said.

Right now, international market forecasts call for oil to drop in value, not rise. Roger Marks, an Anchorage economist who follows oil prices, said he believes prices are high right now because of what happened during the COVID-19 pandemic and because of supply chain disruptions.

That could indicate that prices right now are biased toward the high side, he said.

There are other reasons to doubt that oil revenue will stay high — Alaska’s oil production has been trending downward for decades, so even if prices are higher, there’s less of it to sell.

“There is a case that can be made that as the world kind of starts moving away from oil, that we should expect that prices are going to stay higher,” said Ed King, a former state economist who now works as an aide to Sen. Roger Holland, R-Anchorage.

“But there’s a problem with that, in that our production will keep declining. So we’ll get a higher price or a lower volume, and that doesn’t actually solve our problems,” King said.

CORRRECTION: The original version of this article misspelled the name of attorney and analyst Brad Keithley.