Alaska’s new oil windfall pits bigger PFDs against savings, schools and maintenance backlog

Amy Gallaway teaches civics at Fairbanks’ West Valley High School. And she has been watching, with growing frustration, as Alaska lawmakers ponder what to do with the state’s multi-billion-dollar cash windfall stemming from higher oil revenue.

Gallaway’s class sizes, since she started at West Valley nearly two decades ago, have grown by roughly one-third as lawmakers, grappling with deficits, have continually denied increases to Alaska’s per-student spending formula.

Gallaway’s district has closed three schools. It’s now considering cutting librarians. Her colleagues are leaving the state in search of better retirement programs; she heard about two more just this week.

But with news of all the extra cash, Gallaway said she’s still hearing most lawmakers talking not about prioritizing schools, but about paying larger Permanent Fund dividends — a development she describes as “maddening and demoralizing.”

“We hear all the time that state budgets are a reflection of what we value. They are what we want our future to be. And what I see in Alaska’s Legislature and their priority on the dividend is a priority on getting re-elected,” Gallaway, a former Alaska teacher of the year, said in a phone interview this week. “I’m quite literally watching my school district be gutted. At the same time, I don’t hear most legislators really caring.”

At a news conference Tuesday, GOP Gov. Mike Dunleavy touted the state’s new surplus, brought on by higher oil prices as a result of the war in Ukraine.

But beyond stashing some of the money in savings, the governor offered just one concrete policy priority in response: a “much higher PFD than people have been contemplating.” He said lawmakers should approve a dividend of “at least $3,700.”

Asked if he would support an increase to per-student schools spending, Dunleavy was non-committal.

“I’d have to see what the bill looks like,” he said. “I’d have to look at the final product.”

Gallaway is one of many Alaskans who will be closely watching how state legislators divide up the surplus as they draft next year’s budget. And her point of view reflects a tension embedded in that process: A finite amount of money means tradeoffs between dividends, savings and spending on other government programs — many of which have suffered through years of cuts or flat funding.

Lawmakers say they have other priorities for the surplus beyond higher dividends, including education and a $2 billion maintenance backlog that’s been neglected during tight budget years. But even those who have advocated for restraint on dividends in the past also say that an extra payment is merited this year, as Alaskans face rising fuel prices and the highest rate of inflation in decades.

“Knowing that the cost of living is going to spike upwards substantially for Alaskans, I think the discussion of an energy relief package for this year is completely warranted,” said Dillingham independent Rep. Bryce Edgmon, part of the House majority leadership.

Members of the largely-Democratic House majority have proposed a $1,300 “energy relief check” on top of a $1,300 dividend, which would cost the state roughly $1.6 billion.

The House plan also includes setting $1.2 billion aside to pay for K-12 schools two budget years from now.

The proposal would leave an overall surplus of just $800 million to transfer into state savings in the coming fiscal year — and even that amount is only possible after plugging the budget with $300 million in leftover federal pandemic relief money, according to legislative projections.

Dunleavy’s $3,700 dividend proposal would cost an additional $700 million, though he has not endorsed setting aside the $1.2 billion for schools two years from now.

Anchorage Democratic Rep. Ivy Spohnholz, another majority member who chairs the House Ways and Means Committee, said that her caucus’ $1,300 energy relief check — which she stressed is “not a dividend” — “pencils out in the budget.”

“We have the funding and are experiencing record inflation,” she said. “It’s practical. It’s affordable.” A $3,700 dividend, she added, “probably isn’t responsible” given that the state is unlikely to be able to maintain payments at that size in future years.

Historically, the vast majority of Alaska’s revenue has come from taxes and royalties from the state’s huge North Slope oil fields.

In recent years, earnings from the $81 billion Permanent Fund — a pool of state investments original seeded with oil revenue — have eclipsed petroleum as Alaska’s largest source of cash, amid diminished oil production and lower per-barrel prices.

Those declines blew a multi-billion dollar hole in the state’s budget. And lawmakers, over the past decade, have spent some $15 billion that they’d socked away in Alaska’s two primary savings accounts — with just $1 billion, roughly, remaining at the start of the current fiscal year.

But the recent price spike has reversed that trend, and oil is once again expected to generate the majority of Alaska’s unrestricted revenue this year and next.

The change in the state’s fortunes is stark: In a new forecast released this week, Dunleavy’s administration is projecting $4.4 billion in unrestricted oil revenue in the fiscal year that starts July 1.

That’s nearly four times the $1.2 billion in unrestricted petroleum revenue that the state collected in the fiscal year that ended last year.

“Quite a shift since last June, when we had to scrape nickels and dimes together,” said Sitka Republican Bert Stedman, co-chair of the Senate Finance Committee.

Dunleavy, at his news conference Tuesday, called the new projections “really good news” and called on lawmakers to pass his proposed dividend, which would cost the state roughly $2.3 billion.

In a follow-up phone interview, Dunleavy said he singled out dividends, and not education, because dividends have been reduced in recent years from the size they would have been had lawmakers stuck to a historical legal formula linked to the Permanent Fund’s investment returns.

The per-student schools spending formula — known as the base student allocation, or BSA — has stayed the same, he added.

“The BSA has not been cut. The PFD has been cut,” he said. “The PFD touches almost everyone in the state of Alaska. The 80-year-old woman living by herself, the two-year-old kid. I would say that the rate of inflation is going to impact and hurt a lot of those folks.”

Education advocates note that the schools spending formula has not increased in seven years — a period that’s seen 8% inflation — meaning that their purchasing power has fallen even if the amount of money they’ve received has stayed the same.

And Alaska schools are now being hit with the same steep increases in fuel and other costs that are hitting residents, according to Lisa Parady, head of the Alaska Council of School Administrators.

“We’re in crisis here,” she said. “I don’t know how we can be only focused on the dividend, when we haven’t inflation-proofed education for so long.”

Some lawmakers, meanwhile, say they’re acutely aware of the challenges facing Alaska schools and will be keeping them in mind as they draft next year’s budget.

They also say the Legislature is not forgetting its recent lean years — even if they acknowledge they’re likely to spend more this year than last.

“When I think back to the last time when I was chairman, when we had a revenue spike, the savings conversation was harder to get going in the building,” said Stedman, the Senate Finance Committee co-chair, who’s served in the Legislature since 2003. “This go-around, explaining to some of the newer members how we did it last time resonated really well with them.”

Stedman and Spohnholz both said that legislators are eyeing additional spending on deferred maintenance — as opposed to new projects that could saddle the state with higher ongoing bills in the future, when it’s unlikely that oil revenue will continue at the same level.

“We also need to be thinking about the long term, and not just thinking about today,” Spohnholz said. “We have squandered a lot of money over the years on things which we didn’t get a lot of return on investment on.”

Both legislators said they think the Dunleavy administration’s recent revenue forecast — which was based on a five-day window of exceptionally high oil prices — is unlikely to hold up. And even Dunleavy, in his news conference, acknowledged that “oil prices go up,” and “oil prices go down.”

“We’re going to be digging into this and ground-truthing these numbers over the next few days,” Spohnholz said. “It’s pretty clear to me that there’s not a lot of commitment to the integrity of these numbers, and so we have to be really careful that we’re not making fiscal policy decisions based on a highly volatile report.”