Alaska Legislature starts budget process facing historically volatile oil prices

JUNEAU — The Alaska Legislature is starting its annual budget-making process during a period of historic volatility in oil prices.

With oil revenue set to account for around a third of the funds that will go toward funding state services, capital projects and the annual Permanent Fund dividend, Alaska Senate members charged with crafting the budget said Friday that they would not bank on high oil prices when planning the budget for the fiscal year that begins in July.

The price uncertainty began during the COVID-19 pandemic, according to Dan Stickel, chief economist of the Department of Revenue, who spoke to the Senate Finance Committee. North Slope crude oil hit a record low of $16.55 per barrel in April of 2020. Two years later in June, the price of oil had risen almost eight-fold to $127.77 per barrel — the highest it had been since 2012. The price per barrel has remained below $90 since the beginning of December.

The Department of Revenue has projected that the Alaska North Slope crude oil price will average $88.45 cents over the fiscal year that starts July 1, bringing in just under $3.4 billion. At that price point, Stickler said a $1 change up or down over the next fiscal year would equal roughly $70 million in gained or lost revenue. A now-annual draw of Permanent Fund earnings is set to contribute another roughly $3.4 billion.

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Gov. Mike Dunleavy’s unseen carbon monetization plan has been flagged as potentially a significant source of new revenue, but it was not part of the department’s presentation on Friday.

There are some reasons for optimism for the state’s fiscal picture coming from the oil patch. John Boyle, commissioner-designee of the Department of Natural Resources, told the Senate Finance Committee on Wednesday that oil and gas producers have kept production levels steady from aging oil fields, which he called a “major accomplishment.”

Last year, the state was awash with unexpected oil revenue after Russia’s invasion of Ukraine sent prices soaring, and there was also a flood of federal coronavirus relief. This year, Stickel said the federal funding would make up a similar share of revenue to the state as oil and Permanent Fund earnings.

Sitka Republican Sen. Bert Stedman, who manages the operating budget in the Senate, said legislators would not be relying on an oil price just under $90 a barrel to craft the budget. Instead, a yet-to-be-determined, but lower oil price figure, would be used to ensure the state does not experience a shortfall and need to rely heavily on drawing from the $2.3-billion Constitutional Budget Reserve, the state’s main savings account.

Stedman said he wanted to make plans for excess oil and gas revenue above a conservative oil-price figure if it is realized. In 2022, the Legislature’s budget was written to fund schools a year ahead of time and to make larger deposits into state savings accounts with oil over $100 a barrel, but the price of oil has since dropped to $82 per barrel as of Wednesday, ending those plans.

A starting point for the Legislature will be the budget proposal Dunleavy unveiled in December. The governor’s budget effectively contains a $300 million deficit, which Stedman expects to balloon to around $400 million when supplemental spending needs for the current fiscal year are considered.

With school districts strained by years of virtually flat funding, the Senate majority and the House minority have said increasing education funding would be a top priority this legislative session. Neither have agreed on a new dollar amount for schools, with the Senate Education Committee set to hold its first hearing Monday.

The new Republican-led House majority caucus was more ambivalent Thursday about increasing the per student funding formula known as the Base Student Allocation. House Speaker Cathy Tilton, R-Wasilla, said a conversation about that should take place, but that “there could be other options and alternatives.”

Palmer Republican Rep. DeLena Johnson, who will manage the operating budget in the House, stressed in an interview that lawmakers would need to make tough choices with state revenue more strained than it was at the start of last year.

“If we want to increase education — to whatever level that might be — then there may have to be other things that need to go,” she said.

A complicating factor will be the size of the capital budget. Last year, it was more than $700 million, largely to pay for an expanded Port of Nome and to rebuild the crumbling Port of Alaska. Before 2021, the capital budget had been closer $100 million annually for several years with strained state finances.

Alexei Painter, who heads the nonpartisan Legislative Finance Division, said there would be risks in stripping back capital budget spending to that $100-million figure. For Alaska to receive funding from the trillion-dollar federal infrastructure bill, there will need to be state contributions, he said.

Reps. Neal Foster, a Nome Democrat, and Bryce Edgmon, a Dillingham independent, are set to manage the capital budget in the House as members of the Bush Caucus who joined the Republican-led majority. Foster said as a rural lawmaker that priorities for him include improving basic infrastructure like water and sewer.

The largest single outlay in Dunleavy’s budget proposal is for a statutory Permanent Fund dividend at a cost of $2.5 billion. If approved, eligible Alaskans would receive a record-high PFD of roughly $3,900.

Since 2017, the Legislature has not followed the statutory formula to calculate the size of the Permanent Fund dividend, with lawmakers instead choosing the size of the PFD as part of the budget-making process. The Senate and House majority caucus leaders said during the first week of the session that they did not have united positions on what dividend amount they will support.

Dunleavy and legislators across the Capitol expect the $3,900-dividend figure to drop as other priorities are approved. Juneau Democratic Sen. Jesse Kiehl, a member of the Senate Finance Committee, said that without new revenue sources, the only way to balance the budget would be to reduce the dividend size.

“We can cross our fingers and pray for oil to go up and stay up, but that’s not a fiscal plan and it’s not a strong future for the state,” he said.

The Republican-led House majority coalition has said that ensuring the state’s “fiscal stability” will be a priority this legislative session with few additional details, beyond wanting to implement a tighter legislative spending cap. In 2021, a bicameral and bipartisan group of legislators agreed to a framework for a long-term fiscal plan, which included a new dividend formula, calls for a new spending cap and hundreds of millions of dollars in new revenue each year. But the framework was never implemented.

Johnson said that framework could be a starting point for caucus discussions with a caveat: “That was a different caucus, that was a different group of elected officials.”

Ketchikan independent Rep. Dan Ortiz, who is a returning member of the House Finance Committee, said the state’s fiscal picture and the challenge of how to prioritize spending will be familiar for those who have served in the Legislature for the past few years.

“It’s the same basic issues,” Ortiz said. “You’ve got the desires of folks to continue to see government services adequately funded, as well as having a very nice PFD, and not having to pay for it with taxes.”

Anchorage Daily News reporter Iris Samuels contributed to this story.