Falling oil prices leave Alaska lawmakers with a $925 million revenue hit, affecting budget and PFD

JUNEAU — Falling oil prices are projected to leave Alaska’s state budget with a $925 million revenue hit, pushing lawmakers to reduce the size of this year’s proposed Permanent Fund dividend.

While the governor favors a $3,700 dividend, the House majority has signaled its support for a $2,700 dividend and the Senate majority has started discussing a more modest $1,300 dividend over the long-term, which would allow the state to also pay for greater school funding without drawing down the state’s sole remaining savings account.

And even though Gov. Mike Dunleavy has not amended his request for a full statutory dividend, he has acknowledged that outcome is unlikely. “I doubt it’s going to be a fully statutory (dividend),” he said Tuesday. “In the end, the Legislature appropriates, so we’ll see what that number lands on.”

The Department of Revenue released its latest projections Tuesday, estimating that the price of oil would average $85 per barrel over the current fiscal year, which ends June 30, and $73 per barrel for the 2023-24 fiscal year. The department’s latest projections estimate that lawmakers will see a $925 million revenue hit over both fiscal years, compared to projections made in December.

The governor’s amended budget plan announced in February had a $400 million deficit that he proposed covering from savings. Dunleavy supported a full statutory dividend at the time, which would pay roughly $3,900 for every eligible Alaskan at a cost of $2.5 billion. He reiterated his support for a full dividend Tuesday, despite the projected deficit under his proposal ballooning to over $900 million.

“I believe that we should do everything we can to keep as much money in the hands of the people,” Dunleavy said during a Tuesday press conference.

The governor has proposed monetizing carbon as a way to potentially raise billions of dollars in new state revenue by storing carbon underground or selling forestry offsets. Dunleavy’s proposals have advanced from one committee in the House, but they have received a more lukewarm reception in the Senate. Those proposals are not expected to raise revenue over the next fiscal year.

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In anticipation of a worsening revenue forecast, the House reduced the size of the dividend in its budget plan during a finance committee hearing Monday to around $2,700 per Alaskan. The dividend would follow the “50-50″ model — where 50% of a now-annual draw from the Permanent Fund would go to state services, and 50% would go to the dividend. But the House’s budget would still be in the red by over $400 million.

Palmer Republican DeLena Johnson, who manages the operating budget in the House, said Tuesday that there had not been a caucus discussion about the size of this year’s PFD. But she did not anticipate the Republican-led House would want to go lower than a $2,700 dividend.

House Republicans, who previously have publicly supported calculating the size of the dividend according to the 1982 statutory formula — which hasn’t been followed since 2016 — said their priority is not necessarily passing a full dividend this year.

“It’s really this political football that gets kicked around back and forth,” said Fairbanks Republican Rep. Frank Tomaszewski. “What I really want to see is a sound fiscal plan coming out of the Legislature.”

To bridge the gap for the current fiscal year, the Legislature is planning to spend from the state’s main savings account. The governor has said an additional $115 million is needed for unanticipated budget items in the current fiscal year, including over $50 million for last summer’s fire season.

The Constitutional Budget Reserve — the state’s main savings account — has a balance of roughly $2.3 billion. Legislators are planning to use it to fill the deficit and pay for a handful of fast-tracked budget items, including hiring staff to address the state’s food stamps backlog and a shortage of public defenders in Bethel and Nome. Three-quarters of legislators need to vote to spend from that account for a draw to occur, but legislative leaders said they expect their caucuses will support that spending.

Another priority with wide support in the state Capitol is addressing school funding. Legislators have heard from education stakeholders across Alaska of an ongoing budget crisis plaguing schools around the state. But the House’s current spending plan does not include a proposed increase for Alaska’s school districts or a boost for teacher salaries, which would increase the deficit further.

The Senate is hearing legislation that would increase the Base Student Allocation — the per-student funding formula — by $1,348 over two years. The nonpartisan Legislative Finance Division estimated that would cost $257 million during this year’s budget cycle, rising to $347 million next year.

In the Senate Finance Committee, discussions turned Tuesday to rewriting the dividend formula in state statute. A Senate bill introduced last week would establish a 75-25 split from a Permanent Fund draw between services and the dividend. Under that proposal, the PFD would be roughly $1,300 this year, rising to an estimated $1,500 by the end of the decade.

“That’s probably the single most important piece of legislation to get our feet back on the ground,” said Sen. Lyman Hoffman, D-Bethel, during a Tuesday news conference. He said that there was not a united position among the 17-member bipartisan Senate majority caucus on the size of this year’s dividend, but that a larger PFD would require new state revenue.