‘We are right at the cliff’: Alaska faces a worsening fiscal outlook making PFD vulnerable

Published: Jun. 19, 2020 at 12:33 PM AKDT
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Alaska’s fiscal future is bleak and paying any Permanent Fund dividend amount to Alaskans will be difficult in 2021.

On May 12, the Department of Revenue released an updated forecast on the state’s revenue picture. Falling oil prices and production during the COVID-19 pandemic mean the state’s balance sheet looks even worse than it did

The Department of Revenue examined different scenarios facing Alaska and projects that the current fiscal year could see the state down between $115 million and $125 million from the April forecast.

For the fiscal year starting on July 1, under some scenarios there is projected to be between $359 million and $476 million wiped from the state’s revenue picture compared to earlier in spring. Compounded with earlier revenue falls, lawmakers could face a roughly $1.2 billion deficit before considering a PFD.

In recent weeks, oil prices have risen which could help erase some of the deficit. North Slope oil production is still hovering just below 400,000 barrels per day.

Brad Keithley, the managing director of Alaskans for a Sustainable Budget, said the price rise had erased some of revenue drops and that Alaska's finances were close to the April forecast.

He noted that the state still faces significant fiscal challenges.

In May, Pat Pitney, the head of the Legislative Finance Division, said the Constitutional Budget Reserve (CBR), the state’s one remaining savings account, is functionally empty.

“We are right at the cliff,” said Rep. Andy Josephson, D-Anchorage in May. He believes lawmakers need to implement new revenues to bridge the fiscal gap.

Measures that could be on the table include an income tax, a sales tax, bonds,

and raising taxes on the oil and gas industry. “There’s going to have to be a vigorous fiscal debate, and a quick one,” Josephson said.

Rep. Lance Pruitt, R-Anchorage, said in May that those revenue conversations should take place with the caveat that there needs to be buy-in from Alaskans.

Pruitt’s focus is on implementing a spending cap to limit budget growth and working to make difficult cuts to the budget. “It means that we're trying to do what a normal household has to do, fit our budget within the revenues and income that we'll have,” he said.

Josephson agreed making $1 billion-plus in cuts is possible but argued that there would be stark results for state services. “You can, if you let every prisoner out of jail. You can, if you want kindergarten classes with 40 kids, you can do those things,” he said.

Both Josephson and Pruitt agree that the uncertainty of the state’s finances make paying a PFD difficult. Making any commitment on the dividend or whether it will be paid at all in 2021 isn’t possible “We can’t promise now, anything,” Pruitt said. “The future of the dividend is very vulnerable,” Josephson said.

For economist Mouhcine Guettabi with the Institute of Social and Economic Research, shrinking the budget or cutting the PFD during the COVID-19 pandemic is risky. “You remove even more money from the economy and it puts it in a really precarious place,” he said.

Guettabi says lawmakers need to focus on ensuring that the state’s economy doesn’t crash due to the pandemic. “The shock is so large that financial assistance to households and businesses needs to be large and needs to be sustained,” he said.

The $63 billion Permanent Fund is an inviting source of revenue to bridge fiscal gaps and pay a dividend during the pandemic. Guettabi said lawmakers could consider making a temporary excess draw on the Permanent Fund to help Alaska’s economic recovery.

But there is a downside to breaking

on drawing from the Permanent Fund. According to Pitney, taking $1 billion out of the fund means the state won’t be able to earn $50 million per year, forever.

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