With crude oil prices falling, economists question the sustainability of Dunleavy's PFD plan
West Texas Intermediate and Alaska North Slope crude prices are each down around 22 percent in the last month. The question — Is this precipitous drop cause for alarm, or just due to the ebb and flow of global economics?
And more importantly, what does this all mean for Alaska?
The concern is always focused on how crude oil prices impact government, budgeting and deficits. Local economists say predicting prices in the long-term is not surefire, and having other means in place to fund deficits could very well be the difference in Alaska's future.
Gov.-elect Mike Dunleavy campaigned on the promise of restoring the PFD by following the budget formula used prior to 2016, before Gov. Walker issued a line-item veto on half of the PFD payout to keep state government operational amidst a crushing recession and dwindling oil revenues. The legislature followed suit in 2017, setting a fixed dividend amount at $1,600.
But where will the money come from?
"If there are new deficits, it's going to come out of the Earnings Reserve Account of the Permanent Fund,” said former Department of Revenue petroleum economist Roger Marks, who worked in the Tax Division for 25 years. “And this additional dividend payback is also going to be paid out of that same earnings reserve."
Gov.-elect Dunleavy said in a live interview with Channel 2 Wednesday that there is currently $19 billion in the ERA that was earmarked for Alaskans before Gov. Walker’s 2016 veto. That’s where he says the money to pay a full PFD and manage government expenses would come from.
But Marks says the ERA is directly tied to Alaska oil production taxes and royalties. “So when prices go down, we get less production taxes and less oil royalties, which has an effect on state revenues,” Marks said.
One possible scenario challenging Dunleavy's plan is the continued decline of crude oil prices as they have steadily over the last month. How could an account set up to run state government keep that government afloat if the very thing fueling it is in steady decline?
That’s the scenario that has both Roger Marks and long-time Alaska oil and gas analyst Larry Persily concerned about the Governor-elect’s plans for running the state.
"We're dependent on one source of income, and we follow oil prices like it's some tablet from Moses from the mountains,” Persily said. “We should think 'What are we going to do long-term to pay for public services we want?'"
Gov.-elect Dunleavy has earmarked public safety, education, transportation and natural resource management as key funding priorities. He says he is confident that through more efficient management of government spending in the form of cuts to services, that decreased spending will be enough to offset the drain on the ERA.
“We’re going to manage the state better; we’re going to find efficiencies and we’re going to make sure that the money that people have already allocated, and that we’ve gotten through our revenue for oil is used efficiently,” Dunleavy said. “Until we do that, we need to make sure that the people of Alaska can rely on us and trust us to follow our own laws. So the payback of the PFD I think is important.”
Mark says his response is firmly rooted in more than 25 years working in economics.
"It will be challenging to fund both future deficits, to also fund future state spending that's also going to come out of the earnings reserve,” he said. “It's unclear whether you can fund all those things from the account. It's going to make future cash flow difficult to connect the dots on if you pull what he wants to pull out."
And if the ERA does run out, both Marks and Persily hinted at a broad base tax if the money from the ERA is otherwise unavailable.
“Certainly there are Alaskans who have talked about taxes — sales tax, income tax,” Persily said. “Politically, I don't think that's going to happen in the next legislature. But someday I think it's going to have to happen.”
But Dunleavy says in the event of a worst-case-scenario in the form of consistently low oil prices, Alaskans would be the first to know about any changes.
“And if for some reason there’s some issue down the road, or some disaster, or some fiscal issue that we don’t foresee, we’ll have that discussion with the people of Alaska,” he said. “They’ll be part of any changes to the Permanent Fund or PFD. That I can guarantee you.”