Alaska’s finances look good, revenue commissioner says. Still, problems loom

Alaska’s financials are looking good, state revenue commissioner Adam Crum says. The state budget is balanced, and with oil prices higher there may even be a small surplus this year.

On the private sector side, the oil and gas industry will have large new projects underway later this year. There is big potential as Alaska takes advantage of the transition in energy now underway worldwide, putting to use its wind, geothermal, hydro and even solar resources.

All that is good. But there is still outmigration. Young people are still leaving. The state’s economy needs to grow to keep them here, Crum told the Resource Development Council, an Anchorage business group Nov. 2.

Gov. Mike Dunleavy is Crum’s boss, and his goal is to reverse outmigration so that by the end of Dunleavy’s second term as governor the state’s population, and workforce, will be growing again.

A new revenue forecast will be out in mid-December, most likely a day or two before the Dec. 15 deadline for the governor to issue his Fiscal Year 2025 budget proposal, Crum told RDC. That will present specific numbers on past performance and expectations.

A revenue surplus is expected because the budget for the current year, Fiscal Year 2024, was based on an oil price average of $73 per barrel for the year, which began last July. Oil prices have trended higher since July. It’s too early to make an estimate of the surplus, Crum said.

But while oil prices are always a wild card petroleum revenues now support a smaller part of the state budget, about 35 percent in the current budget, compared with 75 percent or more in years when oil production was higher.

Alaska Permanent Fund income now pays for most of budget. In the current FY 2024 $3.53 billion was paid by the Fund to support the budget, and next year it will be $3.65 billion. The amount will keep growing, reaching $4 billion in FY 2028, because the Fund itself is growing.

The good news about this is that the amount paid by the Fund for this year and next are now known with certainty because what the Fund contributes to the budget is paid based on a Percent of Market Value, or POMV, formula of 5 percent of the Fund’s total value on a five-year average.

Because the amount paid is based on an average of the previous five years the POMV payment adds certainty for the governor and Legislature in creating the budget.

This is in sharp contrast to the years when the budget largely depended on oil with its volatile prices. Other revenue from non-oil source pay a much smaller part of budget, the instability of oil markets and prices left the governor and Legislature only guessing on how much they could spend for public services.

But while the state revenue structure is now more diversified and stable than it was prior to 2018, when the Legislature adopted the POMV, it doesn’t mean there aren’t problems, Crum said.

One difficulty is created by the unusual structure of the Permanent Fund, which is unlike a traditional endowment that supports worthy or public purposes.

When the Legislature wrote the amendment to the state Constitution in 1976, which voters approved that year, legislators wanted the Fund invested in safe assets, which at the time meant fixed income, mostly bonds. Stocks were then considered too risky. Spending of certain Fund earnings was allowed, but from the fixed income.

To deal with this, the Legislature in 1976 wrote the constitutional amendment to split the Fund, with a principle, or corpus, constitutionally protected, and which can’t be spent, and an Earnings Reserve Account, or ERA, to hold the realized gains, or cash earnings. The cash earnings came from interest on bonds and later income from real estate and sales of stock when the Legislature allowed those kinds of investments.

However, only the realized, or cash, earnings going to the earnings account can be appropriated, or spent, by the Legislature. Over the years money for the annual Permanent Fund Dividend was appropriated by the Legislature from the earnings reserve. More recently the large POMV payment, which now funds the PFD and state services, has had to come from the reserve account.

To make this work there has to be enough coming into the earnings reserve to make these payments. However, the concern is now that uncertainty in financial markets has reduced cash earnings to the point that there might not be enough in the account, to pay the annual POMV that supports the PFD and the budget.

The solution, Commissioner Crum said, is to end the two-account structure and combine into a single fund that is protected but with an annual POMV allowed coming from the combined account. In this way the Fund would be like an endowment like those of large universities like Harvard.

This change, however, will require a rewrite of the 1976 constitutional amendment that created tur Fund.

The Fund’s trustees, which include Commissioner Crum, will likely propose this to the Legislature, but its approval will need not only legislators’ approval but that of voters in the next general election.

All this is complicated, so explaining it, first to legislators and then the public, will require the Fund’s trustees to be persuasive..