Oil price war, cruise season in peril: What now for Alaska’s budget?

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THE PERFECT STORM

Gov. Mike Dunleavy sounded the budget alarm two years ago, stepping away from the Senate Majority when he could not vote for the budget that was too big, in his calculation. Or for a Permanent Fund dividend that violated Alaska Statute.

Then he ran for governor on promises to get spending under control, follow statute on the Permanent Fund dividend, and lock up repeat criminals.

Now that he’s governor, has not been able to get the Legislature to go along with much in the way of budget cuts, or the full Permanent Fund dividend, or program and budget restructuring, although the Legislature did support him on criminal justice reform.

His relationship with the Legislature’s political leadership has been strained, to say the least.

As luck would not have it, the price of Alaska North Slope oil just dropped into the mid-$30s.

Even if it doesn’t go lower, there’s not enough revenue coming in to pay for the current $4.5 billion budget, much less the $300 million supplemental budget that is on the table.

At $30 a barrel, only $1.1 billion in revenue would come into the treasury, forcing the Legislature to consider breaking the statutory formula created by Senate Bill 26, which passed in 2018 to stabilized the draw from the Permanent Fund Earnings Reserve Account.

It took three years to get that bill passed. SB 26 was going to solve at least some of Alaska’s budget problems going forward, as it promised a “structured draw.”

But it was deeply flawed, because it did not address another existing statute, which is the formula for the Alaska Permanent Fund dividend. That statute has been broken, first by Gov. Bill Walker and then by subsequent Legislatures; Walker vetoed, and then the Legislature only appropriated half of the dividend, rather than the full statutory amount.

This year, it seems likely that the Permanent Fund dividend will be shaved to just 20 percent of available revenues, rather than a 50-50 formula. Meanwhile, budget leaders in the Legislature are trying to grow the Permanent Fund corpus to $100 billion at a time of great volatility.

The budget ball is in their court, and specifically, the operating budget is in the Senate Finance Committee.

For now, its nearly a flat budget and they have not nearly enough money to pay for it. There are bills to grow the budget, such as House Bill 236 offered by Rep. Andi Story, which would add another $60 million in education spending over the next two years.

[Read: In one Alaska school, it costs $139,000 per student.]

There are add-ons for the ferry system, and add-ons for Medicaid; will the Legislature pass those?

There was the legislative effort, led by Democrats, which succeeded in hobbling the efforts of the governor’s Alaska Development Team, which was supposed to help diversify the economy.

Will the governor make drastic vetoes again, which would fuel the hopes of those trying to have him recalled?

Gov. Dunleavy has had perhaps the worst set of circumstances to deal with of any Alaska governor in his first 15 months of office, at least since Gov. Bill Egan governed during the aftermath of the Great Alaska Earthquake. For Dunleavy, it has been like winning a cross-ocean voyage on the Titanic:

  • A major earthquake just after the election
  • Expensive wildfires in the summer of 2019
  • A ferry union strike during the high season for tourism
  • Ferries break down due to years of mismanagement
  • Crashing oil prices
  • BP exiting the state, and the loss of hundreds of high-paying jobs
  • Coronavirus and its unknown economic and health impacts
  • An advisory from the U.S. government that people avoid cruise ships
  • A legislature unwilling to hold the line on spending
  • An oil tax measure going to the ballot this year that would make Alaska uneconomic for oil companies
  • And, of course, a recall petition by those who blame Alaska’s problems on the current governor

Alaska is a living its reality of the state government’s dependency on oil, and a public that may be unwilling to accept less money, less revenue sharing for communities, and fewer state services.

The price of Brent crude could drop into the $20s this week; Alaska tracks slightly higher than Brent, but could still see oil selling below $30.

That is forcing a crisis just ahead, as expenditures far exceed the ability of Alaskans to pay for their government, even if there was a personal income tax or a still-higher oil tax to pay for it.

49 COMMENTS

      • I have always balanced my books. I balance every credit card statement.
        First you take a deep breath. Then when you are in a hole you stop digging. Many of us have been deep underwater in debt and had to make the tough decisions to get out. We suffered and our kids suffered, but we survived and paid every bill. STOP DIGGING FIRST!

  1. Bring back Donna Arduin. She warned us all that this could happen. She has the backbone to save us from ourselves. The grandees of the Legislature are incapable of leadership or action or preparing any plan to address the fundamental problem: spending too much on government.

    • Tuckerman,
      Forget Donna, there are many of us who have been saying for years that the “one lane” petroleum road this state is traveling down will not work for the future.
      The “futures” stocks on oil just tanked over 30 percent…and will fall further.
      Conversely, the market bet against companies like Tesla and are losing more money due to Tesla’s success.
      Listening to Elon Musk speak tells me how far in “the weeds” Alaska truely is these days.
      Governor Dunleavy needs to look around the state and work with those he does not see “eye to eye” with and stop listening to outside interests.
      The first place to start is a complete audit of the PF and divestment from foreign totalitarian regimes like China and Saudi Arabia…that money would be better invested in domestic renewable energy projects and the growing tech sector across the U.S.

      • Tesla? Tesla is a money pump boondoggle that’s going to crash into the mantle when the pot-smokers realize that their supply lines are under quarantine and the money pumps got turned off. -14.5% today, looking for that vaunted 420 number tomorrow.

        • “Art”
          Tesla is one of two American car companies that never went bankrupt…
          Do not expect the electric car market to fold (inspite of all the friction from D.C.).
          Tesla just celebrated their 1,000,000 production vehicle with record stock gains.
          On a similar trajectory is the Cannabis market across the U.S. which is currently valued at $11.5 Billion dollars with a projected gain of 15 percent in the next five years…
          Oils trajectory is falling fast and expected to stay down well into the future.
          The times are changing and just like states like Pennsylvania were left in the coal dust 100 years ago, Alaska now must “rebrand” itself for the post oil millennium generation to come.
          Problem is too many politicians have their hands in the “oil man’s” cookie jar.

      • The market for Tesla and all the other electric vehicles would vanish immediately if the massive subsidies and tax advantages were removed.

        The public employee union racket, the education racket, and the healthcare racket are sucking all the money out of the Alaska economy. We have burned through our savings outside the PF so that the rackets could keep their hooves in the trough. We would have ample reserves to weather this market share battle between Russia and Saudi Arabia if we had kicked some hooves out of the trough. Instead, we put more hooves in the trough so million dollar a year health care administrations could make more money by sending invoices to the State. We have fifty-something SDs and REAAs and spend tens, probably hundreds of millions on administration of them, when all they do is provide some highly paid tourists going to lobby the legislature and go to conference. We could easily run the State’s education system with about ten organizational units. And we could certainly run the schools in the unorganized borough that make no contribution to education from DEED; they couldn’t produce a worse result than worst in the Nation.

        I can go on, but it is pointless; the reason we on the right do see “eye to eye” with leftists is we live in a rational world and don’t believe we can run a State on pixie dust and unicorn flatulence.

          • I’m pretty sure you got it right the first time. No one, right or left, believed the state could run on pixie dust and flatulence, except the GOP majority that got us into this fine mess and those who thought the PF was their personal slush fund.

        • Art,
          Funny…at first I was going to speak of the mental block this administration has of anyone on the perceived “left” but I figured it was a waste of my effort.
          As for subsidies, almost all of the large industries in the U.S. from airlines to oil producers enjoy huge subsidies.
          Look at the billion dollars in tax credits we give to the “oilies” year after year…
          Tesla is not an outlier for receiving government subsidies nor is it the only corporation who benifits from huge tax breaks.
          The point is Tesla’s stock is rising inspite of the Wall Street bankers who bet against them and also inspite of an administration who is not supporting renewable energy or electric vehicles.
          How is this happening?
          Foreign Markets.
          Alaska would be a perfect place for a Tesla vehicle factory or battery plant.
          AK’s shipping routes to Asia would work well for getting this modern technology to market.
          “Tesla’s third-quarter results came as a big surprise to Wall Street as the stock soared within a few days of the earnings release.
          Apart from the unexpected profits, there were several important facts that emerged from the release for investors. For instance…Tesla’s revenue grew strongly in overseas markets…”
          (Insideevs.com)
          It seems that the “pixie dust” you speak of has powdered guys like Elon Musk to quite the personal fortune…

          • Anyone who honestly thinks that oil companies receive subsidies is either ignorant as to what the term subsidy means or is lying. Anyone living in Alaska for more than an hour knows how we “subsidize” oil companies here. We tax them to explore, we tax them when they pump the oil out of the ground, we tax the land they are on to pump and process the oil, we tax them to ship the oil, we tax them to refine the oil, we tax the sale of the oil and all the various refined products of the oil, and when we are done taxing everything along the way, we tax them on any of the other money they make.
            .
            Oil subsidizes government, not the other way around.

        • “The market for Tesla and all the other electric vehicles would vanish immediately if the massive subsidies and tax advantages were removed.”

          As would the subsidies for the oil and gas industries.

          We have burned through subsidies because we are looking for a free ride. No one wants to pony up and be the big boy because that would be the kiss of death in today’s free ride economic fantasy.

          I’m not talking about the people who make minimum wage. I’m not talking about the ones who do the heavy lifting without any respect. I’m not talking about your pixie world flatulence that rewards the high rollers and forgets about the ones who do the real work. The ones who fix your car and build houses and plow the roads and run the gas lines and phone lines into your house so you can rant on MRAK. They are NOT the problem. They are not the unicorns. They’ve been doing this for decades and they know how to do it. Don’t they deserve to get a break instead of the Corrupt Bastards Club elite?

        • Ag subsidies, education grants, health subsidies, infrastructure subsidies, defense industry, lobby industry, public employee health trust, you name it so why not Tesla. No mention of Tesla’s recently complete production plant in China.

        • Dunlevy is not for Alaskans to many uncertainties and wishy washy.. Need to elect a new Governor “don’t like him or how he is running things.. Get rid of Dunlevy now before he run Alaska into the ground..

      • Steve, you are a silly man. Your last governor tried to give control of Alaska’s gas and oil wealth to the Red Chinese. Didn’t you vote for Bill Walker and his side-kick…….BM?

    • Arduin went from California with a budget of 209 billion to Alaska with a budget of 4.2 billion. If I worked in the financial field would see this as a failing career.

    • Tuckerman, I disagree re Legislature leadership. There is leadership is in the legislature. Trouble is, it is very poor leadership that is leading us into Venezuela two dot zero.

  2. This is the start of Alaska’s major difficulties. Many more to follow. My wife told me she doesn’t like the “bad news”. That concerns me. She only wants to hear “good news”. I said “not much good news available” and she said “then I don’t want to hear it”. I’m afraid that’s the “want” of a great many Americans. Denial is becoming the ‘order of the day’. Ignoring the unprecedented calamity that’s facing us is not the answer or panacea. Reality bites. The current problems facing us will only be exacerbated by refusal to acknowledge that America has been dealt a severe problem that many refuse to accept. That attitude will only lead to more difficulties with hard times ahead. For those not prepared it will become much worse. Of course, opinions are like body parts. Everyone has them. Each person is fairly confident that their own opinion is the right one, including me. We’ll certainly see who is correct, and soon.

    • Your wife is like the Ostrich who after burying her head in the sand for a lengthy period of time stands up
      only to see she is surrounded by hungry Lions.

  3. Stop the blame game and man up this is what it means to be Governor. You have put foot in a lot of trap now it’s time lead your way out. Stop finger pointing and using this blog to do it..A true Alaskan survives and becomes victorious

    • Untie Dunlevyhands..
      Dunlevy has not stop trying
      The greedy opposition is the problem
      Get out of his way if you care about this state and alaskans.
      Far too many non profits too scared to make it in the business real world living off the oil taxes via grants etc that can slip money into campaigns to grow the state budget to keep up the appearance of being successful. Get a job and get off the grant drugs.

      DUNLEVY could really make big changes and he has not quit!

      https://mustreadalaska.com/layoffs-about-the-same-as-last-administration/
      TOP COP

      Department of Public Safety Commissioner Walt Monegan and Deputy Commissioner Bill Comer quit their jobs on Friday in the middle of the biggest emergency the state has faced since the 1964 Good Friday Earthquake. The 7.0 earthquake that hit just after the start of business was a major safety concern.

      Rather than stay on their jobs through the weekend and until the end of the Walker Administration on Monday, they called it quits on Friday. The earthquake aftermath would not be their problem over the weekend.

      They left in charge the acting head of the State Troopers, Andrew Greenstreet, who by all counts is a competent leader. He stayed on the job and no-doubt had his hands full.

      Thank God that Mike and Crash were on the radio that day meeting the emergency needs because walkers picks DID QUIT.

  4. Thanks Suzanne, For an excellent article re the current situation with Alaska politics/economy.

  5. Don, thanks for your rah-rah comments, our sad reality is that this governor tried to make cuts and has gotten no help from the legislature. Worse yet, now the recall from those who make their living from government funding. And, politicians beholding to them. Mike Dunleavy will be vilified when he does the right thing for Alaska, he has my full support, its a thank-less job. Keep trying Mike, I’m with you!

  6. Legislature suggests a constitutional amendment to tap the corpus of the permanent fund in 3….2….1….

      • The Permanent Fund was meant to keep the resources of the state from being spent by big government fans. This is an “owner state” meaning we the people own the resources. The big government crowd wasted our share of revenue from the first oil sales and thus the Permanent Fund was born to keep future proceeds from being spent by big government. It’s not a rainy day fund, but a keep the wealth of the people in the hands of the people and away from big government fund. It was set up to keep government honest, we can debate whether or not that has worked, although clearly it hasn’t.

        • And watch as California gets to decide who an Alaskan is. What could go wrong?

          .

          We’ll make it up on volume though.

      • Greg, the fund was created to save oil $ for the people and keep it out or the hands of Government.
        Oral Freeman would puke if he could hear silly unschooled comments.

    • They are already trying for 80/20 government/people that extra 20% has no doubt been planned for awhile, the corpus was made accessible to them with SB26.

  7. Wow, peak oil had finally arrived! Last I read $30 a barrel was where frakkers break even. Last time the Saudis tried this extraction technology just got better. MAYBE THE LEGISLATURE OUGHT TO CONSIDER JOINING OPEC!

  8. TEOWAWKI, the 4th Turning, the Big Reset, has begun but most people don’t even realize it. Many will need to prepare to meet their maker, but are woefully ignorant of this fact.

  9. There’s an interesting dichotomy here. When I read the comments on MRAK they’re almost exclusively responsible perspectives that clearly have Alaska’s ongoing best interest at heart. When I read ADN the vast majority of the commenters have the most irresponsible perspectives; more money, more free stuff, subsidize my transportation, sure buy him a vaginaplasty, etc. Utter nonsense.

    It’s almost like there’s a mutually exclusive readership.

    • I try to keep things lively. It looks like those who respond are mostly at the extremes, or are, at least, accused of being at the extremes. There does seem to be a considerable difference of opinion as to what “socialism” is.

  10. Maybe it’s time to restart the timber industry, trees grow back. And maybe it’s time to start mining again. Just no open pits. Or hows about starting manufacturing stuff? Alaska has a lot if raw materials. We can almost stand on our own. And get royalties. Along with diversifying the economy. The toursism fantasy never paid off in a major way. It helped but that’s all. And it’s time to stop getting greedy with oil taxes.

    • There’s a model for this, Finland. Instead of cutting their forests down and shipping the raw wood to other places, nothing leaves the country without “value added.” Almost all the wood harvested gets made into furniture or gun stocks or paper or something else.

  11. Perhaps the Silver Lining in the State’s current economic catastrophe & the Corona Virus pandemic is that finally we will have to look at meaningful restructuring of our primary education system & let technology bring the public education racket into the modern era. We can no longer afford the current “jobs program” for adults that our schools have become.

  12. “What now for Alaska’s budget?”
    .
    Might one fondly hope the colossus collapses under its own weight especially since productive Alaskans can’t be taxed enough to prop it up?
    .
    Our perception of Alaska’s budget is a black hole of astronomical proportions, an all-consuming singularity from which no light or money can escape.
    .
    It is accountable to forces beyond the understanding and control of mere Deplorables.
    .
    So it seems reasonable to expect that productive Alaskans might eagerly anticipate its demise before it swallows everything, including them.
    .
    Stuff of theoretical physics maybe… who knows what might rise phoenix-like from the collapse, a minimal, populist government, controlled by constituents, without parasitic lobbyists and public-sector union-management teams, living within its means?
    .
    It could happen.

  13. No problema! Big Mike will stand even bigger! Double down Mikey, offer a treble PFD!

    Why on earth we did not just put the returns in the bank is to me a great failing. Jay and Clem et al are, and were friends. Believe me, I’ve heard all the arguments from the mouths of the authors. Norway has over a trillion dollars in the bank.

  14. Five percent more and this will be the fastest swing from high to bear market since 1929………….Don’t know what actual significance that data has, but I closed my trading account. Going to find another hole to toss my money into.

  15. “And, of course, a recall petition by those who blame Alaska’s problems on the current governor”

    Wrong. Those people don’t blame anything on our governor. Quite the opposite. They are afraid of his success and wish to over turn an election. It is no more complicated then that.

  16. A perfect time to cut the government down to a sustainable size. Privatize all of the state union jobs and clean the fat off the plate. We only have 1.1 billion for the politicians to fight over. Leave the PFD alone.

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