Senate Finance co-chair says state needs more in savings

If oil prices stay above $100 a barrel for the next 12 months, the state could end the fiscal year in June 2023 with about $2.3 billion in its savings accounts, not counting the Permanent Fund.

It hasn’t had that much in savings since 2018.

“That’s not enough cash,” Sitka Sen. Bert Stedman, co-chair of the Senate Finance Committee, said last Friday. The state treasury needs a healthier shock absorber to cushion against the inevitable periods of low oil prices, he said.

It all depends on oil markets and prices. Alaska North Slope crude has averaged above $110 a barrel since March, almost double what it was a year ago. The war in Ukraine, strong global demand for fuel and weak supply response from U.S. and OPEC+ oil producers pushed the international benchmark price of a barrel of crude to $120 last week.

State general fund revenues from oil taxes and royalty payments would total an estimated $5.6 billion next year at $110 oil, but less than half that — just $2.5 billion — if crude were to average $70, according to Alaska Department of Revenue charts.

Oil was about $30 a barrel when Stedman joined the Legislature in 2003.

The Legislature and governors in past years going back to the 1990s have used the state’s savings accounts — the Constitutional Budget Reserve and, later, the Statutory Budget Reserve — to continue public services when oil dollars came up short of paying the bills.

Stedman was not an advocate for the $3,200 payout to Alaskans approved last month by lawmakers, who saw this year’s oil revenue windfall as an opportunity to send more money to residents this fall — almost three times the size of last year’s Permanent Fund dividend.

The senator, who visited Wrangell last week, said he was surprised at how many “so-called far-right fiscal conservatives in the Senate” wanted to go on a “spending spree” of payments to Alaskans and more spending on projects around the state. “Frankly, I found it appalling,” he added.

“We spent years in the Legislature listening to the same people pound the table” about excessive state spending, he said, but this year, fueled by oil revenues and the fall election, spending took the stage and saving for the next round of lower oil prices took the back seat.

Advocates of a larger Permanent Fund dividend and more public works spending have argued that the state treasury is flush with oil cash and lawmakers should share more of it with Alaskans who are struggling with high energy costs and inflation.

Stedman has long advocated for depositing surplus revenues into savings and into the Permanent Fund, which spins off investment earnings to help pay for public services and the annual dividend to Alaskans.

The annual draw on the fund’s earnings will provide about one-third of the state general fund budget for dividends and services for the fiscal year that starts July 1. The rest will come from oil revenues and other taxes.

And though Permanent Fund earnings do not bounce around nearly as much as oil prices, the 45-year-old account is not immune to investment risks. It dropped almost $3.5 billion in market value between Dec. 31, 2021, and April 30, to about $79 billion, as stocks and bonds have fallen in value.

The $3,200 payout this fall to Alaskans was more than Stedman and several legislators wanted, but it was the political compromise required to reach a budget deal by the adjournment deadline of May 18. Proposals during the four-month session generally ranged between $2,600 and $5,500.

The state general fund spending plan for the new fiscal year totals about $9 billion, of which about $2.1 billion is for the payout to Alaskans; more than $1.2 billion toward K-12 school operating expenses; $673 million for the state’s share of Medicaid; $367 million for prisons and Corrections Department programs; $321 million for the university system; $140 million for the Transportation Department; several hundred million dollars for public works projects statewide, including $200 million toward a billion-dollar rebuild of the port of Anchorage; and a $350 million deposit to the Statutory Budget Reserve savings account.

With so many lawmakers not returning to the job after this year’s elections — new members could fill 20% to 30% of the 60 seats in the House and Senate — Stedman is concerned that the Legislature could come up short of historical knowledge and understanding of state finances, particularly if oil prices slide downward and money gets tight again.

“It will have an impact when we get into issues that are highly complex.”

 

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