Budget picture gets worse with TAPS flow cut

  • An oil tanker is seen at the Valdez Marine Terminal at the end of the Trans-Alaska Pipeline System. Storage tanks are filling up at the terminal amid surpressed demand and prices, leading operator Alyeska Pipeline Service Co. to reduce throughput but 50,000 barrels per day. (Photo/Courtesy/Alaska Chamber)

Alaska’s finances are deteriorating so fast it’s even hard for the professionals tasked with doing so to keep up.

Legislative Finance Director Pat Pitney told the House Finance Committee on April 22 that the Department of Revenue’s updated spring revenue forecast — which looked bleak when it was released April 6 — is likely “very optimistic” given what happened in the interim.

That’s because what started as a small budget surplus before the Legislature approved this year’s Permanent Fund dividend distribution of $1,000 per eligible Alaskan, required supplemental spending and COVID-19 gripped the world has turned into a $1.3 billion deficit this year that will likely be at least $1 billion next year, according to Legislative Finance calculations.

Revenue officials revised their spring forecast downward by nearly $530 million based on Alaska oil prices generally being below $30 per barrel for the rest of the 2020 fiscal year, ending June 30.

At the time, Alaska North Slope Crude was selling in the $30 per barrel range following a broad agreement by major producing countries to cut global production in May by nearly 10 million barrels per day, or about 10 percent of total oil production worldwide. However, the promise of major oil supply cuts was still not enough to offset the demand drop from a global economy idled by COVID-19 work and travel restrictions.

On April 20, domestic market oil prices fell into the red with the price of Alaska oil falling by $18 in a single day to -$2.68 per barrel, which Legislative Finance analyst Alexi Painter called a “paper negative” driven by trades in the futures market.

While, according to Painter, there likely was no oil actually traded at a negative price and the price quickly rebounded to $9.01 per barrel the following day, it is an apropos descriptor of the State of Alaska’s fiscal situation.

Civic-minded Alaskans are very familiar with the mantra that the state needs to fix its structural budget deficit as the debates over spending cuts and taxes have dominated lawmakers’ time since oil prices started falling in late 2014. Lawmakers off all stripes have routinely been sharply criticized — and voted out of office — for supporting unpopular budget remedies.

But Pitney, former Gov. Bill Walker’s budget director, briefly revisited that history to illustrate just how drastically the State of Alaska’s fiscal picture has changed in less than 10 years. She noted that the state took in nearly $9 billion of petroleum-generated tax and royalty revenue in 2012. The “very optimistic” projection for this year is just less than $1.1 billion.

The 2021 budget passed in late March calls for more than $5.1 billion of state spending, but Pitney noted that both the 2020 and 2021 deficits could grow further with supplemental spending packages needed to combat the effects of the pandemic and other, more common needs, such as wildfire suppression.

“That traditional revenue stream is gone and with the price volatility and the uncertainty in the demand drop the coronavirus has brought, that less than a quarter of our revenue stream and our budget needs from oil is probably something we need to get used to,” she said.

Alaska oil has temporarily stabilized in the $10 per barrel range in the days since and the Revenue Department expects Alaska oil to average just $37 per barrel in fiscal year 2021.

Painter noted that at $10 per barrel companies are barely able to cover the cost of transporting the oil from the North Slope to West Coast markets.

“The breakeven for all oil company spending is generally around $40 (per barrel) in Alaska, so even at the forecast price of $37, which would be a substantial increase from where we are, the companies are losing money,” he said.

In 2018 lawmakers thought they had solved the majority of the structural budget imbalance by approving an annual 5.25 percent of market value, or POMV, on the Permanent Fund; it drops to 5 percent in 2022.

The predictable POMV draw will grow from $2.9 billion this year to nearly $3.1 billion in 2021, but the state will feel the impacts of the COVID-19 pandemic through the POMV for years to come.

The lost value of the Permanent Fund from recent financial market declines means the POMV will be $47 million less than previously expected in 2022. The annual POMV revenue forgone from a poor 2020 will peak at about $300 million in 2027, according to Pitney, before the year falls out of the five-year trailing average window used to calculate the POMV.

That’s all based on the fund ending fiscal 2020 with a balance of $63.1 billion and immediately returning to its historical 7 percent historical return average.

As of April 27, the fund had an unaudited value of $62.5 billion, up from $60 billion at the end of March. It peaked in late January with a total balance of nearly $67 billion.

On top of all that, Aleyska Pipeline Service Co. said April 24 that it had begun to cut Trans-Alaska Pipeline System throughput by about 50,000 barrels per day to deal with a lack of oil storage capacity projected for late May in the system.

Reducing TAPS throughput directly translates to less money for the state, but exactly how much will be forgone is unclear at this point due to a host of ever-changing variables. What is clear is that the original fiscal year 2020 North Slope production forecast of 492,000 barrels per day — another fundamental factor in the revenue estimates — will not be met. TAPS throughput for 2020 averaged 485,583 barrels per day immediately following the throughput cut.

Pitney said before Alyeska confirmed the throughput proration that the Constitutional Budget Reserve, which once held roughly $14 billion and lawmakers have relied on to backfill annual deficits, will be down to $1.4 billion by the end of June and is likely to be functionally exhausted in a little more than a year without making structural budget changes.

The Department of Revenue uses the CBR to manage daily cash flow and its March 31 balance of nearly $2.2 billion includes $465 million held in the state’s General fund as short-term cash flow borrowing, according to Pitney.

She added that turning to the Permanent Fund’s $16 billion Earnings Reserve Account to backfill what the CBR can’t also has long-term consequences. Each $1 billion pulled from the account — which is the spendable portion of the Permanent Fund — beyond the POMV draw translates to $50 million less available each year in perpetuity.

“We have to address the structural budget deficit soon and it’s going to be continued budget reductions, but it’s also got to be new and diversified revenue sources,” she said.

“Changing the dividend formula is not enough to close the structural budget deficit.”

Elwood Brehmer can be reached at [email protected].

04/30/2020 - 9:57am