JUNEAU, Alaska (KTUU) - The coronavirus epidemic is seeing global stock markets seesaw and oil prices drop, Alaska’s fiscal situation is not immune from the uncertainty.
In the past week, the Permanent Fund saw $2.8 billion wiped from its value, mostly due to plummeting stock prices. The New York Times reported that the S&P 500 surged on Monday, meaning some of the Permanent Fund’s losses would be erased.
Some lawmakers used the stock market volatility to call for the Legislature to act conservatively when calculating the 2020 PFD. “We could be heading for some very difficult times,” said Rep. Jennifer Johnston, R-Anchorage, on Friday.
Angela Rodell, the CEO of the Alaska Permanent Fund Corp. (APFC), urged caution when looking at day-to-day performance of stock markets. She described the stock market drop as a “correction” and said that the APFC is using cash on hand to invest opportunistically.
A drop in the value in the fund’s value will not impact the $3.1 billion draw from Permanent Fund earnings for the next fiscal year to pay for state services and the dividend.
“There is one year lag,” Rodell said, explaining that the percent of market value draw (POMV) could be smaller in future years if the fund’s value doesn’t grow before the end of the ongoing fiscal year.
The POMV draw established in 2018 is based on the total value of the Permanent Fund over five of the past six fiscal years. The amount that will be drawn from the Permanent Fund for FY2022 is calculated at the end of the fiscal year based on the fund’s value.
“The only number that really matters is on June 30,” Rodell said, before explaining that markets could rally through June and see the Permanent Fund grow.
The statutory PFD formula that calculates the size of the dividend is much more elastic.
The PFD formula is based on averaging net Permanent Fund income over the five most recent fiscal years, meaning a drop in earnings would equate to a smaller dividend check.
However, a drop in the dividend size under the statutory formula is largely theoretical. In recent years, the Legislature has ignored the statutory formula and decided the size of the dividend through debate and compromise.
The price of oil may be a bigger factor on the size of the 2020 dividend.
In December, the Department of Revenue ratcheted down its revenue forecast by $200 million due to lower-than-expected oil prices.
At the time, the Alaska North Slope (ANS) oil price was forecasted to be $63.54 per barrel for the ongoing fiscal year. On Monday, the Department of Revenue showed the Alaska North Slope (ANS) oil price at $48.31 per barrel.
“The Department of Revenue is monitoring the ongoing changes in global oil markets, and is in the process of updating its oil price projections for the Spring 2020 Revenue Forecast,” a Department of Revenue spokesperson said by email.
Without a dividend in the budget, the Legislature was looking at a roughly $500 million surplus to pay for part of the PFD under the December revenue forecast.
Johnston, the co-chair of the House Finance Committee, warned that unless oil prices rise and production increases that that surplus could feasibly be erased. “If this continues this year, the budget that we’re talking about could be in deficit spending,” she said on the House floor.
Alaska-based economist Ed King says it’s “in the realm of possibility” that hundreds of millions of dollars could be wiped from state revenue. King cautioned into looking too closely at daily oil prices, saying that they could rebound in the months ahead.
The operating budget is expected to be debated on the House floor on Tuesday as it moves steadily through the Legislature.
Legislative leaders say the dividend will likely be debated in separate legislation later in the session. Without a surplus, the Legislature would likely debate drawing from the $2 billion Constitutional Budget Reserve (CBR) to pay for the 2020 PFD.
A full statutory dividend would cost roughly $2 billion. Officials at the nonpartisan Legislative Finance Division have long warned that the CBR needs a $1 billion cushion for fiscal emergencies and to pay for the normal functioning of government.
For the House, drawing more from Permanent Fund earnings to pay for a PFD would likely be off limits.
On Monday, the House of Representatives passed a non-binding resolution, largely along caucus lines, that pledged to not overdraw the Permanent Fund beyond the POMV. Implicit in the resolution is the idea that a full statutory dividend is unsustainable under the state’s current fiscal situation.
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