Juneau, Alaska

(907) 699-6788 ed.king@kingecon.com

Alaska by the Numbers – February 2020

Welcome to this month’s round-up of what happened in Alaska’s finances. It was a tough month for oil and equities, mostly due to the panic around the novel coronavirus. That’s making our already difficult financial situation even more challenging.

The Permanent Fund Gave Back Its Earnings

The Alaska Permanent Fund Corporation website reports total asset values of $65.1 billion as of February 28th. That is down from $68.4 billion at the beginning of the month, suggesting a net loss of $3.3 billion in February.

That is consistent with the stock market performance, which nose-dived last week. The Dow recorded a record high close of 29,551 on February 12th, after starting the month at 28,256 (up 4.5%). By the closing bell on February 28th, it had fallen to 25,409. That’s a 14% drop from the high water mark and a loss of 10% on the month. With about $25 billion on the fund in the stock market, we probably shed between $2 and $3 billion in value during February 2020. However, some of those loses will be offset by gains in other asset classes.

Before the month started, the APFC reported it had earned $3.1 billion during the first seven months of the fiscal year (including a $332 million loss in January). The market crash in February looks like we probably coughed up most of those earnings. How the year ends up will depend on what happens during the last four months of the fiscal year.

Oil Prices Were Plagued with Decreased Demand

While equity investors were focused on the impact of China’s quarantines on the global supply chain, oil traders looked at the impact of reduced transportation on oil demand.

Alaska North Slope oil prices continued to slide in February, ending the month with an average price of $54.49. The average price for the 8 completed months of FY20 is now $63.37.

Assuming prices stay in this $50 range for the next 4 months, it now looks like the fiscal year will end with an average price of $58.85 +/- $4. That represents a forecast reduction of $6 per barrel, mostly from depressed prices related to coronavirus fears and partly from the loss of an ANS premium.

ANS Lost its Premium to Brent

Alaska took a bigger hit to its oil price than the other marker crudes. WTI fell $6.44, and Brent fell $7.77 in February. Meanwhile, ANS closed the month down $10.39. While ANS had been getting an extra $2 or $3 per barrel for the last several months, that premium has now been wiped out. The February average price for ANS fell $0.75 below Brent.

The reversal was expected to occur once the underlying conditions providing the premium were resolved. However, we had hoped the bonus money would flow into the Fall. With the early correction, our revenue outlook gets even worse.

North Slope Oil Production Outlook is Unchanged

Production numbers from the AOGCC show production from the North Slope averaged 529,220 in January. That is a little bit higher than expected, but within normal variance.

Preliminary data from Alyeska suggests that production dipped a bit in February. Early indications are that 518,000 barrels per day were produced during the month, which is a little lower than expected.

Layering this new data into the outlook, the North Slope is still on track to produce 498,717 barrels per day on the fiscal year. That production volume would represent a 1.5% decline from FY19.

The FY20 Deficit Grew Larger

Based on where things stand today, it looks like UGF revenues will fall between $1.7 billion and $2.4 billion when this fiscal year ends. Adding the $2.9 billion that was transferred from the Permanent Fund, it looks like the final deficit for the year will end up being between $0.5 and $1.2 billion.

That includes the $4.4 billion operating and capital budgets and $1.1 billion for PFDs authorized last session, plus a $0.3 billion supplemental budget (mostly for fire suppression and Medicaid). That’s a total spend of $5.8 billion, with between $4.6 and $5.3 billion of available revenues.

FY21 Picture is Becoming Clearer

The legislature is currently working on the FY21 budget, which will fund services from July 1, 2020, to June 30, 2021. The governor’s amended proposal calls for UGF spending of $4.6 billion – plus the statutorily calculated $2 billion PFD distribution (which works out to around $3,100 each).

Of course, we don’t actually know what the statutory calculation for October will be until we see what happens with the Permanent Fund earnings. If those returns end up around zero, the calculation falls to $1.6 billion (about $2,500 each).

The House will pass the budget to the Senate this week. There is no PFD in the House version of the bill, implying they intend to address the issue later. They moved some money from the Department of Corrections to the Department of Transportation, but left the budget total close to what the Governor proposed.

Before considering the PFD issue, it looks like the UGF spending is going to be something like $4.6 billion. The POMV limit says the legislature can’t take more than $3.1 billion out of the earnings reserve and the Department of Revenue forecast is for $1.9 billion of UGF revenues.

That leaves about $400 million for a PFD (about $600 each), if we end up with the leftovers. Or, possibly less if the capital budget gets bigger. Given the uncertainty around oil prices, volumes, and production costs, our model suggests total UGF revenues should fall between $1.3 and $3.7 billion in FY21.

In other words, if the legislature authorizes that $3,100 PFD, there’s a 93% chance we will need to take extra money from the budget reserve or earnings reserve to fund state services. But, if they pass that $600 PFD, there’s a 67% chance that we will end up with extra accessible money.

This is a terrible way to manage a multi-billion dollar budget…

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