Here is your monthly update on how things are going in Alaska’s economy. Read on for some of the headlines and highlights from July 2019.
The Governor Vetoed the Budget
It would be hard to imagine that you’re reading this article without knowing about the veto situation. But, just in case, here you go.
The governor vetoed $273 million from of the $4.6 billion (6%) that the legislature authorized for agency operations. Most notable were $130 million from the University of Alaska and $116 million from Health and Social Services (mostly Medicaid).
Those cuts came on top of $173 million of reductions that the legislature already pulled from the FY19 budget level. Most notable were $115 million from Health and Social Services (mostly Medicaid), $40 million from the Marine Highway System, and $33 million from Commerce.
There were also budget reductions to non-agency operations (mostly oil tax credits). All told, general fund spending is $644 million (12%) below last year.
The legislature will vote on a bill to restore $248 million of those cuts later today. It is unclear if there have been negotiations with the governor to allow these additions to survive the veto pen.
Without the additions, this budget would return agency operations to 2010 spending levels – 2006 spending levels if you account for inflation (2005 levels if you also account for population growth).
The PFD Amount is Still Not Set
The expectation all year has been that the PFD in October would match the $1,600 from last year. However, several legislators view a larger PFD in direct conflict will sustaining government operations, while others want to follow the traditional funding formula.
Those in the former group would like to see a PFD around $900 (the projected amount left over after funding the larger budget). The latter group would like to fund a $3,000 PFD (the amount calculated from the statutory formula).
So, a $1,600 PFD seems like a compromise between those positions.
The House passed a $1,600 PFD last week. The Senate will vote on a $3,000 PFD later today. It’s very unclear how this will all shake out, but it should be cleared up this week.
The Economy Keeps Growing
The Bureau of Economic Analysis has posted the first quarter GDP numbers for Alaska. It shows a 3.3% growth in the economy over last year.
The Department of Labor data shows that jobs numbers are continuing to rise. June jobs numbers were up 1,700 from this time last year. That makes the 9th consecutive month of rising job counts.
Inflation Ticked Upward
The Department of Labor also reports that inflation in Alaska outpaced the national average in 2018. The Anchorage CPI grew by 3% versus 2.4% for the nation as a whole. For the last two years, Alaska’s inflation was less than the rest of the country.
Healthcare and energy cost increases were big factors driving up costs in Alaska more than elsewhere.
Oil Prices Were Flat
Prices in July 2019, the first month of FY19, averaged $65.82. There was surprisingly little volatility in the daily oil prices in July, even as some events in the Middle East, that would normally cause panic, were merely shrugged off.
The EIA short-term energy outlook for July sees Brent prices averaging $67 in CY20. If the current ANS premium holds, it would imply an ANS price for FY19 of right around $68.
Of course, the market is always adjusting to changing conditions. And right now, there is a lot of uncertainty in the market. Current options trading implies a 95% confidence interval for ANS of $45 and $92.
The low side coming from entering a global recession which dries up demand. The high side coming from a supply disruption in the Straight of Hormuz.
Production Numbers are Looking to Improve
After a small decline in FY19, the North Slope appears ready to post an increase in FY20. Preliminary numbers from July 2019 imply production was around 470,000 barrels per day. That’s up from 416,357 in July last year.
With several projects in the early development phase, it looks like FY20 should post a slight increase from FY19. It probably won’t be until at least FY23 that we see those numbers really take off.
FY20 Revenues Should Beat Expectations
Taken together, FY20 Unrestricted General Fund revenues appear on track to be about $2.5 billion. This is a little higher than the Department of Revenue forecast due to the fact that they did not include any revenue from the upcoming ANWR lease sale (of which the State will receive one half of the revenues).
Given the uncertainty around what interest that lease sale will generate, what oil prices will do, and how production numbers will turn out, it is foolish to plan around which single path the future might take.
Taking all that uncertainty into account, the State should expect to receive between $1.9 and $3.4 billion in UGF this year.
The higher the number we budget toward, the more risk of missing that target we accept. The lower the number we budget toward, the more risk of making unnecessary sacrifices we accept.
There is no “right” answer here. It’s just a matter of which risks we are willing to tolerate.
That’s it for today. Thanks for reading.