Juneau, Alaska

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

Alaska by the Numbers – March 2020

March was a crazy month. It’s almost unbelievable how quickly the world changed in response to the COVID-19 pandemic. Here are some quick highlights about how Alaska’s finances and economy were impacted by the pandemic.

The Stock Market Collapsed

March began with the Dow at 26,703. By the end of the month, it was down to 22,334. That’s an 16% drop in a single month. If you measure the peak to the trough, the Dow fell 38% between February 12th and March 23rd.

Of course, this isn’t new territory. The equities market has a history filled with booms and busts. And, this bust was somewhat predictable – although the timing is always impossible to nail down.

In this iteration, the proverbial straw that broke the camel’s back was the quarantine in China. Traders started wondering what that would mean to the markets. Without Chinese exports, several companies would see their manufacturing disrupted. In fact, every supply chain with a link to China was in for a rough time.

As time passed, the extent of the spread became clear. People became afraid to go out or were prohibited to leave their homes. Many businesses were forced to close their doors. Every business felt the impact as money stopped circulating.

In the last week of March, stocks recovered a bit. It’s impossible to know where things go next.

APFC Reports a $1.8 billion loss in February, March numbers will be worse

The Alaska Permanent Fund Corporation released its February 2020 financial report. It shows a net loss of $1.8 billion in February, knocking the fiscal year to date earnings down to $1.3 billion.

Of course, we already know that the stock market crashed further in March. With $22.7 billion exposed to that fall in equity value, we can assume the fund lost at least another $4 billion in the stock market – Plus, whatever losses may have occurred in our private equity, real estate, and other asset classes.

As of March 26th, the reported value of fund assets was $60.3 billion. That’s down $5.2 billion from the end of February. So, that’s a good guess at where things stand. So far, it looks like the losses were mostly absorbed by the unrealized gains in the fund. That means you shouldn’t subtract all of these losses from the ERA.

Oil Prices Crashed

While the stock markets entered freefall, the oil market was feeling the pinch as well. After trading within the $60 to $70 window for most of the previous year, the quarantine in China provided the bears an excuse to break through the floor. In the last week of January, the price from Brent oil fell to $56 a barrel. By February 10th, it was down to $53.

At first, it appeared there would be further cuts by OPEC and Russia, which allowed the price of oil to start climbing back to its comfort zone. But then, the pandemic caused a bigger problem. With oil demand falling by over 10 million barrels per day, OPEC+ couldn’t cut enough to handle the intensity of the disruption.

That’s when all hell broke lose. Russia looked at the situation and decided they weren’t willing to go further. It was time for US shale producers to chip in. So, Russia backed out of the OPEC agreement. Saudi Arabi responded by opening the floodgates.

Falling demand and increasing supply can only lead to one outcome. The price of a barrel of Alaska North Slope oil crashed to a low point of $23.28. March ended up averaging just $33.69 a barrel, bringing the FY20 average price so far to $59.95.

With three months left in the fiscal year, it now appears that the price of oil for FY20 will end up around $52.75 +/- $1.44. That’s a downward revision of $6.10 from last month’s outlook.

Looking forward to FY21, the $59 forecast from the Department of Revenue last Fall has gone from looking pessimistic to being unrealistically high. With so much extra oil in the market, prices are likely to stay below $50 a barrel for a long time. Eventually, demand will recover and supplies will get shut-in. But that is a long process.

Right now, our forecast shows an average expected outcome of $39.68 per barrel for FY21. However, normal volatility creates a 90% confidence range from $27.19 to $55.74.

Oil Development is in Trouble

With oil prices in the gutter, development projects face two problems. First, the project economics take a hit, generating a smaller expected return on investment. Any project that was barely positive enough to get approval at $60 is now below the investment threshold.

Second, lower oil price means lower cash flow. Seeing as it is the revenue from past projects that provide the capital for future ones, every oil company just saw their capital budgets disappear. We’ve already started hearing that companies are adjusting their spending accordingly.

To make matters worse, there is another issue worth watching. One of the challenges of investing in Alaska is the cost of getting produced oil to market. Right now, it costs about $10 to move a barrel of oil from Northern Alaska to Southern California.

For the last decade, Alaska’s oil has been receiving a premium to oil that is produced in Texas or North Dakota. The increased value of our oil has offset the higher transportation cost, which allowed investment in Alaska to compete with other places. However, the value of a barrel of ANS sold for only $2.74 more than a barrel produced in the lower 48 states last month.

Consequently, Alaska’s ability to attract capital away from other investment opportunities has been eroded further. Until oil prices recover, development on the North Slope is extremely fragile.

The FY21 Budget is Complete

The House and the Senate finished working on the FY21 budget on March 29th. Although a lot of false starts occurred during the process, the budget ended up right about were we expected at the beginning of the session. At one point, legislators toyed with the idea of an emergency distribution of cash to all Alaskans, but that effort didn’t survive.

Excluding the PFD, total UGF spending ended up being $320 million larger than the budget signed last year (7.6% growth). Of course, FY20 spending also grew with a supplemental budget during this session. At the end of the day, the budget will end up looking fairly flat – as the cuts that caused so much consternation last year were mostly reversed.

The PFD is the only item in the budget that suffered a substantial reduction. Expect a $1,000 check in October, down 38% from the $1,606 that we all received last year.

FY22 is Shaping up to be a Nightmare

Investment earnings and oil money are the State’s two largest revenue sources. With both markets crashing at the same time, Alaska’s financial picture has dramatically shifted. The answer to our question from before has been answered. We are in trouble now.

The lost value of the Permanent Fund will result in a smaller transfer to the General Fund. It’s looking like it will be closer to $3.0 billion rather than $3.1 billion in FY22. And, smaller transfers will persist as long as the fund balance is lower than projected.

Oil revenues will also be lower than planned in FY22. Right now, the projected starting place is $1.1 billion for the next budget cycle. Add about $500 million in non-oil revenue sources, and you end up with total available funds up to $4.6 billion.

Meanwhile, we can expect pressure for expenditures to rise. Medicaid support is very likely going to increase due to the lingering effects of the pandemic. Local governments, school districts, and social support programs will all ask for additional assistance as we are thrown back into recession. Plus, the loss in stock value has increased our unfunded pension obligation by an amount we don’t know yet.

Even if the legislature is able to hold UGF funding flat next year, the budget will not balance – Not even with a zero PFD. And, since the legislature depleted the budget reserve this year, there is nowhere left to turn. Unless oil prices change quickly, SB26 (the “Permanent Fund Protection Act”) is about to fail – without protecting the PFD or stabilizing the budget.

Local Governments are in for a Rough Year

The state government is not the only place that saw revenues streams dry up. Any government that levies a sales tax is about to realize they have less money than they budgeted on. And, those municipalities in Southeast Alaska that get a lot of cruise ships are about to learn how much that industry means to them. It is increasingly looking like the entire summer season will be canceled.

The Economy Will Feel the Impacts for at Least a Year

The jobs numbers from the Department of Labor show that the economy was doing well before we shut the economy down. We were on pace to post growth of nearly 1,000 jobs during FY20, which is almost exactly what we predicted would happen.

As businesses are asked to lock their doors and people are told to stay at home, thousands of Alaskans have found themselves without a paycheck. Unemployment insurance claims have already increased about 700% in just the last few weeks. It is very likely that Alaska is back in a recession (although the data to confirm it will not be available for months).

And, the damage done by shutting down the economy will have lasting impacts. It is probably going to take a long time for companies to recover from the lost business. It could take years for people to catch up on their personal finances. Layer that on top on reduced oil development and a lost tourism season. All of the sudden, this could become the most destructive economic event in the State’s history.

Of course, the future is always unpredictable. And there are a lot of programs out there providing assistance to closed businesses and individuals that are out of work. Plus, a lot of people are still getting paid, taking paid leave, working from home, or drawing from savings. So, it’s possible that everything ends up being ok. Time will tell.

Government Assistance is Coming

The federal government passed an economic relief package last week. You can read more about it here. Most Alaskan’s should see an extra $1,200 per adult and $500 per child show up in whatever account your tax refund goes into (or you’ll get a check in the mail). If you haven’t done your taxes this year, the IRS will use your return from last year to see if you qualify. With the tax deadline this year extended to July, you have some time to plan accordingly.

If you heard that there was another $1,000 coming from the state government, that funding did not survive in the final budget. But, unemployment benefits were extended. The state waived the waiting period to qualify and the amount you can receive was increased by both the state and federal governments. If you are out of work because of this pandemic, you should see if you qualify for some financial assistance with the Department of Labor.

There are also a lot of ways the federal legislation helps small business owners and independent contractors. For more information, check out the this help center.

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