Are you ready, folks, for an adventure in problem-solving? Buckle up.
We recently learned that the revenue forecast is down a bit so that our undesignated general fund estimate is about $30 million less than was predicted in the fall. We thought we had a $170-175 million gap; we are now looking at a $200 million deficit in the fiscal year we are in presently (FY2025).
We like revving up but it’s not happening this round.
What about the budget the legislature is working on now for FY2026 that begins July 1? The spring forecast is $70 million less than the fall forecast. With the unsustainably high base student allocation (BSA) increase of $1000 in the House Majority’s bill and a PFD of $1400, the deficit is a whopping $532 million.
A $532 million shortfall for the upcoming year. Wow. Not a small amount.
👉OPTION #1 I don’t know anyone who believes it would be fiscally prudent to withdraw that from savings for two reasons: 1) our savings are not built up this year to the degree where we can spare that amount; and 2) $532 million is not a sustainable draw that could occur in future years.
Savings band-aid won’t work for this whopping gap wound.
From a practical standpoint, there are not the votes to make a $532 million withdrawal from savings (it takes a three-quarter vote, so 30 out of 40 in the House and 15 out of 20 in the Senate).
👉OPTION #2 Some suggest we could cover the BSA increase and the rest of the deficit from the PFD. Funny thing is, I haven’t heard that a single legislator has drafted an amendment to the budget to do that.
As background, the original PFD formula puts the PFD at about $3600. A 50/50 PFD (half of the percent of market value draw from the Permanent Fund earnings) puts it at $2800. The Senate Finance proposal is a 75/25 split with 75% for state government spending and 25% for the PFD; that 75/25 PFD amount is $1400.
To cover the proposed $1000 BSA and the remaining gap, the PFD would have to be cut to $580. Because of inflation and annual salary increases due to union negotiations, the PFD would be gone in a few years.
The PFD is on life support at this point.
No one is jumping up and down to champion burning down the PFD to $580. Not yet anyway. We shall see. Maybe there’ll be a proposal to cut it from $1400 to $1000 and pair that up with a less than $532 million draw from savings. A slower burn, but still a burn.
👉OPTION #3 This brings us to the third option we’ve discussed quite a bit in previous editions of this newsletter: oil taxes. You can scroll down to my article links to read why this will hurt our economy. Tax something more and you’ll get less of it. In the case of oil, it’s not just less oil. It’s less revenue in the long run too. Sure, we could raise taxes on oil companies and initially enjoy additional dollars coming into the state coffers but the ROS (return on stupidity) would be far less than ideal. Growing the public sector and shrinking the private sector will not mathematically pan out in the long run, period.
The ring to “tax baby tax” falls flat. It will not motivate production.
If I’ve said it once, I’ll say it a hundred times more. We need to increase our tax base, not our taxes.
At this point, you may be ready to throw in the towel. Hold on to it as you’ll need to wipe your brow from enthusiasm shortly.
The interest in Alaska’s natural resources is growing exponentially, not just in Washington, DC, but around the globe. Serious conversations are underway. A lot of handshaking is happening.
I have one more option on how to deal with the deficit
but let’s focus first on good news
It’s not all doom and gloom, dear Alaskans! We are on the brink of what may be a renaissance in responsible resource development like we haven’t seen since the 1980’s. If the legislature doesn’t mess it up and send the wrong message to industry, investors and the federal administration that wants to help advance projects in Alaska, we could turn a corner toward economic growth and prosperity.
GASLINE MOVING FORWARD
Big investors are inquiring about our gasline project. This is real and it is happening as you read this. We’ve not seen this alignment on this project to this degree, ever. The Asian markets want to have a friendly trade relationship with the US. This is their golden ticket.
The gasline will provide more affordable gas to Alaskans and revenue to our state. Do you know what it also will provide that is arguably even more impactful? It will bring business; it will bring data centers; it will bring value-added processing. Affordable energy will grow our economy and increase our GDP. It will remedy the out-of-proportion ratio that currently exist between the public and private sectors. It will bring jobs and opportunities. It will foster independence for individuals and families and reduce dependence on welfare. It will improve livelihoods and strengthen communities. The gasline will be a game changer.
But that’s not all, folks. There’s more!
ROCK RUSH COMING
The regulatory environment for mining is about to become much more cooperative and business friendly. We have abundant untapped minerals – rare earth elements, coal, metals, aggregates, an array of deposits, and could see a “Rock Rush” in Alaska unlike anything we’ve seen since the 1890’s Gold Rush.
SOCKEYE BLESSING
Sockeye 2, the latest oil discovery announced last week is similar in size to the Willow project, but unlike Willow that is primarily on federal lands, Sockeye is all on state lands. Instead of 3% in revenues to the state like at Willow, Sockeye will deliver 16+% in revenue and royalties to Alaska. Discussions are underway to fast-track this project. This is big, big news! Very exciting!
With Pikka coming online in less than a year, Willow by 2029, Sockeye fast-tracked, we will be approaching amounts of oil flowing we haven’t seen in over 20 years; we will begin to close back in on 1 million barrels in TAPs as these projects move forward.
👉OPTION #4 Things are on the up and up in the world of responsible resource development in Alaska. Perhaps rather than pulling out the welcome rug from under companies and investors, draining our savings, or killing the PFD, we should do a little trimming to get us through the next few years until these resource development projects come online and are producing.
Trimming? Libs of Facebook think it is impossible. The big spenders doubt it can be done. But think about it. A $200 million shortfall for our current year is 1.25% of our overall $16+ billion budget (includes $6.7 billion federal funds and $9.3 billion state funds).
Could we “trim baby trim” instead?
Would trimming 1.25% of spending be impossible? I don’t think so. Now the big spender smarty pants will quickly jump in and say, “What would you cut?” I am not on the Finance Committee, so I don’t have my nose in the numbers every day, but what about a simple 1.25% off of everything?
And for the next year’s budget? It would take a 3.13% trim. That’s do-able too. We can get from point A to point B, Alaskans. We can get there without oil taxes, without saving withdrawals, and without obliterating the PFD.
