Looking north along the Trans-Alaska Pipeline, where the Dalton Highway crosses the Antigun River. First opened in 1977, within five years oil from the pipeline was contributing over 85-percent of Alaska’s state revenues, and funding an unprecedented boom in project construction. (USFWS photo/Lisa Hupp)

The state budget Gov. Dunleavy signed into law in June has a surplus of almost $2 billion, but that won’t necessarily translate into the windfall megaprojects of Alaska’s first oil boom.

Rather, the wartime surplus is going to fill all the financial potholes in the state government, schools,  and agencies that deepened during the last decade of low oil prices.

In part three of our interview series with Sitka Sen. Bert Stedman, who co-chairs the Senate Finance Committee, KCAW’s Robert Woolsey asked Stedman to share his insights into how Alaska is spending its unexpected wealth this year.

Part one: Read or listen to Sen. Stedman’s position on using Sitka’s Permanent Fund to build a marine haulout.

Part two: Read or listen to Sen. Stedman discuss the Katlian Bay Road, and what the project could mean for future road construction along the Southeast coast.

Every $10 increase in the price of oil = $1 billion for Alaska

The main thing to remember about oil prices – and who isn’t reminded every time they fill up a car? – is that Russia’s invasion of Ukraine in February, and the subsequent embargo of Russian oil, pushed oil from $80 per barrel, to $120 per barrel.

In Alaska, every $10 dollar increase in the price of oil amounts to about $1 billion in state revenue.

This all happened fast. The Alaska legislature was in session. Bert Stedman, co-chair of the Senate Finance Committee said there was consensus nevertheless to build a conservative budget that breaks even at pre-war prices, but funnels money into the state’s two major savings accounts, into the Permanent Fund, and into some other select programs, if the price meets or exceeds certain benchmarks.

“And the reason we wanted a structure like this, is we wanted to get the discussion on the table of how do we save our windfall revenue in the event of,  and when it comes – and it does come from time to time,” said Stedman. “So we don’t just balloon up our expenditures or squander it off on frivolous spending, but actually make it beneficial for decades.”

This is a little different approach than the early years of Alaska’s oil boom, when it seemed that there was no end in sight to oil revenues. Times have changed, of course, and Stedman has watched Alaska spend more than it’s earned every year since 2012. Now the budget’s got these “levers” to make sure nothing’s spent unless the revenue is there. For example: $85 oil is the basic budget; $87 oil starts forward funding of the state’s public schools, or paying for schools two years at a time, rather than one; $101 oil begins to refill the nearly-empty Constitutional Budget Reserve; $111 oil and above is deposited into the Permanent Fund. 

The Big Picture: Where’s the surplus going?

This year’s supplemental budget process added hundreds of millions of dollars to the FY22 budget, including $221 million earmarked for local governments to pay off school bond debt.

Even with that extra spending, a huge surplus remained to be diverted into various savings accounts:

  • $199 million to the constitutionally protected portion of the Alaska Permanent Fund;
  • $300 million to the Statutory Budget Reserve, a savings account that can be spent with a majority vote of the House and Senate and the approval of the governor;
  • $342 million to the Higher Education Investment Fund, which funds college scholarships and the state’s equivalent of medical school;
  • $19 million to the Alaska Marine Highway System’s vessel replacement fund; and
  • $1 billion to the Constitutional Budget Reserve, a savings account that requires a three-quarters vote of the House and Senate and approval of the governor.

The higher education fund and the ferry system fund were drained by the Legislature’s failure to approve a supermajority vote last year. 

The money deposited into the funds this year should refill them, if Dunleavy signs legislation that would prevent them from being drained again.

– As reported by James Brooks, in the nonpartisan Alaska Beacon

The Permanent Fund Dividend remains divisive

Stedman would like to see even more money go into the Constitutional Budget Reserve, the state’s main savings account, but it’s not an especially sexy policy. We already know what the main distraction will be in the capitol next year.

“But then there’s also the debate over the dividend,” he said.

The Permanent Fund Dividend captures the interest of Alaskans like nothing else. But it presents a problem for conservatives like Stedman who have a very restrained approach to government spending, even when that spending is a cash payout to residents. He says the dividend formula is from a different era.

“You know, we have the dividend formula that was put in place 40 years ago, under a totally different portfolio structure – it was all bonds,” Stedman said. “And then the split was 50% of the earnings, roughly, to the people for the dividends and the other 50% to the state, and the state reinvested their monies, and we now have a little less than $80 billion in there. But the payout of that old structured formula is significant. It would be probably $4,200, this year, somewhere in there. And you cannot cash flow, the math doesn’t work. You can’t cash flow that and meet (the state’s) other obligations.”

The final compromise on the dividend this year was $2,600, with an additional $600 in energy relief, for a total of $3,200. 

In aggregate, the dividend is just over $2 billion. Stedman is not opposed to sending checks to residents, but he thinks it’s important to the overall debate to consider the trade-offs.

“The state is in dire need of infrastructure,” said Stedman. “We can look around our own community and see that, and as you go from community to community. Alaska’s a young  state, there’s a lot of things that need to be built. We’ve got to expand our energy generation capacity throughout Southeast, including Sitka. We’ve got to start looking in that direction again. It’s  just something to consider: You’ve got to have a balance, you’ve got to meet your obligations, and run your state and make sure your economy’s  cooking along and people have jobs and kids are getting educated. So it’s not something where one issue is prioritized over everything else.”

Curbing the impulse to spend in a windfall year

And what about the big projects? The roads, bridges, ferry terminals, and other capital spending that rides on the coattails of high oil prices? Stedman says the legislature allocated twice as much to projects in the current budget than in recent years, but he himself was reluctant to go overboard.

“A lot of members wanted to have an even bigger capital budget and buy more things for their communities, with the election year and all that stuff,” said Stedman. “I didn’t want to do that. I wanted to concentrate on fixing the fiscal position of the state. So we don’t go into another oil dip, and then we’re totally crippled. And I certainly didn’t want to start new, bigger projects, and then have the finances turned around on us, and we’re stuck with a bunch of this deferred maintenance that we already have, and projects that are underway that are now in trouble, and we don’t have the resources to help them. So I wanted to concentration on the state looking at their deferred maintenance. And the state’s more responsible for that than the local maintenance. And taking a look at at building our savings position, along with increasing the fiscal position of the cities and communities, because they’ve been hit hard also.

The biggest immediate benefit to Sitka is not building something new, but paying for some things already built. The city will get a check for just over $4 million to cover school bond debt reimbursement that had been vetoed by the governor in his first year in office. The bonds paid for numerous improvements and remodels in the Sitka School district over the past decade. Stedman also wanted to knock off the total $200 million in deferred maintenance for Alaska’s schools, but he says “I did not prevail in that position.” Instead, the senate opted to allocate half that amount.