While the House struggles to organize, the Senate Finance Committee began its work Wednesday, January 16, by looking at revenue projections for the State and their impact on the deficit.

Sen. Bert Stedman (R-Sitka) resumes his role as Senate Finance co-chair.  Stedman previously served six years as co-chair, alongside Sen. Lyman Hoffman (D-Bethel), in the 25th, 26th, and 27th legislatures, during the time of the Senate Bipartisan Working Group.

The current Senate Majority expanded the Senate Finance Committee from seven members to nine for the 31st legislature.

“The state is facing a very significant structural budget deficit,” Stedman said in a press release.  “To help fix the problem, the Senate Finance Committee is adding two members.  These additional members broaden the geographic representation and bring valuable experience to the Senate Finance table.”

Expanding the committee is also a political response to Sen. Scott Kawasaki’s (D-Fairbanks) victory in the November election over former Senate President Pete Kelly (R-Fairbanks).  Kawasaki gives Senate Democrats a six-member minority and an additional seat on Senate Finance.

Per the legislature’s Uniform Rules, a six-member minority is entitled to two seats on either a committee of seven or a committee of nine.  Expanding Senate Finance to nine members therefore waters down the minority’s influence.

In addition, the Senate Majority added hardliners Sen. David Wilson (R-Wasilla) and Sen. Mike Shower (R-Wasilla) to balance Hoffman and Sen. Click Bishop (R-Fairbanks). 

While Bishop and Hoffman are part of the Senate Majority caucus, they could be persuaded to join minority senators Donny Olson (D-Golovin) and Bill Wielechowski (D-Anchorage) on future votes that affect low-income working families.  In those situations, Stedman may prove a swing vote.

The outgoing administration of Gov. Bill Walker submitted FY 2020 operating and capital budgets that were balanced, based on a preliminary forecast oil price of $75 per barrel and Permanent Fund dividends (PFDs) of $1,800.

However, when incoming Gov. Mike Dunleavy submitted the same budget to comply with a statutory deadline, there was a deficit of $1.6 billion.

The main driver is the reduction in oil price, new Commissioner of Revenue Bruce Tangeman explained to Senate Finance during a hearing Wednesday.

Tangeman previously served as deputy commissioner of revenue. He later served as policy director for the Senate Majority.

“Mr. Tangeman, tell us some good news.  We have a deficit.  Do we have any revenue?” Stedman joked.

Department of Revenue Correcting for Volatility Triggered By Trump

While Walker was constructing his budget, Alaska North Slope (ANS) crude was dropping from a peak price of about $85 dollars on October 3.  It bottomed out around $54 in late December.  It is currently trading around $60.

According to the Department of Revenue’s (DOR) presentation, a decrease of one dollar equates to $70 million in lost State revenue for prices between $65 and $75.

Ed King, Chief Economist at the Office of Management and Budget (OMB), told committee members that oil price volatility began after release of the Spring revenue forecast.

President Donald Trump’s decision in May to withdraw from the Iran nuclear deal and impose sanctions caused uncertainty about Iranian oil.  The Organization of Petroleum Exporting Countries (OPEC) agreed to boost output to compensate, but in October, the U.S. granted waivers to countries allowing import of Iranian oil.  The glut in supply caused prices to collapse.

Tangeman said the volatility over the past nine months left DOR with little recourse but to return to the Spring projections that he said had been stress tested.  Those projections are duplicated in the Fall Revenue Sources Book.

“We weren’t faulting the work that was done for the [preliminary Fall] price forecast,” Tangeman explained.  “We just needed to go back to a more stable environment, and we felt the Spring forecast was the best numbers to go back to, not only for the current fiscal year, but for future fiscal years, as well.”

That means the Dunleavy administration is operating under an assumption of $64 oil for FY 2020.

King said that price seems about right and that oil prices should remain stable over the next three to six months because supply and demand are now in balance. 

In addition, King said that the bankruptcies Texas and North Dakota shale oil companies experienced have led to consolidation that will smooth prices.  Any time global supply drops, shale oil can fill the gap within weeks.  That puts a ceiling on price, King said.

“The idea that we can have sustained oil prices in the $100 range is unrealistic in the frame of mind that we understand today,” he told Senate Finance.

While DOR’s graphs included oil prices up to $130, Tangeman agreed with Stedman that the odds of those prices being realized are “near zero.”

Senate Finance will hear from the Department of Natural Resources Thursday regarding oil production forecasts, though Tangeman warned that while the State is excited about new development in Pikka and Willow, it is too early to rely on those for revenue forecast purposes.

“The further out those plays are, the more risk we apply,” he said. 

Tangeman said that it was appropriate for DOR to present to Senate Finance first because Dunleavy intends to match expenditures to revenue in his revised budget, expected in February.

Dunleavy Proposes PFD Payments, $650 Million Increase to Deficit

What Tangeman did not address is that Dunleavy’s proposed PFD constitutes half of the deficit.  Of the $3 billion slated to be drawn from the Permanent Fund earnings reserve, Dunleavy would dedicate $1.9 billion for PFDs, $800 million more than Walker’s proposed FY 2020 budget.

Indeed, the Dunleavy administration doubled down Wednesday, introducing Senate bills 23 and 24. 

SB 23 would pay an additional $1,061 — the amount Walker vetoed from the PFD in 2016 — to eligible recipients in FY 2020.  Amounts the legislature did not pay according to the statutory formula in 2017 and 2018 would be paid in FY 2021 and FY 2022 respectively.

SB 24 deals with eligibility for the payments.

Adding $1,061 to Dunleavy’s proposed $3,000 PFD in FY 2020 would increase the deficit by another $650 million, or $2.2 billion total.

In a press conference Wednesday afternoon, Tangeman again declined to acknowledge the PFD’s impact on the FY 2020 deficit, instead telling reporters that the payment was to correct a past wrong.

Dunleavy added that the PFD “back pay” would boost the economy.

But Stedman and Senate Finance Co-chair Natasha von Imhof (R-Anchorage) expressed no interest in drawing more than $3 billion from the Permanent Fund earnings reserve in FY 2020.  Doing so would erode the value of the Permanent Fund, they said Tuesday.

House Republicans Swear In Sharon Jackson, Damaging Negotiations

Stedman announced that budget work will begin in earnest over the next several days as subcommittees are assigned, regardless of what happens in the House.

The House has so far failed to organize.  A Tuesday floor session adjourned without even a nomination for a speaker pro tempore.

The House cannot hold committee meetings and staff cannot be paid until a majority is formed.

James Brooks of the Anchorage Daily News tweeted that most staff were not in the Capitol Wednesday.  A picture of the staff parking garage in Juneau showed mostly vacant parking spots.

Wednesday’s House floor session was already delayed when some House Republicans decided to swear in Sharon Jackson at the court house in Juneau, according to Jeff Landfield of The Alaska Landmine.  

Rep. Chris Tuck (D-Anchorage) argued Tuesday on the House floor that Jackson’s appointment to the vacant House District 13 seat could not be acted upon until the House elects at least a temporary presiding officer.

Nancy Meade, General Counsel for the Alaska Court System, told Landfield the swearing in was without weight.

“A court clerk doesn’t have the authority to make anyone a legislator,” she said.

After Jackson’s swearing in, Wednesday’s House floor session was canceled.

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