Steadily falling oil prices exacerbate state budget deficit

On Aug. 24, as the price of West Texas crude oil dipped to less than $39 per barrel for the first time in six years, state Revenue Commissioner Randall Hoffbeck told the Alaska House Finance Committee that the decline is exacerbating the state’s budget problems.

The state’s budget is based on an average price of $66 per barrel for North Slope crude. Since July 1, the start of the state’s fiscal year, North Slope prices have averaged $53.26, according to the state’s publicly posted database.

For every $5 decline in average oil prices, Alaska loses $120 million in revenue, explained Pat Pitney, director of the state Office of Management and Budget.

At an average of $50 per barrel, the state will finish the fiscal year with $400 million less revenue than expected, Hoffbeck said.

For lawmakers gathered in Anchorage, that’s a grim cherry atop a sour financial sundae that already has the state taking in billions of dollars less than it is spending.

Only the state’s extraordinary reserves — the Statutory Budget Reserve and the Constitutional Budget Reserve — are currently keeping it afloat, and a shortfall will require the state to dip into those reserves to top off the fiscal year 2015 budget before considering the fiscal year 2016 budget.

“The reality is to balance the budget at current production, we would need $109 per barrel,” Hoffbeck told the committee. “The most optimistic forecast you get is $60-80 per barrel.”

Hoffbeck and Pitney were in Anchorage to share with lawmakers the message that they’ve been spreading in meetings and workshops across the state — Alaska needs to talk taxes and revenue to make ends meet.

“It’s unusual to have a discussion in August on the budget, but our situation is such that it warrants early and often communications,” Pitney said.

Also speaking was Gunnar Knapp, an economist and director of the University of Alaska Institute of Social and Economic Research. In the next few months, Knapp explained, ISER will be conducting a study to determine the effects a state income tax, smaller dividend, state sales tax or other tax would have on Alaskans.

“We’re not studying how much money do you get from these different options,” he said. “We’re simply saying that if you make this kind of change, how does it affect jobs?”

The state’s previous best guess comes from a 1987 study that found that cutting dividends would have a bigger effect on the state’s economy than a personal income tax would.

“Is that still true?” Knapp asked. “That’s something we have to analyze.”

The ISER study is expected to be available in October, about the same time that Hoffbeck will begin the process of updating the state’s revenue forecast and Gov. Bill Walker will begin to roll out proposals for revenue legislation.

“It looks as if it’s going to be a busier fall,” said Rep. Mark Neuman, R-Big Lake, and chairman of the House Finance Committee.

On Aug. 18, Standard and Poor’s Ratings Services lowered its outlook on the State of Alaska’s credit rating, citing the state’s fiscal picture.

S&P’s credit rating is a big deal for the state — a lower rating would increase interest rates on any bonds the state issues, making them more expensive. The state has a AAA rating on general obligation bonds and an AA+ rating on appropriation-backed bonds, the highest and second-highest possible ratings.

At the Aug. 24 meeting, Hoffbeck said Standard and Poor’s “made a pretty strong statement” with a “highly unusual” midterm announcement.

He said the state talked to the agency about two weeks ago, before the agency made its announcement, and knew it was coming.

“I think the end of the legislative session will trigger another response from the rating agencies,” Hoffbeck said. “They want to see significant movement or they made it pretty clear that our credit rating could be in jeopardy.”

Updated: 
08/26/2015 - 2:19pm

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