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Growing state deficit signals new era in Alaska finances

Dermot Cole
The state has gone into deficit spending in a big way, starting what could be a long-term trend of depending increasingly on savings while oil income continues to decline. istockphoto

FAIRBANKS -- It has gone almost unnoticed in Alaska, but in a three-year period, the state has said so long to billion-dollar surpluses and hello to billion-dollar deficits. The big cut in oil taxes and the continued decline in North Slope oil production are catching up with us.

Even without lower oil taxes, the state would still be taking in hundreds of millions of dollars less than the $7.1 billion it plans to spend from the general fund this year.

Only because the state stashed more than $17 billion in easily accessible cash reserves, courtesy of the ACES tax system and the 2008 oil price boom, do we remain insulated from an immediate crisis. The deficit for this fiscal year is almost certain to be more than $1 billion.

The exact number will depend upon oil prices and production, both of which are tracking below the estimates for this fiscal year. Updated figures are not expected until December, but the early signs point to a bigger-than-expected draw on state savings.

The oil-tax cut in Senate Bill 21 goes into effect in January, meaning it will apply only to the last six months of Alaska's fiscal year.

The tax cut is expected to mean a $550 million revenue reduction from January to June. In addition, the new law calls for accelerated tax-credit payments, meaning that there is a total of $700 million not available to spend elsewhere.

Oil production dropping, too

Aside from the tax cut, income is dropping because oil production continues the decline that began a quarter-century ago.

Oil production this fiscal year is about 50,000 barrels a day below the level of 2012 and nearly 200,000 barrels below the rate in 2008.

By one measure, the state deficit is already at $959.5 million, the difference between the spring revenue forecast of $6.2 billion and the budget of $7.1 billion. The Legislative Finance Division calls this the “projected pre-transfer fiscal deficit,” to be covered by moving money out of savings accounts. Karen Rehfeld, the state budget director, puts the current deficit estimate at $668 million.

She said the withdrawal of $374 million from one of the savings accounts should not count as deficit spending because that account was set aside for capital projects funded in the budget, such as work on an in-state gas line. I would argue that for the average citizen, it counts as part of the deficit because it is an example of taking money out of savings to fund the budget.

Could deficit reach $2 billion?

Looking ahead, if oil prices remain close to $105 per barrel for the rest of the fiscal year, and if production remains below forecasted levels, the state will have to shift a lot more cash. The deficit would be about $2 billion if oil prices drop and the yearly average ends up at about $100 per barrel.

Oil prices would have to average $118 for the fiscal year to balance the budget, a figure that is far higher than the range of $102 to $111 that we’ve seen recently.

For future fiscal years, there are so many variables that all we can do is guess. There are major elements, at least a half-billion dollars, in the 2014 budget that won't be repeated the following year. But there are always new projects that compete for dollars in Juneau, from gas pipelines to roads and schools.

In a Senate Finance Committee hearing Friday, the head of the legislative finance division touched on the challenge of balancing competing demands for state dollars in the years ahead. David Teal, director of legislative finance, said that the state public schools, Medicaid and the cost of commitments to the public employees retirement systems now take up about half of unrestricted general fund revenues.

“If they increase as projected, by 2022 they’ll take 94 percent of our revenue stream. That leaves virtually no money for agency operations, for a capital budget or anything else,” he said.

The “mismatch between the revenue trend and the expenditure trend isn’t sustainable,” he said.

The size of the state's savings accounts gives it some breathing room, but not much. That's mainly because it's not at all clear that the state will ever be this flush again.

It is possible that the move to cut taxes and make Alaska more profitable for the major oil companies may lead to a slowing in the rate of decline in oil production. Projects that may add tens of thousands of barrels of oil a day are possible. Beyond that, there is no end of speculation and wishful thinking about oil revenue and state finances.

Earlier this year, Gov. Sean Parnell announced what he described as a five-year fiscal plan. He said he favored spending reductions of $25 million a year and holding the annual deficit to $700 million.

As we are already witnessing, that will be easier said than done.

Contact Dermot Cole at dermot(at)alaskadispatch.com. Follow him on Twitter at @DermotMCole.