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Bleak Alaska oil revenue forecast predicts belt-tightening as Parnell preps budget

Pat Forgey
Alaska forecasters call for dramatically less revenue coming into state coffers over this fiscal year, and the next. Lawmakers are already preparing for a great belt-tightening to occur next legislative session.
Aaron Jansen illustration

JUNEAU -- Alaska is predicting a dramatic drop in oil revenue in the current fiscal year, and another drop next year, but the Parnell administration is saying that it is not the fault of Senate Bill 21, the legislation it sought last year in an effort to reduce oil company taxes.

The state's main oil production tax is expected to see a revenue reduction of almost half, down from an expected $4 billion last year to $2.1 billion in the current year, according the Department of Revenue's annual Revenue Sources Book for fall 2013, released Wednesday. That will increase what was already projected to be a budget deficit.

The new projections, on which spending decisions will be based in the upcoming legislative session, are likely to set up some difficult decisions for legislators about how much to cut popular programs, or how deeply to dip into savings to protect them.

Total oil revenues, which are the state's biggest source of money, also include royalties, property tax and corporate income taxes. Those other taxes are showing much more modest changes, with corporate income taxes on oil companies being projected to increase, reflecting an expected increase in corporate profits.

Total oil revenues available for the politicians to spend -- known to budget writers as "unrestricted petroleum revenues" -- will drop from $6.4 billion during the 2013 fiscal year that ended last June 30 to $4.4 billion this year, then to $3.9 billion next year.

Gov. Sean Parnell on Wednesday blamed the decline on lower oil production and lower oil prices. Alaska oil production continued a decades-long diminishing trend, but this year oil prices leveled off as well.

"For much of the past 10 years, steadily rising oil prices have masked our declining production volume," Parnell said in a press release responding to the release of the forecast.

He said his tax legislation, which he is now calling the "More Alaska Production Act," was not responsible for the decline. That legislation has been targeted for repeal in a citizen referendum.

"At these lower oil prices, the More Alaska Production Act produces revenue streams to the state similar to the former oil tax system, ACES,” he said in the release.

The Alaska Oil and Gas Association, a trade group representing the majority of businesses involved in many sectors of the industry, in a Wednesday statement continued its support of Parnell's reforms. “Today’s release of the State’s updated forecast is a clear sign that the new oil tax system is already working -- only 8 months after its passage," the statement said.

ACES, the current system, remains in place until Jan. 1, or halfway through the current fiscal year. The current system increases oil tax rates at high oil prices and lowers tax rates at low prices, while the new system tries to keep them relatively steady across price ranges.

At projected prices, Revenue Commissioner Angela Rodell said, both tax systems bring in about the same amount of revenue.

Senate Bill 21, however, will result in a cost to the state of $250-$300 million this year as it closes out capital spending tax credits that are part of ACES, she said. That will amplify the revenue loss this year, but that will be a one-time expense.

The revenue forecast projects revenue for next fiscal year of about $2 billion less than was projected for this year, highlighting the challenge facing Parnell when he releases his Fiscal Year 2015 budget proposal next week.

Already, there are calls for lower spending, and Parnell's department heads say they've been told to seek no increases in their budget requests this year.

That's something that should have already happened, said Rep. Alan Austerman, R-Kodiak, who co-chairs the powerful House Finance Committee and oversees the operating budget. He said many members of the newly-strengthened Republican majority in the last session were unable to get the budget cuts they wanted through the legislative process.

"They wanted more cuts than we ended up with," he said earlier this week.

But Rep. Beth Kerttula, D-Juneau, warned that the revenue that isn't going to the state due to the oil tax cuts would mean pain for Alaska residents.

"It's going to be a very difficult session, that's one thing we know for sure," said Kerttula, leader of the House Democratic Minority.

"That's our schools, or hospitals, our roads," she said. "The state needs to make sure it is getting its fair share from the state's oil revenues."

Contact Pat Forgey at pat(at)alaskadispatch.com