North Slope oil prices slid to $50 a barrel last week, down more than 50 percent in six months. At this rate, we might have a $3.8 billion state budget deficit this year, up from $3.5 billion estimated just a month ago.
Whew! I have sympathy for new Gov. Bill Walker walking into this.
So far — with one exception — Walker's actions have been quite reasoned. He prudently ordered a stop to unobligated spending on several high-profile state development projects and put off submitting a revised state budget until January to allow his team to develop a plan.
There will surely be spending reductions and virtually no capital budget, but no wholesale operating budget cuts, as that would hugely damage the economy, tipping us into another late-1980s regional recession.
Fortunately we have savings to help us ride this out, and the Department of Revenue has forecast that if we hold spending steady at about $5.6 billion a year, we can stretch the savings to 2023, one year before the major natural gas pipeline and natural gas liquefaction project begin operating and bringing substantial new revenues.
We desperately need that gas/LNG project to stay on track (it's now in the preliminary engineering phase), and the governor has committed to doing his part to ensure that.
One misstep for Walker, a puzzling one but which can be repaired, is his late-night order Jan. 5 prohibiting board members of the Alaska Gasline Development Corp., or AGDC, from signing confidentiality agreements and his firing of three members of the board.
The governor certainly has authority to hire and fire state board members, but the confidentiality decision, while a gesture toward government "transparency" (a campaign theme), was poorly thought out, I believe.
All state agencies and corporations need provisions to safeguard confidential information, and particularly AGDC, which is the entity representing the state's equity interest in a possible $50-billion-plus gas project. No private company will share confidential data with any partner unless the information is protected from competitors.
What's puzzling about this is that rules on confidentiality are common in state agencies. In fact, the public members remaining on the AGDC board previously signed confidentiality agreements so the agency could get on with its work in the gas pipeline partnership. Those are still in effect, which creates the awkward situation where part of the corporation's board has authority to review confidential information and part does not.
The governor is entitled to put his imprint on AGDC with his own team on its board, and that's understood. He'll have to backtrack on the confidentiality exclusion, however, if he really does want the gas project to stay on track. The industry partners have been pretty clear that without the state as a partner the project won't go, and protection of confidential business data is crucial in any business partnership.
We need the gas project because without those new revenues, things look pretty bleak for our state's finances.
Our new governor can be forgiven some stumbles, including this one, as long as he corrects it.
On the upside, Walker's order of a pause on high-profile projects, including AGDC's own Alaska Stand-Alone Pipeline (a gas pipeline planned as a backstop in case the big project doesn't go) is important as a symbolic step.
This won't actually save a lot of money, but symbolism is important right now, because tougher decisions lie ahead.
Steps taken to put these projects being put on hold should be taken with care, to protect the investment we've made so far and preserve them as options. Susitna hydro, the Ambler resource road, the Knik Arm Crossing and the road to Juneau are all strategic infrastructure investments.
Any challenge presents opportunities, of course, and I believe Gov. Walker has a huge one here that shouldn't be missed. The revenue problem now has the public's attention, and this creates a political environment where frank discussions can take place over changes in public service delivery as well as new revenues.
One new source that has to be on the table is using some of our ample investment income from the $50 billion Permanent Fund and other assets. To wall this off and say we can't spend it is irresponsible. The Permanent Fund was created in 1976 as a "rainy day" fund to help support public services when the oil money runs out.
Well, it's raining now.
These are politically volatile topics, but the environment is right to initiate the discussion.
The governor has to initiate it, and do it forcefully. Alaska has a strong-executive constitution precisely for this reason, so a governor can lead. It's a chance to fundamentally change the state's fiscal structure that comes along rarely, unfortunately when oil prices crash.
Gov. Walker has to engage the Legislature in this, of course, and reach out to the public. We're all part of the problem, and we're all part of the solution.
We could start this dialogue by exercise by envisioning whether we could actually get by with a state government funded with sharply reduced revenues, if we really had to. Painful, yes. The end of the world? Probably not.
It would be a bleak scenario, but it might help consensus and solutions to emerge.
This is a huge challenge. Can our new governor rise to it? Can legislators? I think so.
Tim Bradner is a natural resources writer for the Alaska Journal of Commerce.
The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary@alaskadispatch.com.