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Business/Economy

Today's savings leave Alaska better positioned to weather low oil prices

  • Author: Alex DeMarban
  • Updated: September 28, 2016
  • Published December 13, 2014

Despite a devastating slump in oil prices and tanking state revenues, Alaska appears better off than it was during the mid-1980s economic crash because state savings accounts remain massive and the $51 billion Permanent Fund is a critical safety net that is much larger today, observers say.

Today, the state holds more than $12 billion in savings that the Legislature can easily access -- contained in the Constitutional Budget Reserve and the smaller Statutory Budget Reserve. That amount surpasses the entire value of the Permanent Fund in 1986, when the fund was just 10 years old and held an $8.4 billion value, said Scott Goldsmith, professor emeritus of economics at the Institute of Social and Economic Research.

Also, the Permanent Fund's earnings reserve -- the source of the annual dividends -- reached a near-record high of $7.1 billion at the end of October. If they had to, lawmakers could with a majority vote pull out a small portion of that to help balance the budget while having little impact on the dividends, said Goldsmith.

Of course, that's considered politically off the table, but it's legally possible.

"It's not quite the end of the world," Goldsmith said. "Maybe we can see it from here, but it's no cause to panic."

Oil prices have cratered from more than $100 a barrel this summer to $62 on Thursday, causing carnage for a general fund budget almost entirely dependent on revenues from oil production.

But not all hope is lost.

The state expects to end fiscal year 2015 in a $3.5 billion hole, but the state's savings will contain about $9.5 billion even after taking that hit, said Jerry Burnett, deputy commissioner for Revenue.

That sum also comes after accounting for the removal of $3 billion that is still being transferred out to pay down retirement debt, as approved by the Legislature last spring.

The state at the moment expects another $3.5 billion deficit in fiscal year 2016, starting in July.

That is according to forecasts laid out in the revenue sources book released this week, said Burnett. The forecast assumes oil prices will remain low, and cuts to the budget are not made, an unlikely outcome since Gov. Bill Walker and legislative leaders have begun efforts to do just that.

If nothing changes -- although things will -- and the state's savings continues to grow, Burnett said, Alaska will end up with $6.5 billion in savings at the end of fiscal year 2016, about 1 1/2 years from now.

That's still a substantial sum.

"We don't have an immediate crisis of the kind we would have if the state could not pay its bills," Burnett said. "It's not like 2008 and 2009 where some states had to borrow to pay their bills" because of the nation's Great Recession.

And while oil production is expected to drop slightly in the near term, it's expected to tick back up for the next two years, Burnett said. Steady production above 500,000 daily barrels is expected, which will help boost revenues assuming oil prices rebound, said Burnett.

"I think we have a bit of a slump here for a couple of years," he said. "People obviously will have to take actions differently than what they would have if oil prices had stayed up. But the future revenue picture improves a bit."

The downside is the state's long-term picture grows problematic with oil production expected to continue declining after 2017, he said.

But if things get really bad, there's still the Permanent Fund.

"It's nice to know there's $50 billion there as a long-term backstop," Burnett said. "Even with the deficit projected for fiscal year 15, it's likely the state's net financial assets will increase because investment earnings will be larger than the deficit."

Longtime economist Gregg Erickson said oil prices fell into the teens in the mid-1980s, when home values collapsed, businesses were shuttered, and people left the state.

Today, Alaska is better prepared to weather the current downturn because of its reserves, he said.

"The important thing is to not panic," Erickson said. "Let's keep the powder dry and hang in there a while. We need to make some cuts, and you know what? We should. We've probably been spending way too much."

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