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New forecast of Alaska oil revenue takes chunk out of state’s deficit

  • Author: Nathaniel Herz
  • Updated: March 18, 2018
  • Published March 18, 2018

The Alaska state Capitol in Juneau. (Nathaniel Herz / ADN)

A new forecast of state revenue says higher oil prices will help slice a big chunk from Alaska's budget gap, though it didn't seem to change lawmakers' disagreement about how to fix the deficit.

The new forecast, released Friday by Gov. Bill Walker's administration, says the state will bring in $2.34 billion in unrestricted revenue in the current fiscal year, which is $250 million higher than the previous forecast of $2.08 billion.

Revenue in 2019 is projected at $2.26 billion, up $210 million from the $2.05 billion in the previous forecast.

Oil prices are projected to average $61 a barrel for the current fiscal year, compared to the $56 in the previous forecast, and $63 for next year, compared to $57.

If the projections hold true, the state will have to spend less cash this year and next from its primary savings account, the Constitutional Budget Reserve. The account should hold about $2.4 billion at the end of the 2018 fiscal year, June 30, according to the Legislature's budget analysts — down from $13 billion four years ago.

State lawmakers are currently drafting next year's budget and considering how to fix Alaska's massive deficit, and the rosier revenue forecast is likely to influence the debate over which measures are necessary.

The current year's budget is projected to draw about $2 billion from the budget reserve for some $5 billion in spending. Without a major change in the way the state structures its spending, the budget reserve will still be close to empty at the end of the next year, even after the updated forecast.

Most lawmakers agree that a big part of the solution is the $65 billion Permanent Fund, which is forecast to have more than $15 billion in investment earnings available for spending at the start of the next fiscal year. But legislators disagree on how much cash they can sustainably take from the fund each year, and whether other steps, like raising additional revenue with taxes, are necessary.

The largely-Democratic majority in the state House is advancing a budget that, before Friday, was projected to maintain a deficit of nearly $1 billion, even after withdrawing cash from the Permanent Fund. That's because House majority members favor slightly higher spending levels and larger Permanent Fund dividends — which reduce the amount of cash available for government programs — along with lower annual withdrawals from the fund, which they say are more financially prudent.

Friday's revenue forecast reduces the House's deficit to a projected $650 million, or about one-fourth of the cash left in the budget reserve account, according to legislative budget analysts.

That's a significant improvement from the previous forecast, which would have left the House budget withdrawing nearly half the cash in the reserve account.

But one majority member, Anchorage Democratic Rep. Les Gara, argued that the forecast is still a prediction that could turn out to be wrong. He added that the predicted boost in oil revenue doesn't reduce the urgency for lawmakers to adopt measures beyond a restructuring of the Permanent Fund.

Anchorage Democratic Rep. Les Gara speaks during committee hearing last year.(Marc Lester / ADN)

"I think you've got your head in the sand if you're taking out cheerleading pompoms or popping a champagne bottle. If oil prices dip, the state is still on the edge of catastrophe if we don't come up with a real revenue plan," Gara, who sits on the House Finance Committee, said in a phone interview. "If you want to play Russian roulette with oil prices and run the risk that you're going to run out of money in two years, I guess you can. You just won't be able to fund the university and prosecutors and police."

One leader in the mostly-GOP Senate majority, Eagle River Republican Anna MacKinnon, said it's too early to assess the effect of the new forecast on next year's budget, given that lawmakers haven't yet agreed on spending levels nor a framework for pulling money from the Permanent Fund.

The Senate majority, compared to the House, favors lower dividends and less state spending, as well as using slightly more cash from the fund each year, which would leave a smaller deficit than the House's proposal. Senate leaders have said taxes would hurt Alaska's economy and aren't needed unless the state's financial problems become more urgent.

Eagle River Republican Sen. Anna MacKinnon sits in the Senate chambers last year. (Nathaniel Herz / ADN)

The first step, MacKinnon said, is still for lawmakers to agree on a system for spending the Permanent Fund's investment earnings. If they take that step, the Senate will assess its effects "after we watch those numbers settle and another year go by," she said.

Until the Permanent Fund is restructured, the state's deficit remains at more than $2 billion, MacKinnon added. And the extra cash in Friday's forecast, she said, is small by comparison.

"The Senate sees it that we need to solve the $2.5 billion problem," she said.

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