As oil prices fall, the state’s projected budget surplus is shrinking and legislators will face a deficit if the price of oil averages less than $87 per barrel over the current fiscal year.
The Alaska North Slope oil price, hovering around $100 a barrel since the beginning of August, has lost almost a quarter of its value since early June when it reached a high of $128. Falling prices have been attributed to an increase in global oil supply, an economic slowdown in China and fears of a global recession.
The state Department of Revenue released an updated forecast Tuesday, projecting that the state will collect $715 million less in oil revenue over the current fiscal year than it expected in March.
Traditionally, revenue forecasts have been issued twice a year, once in the fall and once in spring. Since January, the department has moved to issuing less detailed forecasts each month, ostensibly to better reflect price volatility, caused partly by Russia’s ongoing war in Ukraine.
When Gov. Mike Dunleavy signed the budget in late June, he referred to a recent revenue forecast that showed the state was set to deposit $1.6 billion into the Constitutional Budget Reserve, the state’s main savings account. Since then, the oil revenue forecast is down by roughly $1.4 billion.
Sen. Bert Stedman, R-Sitka, manages the operating budget in the Alaska Senate. He said that he hasn’t put much value into the monthly revenue forecasts and that the Legislature didn’t rely on them when writing the budget.
Instead, the budget was written with different oil price triggers in mind. At $102 per barrel oil or higher, the state would set aside $1.2 billion to fully fund schools a year ahead of time. Between $87 and $102 per barrel oil, some forward funding of schools would be possible. But if the price of oil averages below that price point over the current fiscal year, the budget slips into deficit.
Typically, the Legislature writes language into the budget to draw from the Constitutional Budget Reserve if there is an unexpected revenue shortfall. But it takes three-quarters of legislators to agree to spend from that account, and with a sharply divided state Capitol, lawmakers planned to use the Statutory Budget Reserve as a backstop, an account that only requires a simple majority to spend from.
In June, Dunleavy vetoed $300 million set to be transferred to the Statutory Budget Reserve. Instead, that revenue would end up in the Constitutional Budget Reserve, which the governor noted the state is constitutionally required to repay after drawing billions of dollars from it to cover budget shortfalls.
The nonpartisan Legislative Finance Division shows the Statutory Budget Reserve has a balance of less than $20 million, meaning a three-quarter vote would be needed to draw from the Constitutional Budget Reserve to cover any significant deficit.
Legislators passed a budget with $3,200 in cash payments per eligible Alaskan to help with high inflation and high energy costs, and big spending in other areas. Dillingham independent Rep. Bryce Edgmon, a member of the House Finance Committee, said he wished they were more cautious. He and his colleagues are now watching closely as oil prices soften and after the Permanent Fund lost value over the last fiscal year.
“I left Juneau, and it was, ‘Happy days are here,’” Edgmon said. “And all engines forward on spending. And that’s not the way I looked at it, but that’s the nature of the Legislature for you.”