Falling oil prices gouge state budget deeper

On Monday, as the price of West Texas crude oil dipped below $39 per barrel for the first time in six years, state revenue commissioner Randall Hoffbeck told the Alaska House Finance Committee that the decline is exacerbating the state’s budget problems.

The state’s budget is based on an average price of $66 per barrel for North Slope crude. Since July 1, the start of the state’s fiscal year, North Slope prices have averaged $53.26, according to the state’s publicly posted database.

For every $5 decline in average oil prices, Alaska loses $120 million in revenue, explained Pat Pitney, director of the state Office of Management and Budget.

At an average of $50 per barrel, the state will finish the fiscal year with $400 million less revenue than expected, Hoffbeck said.

For lawmakers gathered in Anchorage, that’s a grim cherry atop a sour financial sundae that already has the state taking in billions of dollars less than it is spending.

Only the state’s extraordinary reserves — the Statutory Budget Reserve and the Constitutional Budget Reserve — are currently keeping it afloat, and a shortfall will require the state to dip into those reserves to top off the FY15 budget before considering the FY16 budget.

“The reality is to balance the budget at current production, we would need $109 per barrel,” Hoffbeck told the committee. “The most optimistic forecast you get is $60-80 per barrel.”

Hoffbeck and Pitney were in Anchorage to share with lawmakers the message that they’ve been spreading in meetings and workshops across the state — Alaska needs to talk taxes and revenue to make ends meet.

“It’s unusual to have a discussion in August on the budget, but our situation is such that it warrants early and often communications,” Pitney said.

Also speaking was Gunnar Knapp, an economist and director of the University of Alaska Institute of Social and Economic Research. In the next few months, Knapp explained, ISER will be conducting a study to determine the effects a state income tax, smaller dividend, state sales tax or other tax would have on Alaskans.

“We’re not studying how much money do you get from these different options,” he said. “We’re simply saying that if you make this kind of change, how does it affect jobs?”

The state’s previous best guess comes from a 1987 study that found that cutting dividends would have a bigger effect on the state’s economy than a personal income tax would. “Is that still true?” Knapp asked. “That’s something we have to analyze.”

The ISER study is expected to be available in October, about the same time that Hoffbeck will begin the process of updating the state’s revenue forecast and Gov. Bill Walker will begin to roll out proposals for revenue legislation.

“It looks as if it’s going to be a busier fall,” said Rep. Mark Neuman, R-Big Lake and chairman of the House Finance Committee.

Last week, Standard and Poor’s Ratings Services lowered its outlook on the State of Alaska’s credit rating, citing the state’s fiscal picture.

S&P’s credit rating is a big deal for the state — a lower rating would increase interest rates on any bonds the state issues, making them less effective. The state has a AAA rating on general obligation bonds and an AA+ rating on appropriation-backed bonds, the highest and second-highest possible ratings.

At Monday’s meeting, Hoffbeck said Standard and Poor’s “made a pretty strong statement” with a “highly unusual” midterm announcement.

He said the state talked to the agency about two weeks ago, before the agency made its announcement and knew it was coming.

“I think the end of the legislative session will trigger another response from the rating agencies,” Hoffbeck said. “They want to see significant movement or they made it pretty clear that our credit rating could be in jeopardy.”

More in News

COVID-19 (Image courtesy CDC)
State reports 3 more COVID deaths, more than 900 cases

The newly reported deaths push Alaska’s total to 594 COVID fatalities since the beginning of the pandemic.

In this July 1908 photograph provided by the U.S. Coast Guard Historian’s Office, the U.S. Revenue Cutter Bear sits at anchor while on Bering Sea Patrol off Alaska. The wreckage of the storied vessel, that served in two World Wars and patrolled frigid Arctic waters for decades, has been found, the Coast Guard said Tuesday, Oct. 12, 2021. (U.S. Coast Guard Historian’s Office via AP)
Coast Guard: Wreck found in Atlantic is storied cutter Bear

The ship performed patrols in waters off Alaska for decades.

The Federal Aviation Administration released an initiative to improve flight safety in Alaska for all aviation on Oct. 14, 2021. (Peter Segall / Juneau Empire File)
FAA releases Alaska aviation safety initiatives

The recommendations, covering five areas, range from improvements in hardware to data-gathering.

Kyle Kornelis speaks at a public meeting about the Runway 7-25 Rehabilitation Project on Tuesday, May 4, 2021 in Soldotna, Alaska. (Ashlyn O’Hara/Peninsula Clarion)
Soldotna airport unveils revamped runway

Runway 7-25 was temporarily closed earlier this year while it underwent renovations.

Alaska Redistricting Board Director Peter Torkelson speaks at a redistricting open house on Thursday, Oct. 14, 2021 in Soldotna, Alaska. (Ashlyn O’Hara/Peninsula Clarion)
Alaska Redistricting Board Director Peter Torkelson speaks at a redistricting open house on Thursday, Oct. 14, 2021 in Soldotna, Alaska. (Ashlyn O’Hara/Peninsula Clarion)
Redistricting proposals draw concerns from local residents

The state is seeking feedback on the best way to redraw the state’s legislative district boundaries in the wake of the 2020 census.

Signs advertising COVID-19 safety protocoals stand outside the Soldotna Regional Sports Complex on Oct. 6, 2020, in Soldotna, Alaska. (Photo by Erin Thompson/Peninsula Clarion)
Ordinance seeks more funding for sports complex renovations

Approved for introduction by the Soldotna City Council during their Oct. 13 meeting, the legislation would put an extra $583,000 toward the project

Most Read