With Lower Oil Prices, State Expecting Major Deficits

The Alaska Department of Revenue has drastically revised its financial forecast to account for lower oil prices, anticipating multi-billion-dollar deficits.

Download Audio

Oil revenue is expected to drop by more than half. The department’s fall report projects the state will bring in $2 billion from oil taxes this fiscal year, compared to nearly $5 billion in the previous year. The Department of Revenue made that calculation based on an average oil price of $76 per barrel. North Slope crude currently valued at about $60 per barrel.

That drop in oil prices has caused the deficit to balloon. When lawmakers passed their budget this spring, they anticipated a gap of $1.4 billion. Now, the shortfall has grown to $3.5 billion.

Ken Alper is the director of the state’s tax division, and he expects a slimmer budget moving forward.

“You can’t cut $3.5 billion dollars. Certainly not in year one,” says Alper. “There’s core functions of government that meet the needs of Alaskans all over the state that can’t fall off a cliff. So it’s a gradual process, but we’re going to have to tighten our belts and see where we are from month to month and year to year, and change our way of thinking about how we provide government services.”

Last week, Gov. Bill Walker released the budget of his predecessor, Republican Sean Parnell, without endorsement. Parnell’s $5.5 billion proposal would result in a $3.3 billion deficit if accepted unchanged at projected oil prices.

Walker has until February to make adjustments. But even with changes, a draw from savings is inevitable. Alaska now has $15 billion in reserves, but between the two budget deficits and a major transfer of money to the state’s pension funds, those reserves could be winnowed to about $6 billion by the end of the next fiscal year.

Even with those major draws, the Department of Revenue expects the reserves to last at least until 2022, even with some growth of government. That’s because oil prices are expected to bounce back in the long term.

“Once you look at the projected deficits not this year and next, but let’s say three years from now and four years from now, it’s more like a billion dollars a year, all things remaining the same, rather than three,” says Alper. “That greatly extends the lifespan of our savings.”

The drop in oil prices also means revenue from other sources now play a larger role in the state budget. Fishing, mining, alcohol, cigarettes — taxes on all those industries and products have only made up about 10 percent of state revenue in the past. That share is expected to grow to 25 percent next year. The state will also be adding a tax on marijuana because of a successful ballot initiative to legalize and regulate the substance.

But Alper says it won’t be a magic drug for the state’s budget problems.

“It would take a whole lot of marijuana to balance the budget, and I wouldn’t recommend it,” says Alper. “But it will definitely be a revenue source that the state will be seeing starting in a year or two.”

It would take every Alaskan adult purchasing nine pounds of marijuana to make up the shortfall.

While the fall revenue forecast is mostly bleak, there were some bright spots. The state’s investment portfolio grew by $8 billion last year, and returns in the $3 billion range are expected over the next couple of years. Because that money is directed to the Permanent Fund, it’s not in the pot of money that can easily be used for state spending. But it does provide the state some financial security.

“It means that we have assets,” says Alper. “It means that we’re not worrying about bankruptcy.”

The Department of Revenue also expects oil production to increase slightly over the next two years, and projects that it will remain above a half million barrels per day over the next three years.