Falling oil prices wreak havoc on Alaska’s budget


The continued decline in oil prices may be good for drivers at the gas pump, but it’s causing havoc for Alaska as the state looks to overcome a $4.1 billion budget deficit.


As Alaska Public Media reported, Gov. Bill Walker is looking for ways to make up for a 17 percent drop in the state’s oil revenue forecast after sales fell $800 million from the previous year. Walker is proposing tapping into $3.3 billion annually from the Alaska Permanent Fund in order to pay for the state’s current $5.4 billion budget. The rest of the deficit would be overcome by implementing an income tax, cutting government spending and raising other taxes. Currently, the state has enough revenue to cover only 25 percent of its existing budget.


While the state was well aware of its growing deficit, the Department of Revenue’s most recent oil revenue forecast for the current fiscal year was even lower than expected. Alaska Dispatch News reported estimates dropped from $1.6 billion to $1.3 billion. The revenue department’s oil revenue estimations for the next fiscal year fell to $1.2 billion from a previously projected $1.8 billion.


In a news conference, Walker said his new plan, called the New Sustainable Alaska Plan, is designed to shift the state away from its economic dependence on the oil industry.


“We have reached a point in our state’s history that we need to be looking beyond oil a bit,” Walker told reporters. “We have that opportunity now. And you’re not going to do it by sitting back with a Ouija board hoping the price of oil’s going to go to $110, $147. It just isn’t going to work.” In previous years, oil taxes and royalties made up as much as 75 percent of the state’s revenue.

Moving away from oil


In recent years, as much as three-fourths of the state’s revenue has come from petroleum taxes and royalties, while the state has also shelled out significant subsidies for oil and gas companies. As Juneau Empire reported, in fiscal year 2015, the state provided $628 million in tax-credit incentives to the petroleum industry. After oil prices fell and the state was faced with a multibillion-dollar deficit from those credits, Walker placed a $500 million cap on subsidies for fiscal year 2016, which ends June 30.


As Alaska Dispatch News pointed out, changes to the state’s oil industry are apparent in the new oil revenue forecasts. Two years ago, the Department of Revenue was forecasting oil prices at $108 per barrel for fiscal year 2016. Current estimates are down 63 percent to $40 a barrel for fiscal year 2016 and $39 per barrel for fiscal year 2017. The news outlet cautioned these estimates may yet be overly optimistic.


However, speaking with Alaska Public Media, Larry Persily, director of the Alaska Natural Gas Transportation Projects, noted the budgetary issues facing Alaska are not simply linked to falling oil prices, but also declining production.


“The governor’s plan is designed to shift the state away from its economic dependence on oil.”

“We have to accept we’re not the oil and gas state that we once thought we were, and we’re never going to be the oil and gas state that we once were,” Persily said. “Because this isn’t just prices. This is production. We’re down three-quarters from the peak. And no one out there claims to have another Prudhoe Bay in their back pocket. So, it is going to be an adjustment for Alaska.”


Meanwhile, research from the Rasmuson Foundation shows the majority of Alaskans support a move toward a new revenue source as well as more efficiency in the state budget. By a 2-1 margin, Rasmuson survey participants indicated they prefer to pay sales or income taxes than see deep cuts to essential public services.


“This survey shows the majority of Alaskans want to use all the tools we have to close this gap,” Rasmuson Foundation President Diane Kaplan said in a statement. “And current economic conditions show that we can’t wait until next year to get started.”


How Questica can help

States with significant budgetary deficits are faced with tough economic decisions that require careful and long-term planning. Using outmoded budget systems such as inefficient spreadsheets can be cumbersome to financial forecasting and communication, and may hinder transparency.


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Governments preparing their annual budget in the face of complicated financial decisions should contact Questica to learn how flexible budgeting software can aid in establishing the path to future financial balance.