The slide in Alaska’s oil revenue may portend an end to large capital budgets and sizable year-to-year operating budget growth, according to the director of the Legislative Finance Division in his testimony before the House Finance Committee Friday.
David Teal said declining oil production and unspectacular oil prices mean that legislators will have little, if any, surplus money to work with in crafting the fiscal year 2014 budget.
“You can add only $263 million to the governor’s budget without dipping into savings,” said Teal, adding that “these numbers have a sizable plus-minus.”
Gov. Sean Parnell proposed a budget last month, calling it a “leaner” proposal than previous years have seen.
Parnell’s $869.9 million capital budget request — the number includes both $795.2 million in unrestricted general funding (UGF) and $74.6 million in designated general funding (DGF) — is the second-largest put forward by a governor in the past decade, Teal noted.
“In most of those years, the governor has presented a capital budget that addresses his agency needs, but he says to the Legislature, ‘I know you have to add … your community needs,’” Rep. Les Gara, D-Anchorage, commented. “It’s not like he presented a capital budget to the capital budget co-chairs and said, ‘You can’t add anything to this.’”
In the past few years, the Alaska State Legislature has roughly doubled the governor’s capital budget requests. But with a slim projected surplus and a dismal production forecast, it will be constrained this year in its ability to add to the budget unless lawmakers are willing to eat into the state’s $15.7 billion in reserves.
Those reserves, Teal said, are likely why Alaska has an AAA bond rating and why it remains in strong fiscal shape.
“This isn’t really gloomy, from my perspective,” Teal said after describing the surplus reduction and potential deficit the state now faces. “You can afford an average capital budget — sizeable, $875 million capital budget. You’re not forced to reduce the operating budget — you may want to restrain the growth — and you have the luxury of having large reserve balances if you decide you want to spend more money than the current-year revenue.”
Teal continued, “I think the message is you may have turned the corner on your ability to continue large deposits to savings, but you’re not in any immediate danger of huge deficits and tumbling the economy into recession, or anything like that.”
Rep. Mark Neuman, R-Wasilla, suggested that tapping into the state’s budget reserves could prompt rating agencies to reevaluate their high opinion of Alaska’s finances.
“I think that’s probably true,” Teal replied. “If we start dipping very heavily into reserves, then you no longer have that backup. They understand the decline in revenue curve, and … I think they’re expecting us to respond to declining revenue by doing something other than (taking from) reserves.”
As proposed, the total capital budget is about $1.8 billion, the largest funding component of which is federal receipts.
The operating budget remains the largest component of the budget, though it has increased by just 0.8 percent in terms of UGF spending. That is a lower level of growth than is typical.
“My guess is that you will not be able to spend the full $263 (million) projected surplus in the capital budget unless you dip into savings, and that’s because you’re going to find it difficult to hold the operating budget to the $52 million increase that the governor proposed,” said Teal; the draft FY14 operating budget contains $43.3 million more from UGF and $18.7 million more from DGF than the FY13 authorized budget, a total increase of 1 percent when both general funding sources are considered.
“It’s going to be difficult to keep that 1 percent growth rate,” Teal said. In response to a question, he brought up a chart showing a steeper fiscal decline, explaining, “If you jump back to six and a half percent average growth rate, this is the chart, and this one is the one with large deficits. At 1 percent, you don’t have deficits for three or four years, and even out by 2022, they’re not huge.”
Rep. Cathy Muñoz, R-Juneau, the only Southeast Alaska lawmaker on the Finance Committee this year, said after the meeting that she found Teal’s assessment “sobering.”
“On the one hand, we’re in a good position because Alaska has been wise in preparing for the future with large savings accounts, but on the other hand, it’s very sobering when you look at the reality of where we’re at and how much we depend on one resource for the funding of our state government,” said Muñoz. “I think we have a lot of challenges ahead.”
Muñoz also commented on the Legislature’s apparently limited options for adding to Parnell’s proposed capital budget.
“It was interesting to me that the governor has presented a capital budget that’s not going to allow much ability for the Legislature to add without going into savings,” Muñoz said. While she said she was aware that was the case before, she remarked, “It was kind of driven home today.”
• Contact reporter Mark D. Miller at email@example.com.