Analysts: Budget drought ahead

Drop in oil prices, production may lead to dip in state income

Posted: Friday, February 02, 2007

JUNEAU - With North Slope oil production declining and oil prices slipping, a legislative budget analyst warns state spending - now flush with oil-fed billion dollar surpluses - could be back in the hole as early as next year.

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Legislative Finance Director David Teal also told the Senate Finance Committee that mounting demands on the state budget mean lawmakers could be hard-pressed to make the reductions that Gov. Sarah Palin has called for in her budget.

"You can go through the things that are missing from this budget and not surprise yourselves if the budget goes up by $150 million and not down by $150 million," Teal said.

Palin introduced her proposed $3.6 billion operating budget in December as a "work in progress." The highlights of the plan included fully funding education, restoring a bonus program for seniors, continued local government assistance, a repeal of the studded tire tax and a roll back of an increase in business license fees.

Palin also announced she would sock away budget surpluses of $1.3 billion this fiscal year and an estimated $640 million next year.

Furthermore, she said that budget writers would strive to cut $150 million from the operating budget she inherited from former Gov. Frank Murkowski, which is $750 million above what the Legislature approved for this year.

But key elements are missing from Palin's plan, elements that lawmakers have little, if any, choice about funding, said Teal. Those include increases in K-12 funding to cover rising retirement costs, changes in the state's Medicaid match and increases resulting from new state employee contracts.

The governor's budget also does not put money away for education spending in future years, as lawmakers have done for the past two years. And the governor's capital budget, which is the minimum needed to match federal funds, is likely to grow as lawmakers add school construction, roads and other projects for their districts.

Factor in those costs with a sinking surplus and Teal said the state could be back to balancing the budget next year with money from savings.

That was the norm before a dizzying climb in crude prices three years ago plumped up state coffers. Royalties and taxes from North Slope oil fields make up about 85 percent of the state's general fund revenues, a roller-coaster ride over the past decade as prices have fluctuated from a low of $9.39 a barrel in Dec. 1998 to a high of $73.10 a barrel last July.

Lawmakers welcomed the recent bounty with spending increases of about 15 percent a year, though half of that went to cover rising retirement costs, which have since stabilized.

While Teal predicts the growth in government spending will slow, revenues are not likely to keep up.

Oil prices have sagged recently, a trend state revenue experts predict will continue as production continues to decline. Adding to the uncertainty is a new petroleum production tax that lawmakers passed last year.

Legislators built a system of credits and refunds into the tax to spur new development, but analysts don't know how companies will interpret the new rules and how big an impact it will have on revenues.

"We have no idea what credits and refunds will be," said Teal.

The biggest decision lawmakers face is whether to spend this year's $1.3 billion surplus on next year's budget and, if not, how to save it, Teal said.

He questioned the wisdom of the governor's proposal to deposit $1.3 billion into the body of the Permanent Fund which requires a constitutional amendment to tap, effectively putting it off limits.

"With an uncertain future, why reduce flexibility by depositing money into the principle of the Permanent Fund?" he asked.

The governor also is proposing to deposit another $1.8 billion into a state savings account that some say encourages spending because it requires a three-quarter vote of the Legislature to tap. In the past, it has opened up a bartering system because minority lawmakers have held onto their votes in exchange for programs and projects dear to them.

Sen. Kim Elton, D-Juneau, later described Teal's budget presentation as "sobering."

"If a family was building a budget knowing as little as we know, that family would have their stomach in knots," he said.

But Teal said, for now at least, most states would welcome the challenges Alaska's lawmakers face.

"My guess is if you told legislators in any other state your budget's pretty well balanced for this year but you have an extra $1.3 billion to spend, they wouldn't consider it a real challenge. They would look at it as 'Wow'."

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