Federal spending joins oil to stabilize state's finances

Posted: Sunday, December 05, 2010

Alaska's state government is expecting continued strong federal spending in the state over the next two years, according to the state's official revenue forecast for the coming years, released Friday.

Combined with the preliminary reports on oil tax revenues released last week, the forecast shows Alaska in among the best financial shape in the nation.

"Right now Alaska's finances are the strongest they've been in the state's history," said Pat Galvin, commissioner of the Department of Revenue.

Besides oil and federal money, the state's other major source of revenue is investment earnings, such as in the permanent fund and other savings accounts, but which is typically not available for spending.

Alaska imposes few taxes on its citizens, instead funding state government with oil tax revenues and federal contributions.

Just a few years ago, oil prices swung wildly, from a high of $140 a barrel to a low in the 20s, Galvin said, but during the last 18 months they've stabilized, he said.

The forecast makes a conservative projection on oil prices, assuming that during the next few years they'll be in the upper 70s. Oil closed Friday at $88.44 a barrel, according to the department.

At the same time, the forecast makes what may be an optimistic view of federal spending in Alaska, predicting it will continue to be stable or increase.

Last year the federal government spent more than $20,400 per person in Alaska, said the report, the highest spending level in the nation.

About 30 percent of the federal spending in Alaska goes through the state, funding programs such as Medicaid, as well as transportation and education, said John Boucher, a budget analyst with the state's Office of Management and Budget.

Other big federal spending programs include defense, both salaries and procurement, as well as transfer payments such as Social Security. Neither of those go through the state government.

Boucher said last year's big spending on the American Recovery and Reinvestment Act, known as the stimulus, is dropping off, though some of those projects continue. The state is projecting about $3 billion in federal revenue to the state government in each of the next two years, compared to last year's $2.4 billion he said.

The budget forecast estimates for spending include formula-driven programs that are somewhat easier to predict, he said.

"Typically what happens in the fall forecast, we use the previous year as a proxy," he said.

Before the stimulus spending started, total federal spending in Alaska was about $9.5 billion, with about 30 percent of that going through the state.

While many of the formula programs are likely to be stable, federal deficit cutting efforts could result in other cuts, he said. If defense spending is exempted, any cuts would have less impact on Alaska, however.

High oil prices in recent years have helped Alaska refill its coffers, such as the Constitutional Budget Reserve, Galvin said. Four years ago that was down to $2.5 billion, but has since been replenished and now stand at about $10 billion.

That means even with declining production of oil in the North Slope, the state can fund current level of services all the way out to the end of the forecast in 2020, but that will require being conservative with spending increases, he said.

Galvin credited the Alaska's Clear and Equitable Share Act, passed under the leadership of former Gov. Sarah Palin, with getting the state a fair share of its oil profits as its passage coincided with the run up in oil prices.

The Alaska Oil and Gas Association disputed that, saying ACES has actually made the state uncompetitive and is discouraging industry investment in producing new oil.

Maintenance spending is up, Deputy Director of the Alaska Oil and Gas Association Kara Moriarty acknowledged, but that's not what the state needs to refill the trans-Alaska oil pipeline.

"Obviously, we think there needs to be some major reform to ACES," she said.

Galvin said that's not what state audits of industry spending how.

"What they reported back was the increase in capital spending was not driven by an increase in maintenance costs, it was primarily driven by new projects coming online," he said.

Those new projects will help stem the expected decline as Alaska's existing oil field age, he said.

• Contact reporter Pat Forgey at 523-2250 or patrick.forgey@juneauempire.com.

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