State gap could hit $1 billion

Budget reserves depleted in 2004

Posted: Friday, December 07, 2001

A fiscal calamity for the state of Alaska has crept a year closer with recent drops in the price of North Slope crude oil.

The state will exhaust its budget reserve fund in July 2004, Deputy Revenue Commissioner Larry Persily announced this morning.

Previously, the department had forecast that the $2.8 billion fund, known as the Constitutional Budget Reserve, would be gone in the fall of 2005. But with oil prices dipping below $20 a barrel, $906 million will be taken out of the account in the next seven months.

The forecast is based upon oil prices of $18.81 a barrel in the fiscal year beginning July 1, 2002, and $19.72 in the fiscal year beginning July 1, 2003. Oil is overwhelmingly the main revenue source for the state general fund, which provides basic services, but production is expected to remain relatively flat, at just over 1 million barrels a day.

Even in the unlikely event that prices jumped immediately to $25.50 a barrel and stayed there, the budget reserve would gain only an additional 18 months, until January 2006, Persily said. Conversely, if prices plummeted below $9, as happened during the winter of 1998-99, the reserve could be gone in 2003.

"Either way, it's getting pretty soon," Persily said. "The state needs to diversify its revenue sources."

As for state spending, the forecast assumes no budget growth beyond the $115 million that Gov. Tony Knowles is seeking in the 2002 legislative session to keep state services at current levels. That's on top of this year's general fund of $2.4 billion.

If nothing is done, the Revenue Department projects a $1.2 billion budget gap in fiscal year 2005 and $1.3 billion the following year. That's slightly more than the state spends every year on education, from kindergarten through the university. It's also more than the permanent fund dividends.

If state spending goes up even more, as Knowles is certain to propose in his fiscal year 2003 budget request next week, the gap widens. Today the governor called for $17 million more for the University of Alaska.

The forecast doesn't include any state revenue from oil drilling in the Arctic National Wildlife Refuge or from a natural gas pipeline because those projects couldn't be completed in time to save the budget reserve, Persily said. "We're broke before then."

A bipartisan group of legislators, known as the Fiscal Policy Caucus, recently proposed a series of new revenue measures as a starting point for discussions on a long-range fiscal plan. Knowles, a Democrat, is backing the effort, although he hasn't clarified yet what he'll support in the 2002 session.

The group's tentative menu includes small income and state sales taxes, a cruise ship head tax, increases in the gas tax and alcohol excise tax, more taxes on oil production and a cap on permanent fund dividends to free up additional reserves for balancing the budget.

Persily said those measures would bring in about $1 billion a year when fully implemented, delaying depletion of the budget reserve until summer 2008.

But key Republican senators are adamant that constitutional limits on spending must be approved by voters before major new taxes are enacted or permanent fund earnings used.

Two proposed constitutional amendments that have been passed by the Senate and that are pending in the House could go before voters in November 2002. Any taxes enacted by the Legislature in its 2003 session could take up to a year to implement, setting up a potential photo-finish with depletion of the budget reserve.



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