State to see cash surplus - but just briefly

Oil prices expected to drop next year

Posted: Tuesday, December 12, 2000

The good news is high oil prices probably will close an expected gap between state spending and revenue. The bad news is the big bucks for crude won't last.

The Alaska Department of Revenue is predicting a $116.5 million budget surplus this fiscal year, which ends June 30. That's a half billion dollar increase from the agency's last revenue forecast, which in April predicted a $413 million deficit for fiscal year 2001. The difference is the state's main revenue source oil, which has been selling in the double digits, averaging $30 a barrel this fiscal year and hitting a high of $35.62 in September.

"Even the U.S. Energy Information Administration last month characterized oil prices as 'defying gravity,'" Revenue Commissioner Wilson Condon said in a press release.

Today's forecast assumes oil prices will average $30 through June, but that average is expected to drop later next year. The agency anticipates prices will fall "as the world's oil supply moves more into line with demand, and as speculation in the market subsides," Condon said. He predicted North Slope oil prices will stay above "historical" levels for the next four years before settling under $20 a barrel, but the high prices will not be stellar enough to head off a budget gap in fiscal year 2002. Condon said prices probably will average $24.28 a barrel next fiscal year, creating a $514 million deficit by June 2002, and a $717 million shortfall in 2003. The agency has said oil prices would have to average $29 a barrel to balance the operating budget, which costs about $2 billion in state general fund revenue annually.

"The immediate pressure to change our overall fiscal structure has diminished considerably as a consequence of today's high oil prices," Condon said at an Anchorage press conference this morning. "That does not change the long-term reality that we're going to have to make some changes."

Lawmakers in recent years have relied on a state savings account, the Constitutional Budget Reserve, to fund deficits. But Condon today said the savings account, which has roughly $3 billion, probably will be depleted by 2005.

"If we're correct, the state will have to figure out a different way of paying its bills than it currently uses," Condon said.

Oil prices sunk below $10 a barrel two years ago, prompting state lawmakers to consider tapping the Alaska Permanent Fund earnings for state government. The Legislature put an advisory vote before Alaskans in September 1999 asking permission to use some of the money. Voters overwhelmingly said no.

Legislative leaders have said voter response and recent high oil prices means the Republican majority next year will not seriously consider any proposal to tap permanent fund earnings as part of a long-term plan to pay for state government.

"There will reach a point when we reach a cliff, and we're jumping off the cliff of fiscal abyss, that a future Legislature will have to ask the question, 'Are we willing to support using permanent fund interest earnings?' We are not there, and because we are not there, I'm not going to support it at this point in time," said Anchorage Republican and House Finance Chairman Eldon Mulder earlier this month.

Republican leaders this year concluded a five-year plan to cut $250 million from state government; it's unclear whether they plan to continue cutting the budget next year as they write a spending plan for fiscal year 2002.

"I think you're not just going to see a revenue-reduction mode, but also some potential revenue-enhancing mode proposals," Mulder said two weeks ago.

Gov. Tony Knowles is expected to propose an increase in state spending upwards of $100 million in his budget, due for release Friday. Condon said Knowles will not propose any new revenue sources in his spending plan.

Kathy Dye can be reached at

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