Higher oil prices help, but don’t solve the state’s budget problem

Pat Pitney, Director, OMB, in Senate Finance, Feb, 3, 2016. (Photo by Skip Gray/360 North)

It’s the year of the budget at the Alaska legislature.

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And while lawmakers debate new taxes and drawing from the Permanent Fund, oil prices marched steadily upward in January. Two days ago, the price of Alaska’s oil jumped up above $70 dollars per barrel for the first time in three years.

And, that’s big news in Juneau. Some senate Republicans point to those rising oil prices as an argument to bolster their reluctance to vote for an income tax.

It’s big news for Alaska too. Because that’s right about the price point when the state starts making nearly $70 million dollars for every dollar the price increases. But that  doesn’t go far when you’re facing a budget deficit in the billions. Sure, the gap between what the state spends and what it makes starts closing faster. And that price is much higher than the $56 per barrel the state projected for the next year. 

State Tax Division Director Ken Alper said if prices stay in that range through next June, the state expects to bring in about $200 million more than previously thought.

“That will cover a little less than one-tenth of the deficit which is estimated at about $2.5 billion,” Alper said.

Tax Director Ken Alper with the Department of Revenue speaking on oil tax credits to state lawmakers this February, 2017. (Photo by Skip Gray/360 North)

That deficit has been hounding lawmakers for years now. They’ve cut the budget. They’ve argued over new taxes. Meanwhile, they’ve been drawing billions out of the state’s savings accounts for the last four years.

“We’re getting near the bottom of the barrel of those funds,” Alper said.

Alper said there really isn’t enough money left in those savings accounts to cover the budget deficit for another year.

Alper said lawmakers are realizing that the Permanent Fund’s earnings are the most promising source of money to pay the bills. But spending money from Alaska’s Permanent Fund earnings to pay for state government is unprecedented. And negotiations over how to tap into the Permanent Fund are tense.

Budget gridlock has brought the state to the brink of a shutdown twice in the last three years.

There is a chance that the legislature could cobble together just enough money to cover next year’s budget deficit without taxing Alaskans or tapping into the Permanent Fund.

It turns out that one of those other savings accounts — the Constitutional Budget Reserve — isn’t completely tapped. It will have about $2.1 billion dollars in it by the end of this fiscal year. Add that to the $200 million the state could bring in from higher oil prices and that budget gap gets much smaller.

But, state budget director Pat Pitney said it would be a bad idea to drain that budget reserve.

“We don’t want to spend that down to zero. That is the shock-absorber account for the state’s finances,” Pitney said.

Pitney said that budget reserve is the savings account the state uses to cover the gap between when its income rolls in and when it has to pay its bills. It’s basically the state’s cash flow account. Spend that down to zero and if something goes wrong, like widespread damage from an earthquake or a tsunami, there’s nothing to fall back on.

There are a few other places lawmakers could look for more money. But, they could be as politically unpopular as tapping into the Permanent Fund. One would be to drain the $1 billion the state has in the Power Cost Equalization funds — that subsidizes the high cost of rural energy in the state.  The other is about $300 million used to fund merit scholarships for Alaska college students.

But Pitney said that pulling together one more year of balancing the budget on savings doesn’t solve the problem of the state having a budget that is tied so firmly to oil prices.

“And hoping for the next dollar of oil is, is just putting our future on hold,” Pitney said.

Pitney said the reality of a week or a month of higher oil prices can be totally outweighed by a month of low oil prices. She said the state is past the time when it can hope for oil prices to save it.