Ahead of first-draft state budget, oil prices are driving a tighter Alaska fiscal picture

The lowest crude oil prices of the year are coming at a bad time for Alaska.

This week, as required by state law, Gov. Mike Dunleavy will unveil his first budget plan of his second term. Accompanying that plan will be a significantly smaller state revenue forecast.

This spring, the Legislature passed — and Dunleavy signed — a budget that anticipated $8.3 billion in general-purpose revenue.

With Dunleavy preparing to release his first draft for the budget for the 12 months starting in July 2023, preliminary indications are that the state will have less than $7 billion to spend, a significant decrease.

Oil prices will go up and down, Dunleavy said Tuesday, shortly before the annual holiday open house at the Governor’s Mansion in Juneau, and in the end, the budget will be a collaboration between his office and the Legislature.

“We’re just going to have to work with the Legislature on what we want to fund and how we want to fund that,” Dunleavy said.

The governor’s draft proposal will be released Thursday, and Dunleavy said without specificity that he intends to introduce revenue-generating legislation. During his first term in office, the governor adamantly opposed new taxes without a statewide vote and studied the legalization of gambling in Alaska.

Oil revenue accounts for about a third of the state’s general-purpose income, and since 2019, the state has relied on a five-day average of global oil futures markets to estimate the future price of Alaska oil. The futures market is an auction for oil to be delivered on a future date.

Those markets now indicate a price in the high $70s or low $80s per barrel, well below expectations earlier this year and lower than an interim estimate one month ago.

With futures markets trading lower, that will mean a lower revenue forecast and less money to spend in the state budget during the coming year on dividends and other expenses.

This spring, the Alaska Department of Revenue predicted $3.5 billion in unrestricted petroleum revenue for the budget starting in July, known as Fiscal Year 2024 or FY24.

Now, based on the price of oil, the forecast is expected to be in the range of $2.7 billion.

Consultant Brad Keithley, who tracks Alaska oil conditions, said oil production may also contribute to a lower number: The amount of oil being produced from the North Slope has declined over the past few months and is running below expectations.

Most of the state’s general-purpose revenue continues to come from the earnings of the Alaska Permanent Fund, and for FY24 that figure is solid: $3.5 billion, according to the Alaska Permanent Fund Corp.

For the past few years, the state has expected about $400 million to $500 million in other tax revenue and fee income. Dunleavy said on Tuesday that

Aggravating the decrease in anticipated income is a shortfall in current income. The budget that passed the Legislature this spring was built on an estimate of $102 per barrel of oil.

That’s an average for the entire fiscal year, which runs from July 1 through June 30.

Through Monday, prices have averaged $96.27, according to figures collected by the Department of Revenue.

That shortfall was at least partially foreseen by lawmakers, who forward-funded K-12 schools, effectively allocating two years’ worth of public school funding in one.

If income falls short of expectations, that forward-funding will be reduced. As long as oil prices remain above $87 per barrel this fiscal year, the budget will remain balanced and there will be at least some advance funding remaining for FY24, reducing the need to spend on public schools that year.

Originally published by the Alaska Beacon, an independent, nonpartisan news organization that covers Alaska state government.