Alaska state budget runs risk of a deficit this spring as oil prices stay below forecasts

JUNEAU — Alaska oil production and prices are so far below last year’s estimates that the state could run out of money before the end of the fiscal year in June, members of the Senate Finance Committee were told Tuesday.

“It’s a bit of a nail-biter,” said Neil Steininger, director of the Office of Management and Budget.

While the prospect may sound alarming, it’s not as bad as it sounds, said Sen. Bert Stedman, R-Sitka and co-chair of the finance committee.

“There’s nothing to worry about,” Stedman said. “It’ll be internal financial politics in the Legislature.”

The state’s fiscal year doesn’t  end until June 30, and legislators have months to cut spending or approve spending from savings to cover a possible gap.

In addition, a small rise in oil prices or production could resolve the problem, as could better-than-expected tax receipts from the state’s corporate income tax.

An updated revenue forecast will be published in March, and corporate tax figures will be available in April.

The takeaway lesson, lawmakers said Tuesday, is that gambling the state budget on the price of oil can backfire.

Last spring, lawmakers earmarked $1.2 billion in expected oil revenue to cover K-12 schools in the 2023-2024 school year. That was atop the regular $1.2 billion reserved for the 2022-2023 school year.

The second year of funding was designed to serve a dual purpose: fund schools in advance and serve as a budgetary shock absorber if prices and production fell below expectations.

Last spring, the Alaska Department of Revenue estimated that prices would average $101 per barrel between July 1, 2022, and June 30, 2023.

Through Friday, prices have averaged only $91.72. If the average price drops below $88 per barrel by July 1, the extra K-12 funding will be gone, there will be no more shock absorber, and the state would start to run a deficit.

Prices would need to average about $82.70 from now through July 1 to avoid that, said Alexei Painter, director of the Legislative Finance Division, the nonpartisan office that provides budget analysis for lawmakers.

The price on Friday was $79.85 per barrel.

On Tuesday, Painter projected a year-ending deficit of about $300,000 based on current information. Last year, lawmakers authorized spending from the Statutory Budget Reserve, which contains about $20 million, to make ends meet in the case of a deficit.

But a small change in oil prices — about 30 cents per barrel — could eat up that $20 million. So could a missed estimate on corporate income taxes or an unexpected shortfall in oil production.

Tapping the Constitutional Budget Reserve, a $2 billion savings account, is another option to make ends meet, but three-quarters of the House and three-quarters of the Senate would need to vote to spend from the CBR, and Stedman said there aren’t enough votes.

Facing a deficit and without access to the CBR, lawmakers or the governor would have to cut items from the draft supplemental budget, a document designed to address immediate needs that weren’t foreseen last year.

They could also cut $75 million earmarked last year for the Port of Alaska in Anchorage. That money hasn’t yet been spent.

“There would not be great options on the table,” Painter said.

As of Tuesday, that situation is still speculative. The Office of Management and Budget, using slightly different conclusions, estimates the year will finish $100,000 in the black, Steininger said.

But in the context of a $7.8 billion state budget, that figure is close enough to the zero line that both Steininger and Painter agreed that the final result will be close.

“I would just recommend the Legislature does something to avoid it being that close,” Painter said.

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