By Tim Bradner
The financial challenge facing the state of Alaska is serious but as in any crisis, there are opportunities. The current situation presents the opportunity to make substantial and long-needed reforms in state budgeting and to develop new sources of revenues. The state is now dependent on oil revenues to pay for about 90 percent of its budget.
One option the state will consider is “outsourcing” routine services formerly done by state employees, to lower costs. This will provide opportunities for private firms.
We have to be realistic about the severity of the problem, however. Oil prices are about half of what they were six months ago. State oil revenues, which pay 90 percent of the state budget, are less than half of what were estimated–about $2.5 billion instead of $5.5 billion.
State petroleum economists don’t expect a lot of improvement in oil prices over the next two years, although there could always be surprises.
Unless the Legislature makes draconian cuts in spending, which we think unlikely because it would surely tip the economy into recession, the state will draw down on savings, make a certain number of cuts, and ride out the oil price slump.
Department of Revenue officials have calculated that if the Legislature keeps the state budget at about $5.5 billion (unrestricted general fund spending) there are enough cash reserves to last until 2023.
Keeping the budget at $5.5 billion is really an annual budget reduction, however, because inflation must be absorbed. Also, to stay under this cap some agencies will have to trim spending to allow for growth in other spending, such as the seemingly-inevitable rise in health care costs that will push up state spending for Medicaid and state employee and retiree health benefits.
Such a plan would, however, stretch our savings until 2023, after which new revenues come from a natural gas pipeline and liquefied natural gas project, which could begin operations in 2024.
The gas project will bring in substantial new revenues ($3 billion to $4 billion per year are the estimates) but it may be risky to depend entirely on the gas project. A lot of work is underway by the North Slope producers, with a state is a partner, but at best, people give the big gas project a 50-50 chance.
If it doesn’t happen, what do we do then?
This is a sobering question, but at least we have some time to examine contingencies.
If there are no new revenues from natural gas, the Permanent Fund’s investment income presents an opportunity. State investment revenues, mostly from the Permanent Fund, now exceed oil revenues. The Permanent Fund itself cannot be spent but its income can be appropriated, which raises the obvious question of whether some of the income could be used to support state services.
A plan like this could also retain the annual citizen dividend, in some form.
As to the general economy, we are again fortunate. North Slope oil activity has been brisk and drilling and other work is unlikely to shut down because of an oil price slump, although producing companies will almost certainly do belt-tightening.
Oil revenues spent through the state budget and industry spending are economic pillars for the state, but fisheries, tourism, and mining–the non-oil economy–are also important.
The sky isn’t falling, and this isn’t 1986 when an oil price plunge tipped the economy into severe regional recession. That happened because our economy was then being driven by huge amounts of state spending on construction. We had few state cash reserves. When the oil dollars dried up the economy imploded.
It was different in 1998, when oil prices plunged again, this time to as low as $8 per barrel. By then our economy was more diversified and we had some savings. The effect on our economy was hardly noticeable.
There was 2009, also. Yes, that recently. As the national recession hit, oil prices sagged to about $40. People hardly remember it.
Prices recovered quickly in 2009 but they didn’t following the 1998 and 1986 price slumps. There was a long, gradual recovery of prices, and that may happen again this time.
This is why we should take advantage of the time we have now to do some intelligent strategic planning, and wean our state budget off such heavy dependence on oil revenues. That’s the opportunity here, and it’s a big one.
