As oil prices fall, the projected state budget surplus shrinks and lawmakers will face a deficit if the price of oil averages below $87 a barrel on the current fiscal year.
The price of Alaska North Slope oil, hovering around $100 a barrel since early August, has lost nearly a quarter of its value since early June, when it hit a high of $128. The fall in prices was attributed to an increase in global oil supply, an economic slowdown in China and fears of a global recession.
The state Department of Revenue released an updated forecast on Tuesday, predicting the state will collect $715 million less in oil revenue in the current fiscal year than it had forecast in March.
Traditionally, revenue forecasts are released twice a year, once in the fall and once in the spring. Since January, the department has started publishing less detailed forecasts each month, apparently to better reflect price volatility, caused in part by Russia’s ongoing war in Ukraine.
When Governor Mike Dunleavy signed the budget in late June, he referenced a recent revenue forecast that showed the state was about to deposit $1.6 billion into the Constitutional Fiscal Reserve, the state’s main savings account. Since then, the oil revenue forecast has fallen by about $1.4 billion.
Sen. Bert Stedman, R-Sitka, manages the Alaska Senate’s operating budget. He said he didn’t place much importance on monthly revenue forecasts and that the Legislative Assembly didn’t rely on them when drafting the budget.
Instead, the budget was drafted taking into account different oil price triggers. At $102 a barrel oil or more, the state would set aside $1.2 billion to fully fund schools a year up front. Between $87 and $102 a barrel of oil, some term funding for schools would be possible. But if the price of oil averages below that price level in the current fiscal year, the budget slides into deficit.
Typically, the legislature writes a clause in the budget to draw from the constitutional budget reserve in the event of an unexpected shortfall. But it takes three-quarters of lawmakers agreeing to spend from that account, and with a sharply divided State Capitol, lawmakers planned to use the statutory budget reserve as a safety net, an account that only requires a simple majority to spend.
In June, Dunleavy vetoed $300 million that was to be transferred to the statutory budget reserve. Instead, that revenue would end up in the Constitutional Fiscal Reserve, which the governor noted the state is constitutionally obligated to repay after withdrawing billions of dollars from it to cover budget shortfalls.
The nonpartisan Legislative Finance Division shows that the statutory budget reserve has a balance of less than $20 million, meaning that a three-quarters vote would be needed to tap into the constitutional budget reserve to cover any large deficit.
Lawmakers passed a budget with $3,200 in cash payments per eligible Alaska to help deal with high inflation and high energy costs, as well as big expenses in other areas. Dillingham Independent Representative Bryce Edgmon, a member of the House Finance Committee, said he wished they were more cautious. He and his colleagues are now closely watching the drop in oil prices and the loss of value of the Permanent Fund over the past fiscal year.
“I left Juneau, and it was, ‘Happy days are here,'” Edgmon said. “And all the drivers are moving forward on spending. And that’s not how I saw it, but that’s the nature of the legislature for you.