Report warns of budget deficits

In a sobering report of Alaska’s fiscal situation, the non-partisan Legislative Finance Division has warned that continuing spending at the historic rate of growth, or maintaining spending at current levels, “could produce multi-billion dollar deficits in the near future.”

Despite leaving a projected FY 13 General Fund surplus of $490 million at the close of the 2012 legislative session, the legislature now faces a deficit of $410 million for the fiscal year, the report noted.

For the past eight years, higher-than-projected oil prices more than made up for lower-than-projected oil production, leaving the state with annual surpluses. While some of the surpluses were spent, legislators also saved substantial amounts.

During FY 13, oil production has been below FY 12 levels by more than 8 percent. Reduced production accounted for about $490 million in lost revenue, which erased the surplus legislators were expecting and intending to use in the next budget cycle. Compounding lower production, oil prices are running $2.85 a barrel lower than the $110.45 that was projected. The result is another $410 million in lost revenue.

The Department of Revenue predicts that FY 14 oil production will decline by 2.7 percent from FY 13, and that oil prices will be about $1 a barrel more than in FY 13 – averaging $109.61 a barrel. The result is projected FY 14 unrestricted General Fund revenue is $510 million below projected FY 13 revenue.

The Department of Revenue expects oil production to fall by an average of 5.5 percent annually over the next several years. The official forecast also shows oil price increases that offset a large portion of the lost revenue associated with declining production.

The Legislative Finance report estimated the price of oil would have to be $105 a barrel for Governor Parnell’s proposed new budget to balance. As recently as FY 10, the price of oil needed to balance the budget was only $64 a barrel, rising to $110 a barrel for the current year.

“The rapid increase in the break-even price of oil…should be cause for concern,” the report states. Spending on agency operations has increased an average of 6.5 percent a year for the past ten years, the report noted.

The report echoes concerns of Parnell’s budget office that falling oil production and increases in state spending are not sustainable. House and Senate leaders also are concerned. Parnell has proposed a tighter budget for FY 14 and has introduced a bill to reform oil production taxes to stimulate investment in new oil production.

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