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Budget Blues
Alaska is still riding an oil price rollercoaster. Some years that makes us flush with cash. This is not one of them.
The Senate Finance Committee spent time this week with the oil production and revenue forecasts. Alaska will pump more crude over the next several years. But because of the way our oil taxes work these days, our revenues won't increase.
That's because companies with existing tax bills can deduct a healthy chunk of what they spend on new projects. If a company is new to Alaska and doesn’t have a tax bill yet, they can deduct the expenses later when the project starts pumping. Combine that with a tax break for 'new' oil, and the revenue really drops. There's an argument we might come out ahead on that structure when the oil is underneath state land because Alaska gets another payment: a royalty. But when it's under federal land (like the Willow project, ANWR, or NPR-A) there's just our production tax, and the state ends up flat. That means we won’t see much benefit in state budgets from the new oil coming up. And if prices drop, we'll be farther in the red.
The good news is our investment earnings (almost entirely the sustainable draw from earnings of the Permanent Fund) are flat to slightly up.
When we passed the budget last year, oil prices were high and steady, and we projected a surplus. They've dropped since then and now we face a deficit to finish this year. We’ll have to fix that hole before we adjourn. That’s even before we consider “supplemental” budget requests to cover cost overruns for things like 2024 wildfires, Medicaid cost increases, and rising prison expenses, which will deepen the chasm.
Where does all this leave us as we plan the budget for next year? Less than chipper. The governor proposed great big PFD checks again this year. That creates about a $1.7 billion deficit. I predict we won't do that. The past few years, the legislature has come closer to what we call a 75/25 PFD—putting about $900 million into dividends and $2.7 billion into services. Next year, even that might leave a hole.
We’ve squeezed agency budgets past the breaking point in many cases, leading to noticeable backlogs in state services—or agency failures—in a growing number of places.
Don’t even get me started on the meager capital budget which does next to nothing to address the massive statewide deferred maintenance backlog.
The governor also hasn't proposed any sizable cuts again this year.
Instead, he sent the legislature an impossible 10-year 'plan.' It would burn through our last savings in two years, and leave the state a staggering $12 billion in the red by year 10. Keep in mind, Alaska's constitution forbids borrowing to fund the operating budget.
The governor also proposes no new revenues to fill the hole. To my dismay, I'm not finding the votes among my colleagues for significant new revenues right now, either. If all we do is drain our reserves, there will be nothing left for our next governor to run the state.
We have tough choices ahead of us this year and not much light at the end of the tunnel. I’ll keep pushing to protect our savings and advance the conversation on both fixing our oil taxes and bringing back a broad-based tax.
Without one or both of those, only a big spike in the price of oil—currently predicted by no one—will keep Alaska's government serving Alaskans.
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