Alaska Fiscal Policy: Dealing with $80 oil …

At the request of the (Anchorage Municipal) Budget Advisory Commission, yesterday (November 5) I made a presentation on Alaska Fiscal Policy.  When I was first asked to give the presentation the working title was “The need for implementing sustainable budgets.”  Due to dramatic changes since then in the oil markets, however, by the time I gave it yesterday the title was “Alaska Fiscal Policy:  Dealing with $90 $80 oil.”

As I have written previously on these pages Alaska is in the midst of what are becoming gut wrenching drops in state revenues.   Assuming oil prices hold at or near $80 for the remainder of the Fiscal Year (which may be a heroic assumption given the continuing turmoil in oil markets), state unrestricted general fund revenues will total about $3 billion.  While that may seem alot, state spending for this year is currently set at $6.2 billion, resulting (if things continue on their current course) in a budget deficit which will land somewhere in the neighborhood of $3 billion by the end of the fiscal year.

To bring that number home, at that level the deficit will equal roughly $4,500 per Alaska man, woman and child.  To bring that even closer to home, for those that are suggesting the current level of state spending cannot be reduced any further, and as a result any differences will need to be made up through taxes and other revenue “enhancements,” the amount of such revenue adders will need to equal $18,000 per every Alaska family of four just for state spending to break even for the year.

As I said during the presentation yesterday, most observers now predict that oil prices in this range are likely to last at least for a couple of years, with some suggesting instead we are now at the front end a long term readjustment in oil pricing fundamentals which will last much longer.  Given the reduced level of state savings remaining due to the deficit budgets of the last two years, either way Alaska is facing the need for substantial changes in state spending levels in the very near future.   As a state, we simply don’t have the reserves remaining to ride out this price environment for an extended period.

I will be writing more — much more — on this issue over the next several months.   For now, however, the slide deck I used yesterday to discuss the issue is available here.  Please feel free to react and comment below.

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