Legislative

October Report

Submitted by Wendy Chamberlain

The recent drop in oil prices, coupled with a jittery stock market is alarming many legislators. This years’ budget is based on a per barrel oil price of $105.06. Today, West Coast Crude oil is trading at $82.80. If these low prices continue the Legislature will be forced to appropriate additional funds from the Constitutional Budget Reserve account to balance the current years’ budget. Pricing for Alaska North Slope crude has been steadily declining this past month.

What is causing this decline?

  • The price premium paid for Alaska North Slope crude oil has dropped more than $2/barrel as West Coast refineries are purchasing more oil from the North Dakota shale.
  • Saudi Arabia is competing for a larger market share.
  • Production is down more than 100,00 barrels per day from 2010 levels.

State economists originally projected an average per/barrel of $105.06 for the FY 2015 budget year (the current year). The actual price needed to balance the FY 2015 budget is $118/barrel. To offset the $13/barrel shortfall, $1.3 billion was drawn from the Constitutional Budget Reserve (our savings account) . If oil prices remain at current levels ($85-$95/barrel) an additional savings draw will be required JUST to cover the drop in prices. Unless prices increase sharply the Legislature will have to make tough decisions next session.  The budget shortfall for next year could be over $1.6 billion.

What are the budget drivers?

Formula programs

K-12 Education funding totaled $1.78 billion this year.

The state’s share for Medicaid costs was $760 million.

(These two important programs totals over $2.5 billion).

Employee health care costs have increased to $1371 per month.

Energy Costs are up significantly higher

Debt Service for FY 2015 totals $219 million

$350 million is required annually to pay down the unfunded pension liability. (This amount is reduced by $250 million this year through the Legislature’s transfer of $3 billion from the state cash reserves to the pension fund).

Oil tax credit incentives

Individual capital costs for projects such as the Alaska Gas Pipeline, Susitna Dam, Knik Arm Crossing, Anchorage Port, and University of Alaska.

What does the state have in savings accounts?

  • The Constitutional Budget Reserve Account currently has a fund balance of $11.70 billion
  • The Statutory Budget Reserve balance is $3.72 billion as of September 30, 2014.
  • The Alaska Permanent Fund balance currently stands at $51 billion. (Accessing this fund is very very difficult).

Not all-bad news.

The State of Alaska receives 90 percent of its’ revenue from oil; it is not surprising the picture is starting to look troublesome. Last year, Alaska’s Republican-led legislature voted to cut taxes on oil and gas companies. This issue was placed before the voters in August and, after a huge media campaign the tax cut measure won by a narrow margin. Lawmakers are betting that lower taxes will coax companies to invest in the state and ultimately start producing more oil. BP is upping its capital budget in Alaska by 25 percent in 2014, to $1.2 billion. ConocoPhillips, the state’s largest producer, is spending $1.7 billion, 50 percent more than in 2013. The company has already raised production in Alaska by 6,000 barrels per day this year and plans to add as many as 40,000 barrels a day by 2018. If this trend continues Alaska’s lower taxes could incentivize oil companies to drill in Alaska.

The next Legislative session is scheduled to commence January 22, 2015. We are likely to see significant budget reductions along with a push to shift some costs over to the local governments and municipalities.

I will update you again after the November elections.

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