Ahead of the first draft of the state budget, oil prices ensure a tighter budget picture in Alaska

The Alaska State Capitol on April 22, 2022 in Juneau, Alaska. (Photo by Rashah McChesney)

The year’s lowest crude prices come at a bad time for Alaska.

This week, in accordance with the law, Governor Mike Dunleavy will present his first budget for his second term. This plan is accompanied by a significantly lower forecast for government revenues.

This spring, the Legislature passed — and signed into Dunleavy — a budget that earmarked $8.3 billion in general purpose revenue.

As Dunleavy prepares to release its first draft budget for the 12 months beginning July 2023, preliminary indications are that the state will spend less than $7 billion, a significant drop.

Oil prices will rise and fall, Dunleavy said Tuesday just ahead of the annual open house at the Governor’s Mansion in Juneau, and at the end the budget will be a collaboration between his office and the Legislature.

“We just have to work with the legislature on what we want to fund and how we want to fund that,” Dunleavy said.

The governor’s draft proposal will be released on December 15, and Dunleavy said without specifying that he intends to introduce revenue-generating legislation. During his first term, the governor firmly opposed new taxes without a statewide vote and investigated legalizing gambling in Alaska.

Oil revenues account for about a third of the state’s overall revenues, and since 2019 the state has relied on a five-day moving average of global oil futures markets to estimate the future price of Alaskan oil. The futures market is an auction for oil to be delivered at a future date.

These markets are now showing a price in the high $70 or low $80 a barrel, well below expectations earlier this year and lower than a preliminary estimate a month ago.

As futures markets trade lower, that means a lower revenue forecast and less money to spend on dividends and other expenses in the state budget in the coming year.

This spring, the Alaska Department of Revenue projected $3.5 billion in unrestricted petroleum revenues for the budget beginning in July, known as fiscal year 2024, or FY24.

Based on the price of oil, the forecast is now expected to be in the $2.7 billion range.

Advisor Brad Keithley, who follows oil conditions in Alaska, said oil production could also contribute to a lower figure: The amount of oil being produced from the North Slope has declined in recent months and is below expectations.

Most of the state’s overall revenue continues to come from Alaska Permanent Fund revenue, and for FY24 that number is solid: $3.5 billion, according to the Alaska Permanent Fund Corp.

For the past few years, the state has expected about $400 to $500 million in other tax and fee income.

The drop in expected income is aggravated by the loss of current income. The budget that passed the Legislature this spring was based on an estimate of $102 a barrel of oil.

That’s an average for the full fiscal year, which runs July 1 through June 30.

As of Monday, prices averaged $96.27, according to the Treasury Department.

This shortage was foreseen, at least in part, by the legislature, which prefunded K-12 schools, effectively allocating two years of public school funding in one.

If revenue falls short of expectations, this upfront funding will be reduced. As long as oil prices stay above $87 a barrel this fiscal year, the budget remains balanced and there will be at least some upfront funding left for fiscal 24, reducing public school spending this year.

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