Alaska expects larger budget deficit of $3.5 billion as price of state's lifeblood oil slumps

Slumping oil prices have helped push Alaska's potential budget deficit this year to $3.5 billion — an increase of $2.1 billion from what lawmakers expected in April.

The price of oil, forecast at $105 a barrel in the state's spring revenue forecast, is now expected to average about $76 a barrel for the fiscal year that ends June 30. The price is forecast to dip even lower, to $66 a barrel, during fiscal 2016 before rebounding.

The average price last fiscal year was $107 a barrel, according to the fall revenue forecast released Wednesday.

The forecast expects unrestricted general fund revenue of $2.6 billion this year, down from $5.4 billion in 2014. That, combined with about $200 million in anticipated supplemental budget items like oil and gas credits, accounts for the predicted $3.5 billion deficit, said Jerry Burnett, a deputy Revenue commissioner. The revenue forecast itself does not delve into the overall budget.

Unrestricted general fund revenue — money not limited in its use by the constitution, law or something else — is expected to drop to $2.2 billion in 2016.

The state is expected to dip into savings to get by. Gov. Bill Walker, who took office Dec. 1, has warned of lean times ahead.

The Revenue Department said oil prices were the biggest factor in the revenue drop from the prior forecast. It also cited increases in expected lease expenditures by oil and gas companies, which reduce the amount of tax they pay.

In a news release, acting Revenue Commissioner Marcia Davis said while despite lower oil prices and less revenue in the short term, "our long-term view is optimistic."

"Greater investment by the oil and gas industry on the North Slope and solid performance of state investments makes Alaska's overall financial health sound," she said.

Alaska relies heavily on oil revenue to fund the operations of state government. It has ridden this wave before and recovered. One major difference this time, Burnett said, is lower oil production. Production has been on a downward trend since the late 1980s.

Even as prices have fallen, however, oil companies have continued making investments on the North Slope aimed at boosting production, Burnett said. The forecast expects increases in oil production in 2016 and 2017, up from the forecast 509,500 barrels per day for the current fiscal year.

The expected drop in the oil and gas production tax is sharp, from $2.6 billion last year to about $520 million this year. The tax is expected to bring in about $310 million in 2016 and about $1.2 billion the following year.

One of the biggest political debates in recent years was over the state's oil production tax. The tax was overhauled in 2013, a change that critics said amounted to a giveaway to oil companies.

But Burnett said the current situation is a function of price. He said with these low prices, "there's very little production tax revenue, regardless of what system you're under."

When prices are low and companies are investing — incurring expenses they can deduct — they don't pay a lot in taxes, he said. The current tax structure, as well as others in the recent past, allowed for deductibility, he said.