High oil prices have been masking declining production, a problem that isn't abating. The state faces $11 billion in unfunded pension liabilities, an obligation that continues to rise. The cost of running state government has been rising steadily, a fact the administration attributes partly to formula-driven programs, like Medicaid and education. Alaska's share of Medicaid is expected to be $678 million next fiscal year and $1.2 billion by 2022.
And federal aid is expected to decline as Congress faces a huge deficit. Federal funds make up about a quarter of the state's budget, and to maintain services, the state could have to use its own money to make up for any cuts, Gov. Sean Parnell's budget director, Karen Rehfeld, said.
Oil will need to average about $96 a barrel for Parnell's current budget proposal to balance, and that's before lawmakers have had a chance to add things like capital improvement projects.
With a drop in prices, even to an average of $90 a barrel, at current spending levels, the state would be dipping into savings, Rehfeld said.
"I think that, rightly so, people are very concerned about, long-term, our ability to sustain the programs that we currently have and make the investments that we need to in infrastructure to really grow the economy with this declining oil production," she said, adding: "That generally describes why it's important for us to be careful about decisions we make, this year and every year, and to save as much as we possibly can."
These aren't new concerns, but Rehfeld said they're amplified by what she calls a "pretty dramatic decline" in oil production.
North Slope production declined by 6.3 percent between fiscal years 2010 and 2011, according to the state Department of Revenue. A 4.7 percent decline is forecast this year, and a 3.3 percent drop next year. Oil provides about 90 percent of the state's unrestricted revenue. Oil and federal funding are the major drivers of Alaska's economy.
If agency operations' budgets continue to grow at 7.8 percent, as they have on average between fiscal years 2004 and 2013, the state could be in deficits by 2015, even with modest capital budgets, according to a legislative fiscal analyst's report.
Legislative Finance Division Director David Teal told the Senate Finance Committee this past week that 3.3 percent agency growth, which is what Parnell proposed for next year, will be tough to achieve, noting there are additional issues that lawmakers might want to address, like increased school and renewable energy funding and perhaps $100 million more might be needed to cover anticipated costs by TransCanada Corp.
TransCanada holds an exclusive license with the state to advance a major natural gas pipeline project. Under terms of the Alaska Gasline Inducement Act, TransCanada Corp. can receive up to $500 million in reimbursable costs.
Then there's the capital budget: some lawmakers already anticipate a budget in line with the current year's spending plan, $2.8 billion, or $1 billion more than Parnell requested. Parnell left room for lawmakers to add projects, and Sen. Bert Stedman, R-Sitka, said a robust capital budget will be important to Alaska's economy and helping it to further withstand the ripple effects of the softened U.S. economy.
Parnell has proposed cutting oil taxes as a way to boost investment and production. His goal — shared by lawmakers — is getting more oil into the pipeline. But there's disagreement on how to go about doing that.
Parnell's tax bill, as passed by the House, would require oil of $100-$105 a barrel to generate enough revenue for his proposed budget, deputy revenue commissioner Bruce Tangeman said. The Revenue department estimates that oil will average about $109 a barrel this year and next year.
The Senate, which refused to act on the plan last session, citing lack of sufficient information, is expected to come up with a tax bill of its own.
There are bright spots: Standard & Poor's recently upgraded its bond rating for the state to AAA, its highest, citing what it called "exceptionally strong fiscal practices" incorporated into the budget process. Given the high oil prices, the state is expected to have surpluses of $3.7 billion between this year and next. It has about $13 billion in the constitutional and statutory budget reserves.
Stedman, co-chair of the Senate Finance Committee, said the state has a lot of money, but not enough to do everything that people want. Alaska is pursuing several mega-projects, including an in-state gas pipeline project and a dam that would be among the largest built in this country in decades. That's not to mention community wish-lists, or rural energy needs.
If it were up to him, Stedman said he'd rank the projects and go from the top, down. His committee is trying to get a "holistic" look at the situation, to get a better sense for how to proceed. But he said he couldn't imagine the panel not dealing with the pension issue with an infusion of equity, perhaps ranging from more than $1 billion to less than $4 billion.
Alaska has no state sales or individual income taxes, and even with the coming challenges, there hasn't been any serious talk about moving toward either of those.
John Boucher, senior economist in Parnell's budget office, said the state's in a position where "we can manage our way through this.
"I don't want it to seem like we're sounding the alarm bells, and 'abandon ship,' so to speak, because that's not the future I see for this state," he said. "We've managed for a significant amount of time, and through a combination of good fortune and prudent planning, the state has positioned itself pretty darn well."