Friday, July 6, 2012

New fiscal year rings in with oil prices dipping

Tim Bradner
Alaska Journal of Commerce

Happy Fiscal New Year! For the state of Alaska, municipalities and school districts around the state, July 1 is the start of a new budget year.

It’s a time for reflection, too. Oil prices and state revenues are down. Budgets are rising, pushed by increasing population and rising health and fuel costs.

A modest $250 million surplus is projected for Fiscal 2013, the budget year that started July 1. If oil prices stay low, that surplus could vanish. There was a much more hefty surplus, $1.8 billion, in Fiscal Year 2012 that ended June 30.

The surplus deposit brings the state’s savings, outside the Permanent Fund, to about $15 billion, which means the state has a big cushion. Still, the underlying numbers are cause for concern.

From June 11 to June 28, North Slope oil traded at less than $100 per barrel, reaching a low of $92.44 on June 21. News of a eurozone financial deal sent oil to its fourth-largest gain ever on June 29. Benchmark crude and Alaska North Slope crude each jumped $7 per barrel, with ANS closing at $100.21. Fresh Iran tensions pushed ANS to a close of $130.16 on July 3.

The surge could be a sign of a short-term dip, but it could also be part of a longer-term trend.

That’s worrisome, because the price needed to cover expenses and balance the budget for Fiscal 2013 is $104.25 per barrel, state budget director Karen Rehfeld said. If prices stay down the state will have to dip into its cash reserves.

That’s happened before. In fact, the state ran technical deficits for many years, drawing funds from the Constitutional Budget Reserve, a savings account funded with litigation settlement money. When oil prices and revenues increased the Legislature paid back those draws.

What’s different now, however, is that the expected state revenue decline in Fiscal 2013 is due mainly to oil production declines, and not any expected decrease in prices.

In its revenue forecast the state estimated that oil prices would remain flat in the $110 per barrel range over both Fiscal 2012 and Fiscal 2013.

State revenues, however, are expected to drop, from $14.34 billion in Fiscal 2012 to $12.58 billion in Fiscal 2013. The drop in production, from an average of 580,000 barrels per day in Fiscal 2012 to an average 563,000 barrels per day in Fiscal 2013, accounts for much of the drop.

Oil production from the North Slope has been declining at rates averaging 6 percent per year.

Overall state spending is down about $500 million in FY 2013. However, when the budget surplus transfers to savings are accounted for, costs are actually up for agency operations as well as “formula” programs in the budget like school funding and Medicaid.

The big drivers in the state operating budget include increases in Medicaid, the state/federal health care program for low-income Alaskans that is 50 percent funded by the state.

Medicaid costs are growing because the costs of medical care are rising. The overall Medicaid budget is up $130 million this year to about $1.6 billion, Rehfeld said. The state’s share is about $676 million, she said.

State personnel costs are also rising steadily at about $50 million to $60 million per year, mainly because of agreed-in public employee labor contracts as well as employee medical costs under the state’s benefits programs.

One other built-in increase in the budget is a state appropriation to fund teachers’ and public employees’ pension funds. This is aimed at reducing a projected $10 billion deficit in the funds, between expected income from investments and retirees’ needs, for both the pensions and medical care.

The appropriation toward the pension liability is about $610 million in state funds this year, and the amount will grow under a schedule to retire the unfunded liability in 25 years. The state’s annual payments will exceed $1 billion per year in the near future.

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