The financial challenge facing the state of Alaska is serious but as in any crisis, there are opportunities. The current situation presents the opportunity to make substantial and long-needed reforms in state budgeting and to develop new sources of revenues. The state is now dependent on oil revenues to pay for about 90 percent of its budget.
Unless the Legislature makes draconian cuts in spending, which we think unlikely because it would surely tip the economy into recession, the state will draw down on savings, make a certain number of cuts, and ride out the oil price slump.
Department of Revenue officials have calculated that if the Legislature keeps the state budget at about $5.5 billion (unrestricted general fund spending) there are enough cash reserves to last until 2023.
If there are no new revenues from natural gas, the Permanent Fund’s investment income presents an opportunity. State investment revenues, mostly from the Permanent Fund, now exceed oil revenues. The Permanent Fund itself cannot be spent but its income can be appropriated, which raises the obvious question of whether some of the income could be used to support state services.
As to the general economy, we are again fortunate. North Slope oil activity has been brisk and drilling and other work is unlikely to shut down because of an oil price slump, although producing companies will almost certainly do belt-tightening.
The sky isn’t falling, and this isn’t 1986 when an oil price plunge tipped the economy into severe regional recession. That happened because our economy was then being driven by huge amounts of state spending on construction. We had few state cash reserves. When the oil dollars dried up the economy imploded.
This is why we should take advantage of the time we have now to do some intelligent strategic planning, and wean our state budget off such heavy dependence on oil revenues. That’s the opportunity here, and it’s a big one.
See Full Story By Tim Bradner at AlaskaNomics.com
image credit RDC
