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Oil-Patch States Are Feeling the Pain As Crude Prices Plunge

Nowhere in the United States is the plummeting price of crude oil causing a bigger problem than in Alaska, where the state is facing a $3.5 billion shortfall in its upcoming $5 billion budget.
January 8, 2016, 5:55pm
Photo by Al Grillo/AP

The steep plunge in the price of black gold is leaving state governments in the oil patch up to their necks in red ink.

States that saw a steady flow of cash when oil was $100 a barrel are now looking at prices around $35 or less. In Louisiana, the downturn comes on top a string of earlier budget crises. Oklahoma budgeters appear to be looking at their biggest gap since the 1980s, the last big oil slump.

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But nowhere is the collapse of crude hitting harder than Alaska, where roughly 90 percent of the state's general fund comes from oil revenue. Even after sharp cuts, the state has to plug a projected $3.5 billion shortfall in the upcoming $5 billion budget. That's left Gov. Bill Walker proposing big changes — a state income tax and changing how the state's oil wealth gets spent and invested.

"There's enough in his proposal to get everybody mad," said Gunnar Knapp, director of the Institute of Social and Economic Research at the University of Alaska Anchorage.

Related: A Year of Low Oil Prices Means Fewer Rigs in the US — But Not Less Oil

Right now, 75 percent of Alaska's oil money goes to the state budget, Knapp said. The rest goes to what's called the Permanent Fund, a huge trust fund that pays an annual dividend to every Alaskan — more than $2,000 to every man, woman, and child in 2015.

Walker wants to change that drastically, paying the dividends straight from oil revenues and using a share of the profits from the nearly $50 billion Permanent Fund to pay for state government. The idea is to insulate the state from big swings in oil prices — but it would also likely mean lower annual payouts to Alaskans, Knapp said. And Walker, an Independent elected in 2014, has to get his plan through a state Legislature where three-quarters of the members will be on the ballot in November.

"The political standard wisdom for a long time has been that it's political suicide to touch the Permanent Fund's earnings, much less reduce people's dividends," Knapp said. Others believe spending cuts are needed first. "But when it comes to actually cutting government, you find very strong resistance to any significant, large-scale cuts," said Knapp. "All the options are unpopular."

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Alaska got a warning from the financial markets Tuesday, when the bond rating agencies Moody's and Standard and Poor's downgraded the state's credit ratings based on its fiscal outlook. That might add only a little bit to borrowing costs, but could make it harder for the state to recruit new business, Knapp said.

"It should be taken very seriously as a candid, sober assessment by outside observers about Alaska's economic and political condition, and the same kind of reasoning and concerns are likely to apply to any company thinking about doing any kind of investment in Alaska."

'We're now at a point where all the easy cuts and then some have been made.'

Texas is still the biggest US oil producer, but its economy is much more diverse. Oil accounts for only 6 percent of state revenue, said Arturo Perez, a fiscal analyst at the National Conference of State Legislatures. And while North Dakota is seeing its first oil bust since the shale boom that made it the No. 2 oil-producing state, its budgets have played it cool with the money they've raked in, Perez said.

Perez said one Alaska official offered some advice for North Dakota last year: "Tell them not to do away with their personal income tax and general sales taxes like we did." He said when he passed that along to a North Dakota counterpart, the response was, "Don't worry."

"They only allow $300 million a year to flow into operating expenditures, so the vast sum of general fund revenue still comes from income tax and general sales taxes and other taxes," he said. The rest of the money goes into a permanent fund that's occasionally tapped for capital projects, but "in a cash-on-the-barrel type approach."

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The bust has also given the state a "breather" after the rapid growth that brought oil workers from all over the country to remote towns like Williston, straining housing and public services, Perez said.

"Obviously there are people who have lost their jobs," he said. "But as a whole, the state has taken measures to keep themselves from riding a rollercoaster, at least on the budget."

Related: Saudi Arabia Is Driving Down Oil Prices, and That Might Be Good for the Environment

Meanwhile, in Louisiana, the state is far less dependent on oil money than it was during the 1980s. But it's had a series of budget crunches even before this year's bust, and a new governor will be taking office Monday with another big shortfall staring him in the face.

"We're now at a point where all the easy cuts and then some have been made," said Jan Moller, director of the Louisiana Budget Project, a Baton Rouge think tank.

Louisiana's state general fund runs about $9 billion, with oil money typically providing less than 15 percent of that, Moller said. But state budget forecasts were made based on a projection of $68 a barrel; it's been running below $40 for more than a month. Sales taxes and income tax forecasts are also down as oil companies tighten their belts.

"We've got a lot of blue-collar jobs, roustabouts and people who work offshore," Moller said. "There are a lot of families who aren't college educated, but they make a pretty good living in the energy industry when prices are high, and who are going to be struggling quite a lot when prices are low and companies are laying people off."

As a result, the state needs to find $750 million to pay the current year's bills, plus another $1.9 billion for the next budget year. Outgoing Governor Bobby Jindal, who recently dropped out of the Republican presidential race, relied heavily on cuts to state colleges to get through the shortfalls on his watch; his Democratic successor, John Bel Edwards, was elected on promises to spare higher education, and will now have to find alternatives —probably by raising taxes, Moller said.

"But what's going to be taxed and how and who's going to pay that freight, we don't know," he said. "Obviously, from our perspective, we hope that the taxes aren't put on the people who can least afford to pay."

Follow Matt Smith on Twitter: @mattsmithatl