Why Rising Oil Prices Won't Save Alaska

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PHOENIX - A sharp rebound in oil prices won't be enough to rescue Alaska from its $3 billion annual deficit or protect it from possible further downgrades, Moody's Investors Service said Monday.

West Texas Intermediate crude futures finished Friday at an 83% bump from the February low, a big positive for oil revenue-dependent states like Alaska that have seen their revenues plummet along with oil prices. That jump, if sustained, would add approximately $200 million of annual tax revenue to Alaska's coffers, Moody's calculated, but would still fall short of solving the fiscal problems that caused all three major rating agencies to downgrade the state this year.

Alaska has been so reliant on royalties and taxes related to the oil industry that as much as 90% of state revenues have come from that sector in the past. But even with Moody's predicting an upward trend in oil prices, Alaska needs a significant fiscal overhaul to get itself back on track, Moody's analyst Dan Seymour wrote.

"Oil at $48 per barrel does not come close to solving all of Alaska's problems," Moody's said. "The size of the state's spending programs in prior years was constituted around oil at more than $100 per barrel, and as revenues have declined along with the price of oil, state expenditures have yet to keep pace. The state's unrestricted general fund revenues peaked at nearly $8 billion in 2008, and the state forecasts revenues to fall to $1.3 billion in 2017. The state appropriated $5 billion of unrestricted general fund spending in fiscal 2016. The state projects its revenues in fiscal 2016 will cover only 40% of its spending, leaving a deficit of $3.4 billion."

Alaska Gov. Bill Walker had proposed a reform package centered around a proposal to use earnings from Alaska's Permanent Fund, a $53 billion investment pool of oil money, to finance some state services. The Alaska Senate passed that legislation earlier this month, but the House of Representatives chose to adjourn without sending the bill, SB 128, to the floor for a vote.

"I am deeply disappointed that, after more than a year of conversations with Alaskans and more than 400 meetings with legislators about our fiscal problems, SB 128, a critical piece of legislation for Alaska's future, never made it to the House floor for a vote," Walker said in a June 19 statement. "With a $4 billion deficit, it is time we pull together as Alaskans to address this fiscal deficit now."

Moody's warned that Alaska would struggle to maintain its Aa1 rating without a plan to balance its budget at the new oil price levels. The agency forecasts that Alaska would deplete available reserves by 2020 with oil at $30 or $40 per barrel, and higher oil prices only minimally extend the depletion date: 2021 at $50 per barrel and 2022 at $60 per barrel.

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