Spring Revenue Forecast Brings More Gloom

Alaska's Fiscal Hole Got Deeper Without Any Digging

Fine Grind -- News and Analysis

Alaska’s Department of Revenue released a gloomy spring revenue forecast today. As the Legislature has begun to wrestle with massive revenue shortfalls, the administration’s forecast says, “Not so fast. It’s worse than we thought. About $300 million worse for 2016 and about $500 million worse for FY 17.”

The department has strived to be more conservative in predicting oil prices in recent years, but oil has underperformed even those more cautious predictions. During a late morning press conference Gov. Bill Walker said the spring forecast underscores the urgency to change the state’s fiscal model. To bolster that claim Revenue Commissioner Randall Hoffbeck said the current forecast includes a new feature that presents all revenues available, including Permanent Fund excess earnings. Adding in those numbers, according to Hoffbeck, would bring state revenues available for budgeting up to $3.9 billion for FY 16 and $4.3 billion for FY 17. That’s compared to $1.3 billion and $1.2 billion respectively under the current fiscal model. It’s a 17 percent hit in 2016.

Forecasting tools have improved greatly since the days of goat entrails and pig bladders, but when it comes to oil prices the results aren’t all that much better. That’s no reflection upon the skills and intelligence of the forecasters, but rather a result of the extreme volatility of the market. More important than whether the department hits a specific price in some snapshot of time is how the commodity performs over a long period of time. That has long created a problem for budgeting in Alaska where the Constitution prohibits one legislature from binding the hands of a future legislature.

That prohibition, tied to the volatile nature of oil revenues over short periods has essentially forced legislatures to spend like mad in good times and then slash to the bone in lean times. There were some significant savings during the extreme flush years of record high prices while the overly-aggressive progressivity function of ACES was in place. That said, state spending was also at record levels during those years. Not being able to spend money on behalf of future legislatures tends to encourage current legislatures to not leave a bunch of money laying around for those future legislators to spend either.

One of the benefits of switching to a rules-based fiscal plan based largely on Permanent Fund earnings and some taxes is that the volatility will be greatly reduced, and legislatures will be able to budget more responsibly, without overspending in fat years and then being forced into severe contraction in lean years. In any case, today the future looks bleaker than it looked yesterday as long as the state continues to rely on oil revenues as its main source of budget money.

PUBLISHER’S NOTE: Grinder News was on a brief hiatus while a charming seven year old visited for his spring break. We’re back in gear now. By Wednesday we’ll have two more detailed articles on this topic, and we’re also working on a multi-story piece about how the government actually works in Alaska.