New forecast projects growing state deficit from reduced Alaska oil revenue

JUNEAU — The Alaska Department of Revenue forecast on Wednesday that the state would see a bigger deficit in the next fiscal year due to lower-than-expected oil prices.

The Legislature is facing a $650 million shortfall over two fiscal years based on status quo spending. Senators have started discussing new revenue measures to help bridge the state’s fiscal gap.

The state issues revenue forecasts twice a year. Legislators use the March forecast to write the budget for the fiscal year that starts July 1.

North Slope oil is expected to average $68 per barrel in the next fiscal year. That would be a $2-per-barrel drop from projections made in December — equating to a $70 million hit to the state treasury.

Additionally, oil company deductions are helping keep state revenue stagnant, state officials testified Thursday.

The state House and Senate are both governed by Democrat-dominated majorities. But leaders of the two legislative chambers have signaled support for different spending priorities.

The Senate Finance Committee has modeled using “the 75-25″ model to calculate the PFD this year, and a $175 million boost in extra school funding. If that formula was followed, the 2025 dividend would be close to $1,420.

The Senate’s projected deficit over two fiscal years: $650 million.

Meanwhile, the House on Wednesday approved a $275 million school funding increase. House majority leaders have signaled support for a $1,000 dividend this year.

The House’s draft spending plan was still anticipated to leave the state with a $285 million shortfall over two fiscal years.

Legislators say there are few options to fill the fiscal gap.

Bethel Democratic Sen. Lyman Hoffman, who manages the Senate’s operating budget, said Thursday that any budget cuts this year would be “minimal.”

Additionally, there is little appetite to overdraw the Permanent Fund. Instead, senators have proposed a constitutional amendment intended to protect the fund in the long-term.

Senate majority members have also strongly opposed drawing from the state’s main savings account to balance the budget.

”That’s why we need to have this revenue discussion,” Hoffman said.

Senators have recently introduced measures that would reduce tax credits available for oil companies; increase taxes paid by Hilcorp Alaska, which operates the large Prudhoe Bay oil field; and tax some out-of-state businesses that operate online.

Collectively, those measures have been estimated to raise up to $500 million per year.

The House majority has not introduced similar revenue bills.

Fairbanks Rep. Ashley Carrick said that fiscal policy discussions are planned next week in the House State Affairs Committee — a committee that is typically tasked with overseeing agencies such as the Department of Transportation.

Carrick said Wednesday that lawmakers are set to make “really challenging” budget decisions before the end of the legislative session in May.

“It’s also super important that we’re thinking long-term, and I think a lot of us are really interested in doing that and having those conversations too,” she said.

A more immediate concern for legislators: the deficit for the fiscal year that ends June 30 is expected to be over $165 million.

House Speaker Bryce Edgmon, a Dillingham independent, said legislators may need to draw from savings to fill the current fiscal year’s deficit.

“Well, there may be no choice,” he said Wednesday.

Three-quarters of the House and Senate would need to support drawing from the Constitutional Budget Reserve — the state’s main $2.8 billion savings account — to balance the budget.

That would give Republicans in the House and Senate minorities leverage over any savings draw.

Hoffman said Thursday that Gov. Mike Dunleavy should be involved in revenue conversations occurring in the state Capitol.

“I don’t want to work on things and spend time and political energy on a solution that is not going to be signed into law,” Hoffman said.

Since being elected in 2018, Dunleavy has largely been absent from legislative tax debates. In 2023, he said that he would introduce a state sales tax, but it never materialized.

Dunleavy spokesperson Jeff Turner on Thursday said by email that that the governor’s “position on taxes has always been consistent. He is not favorably disposed to taxes.”

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