January 26, 2015

From ‘Fiscal Apocalypse’ To ‘Meh’ : Oil States Respond To Price Slide

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Wyoming's State Capitol

Wyoming's State Capitol

The budgets of oil states are going to be hard hit by the recent slide in oil prices. Measured in dollars, Texas is the clear loser, but in terms of actual on-the-ground impacts, it isn’t quite so simple. In the country’s number two oil-producing state, North Dakota, falling prices have barely caused a ripple, while in Alaska (ranked fourth), lawmakers are calling it a “fiscal apocalypse.” In Wyoming (ranked eighth), reaction has been subdued, but that may not last.

Wyoming Governor Matt Mead set the tone for the conversation in his State of the State address earlier this month.

“I’m pleased to report to all of you, with full confidence: The state of the state is strong, and getting stronger,” he said.

That’s a bold statement given that oil, which accounts for roughly 20 percent of state revenues, has lost more than half its value in recent months. For every $5 drop in the price of a barrel of oil, the state loses $35 million. In the next fiscal year, that’s expected to translate to $220 million dollars less for state coffers.

“We are in a better position now than we have been in the past,” Mead continued. Why? In short: Savings. Wyoming has billions in the bank, including more than $2 billion set aside in a ‘rainy day’ fund. Although no one is talking about spending that money yet, Mead has asked the Legislature for $150 million — from other funds — for things like passing lanes on state highways and a new high altitude sports training center at the university.

“Our forebears did not view the role of government as a bank,” Mead said. “They were not hoarders, but builders.”

Alaska Governor Bill Walker also made plenty of references to forebears in his State of the State address — to their grit and resilience through tough times.

“We are descendants of adventurers, of dreamers, the restless and survivors — those who refuse to accept no for an answer.”

Walker’s message, while arguably optimistic, basically came down to this: DON’T PANIC. That’s because while Wyoming gets 20 percent of its revenues from oil, Alaska gets up to 90 percent, and much of that goes to fund the day-to-day operations of government. Falling oil prices are not denting Alaska’s budget—they’re devastating it. Walker has halted spending on the state’s six major infrastructure projects and says budgets could be cut by up to 25 percent over the next four years.

“Today we are faced with a $3.5 billion deficit and as I said, using $10 million every day from our savings,” he continued. “Some might call this a crisis. I call this a challenge and an opportunity.”

Whatever you call it, it’s a far cry from the situation in North Dakota, which produces almost twice as much oil as Alaska. There, it’s basically business-as-usual.

“Oil is a non-renewable resource, it’s a one-time funding source and it goes, mostly, into long-term trust funds,” said Ryan Rauschenberger, North Dakota’s tax commissioner.

In that state, less than five percent of oil revenue actually goes to the general fund. Which is probably why Rauschenberger, and most other state officials, sound decidedly un-panicked.

“Keep in mind, we had originally forecasted $8.3 billion in total oil and gas taxes, but by law, only $300 million goes into the general fund, and that’s one of the first things that gets deposited, so that again is relatively secure when it comes to ongoing revenues for the state.”

Of course, no one knows when the oil price slide will end, or reverse, and even in states where calm has prevailed, it may not last. After a presentation about future state revenues, Wyoming Representative Tim Stubson urged caution.

“Everybody says we’re better prepared, but in the early ’90s, before they hit 10 years of flat budget, they may have thought they were well-prepared too,” he said.

In light of that, Stubson is less eager than the Governor to spend money right now.

“If we fall to temptation of spending every dime when we have it, then we’re going to be in real trouble,” he said. “But if we recognize this volatility and we plan for it, then I think we can build stability into the system.”

Stubson is likely to find some push-back on the idea that government spending should conform to the worst-case scenario, especially in light of the state’s massive savings accounts. It’s clear, though, that regardless of who wins that argument — the hoarders or the spenders — the conversation will dominate oil state capitols for months to come.