The decline in oil prices during the past several months is having a harsh impact on the financial and economic well-being of several states whose fortunes are tied to the petroleum industry.
This in turn will affect the financial conditions of several cities in these states. Eventually, the security or credit-worthiness behind the general obligation bonds issued by these entities will be influenced.
To compensate for the decline in oil prices, the states have begun to adjust their budgets to reflect a shortfall of revenue and to curtail expenditures. It also is imperative that the states promote economic diversification to offset their dependence on petroleum, and in some cases on agriculture and real estate.
Actually, the general fund of these states, which is the principal accounting fund into which most of the revenue is deposited and then expended, has been declining since 1982, and the decline simply accelerated in 1985 as oil prices tumbled. Despite the loss of revenue, the worse-case scenario that analysts envision is the possible downgrading of credit ratings by the rating agencies, with no state falling below an A rating.
Alaska is perhaps in the strongest position because it prepared its fiscal 1986 budget assuming a price of $14 per barrel of oil. On the other hand, Louisiana used $27 to $28 per barrel, and Texas used $25 per barrel, thereby overstating their incomes by a wide amount. Further, Alaska benefits from a $7.1 billion permanent fund that earned about $660 million in 1985. Part of these earnings might be transferred to the general fund, if they are needed.
Louisiana faces the severest problems. Not only are the oil and gas sectors of its economy hurting, but lumber and crop prices have deteriorated since 1982. Louisiana could be downgraded to an A. But analysts believe New Orleans, which has had problems, could be downgraded to a BBB rating from its A- status.
Texas, with its diverse economy, should be able to ride out the economic storm, and the general obligation bonds of New Mexico are considered "safe." It is felt that Oklahoma, largely dependent on oil and gas production, plus agriculture, might have a difficult time balancing its budget. The oil problems might cause Tulsa and Oklahoma City to face a decline in their quality ratings.
Because many of the financial and economic conditions of these entities are reflected in their market prices, it probably would not be wise to sell these securities and move into others. However, for those individuals who would feel better doing so, the states of Massachusetts, Florida and Georgia would be worthy replacements.