Low oil prices are bringing a mountain of budget troubles to Alaska's state government.  (Photo by Nikki Kahn/The Washington Post)

What U.S. state is as hooked on oil revenues as Venezuela, Iran, or Russia?


Plunging oil prices have blown a huge hole in the budget of the oil-rich state, where in recent years taxes on oil production have covered more than half the total budget ($13.5 billion including federal funds and capital projects) and 90 percent of the state's discretionary spending ($6.5 billion to run agencies and schools). Now, with prices under $70 a barrel, the budget deficit could balloon to more than $3 billion, about half of the state’s discretionary spending level.

In his inaugural address earlier this week, Gov. Bill Walker recounted his impoverished childhood and his family’s determination to make ends meet after losing almost everything in the 1964 earthquake. It was an allegory for Alaska's current situation. “Today, oil is hovering around $70 a barrel,” he said. “We’re heading into some lean times. There is no reason we cannot turn that around.”

Turning it around could be difficult. Ever since the giant Prudhoe Bay oil field starting production in 1977, Alaska has relied heavily on oil revenues. Les Gara, a member of the Alaska state legislature, said that the oil price would have to hit $110 a barrel for the state government to break even.

"No one wants to pay high prices for gasoline, but at the same time we want to fund our roads and schools and opportunities for young people," Gara said. Alaskans, especially those in remote areas, pay some of the highest prices in the country for basic goods, such as milk or gasoline. And before oil prices jumped to record high levels over the past four years, Alaska was running far behind on maintenance projects and provided little education aid for its residents.

"While low oil prices are very good for consumers whether in rural Alaska where people rely on diesel fuel or across the country, it is terrible for finding ways to fund disadvantaged kids, foster youth programs, or pre-kindergarten education," said Gara. "So it’s a mixed bag for Alaskans."

The new governor Walker has said he would review several controversial expensive projects such as the Knik Arm Bridge, Juneau Access, and Susitna Dam. He also favors taking federal money for Medicaid, which his predecessor opposed.

But don't cry for Alaska too much. The state has built up three different rainy day funds — two of which are dedicated to covering deficits in lean years and the third a sacrosanct $51 billion Permanent Fund, which every year writes checks to every person living in Alaska. On Oct. 2, payments of $1,884 each were paid out. The wisdom of building up such funds was supposed to make Alaska look more like Norway, which has a huge oil-financed investment fund, and less like Venezuela.

However, the Permanent Fund is not supposed to be touched to fill budget gaps; it is supposed to help Alaskan families as production in Prudhoe Bay declines. And the two rainy day funds are running a little dry. The Constitutional Budget Reserve was worth $11.8 billion on Oct 31 and the Statutory Budget Reserve was worth $3.7 billion. But the state legislature has voted to transfer $3 billion from those funds to cover part of a $12 billion gap in state's pension funds; Alaska has the seventh worst pension funding shortfall in the United States, according to a Bloomberg News report. Another $3 billion will go to cover the deficit in the fiscal year that will end June 2015.

That will leave the Constitutional Budget Reserve with about $9.5 billion, barely more than the remaining pension fund shortfall. "And that’s assuming today’s oil prices continue, which is a wild card," said Gara.