Suspect surplus Oil income boosts budget, but how permanent will state's windfall be?

Posted: Wednesday, December 01, 2004

Record-high oil prices will send hundreds of millions to state coffers, but lawmakers and budget analysts are warning against calling new revenues a surplus.

A forecast by the Alaska Department of Revenue in April projected the price of a barrel of oil would average $28.30 through fiscal year 2005, which runs from July 2004 through June 2005. But the first five months of the fiscal year have yielded an average price of $42 per barrel.

The oil windfall likely will send more than $500 million to the Alaska's general fund and is enough to cover the state's fiscal gap of $360 million, according to state budget director Cheryl Frasca.

"It's an unusual position to be in," Frasca said. "We're trying to be judicious in how to spend it."

Gov. Frank Murkowski will release his proposed budget for fiscal year 2006 next month, but he already has rolled out several spending proposals, the most notable being a $126 million increase to K-12 education funding over the next two years. That's in addition to the $82 million increase this year, which was touted as the largest funding boost to schools in the state's history, Frasca said.

Monday in Anchorage, Murkowski announced a package of budget proposals that would send $6 million to the Office of Children's Services and $1.5 million to the Division of Juvenile Justice.

Other proposals announced earlier this month would provide $7.1 million for state substance abuse and fetal alcohol syndrome prevention programs and a $1 million grant for social services programs for the needy.

Lawmakers and budget analysts warn that much of the new revenue will be needed to help fund programs that have been cut.

"I view it as a windfall in that it is temporary in nature," Frasca said. "We're not ready to build our future on today's oil prices."

Tom Boutin, deputy commissioner for the Department of Revenue, said although prices are high now, the volatility of the oil markets could bring the price down suddenly. He noted that the average price of a barrel of oil for June was $36.76, compared to October, when the price averaged $48.34.

"Alaskans are accustomed to this kind of volatility and they know this price won't stay up forever," Boutin said. "I don't think anyone should budget on prices that are at the all-time peak for commodities."

Rep. Bruce Weyhrauch, R-Juneau, called the surplus "illusory" because much of the money will go back to programs that were cut by the governor and Legislature in the last few years. The state should deal with the increased cost of health care, education funding, social services needs and other infrastructure projects before establishing new spending, he said.

"We had a $650 million deficit two years ago," he said. "Now we have a $650 million surplus."

Weyhrauch said the oil revenues should not undercut new revenue proposals. The Juneau lawmaker recently was appointed chair of the House Ways and Means Committee, which is tasked with establishing a long-range fiscal plan for the state.

Sen. Kim Elton, D-Juneau, said he anticipates many lawmakers will push for various new infrastructure and public works projects.

"The tension is going to be what meets real needs and what is gorging," he said.

Elton acknowledged the surplus could diminish Democrats' power in the Legislature if it means lawmakers don't face a fiscal gap in 2006. Every year lawmakers must approve opening the state's rainy day account, the Constitutional Budget Reserve, with a three-quarter vote in both the House and Senate. This requires the approval of Democrats, who in the past have held up the appropriation in exchange for their own legislative agenda.

Without a fiscal gap, Democrats could be left virtually powerless.

Speaker of the House-elect John Harris, R-Valdez, said he doesn't want to see a lot of capital projects competing for the new revenues before other infrastructure needs are funded.

"I don't want to see us go out there and put a lot into capital projects when we're not maintaining the old ones," he said, adding that he'd like to see more money for deferred maintenance projects for schools and social services programs for seniors, elderly and the needy.

"Deferred maintenance isn't necessarily bricks and mortar," he said.

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