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$2 billion revenue shortfall raises lingering questions

By Rhonda McBride 7:32 AM December 11, 2013

The merits of SB 21 will be hotly debated in the upcoming legislative session.

ANCHORAGE – Alaska Gov. Sean Parnell will roll out the state budget for the next fiscal year Thursday.

He’s already said to expect cuts. The only questions are how deep will they be and how much will he dip into state budget reserves? Parnell has about a $17 billion cushion in various savings accounts he can use.

In the backdrop of the coming budget is last week’s troubling news from the Alaska Department of Revenue which announced a $2 billion revenue shortfall.

Democrats immediately blamed the revenue gap on Senate Bill 21, the oil and gas tax law enacted this year. The new measure did away with a tax reform law known as ACES, an acronym for Alaska’s Clear and Equitable Share, which passed during the administration of former Gov. Sarah Palin.

Supporters of SB 21 said the new law is not to blame, but instead helping to soften the blow from lower oil prices.

It’s not easy to sort out the truth, especially in what is an unusual fiscal year split between two tax systems.

The first half of the budget cycle is in 2013, from July to December. It’s under the ACES tax structure. The second half is in 2014, from January to December, and is under SB 21.

For opponents of SB 21, the $2 billion dollar budget gap is ammunition in the battle to repeal the law during next year’s August primary.

“This is of great concern,” said Sen. Bill Wielechowski, an Anchorage Democrat. “It’s an enormous gap. It’s much more pronounced than what we had expected, what we were told by the Parnell administration just this last spring.”

In its spring 2013 forecast, the Department of Revenue estimated a $500 million shortfall.

“I think the administration wanted to pass its oil tax bill so badly, I think there were some numbers that were seriously off,” Wielechowski said. “And I think that’s very troubling.”

The accusations have angered the governor.

“People are not telling the truth about what’s happening,” Parnell said. He contends that in today’s climate of lower oil prices, SB 21 actually brings in more cash for the state than ACES would.

The administration said three factors determine how much oil and gas revenue the state collects.

The first is the price, which dropped from $109.61 a barrel in the spring to $105.68 in the fall — a $4 drop. State economists said a dollar drop in the price of oil per barrel translates into a loss of about $100 million in revenues.

The second factor is the amount of production, which has decreased by eight percent. Production has been in decline for some time, but revenue forecasters were caught by surprise. They were expecting a drop in the five percent range.

The third factor is production costs, which oil companies are allowed to deduct. These expenses were higher this year.

It was as if the state lined up three lemons on a slot machine. All three factors in the revenue equation — price, the amount of production and the cost of production — all combined to generate the shortfall.

At least that’s how the state explains it.

Opponents of SB 21 call this spin.

“This is a financial train wreck,” Wielechowski said. “Many of us felt SB 21 shouldn’t have been passed. And now we have the proof of what we’re getting from that.”

Wielechowski points to revenue projections for future years.

“Revenue is down billions per year, every year,” Wielechowski said. “If you go out 10 years, which is what the governor told us we needed to do, we’re $3 billion short of where we were in 2013.”

Tim Bradner, a veteran oil and gas reporter who writes for the Alaska Journal of Commerce and the Alaska Economic Report, warns about the dangers of misinterpreting the data.

“It’s natural that people put two and two together,” Bradner said. “Two billion dollar giveaway is what they see on the bumper sticker, two billion dollar revenue drop. But it’s more complicated than that.”

“As much as I’ve studied it over the years, I still don’t understand a lot of it,” he said. “None of us can be experts. And this upcoming election at the end of August is going to be a bumper sticker war, and trying to understand the nuances is going to be very difficult for people.”

While a $2 billion dollar shortfall is getting a lot of attention, it’s not unprecedented for state revenue forecasters to be so far off the mark  — or for oil revenues to make a wild, unexpected swing, Bradner said.

“In 2012, we had $9.4 billion in revenues,” Bradner said. “These are actual numbers, not projections.”

“In fiscal 2013, those dropped to $6.9 billion,” he said. “That’s a pretty significant decrease, but we didn’t hear a lot about it, because the SB 21 controversy wasn’t mixed up in it — and we were so flush with revenue, people didn’t notice it as much.”

So what about the governor’s claim that SB 21 rakes in more revenue than ACES under current lower oil prices?

“People forget that the new SB 21 has a 35 percent tax rate, and that’s higher than the 25 percent tax rate under ACES,” Bradner said.

ACES, Bradner said, is more beneficial when oil prices are high. It has a tax mechanism that rises aggressively in response to increases in oil prices — up to 50 to 60 percent, compared to SB 21 which taxes at a constant 35 percent.

According to Bradner, if ACES were to remain in effect for the rest of the fiscal year, its rate would be slightly lower, at about 34.9 percent.

Conversely, had oil prices gone up and ACES remained in effect for the second half of the fiscal year, the old tax structure would have likely collected more cash than SB 21.

Supporters of the new tax law argue that the real proof of success is whether industry invests in production. They point to ConocoPhillips’ recent decision to increase its capital budget by 50 percent. The oil company plans to add two new rigs, while BP Exploration is also adding two rigs.

Still, critics of SB 21 insist the numbers aren’t adding up. They point to declining production over the next decade, while proponents of the new law argue that the decline would be much bigger if SB 21 weren’t in play.

The only thing both sides seem to agree upon: The merits of SB 21 will be hotly debated in the upcoming legislative session.

 

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