Energy-Dependent States Reeling From Two-Year Commodity Crunchby
Governments’ mid-year revenue forecasts and tax receipts fall
Officials face budget shortfalls in an election year
Energy-dependent U.S. states stepped over the threshold of fiscal 2017 only to face revenue shortfalls precipitated by the two-year-old oil and gas industry rout.
Some aren’t sure how they will pay for schools, health care, infrastructure and universities. Lawmakers in Alaska, Oklahoma, Louisiana and North Dakota already pared budgets by billions, raising taxes and cutting programs to the bone to fill deficits. These states, as well as Wyoming, are in the throes of recession even as the U.S. enters the seventh year of an economic expansion.
"We have a cash flow problem," said Democratic Louisiana Governor John Bel Edwards on June 24, after his legislature ended the longest session in its 204-year history. "There is every possibility we are going to have to take out a loan to pay regular, ordinary bills."
Even as crude oil prices rebounded this year to hover near $50 -- the point at which some drillers said they might restart work -- the catastrophic impacts on budgets became more pronounced in mid-year forecasts and revenue reports. As recently as two years ago, oil traded for more than $100.
The loss of tens of thousands of high-paying energy jobs led personal-income and sales-tax collections to plummet to a 17-year low in Oklahoma and to levels not seen since 2010 in North Dakota. Levies on oil and gas production and mineral royalty payments in energy-producing states have tumbled nationwide, with Oklahoma’s falling by more than half.
The effects are cascading into manufacturing, financial services and wholesale trade, leading to thousands of additional job losses. Texas, the nation’s largest oil-producing state, lost 38,100 manufacturing jobs and Oklahoma said goodbye to 10,400 from the first quarter of 2015 to the first quarter of 2016, according to IHS Economics.
Steep revenue declines, combined with the lack of political will to make tax bases less reliant on commodity prices, prompted credit-rating company’s to downgrade Alaska, North Dakota and Louisiana, with Oklahoma at risk of being cut. Those states, where the economy took off as production expanded, rank in the bottom 10 for employment growth and real gross state product. In Texas, Governor Greg Abbott warned agency heads last week to prepare for budget cuts of 4 percent late next year as revenue growth cools.
"The drop in oil prices wiped out all the impressive gains these states enjoyed," said Karl Kuykendall, a Lexington, Massachusetts-based economist with IHS. "There will be tense budgetary sessions upcoming."
In North Dakota, general fund collections are $90 million below January projections for fiscal 2016-2017, primarily as a result of lower sales-tax and motor-vehicle-tax revenue. The decline forced the state to commit the entirety of a $572.5 million rainy day fund to shore up the budget. Governor Jack Dalrymple this year ordered across-the-board spending cuts when revenue fell $1 billion short.
If revenue continues to deteriorate, the governor may need to order further cuts or call a special legislative session to tap remaining reserves, said Pam Sharp, director of the North Dakota Office of Management and Budget.
"If we have another shortfall, we have some major decisions to make," she said. "I don’t anticipate the month of June will show that all of the sudden everything’s turned around."
In Wyoming, slumping sales and use taxes and commodity levies -- which fund 70 percent of services -- prompted Governor Matt Mead to order $248 million cut from the budget for the fiscal year that started July 1.
The Health Department will forgo $90 million, resulting in the loss of $43 million in federal matching funds, cutbacks anticipated to cause the loss of 677 jobs statewide, said David Bush, a spokesman, in an e-mail.
In Louisiana, lawmakers raised sales taxes and levies on cigarettes and alcohol to fill a record $2 billion shortfall caused in part by a $400 million drop in mineral severance receipts and royalties. The increases were the largest amount ever in a state budget, said Treasurer John Neely Kennedy. One legislator compared the fiscal crisis to the aftermath of Hurricane Katrina.
In Alaska, after a six-month standoff over how to fill a $4 billion deficit, Governor Bill Walker on June 29 vetoed $1.29 billion in budget bills and slashed next year’s spending for education and other programs. He put highway funding on hold and deferred $430 million in oil credits due to companies. He also cut in half an annual payout the state’s residents receive to $1,000. The governor called the legislature into a second special session July 11 to consider new ways to raise revenue rather than funding the shortfall with reserves.
Flanked by whiteboards that showed the dividend fund hitting zero in four years absent restructuring, and a fuel gauge representing reserves that have dropped to $2.5 billion today from $12.8 billion in 2014, Walker called on legislators facing re-election to take the politics out of budgeting.
"This is a day of reckoning," said the first-term independent, whose staff made more than 400 presentations to Alaskans in the past year promoting a budget that the legislature rejected. "Talk to your legislators. Tell them to pass a fiscal plan that is balanced."