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Alaska has weathered fluctuating energy prices but outlook is cloudy

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(The Center Square) – Alaska receives 44% of its unrestricted fund revenues from the oil and gas industry but has weathered the fluctuating prices well, according to Fitch Ratings, which provides credit ratings and research.

The Last Frontier is rated A+, and its outlook is stable as the state continues to consider what its future revenue system will look like.

Gov. Mike Dunleavy and state lawmakers discussed possible tax options during the 2023 legislative session, including a sales tax. But the state also received positive news as the Biden administration approved three drilling sites in the North Slope in what is called the “Willow Project.”

“It’s largely good news for Alaska because it continues to keep resources moving through the trans-Alaska pipeline system,” Douglas Offerman, a senior director at Fitch Ratings, told The Center Square. “It’s not going to rescue the state’s budget and turn back the clock to pre-2014, but it will be helpful eventually once the energy is flowing.”

Energy prices crashed in 2014, and the effects were significant on all energy-producing states but particularly for Alaska, according to Offerman.

“So Alaska kind of had to move quickly to figure out what to do, but at the same time, they had built up a big constitutional reserve fund balance at that time,” Offerman said. “That was a significant multi-year cushion that is much smaller now but nonetheless they were able to fall back on that.”

According to information from Fitch Wire, state budget officials have projected that combined balances in the constitutional budget reserves and the statutory budget reserve will drop from $2.6 billion at the end of fiscal year 2022 to $2.1 billion by fiscal year 2023. The reserves could be at $1.2 billion in fiscal year 2024 as withdrawals are made to balance the unrestricted general fund.

The Alaska Department of Revenue’s Spring Forecast showed a drop in oil prices by $3.20 a barrel for fiscal year 2023 and $8 a barrel for fiscal year 2024.

“Driven by this lower outlook for oil price and production, the Unrestricted General Fund revenue forecast has decreased by $246 million for FY 2023 and $679 million for FY 2024,” the revenue department said in its report.

“Our expectation is Alaska is going to continue to move towards some kind of consensus on what its revenue system looks like,” Offerman said. “It has to make decisions on tax revenues, it has the challenge of a flat to declining population. But it has many solid attributes as well.”

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