Revenue forecasting: "Oil States’ Budgets Face Crude Awakening" (WSJ, 01/13/15)

By
Ana Campoy,
Mark Peters and
Erica E. Phillips
Jan. 12, 2015 6:34 p.m. ET

Energy-producing U.S. states are paring budget forecasts and planning spending cuts amid a plunge in prices that is testing their reliance on revenue from the oil patch.
From Texas to North Dakota, states that benefited from a surge in domestic oil production in recent years are now bracing for reduced collections of extraction levies known as severance taxes and royalties as prices fall and companies cut back on drilling. In turn, income- and sales-tax growth could slow as producers cut jobs.

While most energy-rich states have amassed ample rainy-day funds in anticipation of the oil industry’s historic booms and busts, the falling prices have budget writers scrambling to adjust earlier fiscal projections that had assumed much higher crude-oil prices.
In Texas, the country’s top oil producer, officials on Monday said the windfall from the recent oil-shale boom will carry over to the budget for the next two fiscal years. But they are expecting the gush of cash from oil production to slow down considerably, projecting a 14% drop in oil-related taxes to $5.7 billion in fiscal 2016 and 2017.

“The state economy will continue to expand, though at a much slower pace than we’ve seen in recent years,” said Texas Comptroller Glenn Hegar, a Republican.
Still, some Texas politicians who made promises to increase spending on roads and cut taxes remain committed to them. “You want to make sure that your taxation policy promotes growth and doesn’t put adverse pressure on home owners,” said Republican Paul Bettencourt, an incoming state senator.

The consequences are more severe in Alaska, where oil-industry taxes account for 89% of the state’s operating revenue, and budget problems loomed even before oil prices dropped.

Alaska now has a $3.5 billion hole in its $6.1 billion budget, and Gov. Bill Walker has called on state agencies to reduce budgets by 5% to 8% for the coming fiscal year. The state expects to dip heavily into its $14 billion in reserves to bridge the gap, but officials acknowledge that is not a sustainable solution.

“Even though we have the money to cover it, we’re still going to make some significant changes on the spending side,” said Mr. Walker, an independent.

Other states are predicting less pronounced impacts, including North Dakota.
The state is diverting only $300 million of the $6.76 billion in oil-tax revenues it plans to collect in the two-year period ending June 30 toward operating costs, with the rest going to trust funds, capital projects and local governments.

Still, Gov. Jack Dalrymple said that some water projects could be imperiled if oil prices remained below $55 a barrel for five months, which would trigger a state rule that reduces a key oil-severance tax to zero for most production.

“You see people walking around the Capitol looking at their smart phones every couple of hours just keeping track of WTI,” said Mr. Dalrymple, a Republican, referring to West Texas Intermediate, the U.S. benchmark price for oil.

U.S. oil fell $2.29, or 4.7%, to settle at $46.07 a barrel on the New York Mercantile Exchangeon Monday, the lowest level since April 2009. The U.S. benchmark has fallen 14% so far this year.

To be sure, the oil-price drop has a largely positive impact for the U.S. economy, as businesses and consumers across the country enjoy the lowest gasoline prices in five years. Moody’s Analytics is estimating a roughly 5% growth in state tax-revenue collections for the fiscal year ending June 30, thanks in part to lower gas prices spurring increased consumer spending.

But analysts agree that the economies of oil states, which have largely grown at a faster rate than other states since the recession, would suffer if oil prices stay at current levels for a prolonged period of time.

On Monday, Moody’s Analytics forecast that if oil remained below $60 a barrel for three years, considered by the firm an unlikely scenario, North Dakota, Alaska and parts of Texas would likely fall into recession.

In Louisiana, where severance taxes accounted for 9% of total tax collections in recent years, officials have eliminated 162 vacant positions. State officials said there could be more cuts in coming months, since their revenue forecast is based on an estimate of $81.33 a barrel for oil.

In Wyoming, state economists predict the $3.5 billion in general-fund revenue budgeted for the current two-year fiscal period will fall $4.4 million short as energy-production taxes shrink, an amount easily covered by the state’s $2 billion rainy-day fund.
Gov. Matt Mead said Wyoming has amassed enough reserves to afford increased spending despite lower oil prices. “We can do a lot with the money that we have,” said Mr. Mead, a Republican.

In New Mexico, which has recovered from the recession more slowly than neighboring states, the price drop is putting state lawmakers in the uncomfortable position of not knowing when they can firmly forecast revenue.

State economists in December cut their forecast for oil prices in fiscal 2016 to $66 a barrel from the $88 a barrel they calculated in August. On Friday, lawmakers submitted a $6.29 billion budget proposal based on that new estimate, but state Sen. John Arthur Smith said it might have to be revised down again when the legislative session resumes later this month.

“If I had my druthers, we wouldn’t be having our session until March or April rather than January,” said Mr. Smith, a Democrat.