Several states that are dependent on energy revenue are facing strained budgets due to low oil prices, and at least three — Alaska, Louisiana and New Mexico — are at risk having their credit ratings lowered, according to a report from Standard & Poor's Ratings Services.
"In short, the more aggressive a state was with regard to its assumptions and use of oil-related revenues during the oil boom, the more acute its fiscal pressures now, in the oil price bust," according to S&P. "For states with greater budgetary reliance on oil-related revenue, the unrelenting decline in prices places a larger budget on state lawmakers to identify and enact corrective fiscal measures."
The report, entitled "Collapsing Oil Prices Seep Into State Credit Profiles," suggests that as state lawmakers head into session in the next budget season, their true fiscal situation "could be more intense than what their official forecasts currently anticipate." The report surveys the situation in eight major oil-producing states: Alaska, Louisiana, Montana, New Mexico, North Dakota, Oklahoma, Texas and Wyoming.
S&P pointed out that all of the states in the survey forecast a higher price for oil than what the ratings agency expects in 2016 ($40 per barrel). For example, Alaska has a fiscal 2016 price assumption of $49.58 per barrel, according to S&P, while Louisiana's is $48.02 per barrel and Texas is $49.48 per barrel. Looking ahead to fiscal 2017, just one state (North Dakota) is identified as having a forecast in line with S&P ($45 per barrel).
West Texas Intermediate crude, the U.S. pricing benchmark, was trading above $31 a barrel on Friday, or about 7 percent higher than the previous session.
Another alarming point: Job growth from the oil-producing states (Texas, North Dakota, Louisiana and Oklahoma) is now lagging the rest of the nation as a whole, and hard times in Texas mean public assistance expenditures in fiscal 2016 are running ahead of what was previously forecast. At the same time, tax collections are lagging prior-year trends.
Taxable income from the oil and gas industries for the first four months of fiscal 2016 was nearly 50 percent lower than collections during the like period in 2015, according to the Texas Comptroller's Office. Sales tax collections in fiscal 2016 through December were a little more than 2 percent less than collections for the same period in fiscal 2015.
That said, the Texas economy has a lot more going for it than just oil, and there's been job growth in technology, health care and construction since the oil bust of the 1980s. But even with the state's business diversity helping to mitigate the downturn in oil prices, S&P believes there's still credit risk ahead for Texas.
"You can only segregate the effects of falling oil for so long," said Gabriel Petek, a credit analyst for S&P and one of the authors of the report. "What's starting to happen is these oil producers are reigning in their operations and reducing their workforces, which sort of has a negative multiplier effect (throughout the broader economy)."
Three states — Alaska, Louisiana and New Mexico — are listed as having credit quality under negative pressure, according to S&P. (Neither of the two states with the dubious distinction of having the worst credit ratings in the nation — Illinois and New Jersey — are oil states.)
"North Dakota and Oklahoma are feeling some of the effects" of the oil decline, Petek said, who noted that "at this time it hasn't translated into an outright ratings action."
California is also a major oil-producing state, but its budget isn't dependent on oil revenue The analyst noted that California doesn't levy an oil severance tax. "Where it shows up in government finances is at the local level, because the falling oil prices lead to lower property values among the companies that own the oil fields. Kern County and the city of Bakersfield are some local governments in California that are currently much more directly affected by it."
As for Louisiana, revenue related to oil and gas represents about 8 percent of the state's forecast general fund revenue. That is sharply below the 1980s, when around half of Louisiana's budget was financed by energy industry revenue. Regardless, the pain today is evident.
Louisiana "has significant offshore drilling activity, which is less sensitive to short-term drops in oil prices than that of shale plays, but prolonged declining oil prices are likely to impact the state's mineral-dependent employment base," according to the S&P report. "Additionally, falling energy prices could benefit Louisiana's petrochemical industry, which somewhat helps to mitigate the negative effects of the oil price shock."
Even with Louisiana's petrochemical industry benefiting from low oil, the state still faces difficulties, with the state facing a nearly $2 billion budget shortfall for the next fiscal year.
As for New Mexico, the state is facing a slight decline in general fund revenue due partly to oil and natural gas revenue. State lawmakers are also considering a plan to delay proposed pay raises for state workers due to the oil crunch impacting general funds.
"Oil production in New Mexico has been increasing, despite recent price drops, which has somewhat cushioned revenue losses," said S&P. New Mexico projects its recurring energy-related general fund revenue will grow from $791 million in fiscal 2016 to $808 million in fiscal 2017.
The oil price decline is weighing especially heavily on Alaska, where the state's governor has proposed tax increases to close a multibillion-dollar budget hole.
"Alaska is probably in the most difficult position right now," said analyst Petek, who is based in San Francisco. "It largely related to the fact that they operate roughly 80 percent of their operating budget from oil-related revenues. They have about a $5 billion budget and they are only bringing in about $1.8 billion in revenue this year, and it's directly because of the fall in oil prices."
This month, S&P lowered Alaska's general obligation debt rating from AAA to AA+. Petek said the agency could cut the rating again, depending on how the fiscal situation plays out in the state.
Alaska Gov. Bill Walker has proposed higher taxes on the alcohol, tobacco, mining and fishing industries in order to help close the budget gap. He has also proposed the state's first income taxes in 35 years and wants to reduce the size of the annual oil check that state residents get each year.
"They really have to examine how they finance government in Alaska," said Petek. "The governor has made some pretty significant proposals to revamp the whole architecture of state finance. So far he doesn't have a political consensus."