Oil plunge threatens schools, other services in US producer states

FEB 9, 201612:11 AM

[NEW YORK] From Alaska to Oklahoma, crowded classes, suspended art programs and longer school commutes give students and parents a taste of the downside of cheap gas as oil-producing states scramble to plug budget holes blown by tumbling crude prices.

Spending on education, healthcare and other services is either being cut or faces cutbacks in about half a dozen states that have relied on oil taxes for a sizeable part of their revenues and most did not prepare for oil diving as deep as US$30 a barrel.

Heather Popowsky, who has fourth, seventh and eighth graders in Edmond Public Schools in Oklahoma City, said the belt-tightening was evident. "I have seen elective programs like music and art cut back. I've seen a shortage of new teacher hires, so student to teacher ratio has risen. There has been an increased call out for additional supplies at school." Oklahoma, where oil-related revenue has accounted for 10 per cent of the budget at the peak of the shale boom in 2014, in December slashed its oil production tax revenue forecast for this year to US$2 million from US$102 million planned for in June.

The state has already cut spending on education, which accounts for a third of its US$7 billion budget, by US$25 million in the 2015-2016 fiscal year and another US$20 million cut looms. "We're starting to have conversations now that this is as bad as it was back during the energy industry crash of the 1980s," said Matt Holder, chief operating officer for the Oklahoma Department of Education. "Some of our smaller school districts are having talks about whether they are going to make it through the next crunch," he said.

Other services will feel the squeeze too with Medicaid providers facing a 3 per cent cut in payments and a hiring freeze in force at the state's department of human services, says David Blatt, director of the Oklahoma Policy Institute, an independent think tank.

Alaska, where until recently oil tax revenue funded up to 90 per cent of the state budget is set for a 68 per cent gap between spending and revenues this year, according to Moody's.

Its Governor Bill Walker has suggested taxing residents'income for the first time in 35 years. He also proposed using part of the money earned by the state's US$47 billion "rainy day"fund to cover state expenses rather than pay out as an annual dividend to residents as usual.

ONE-LEGGED BUDGET Despite Walker's proposals, Standard and Poor's this month lowered its rating on Alaska's debt to AA+ from AAA.

With cuts to the US$1.4 billion education budget on the agenda, schools - particularly those in remote areas - could eventually be forced to shutter, said Mike Hanley, commissioner for the Alaska state Department of Education. "Oil revenues have treated us very well," Hanley said. "But Alaska is a one-legged revenue stool and we've become too dependent on oil." David Teal, director of Alaska's Legislative Finance Division, said services such as healthcare and corrections could also face cuts. "Of course, people are complaining loudly about reductions in ferry service and snow plowing, but I am not sure they realize that other services will be reduced," he said.

While Alaska's financial buffer eases the immediate pressure, the diversified economies of other leading oil producers - Texas and California - make them less vulnerable to the oil slump. California, the nation's third largest producer, is also less exposed because it has never taxed oil production.

The outlook is bleaker for states such as Oklahoma, North Dakota, or Wyoming, that have less of a financial cushion and depend more on the oil industry for jobs and income.

North Dakota, the epicenter of the shale oil boom and the second largest US producer behind Texas, faces a budget shortfall of more than US$1 billion and is now debating whether to dip into its reserve fund first or slash spending, including a proposed US$72 million cut in the state's education budget.

"If you look at a lot of the states that aren't dependent on oil production, their revenue forecasts are for growth," said Gabriel Petek, an analyst at S&P. "But if you look at these other states, it's almost like a parallel universe," he said. "If anything, there are cutbacks." In a recent report, Petek said that as oil industry jobs losses mount, so too does demand for state-funded social services paid for by the state, possibly setting oil-dependent states for more credit downgrades and greater financial stress.

REUTERS