Budget Problems Abound in the Oilfield

While lawmakers in Oklahoma work to fill the $1.3 billion hole in the state’s budget for next year, Moody’s Investors Service released reports on several oil-producing states this week, and the news was not good for the Sooner State. The report shows declining revenues for state and local entities due to the slowdown in oil and natural gas production and the effect that downturn has had on tax collection.

“Low oil prices have already caused sharp declines in revenues collected by Oklahoma and its local governments,” Moody’s Associate Vice President Julius Vizner said in the report, “but more pain is on the horizon as the rest of the economy slows down due to muted drilling activity.”

Oklahoma’s current rating from Moody’s stands at an Aa2, which is the company’s third highest credit quality rating. The Sooner State has remained at or near this status with Moody’s since 1993, but the decline in the energy industry forced the company to downgrade the state’s outlook from stable to negative in its December prospectus. Moody’s has reported that further declines in the energy sector along with the failure by state lawmakers to address the budget gap could force a downgrade in the state’s financial rating.

Across the Red River, the story is much the same. Texas House Speaker Joe Straus sent a letter to House Appropriations Committee members this week warning that “a significant challenge” is facing them.

“For nearly 12 years, Texas job growth outperformed many other states and the nation as a whole,” Straus wrote. “However, with job losses in the energy and manufacturing sectors, that is no longer the case. The impact is also being felt in the state’s finances. Out of the last six months, the state’s sales tax – the largest single source of general purpose funding for government – has registered five monthly declines.”

Strauss’ warning comes as lawmakers tasked with writing the budget were informed that next year’s plan will include only half of the unspent general-purpose revenue that was on the books in 2015.

Not everyone in Austin sees gloom and doom in the Lone Star State’s future. Texas Comptroller Glenn Hegar had a different outlook when addressing the Committee this week.

“If you look at the Texas economy, the 12th largest economy in the world, obviously lower oil prices have had an impact on our unemployment – one in the manufacturing industry and number two in the oil and gas industry,” Hegar said, “but overall, it’s still amazing that Texas has gained 185,000 jobs in the last 12 months.”

Hegar, however, is showing caution in his planning for the 2017 budget. He has already lowered the state’s projected budget number by $3 billion due to the projected loss in tax revenue based on the decline in the energy and manufacturing sectors.

“If prices continue to stay where they’re at or go down, you’re still going to see a lot more pain in those sectors, and that’s not good for the balance sheet,” Hegar said.

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