As we have discussed in previous columns, one of, if not the greatest, causes of Alaska’s fiscal problems is the use of projected year-ahead oil revenues in the annual budgeting process. As current or projected oil revenues rise, spending patterns and expectations develop that become hard, if not impossible, to break when, as they inevitably do, oil revenues fall again in the current or subsequent years. 

The fluctuations create a revenue-and-spending roller coaster, making Alaska’s fiscal condition highly unstable. Over the past two decades, Alaska’s petroleum revenues have ranged from less than $1 billion in some years to more than $8 billion in others—swings that overshadow virtually every other aspect of the state’s annual operating budget.

During the mid-2010s, the spending patterns and expectations that developed over the latter half of the previous decade and into the first part of the then-current decade, amid high oil revenues, led to a period of deep and continuing deficits as oil revenues fell from Fiscal Year (FY) 2013 onward. But rather than returning to the spending patterns that had prevailed in earlier, lower-revenue periods, successive legislatures drew down various fiscal reserves accumulated over time to keep annual spending at elevated levels relative to annual, recurring revenues.

By FY2017, with those fiscal reserves largely depleted, rather than address the underlying disconnect, successive legislatures began unilaterally recharacterizing funds specifically designated by statute for distribution to Alaskans as Permanent Fund Dividends (PFD) as “unrestricted” and withholding and diverting (i.e., taxing) them to maintain spending levels.

While an oil price spike from FY2022 – 2024 lessened the problem, rather than using the temporary surge in oil revenues during the period as an opportunity to restock the state’s fiscal reserves and reset expectations going forward, the legislatures then in office used the surge to pay for additional, so-called “catch-up” spending and a short-term reduction in PFD tax levels.

Once the price spike abated, the state returned to riding the downhill portions of its fiscal roller coaster.

Alaska is virtually alone among major oil-producing states in allowing most of the volatility of oil revenues to flow directly into its annual operating budget. While Alaska has reserve accounts, it has no automatic rule tying deposits into those reserves to swings in oil revenues, unlike other oil-producing states.

In most other oil-producing states, stabilization mechanisms are built directly into the way oil revenues enter the budget. Rules automatically divert windfall revenues into stabilization or permanent funds during high-price periods and allow those funds to supplement revenues when prices fall. In Alaska, by contrast, most petroleum revenues flow directly into the unrestricted general fund and are available for immediate spending. Decisions about whether to save or spend windfall revenues are therefore left largely to annual legislative discretion rather than governed by automatic fiscal rules. As a result, Alaska’s budget tends to expand during oil booms and go on life support during downturns, producing the boom-bust cycle that has characterized Alaska’s finances since oil revenues first became a dominant source of state revenue. 

Alaskans have experienced this cycle repeatedly. Spending rises when oil prices surge, only to be followed by deficits, reserve drawdowns, and political fights over cuts and the PFD when prices fall again.

Other states heavily reliant on oil revenues use rules designed to stabilize the amount of such revenues available for spending from year to year. Texas and Louisiana, for example, use statutory or formula-based baselines that determine the level of oil and gas revenues treated as “normal” for budgeting purposes. Revenues above those baseline levels are automatically deposited into stabilization funds, which can later be used to offset shortfalls when revenue levels fall below the baseline.

New Mexico and Oklahoma use a somewhat different approach, relying on historical revenue trends – often measured against multi-year averages – to distinguish between normal revenue and temporary windfalls. Oil and gas revenues above those trend levels are diverted into savings or stabilization funds, which can be drawn down when revenues fall below the historical average.

Rather than smoothing oil revenues within the budget itself, Wyoming and North Dakota take a longer-term approach by depositing a substantial portion of their annual mineral revenues directly into permanent investment funds, using only a relatively limited share of those revenues for current government spending.

As oil prices start spiking again, Alaska should use this opportunity to get off the fiscal roller coaster it has been on since oil revenues first became a significant factor in the 1970s and to reset its approach along lines used in other states. As those other states have found, smoothing the contribution that oil revenues make to the annual budgeting process will lead to a much more predictable and sustainable budget in future years. In public finance, it is widely accepted that governments dependent on volatile commodity revenues should base recurring spending on long-term revenue trends rather than current prices, saving windfalls during booms to cushion downturns.

In considering which approach the state should use, we have largely discounted the ones used by Wyoming and North Dakota. While using one of those would have the potential advantage of materially increasing the amount set aside in Alaska’s Permanent Fund, thus increasing long-term draws from that fund, it would also remove the ability to stabilize oil revenue levels during low-price periods, continuing the same problem the state faces now. Although to a somewhat lesser extent, the state would still be riding the same oil price roller coaster.

The Texas and Louisiana approaches have much to recommend them. Depending on the method used to set the baseline, they tie the role played by oil revenues to more stable, long-term benchmarks rather than allowing annual budgets to fluctuate with current oil prices. Texas uses a historical benchmark based on oil and gas production tax collections in fiscal year 1987. When current production tax revenues exceed that benchmark, most of the excess is automatically transferred into the state’s Economic Stabilization Fund. Louisiana uses a different approach, setting a statutory “mineral revenue base” that determines the amount of oil and gas revenues available for the operating budget, with revenues above that level similarly diverted to stabilization funds.

One challenge in applying that approach to Alaska is that, depending on which period is used as the base, the level of the state’s oil revenues may or may not keep pace with it. If they did not on a sustained basis, then the amounts maintained in the related stabilization account might not be sufficient to offset differences between the baseline and actual revenues. On the other hand, if the level of the state’s oil revenues consistently outstripped the baseline, Alaska might deprive itself of the benefits that a higher level of oil revenues might bring, for example, in terms of lower taxes in other areas (such as PFD cuts).

For those reasons, in thinking about the issue, we have found ourselves gravitating, as we did in previous columns, to the general approach taken in New Mexico and Oklahoma, of relying on historical revenue trends to distinguish between normal revenue and temporary windfalls. While oil price cycles are not perfectly symmetrical, using such an approach would help bring some needed fiscal discipline to the Alaska budget.

Under such a system, the state would first calculate a multi-year average of petroleum revenues and use that average amount for budgeting purposes. When actual oil revenues exceed that average during high-price periods, the difference would automatically be deposited into a stabilization fund. When oil revenues later fall below the average, the stabilization fund would provide supplemental revenues to maintain the budget at the average level.

The first step would prevent windfalls from resetting spending patterns and expectations at levels that the state would not have the revenue to maintain during subsequent periods. And later, even if the amount in the stabilization account did not fully offset the shortfall during periods of lower oil revenues, it would at least reduce the shortfall the state would need to make up elsewhere.

In thinking about how to transition to such an approach, one key is to start during a period of expected windfalls (relative to average revenue levels). As other states have realized, it is easier to sequester and maintain windfalls for later use during high-revenue periods than to find revenues from other sources to close budget gaps during low-revenue periods. 

The following example helps demonstrate the approach. In this chart, we start using a historic 5-year rolling average of total petroleum revenues in FY2020 (the red line), before the oil revenue spike the state realized in FY2022 – FY2024.  The cumulative amount saved in (or owed to) the New Mexico-style stabilization account is reflected in the red bars. 

As the chart shows, the mechanism would have deposited a significant amount of revenue into the stabilization account during the run-up in current oil revenues relative to the rolling 5-year average from FY2022 to FY2026. While those would have gradually reset the rolling 5-year average used for budgeting purposes to higher levels, the amount deposited into the stabilization account would have helped offset at least some of the higher spending in the subsequent period.

Perhaps as importantly, the accumulated amounts retained in the stabilization account would have provided the Legislature with the ability, as it saw oil revenues begin to drop precipitously in FY2025 – FY2027, to maintain spending at lower levels than those implied by the 5-year rolling average, but higher than those supported by the level of current revenues during subsequent years.

Of course, Alaska can’t switch to the FY2020-based 5-year rolling average now because it didn’t deposit the windfall amounts in a stabilization account at the time of the FY2022 – FY2024 price spike.

But the price spike resulting from the current “major combat operations” in Iran offers a new opportunity to make it right.

The following chart shows what a New Mexico-style stabilization approach would look like if initiated currently, using FY2027 as the first year, and, to reflect how the approach would interact with the current oil price spike, calculating current revenues based on the higher prices reflected in the current oil futures market (as of yesterday, March 5, 2026).

As a transition mechanism, the 5-year rolling average is calculated based on oil revenues projected for FY2026 and the four subsequent years in the Fall 2025 Revenue Sources Book. The 5-year rolling average levels used in subsequent years would be calculated using the final, actual results for FY2026 and each subsequent year until the state had 5 years of actual results on which to base the calculation. At that point, subsequent calculations would be based on the previous 5 years of actual results.

As is clear, by rule, the approach would sequester and maintain a growing amount of funds in an Alaska stabilization fund, anticipating that, as they inevitably do, oil revenues would fall again in future years.

To illustrate how the approach would work if, instead of continuing to follow the current futures market during the period, oil revenues began to decline, the following chart shows projected oil revenues declining at a rate of 3% annually, beginning in FY2031, halfway through the period.

As is clear, rather than continuing to build balances, the stabilization fund would provide supplemental revenues to the annual budget as current revenues fall below the 5-year average, maintaining revenue contributions at the 5-year rolling average.

As we have discussed in previous columns, some additional modifications to the New Mexico approach might improve its application to Alaska. For example, because the role played by oil revenues in Alaska’s budget is so significant and the variations in Alaska’s oil revenues are so extreme, using a 10-year rolling average rather than a 5-year rolling average might work better. Using some sideboards, such as limiting changes up or down to 5% of the previous year’s amount, would provide even greater stability.

But while those might work even better for Alaska, using the simple 5-year averaging approach still would be a significant improvement over Alaska’s current “boom-bust-boom-bust” revenue cycles.

Importantly, adopting such a rule would not determine the size of government, the level of the PFD, or whether the state eventually adopts other revenue sources. It would only change how oil revenues are incorporated into the budget, so that temporary price spikes no longer reset long-term spending expectations.

The current price spike resulting from the developments surrounding Iran offers a new opportunity to make it right. The Alaska Legislature should take it.

Brad Keithley is the Managing Director of Alaskans for Sustainable Budgets, a project focused on developing and advocating for economically robust and durable state fiscal policies. You can follow the work of the project on its website, at @AK4SB on Twitter, on its Facebook page or by subscribing to its weekly podcast on Substack.