BLOOMBERG BUSINESS

Oil-Producing States Battered as Tax-Gushing Wells Are Shut Down

By Darrell Preston
December 29, 2015 — 12:01 AM EST Updated on December 29, 2015 — 9:16 AM EST


In Kern County, California, one of the nation’s biggest oil producers, tumbling energy prices
have wiped more than $8 billion from its property-tax base, forcing officials to tap into reserves
and cut every department’s budget. It’s only getting worse.


The county of 875,000 in the arid Central Valley north of Los Angeles may face another blow in
January, when it reassess the oil-rich fields that line the landscape. Last year’s tax bills were
based on crude selling for $54 a barrel. It finished Monday at less than $37.


“We may never go back to $99 a barrel, but we were good at $54,” said Nancy Lawson, assistant
administrative officer of Kern County, which includes the city of Bakersfield. “If it keeps going
down and stays down we may have to look at more cuts in the next budget.”


As the price of crude falls for a second year, marking the steepest decline since the recession, the
impact is cascading through the finances of states, cities and counties, in ways big and small.
Once flush when production boomed, some governments in major energy producing regions are
facing a new era of unwelcome austerity as wells are shut -- along with the tax-revenue gushers
they spouted.

 

 

Alaska, Louisiana and Oklahoma have seen tax collections diminished by the rout, which has put
pressure on credit ratings and led investors to demand higher yields on some securities. In Texas,
the largest producer, the state’s sales-tax revenue dropped 3 percent in November from a year
earlier as the energy industry exerted a drag on the economy.


Further west, Colorado’s legislative forecasters on Dec. 21 estimated that the state’s current year
budget will have a shortfall of $208 million, in part because of the impact of lower commodity
prices. In North Dakota, tax collections have trailed forecasts by 9 percent so far for the 2015-
2017 budget.


“The longer it goes the more significant it gets,” said Chris Mier, managing director with Loop
Capital Markets in Chicago.


The pressure contrasts with what’s happening in most of the country, where states and cities are
enjoying a break from the fiscal strains that lingered for years after the recession ended in 2009.
In the three months through June 30, a period when income-tax payments are due, states’
collections jumped by 6.8 percent from a year earlier, the biggest increase in two years,
according to the Nelson A. Rockefeller Institute of Government in Albany.


Because of such gains, Standard & Poor’s has boosted more ratings than it has cut for three
years, the longest streak of improvement since 2001.


Reversal of Fortune
Some states are being left out, a result of the energy-price crash that’s also being felt by countries
including Saudi Arabia and Venezuela.


On Dec. 23, Moody’s Investors Service said Oklahoma may be downgraded from Aa2, the third
highest rank, because of the prospect for a “prolonged, muted recovery in prices and
production.” In February, S&P and Moody’s cut their outlooks on Louisiana’s rating -- which is
now the third highest from both -- because of oil’s impact, which left the state with a $487
million mid-year deficit. Alaska is at risk of losing its AAA rating from S&P, which cut its
outlook on the state in August after the government’s revenue was cut by more than half.


The outlook has led investors to demand higher yields relative to other debt. A 10-year Louisiana
bond traded last month for a yield of 2.64 percent, or 0.56 percentage point over top-rated debt,
more than triple the gap when they were first sold a year ago. That difference on a 10-year
Alaska bond has nearly doubled since August to 0.31 percentage point.


“We’ve been avoiding Alaska for some time now because we don’t like the fundamentals,” said
Dan Heckman, national investment consultant at U.S. Bank Wealth Management, which
oversees about $130 billion.


Tough Jobs Ahead
When legislatures begin work next year on new state budgets, they may face another round of
deficits. Oklahoma officials this month estimated that there will be a $900 million budget hole
for the fiscal year beginning in July after revenue fell short of estimates. Governor Mary Fallin in
October ordered state agencies to plan to cut spending by 10 percent, said Preston Doerflinger,
finance director.


“This offers us a chance to improve efficiency and decide what services we will offer,” he said.


In Kern County, where Chevron USA Inc. is the largest taxpayer, a fiscal emergency was
declared in January, allowing officials to use reserves and make spending adjustments. For the
current budget, which lasts through June, the county cut spending by $61.5 million, or 2 percent.
The new property-tax assessments will set the outlook for next year.


Investors have demanded higher interest rates from Kern County, though it can still borrow for
yields similar to localities with top credit grades. At its annual note sale in June, the county paid
a 0.31% yield on one-year notes, the same as AAA rated debt, according to data compiled by
Bloomberg. A year earlier, it paid about 0.10 percentage point less than benchmark debt.


Such ripples from the oil-price rout may become more common next year, said John Dillon,
strategist with Morgan Stanley Wealth Management.


“Investors need to pay attention to specific issuers in oil production states so they’re not
blindsided in 2016,” he said.


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