New budget report predicts state savings accounts will be empty by 2021

 Alaska State Capitol in Juneau, Alaska (KTUU)
Alaska State Capitol in Juneau, Alaska (KTUU) (KTUU)
Published: Sep. 14, 2018 at 6:17 PM AKDT
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In a warning to legislators, the nonpartisan Legislative Finance Division says the state’s budget battles don’t appear to be over.

In a 10-page report, David Teal, Director of Legislative Finance, says the same level of state services this year will cost $200 million more next year.

And that doesn’t count Permanent Fund Dividends.

State spending has been one of the most contentious issues in the Legislature, with arguments over the budget inside each caucus, between the majority and minority caucuses in the House and Senate, and between the House and the Senate themselves. The budget — and how to pay for Permanent Fund Dividends — is looming as a major issue in the Alaska governor’s race too.

How the dividend will be calculated is liable to be “the primary issue of the 2019 legislative session,” Teal said in the report.

“The document sort of points out the fake budgeting that goes on during campaign cycles,” said Rep. Les Gara, D-Anchorage, a long-time member of the House Finance Committee who is retiring this year.

Eagle River Republican Anna MacKinnon, a retiring co-chair of the Senate Finance Committee, referred questions to the other co-chairman, Bethel Democrat Lyman Hoffman. An aide said Hoffman was on personal leave and unavailable.

Teal’s report, an assessment of next year’s impacts from decisions made by the Legislature this year, was released last month. It was reported first in a blog post by journalist Dermot Cole of Fairbanks.

In the report, Teal says the Legislature produced a reduced budget last session by only paying 75 percent of the annual cost of new state prosecutor and trooper positions. While recruiting for those slots meant the full amount wasn’t needed, the “preferred” practice is to budget for the full amount, then reduce it in a supplemental budget during the fiscal year, Teal said.

Fully funding those positions will appear to be a budget increase next year.

Far more money — about $100 million — was shorted for Medicaid, the report said.

In the 2018 budget, Gov. Bill Walker requested a Medicaid budget of $580 million, “which was $45 million less than projected costs.” The Legislature further reduced the amount by $16 million, Teal noted, leaving the program short some $61 million.

Later, in a supplemental appropriation, the Legislature provided $73 million of an administration requested $93 million for Medicaid. That, coupled with the state’s payment of past-due claims and a surprise $15 million shortfall in federal reimbursement because new state software wasn’t certified on time, meant that the fiscal year that started in July “began with a projected shortage of $67.8 million.”

There’s trouble in the capital budget too, according to Teal’s report. While it’s normal for the Legislature to scrounge for unspent money from other projects to help make up the capital budget, “with each passing year, the search for available money becomes more difficult,” the report said. It predicted only half of the $52 million spent in the past session will be found this year.

Some treatment funds are also in trouble, with spending at “unsustainable levels.” The report cited the alcohol and other drug abuse treatment and prevention fund and a tobacco-use education and cessation fund. Cigarette-tax revenue is declining, the report said.

Calculating the Permanent Fund Dividend is also sure to be a hot topic, the report said. Using the standard formula, the dividend for every man, woman and child in Alaska would be about $3,000 next year. The report questioned whether that amount was even possible.

The current year’s dividend will be $1,600 after the House briefly set a standard dividend of $2,700.

“The appropriation for dividends (this year) was a negotiated amount that was inconsistent with statute,” Teal’s report said, referring to the $1,600 dividend.

“Using the latest available official projections of revenue and expenditures, paying statutory dividends generates deficits between $1.4 billion and $1.8 billion each year from fiscal year 2020 through fiscal year 2027,” the report said. After draining the state’s two major “rainy day” accounts, the constitutional and statutory budget reserves, the report said the state’s “fiscal model breaks down.”

The report predicted the savings accounts will be empty in 2021.

While tinkering with the formula for paying dividends could reduce the annual payout by $1,000 and “improve” the situation, “the deficits would remain unfilled without tax increases or expenditure reductions,” the report said.

Balancing the budget without changing taxes or reducing spending would require a dividend of roughly $1,200, the report said.