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As Gov. Mike Dunleavy prepares the state administration’s budget for next year it appears spending increases of $300 million or more are already “baked in” from the current year budget.
This means that if the governor wants to trim the budget another $300 million he must first absorb the $300 million in additional spending inherited from this year before attempting, legislative finance analysts and legislators say. That means a $600 million reduction to achieve the target.
While this is sobering, the good news is that a mechanism to draw a part of the Permanent Fund’s annual income to help fund the state budget is working well, David Teal, director the Legislative Finance Division, told Commonwealth North, a business group in Anchorage.
This adds important stability to the state’s finances that were previously mainly dependent on volatile oil income, Teal said.
State unrestricted general fund operating appropriations total $4.18 billion this year, Fiscal Year 2020, down 10 percent from $4.64 billion for last year, Fiscal Year 2019.
A $75 million shortfall in the state Medicaid budget is now expected, Teal said. The governor vetoed funds for Medicaid but expenses have continued to increase because services to lower-income Alaskans enrolled in the program are mandated by federal law. This creates the shortfall.
Another $100 million increase in pension payments will also be required due to a change is assumed earnings on invested public pension funds. More state money will also be needed for repairs from the November, 2018 earthquake, and the state’s share of the tab for 2019 summer firefighting is still unknown.
That’s not all: The Legislature made decisions in funding the current year budget that will complicate its task next year. The state capital budget, for example, was funded the Constitutional Budget Reserve, a savings account, instead of from general fund revenues, the traditional practice.
If lawmakers again decide to use this procedure for an FY 2021 capital budget it will further deplete savings. The state depends on the CBR, which now has about $2.3 billion, as an emergency reserve as well as to fund day-to-day expenses during the year, such as for payroll.
Similar, funding for the governor’s anti-crime package of bills is coming, this year, from the Power Cost Equalization or PCE fund, a savings account used to stabilize electricity rates in rural communities.
Funds for those programs will have to come from the general fund next year, which will add to the FY 2021 budget, unless legislators decide again to fund them “off budget” from the PCE fund or other savings.
Despite all this, there is some good news, Teal said. Whatever else is said about state finances and the budget, the annual percent-of-market-value draw on Permanent Fund earnings now authorized in state law is a huge positive.
The amount paid now from the Fund earnings, and projected forward, exceeds the expected state oil income. Now more than half the state budget, or the Undesignated General Fund portion of it, has a revenue source that is more predictable than petroleum, Teal said.
The “POMV” draw this year is $2.9 billion and given the projected returns of the Permanent Fund the draw should reach $3 billion a year and slowing rise, he said. That looks secure for the near-term at least, unless there’s a meltdown in financial markets like what happened told in 2009.