Grim budget math laid out for legislators

Despite the Legislature’s efforts to hold the line on spending the state budget is being pushed up by continuing cost increases in health care and other causes, which makes lawmakers’ task to close a continuing multi-billion-dollar budget gap more difficult.

State budget director Pat Pitney said that if the historic trends in health care and education spending continue, the state’s Unrestricted General Fund budget is forecast to increase from $4.36 billion this year to $4.75 billion next year and to $4.9 million the year after,

Pitney spoke to the Senate Finance Committee last week. While the Legislature has convened its special session in Juneau the Senate committee held several days of hearings in Anchorage.

Pitney said the big “drivers” in the budget increases are the state’s expenditure for health care, for active state workers and retirees, including municipal and school retirees, as well as Medicaid, the health care program for low and moderate income Alaskans where the state picks up part of the tab.

However, budget increases anticipated next year now estimated at between $347 million and $388 million, are due a variety of reasons, including an additional $40 million for the state ferry system; $108 million in additional funds to public employee pension funds and $118 million for oil and gas tax credit refunds to companies, although this program is ending.

State funds for Medicaid may have to increase between $76 million and $32 million, however, and state education spending is projected to rise $17 million. There are always expenses for forest firefighting, too, which can never be known in advance.

Pitney said state health care spending has been rising at over 5 percent yearly, and the rate for Medicaid alone is 5.7 percent yearly. Medicaid expansion under the Affordable Care Act, a controversial initiative ordered by Gov. Bill Walker, has not added significantly to state costs because the federal government picks up most of the tab for the expansion.

However, the state now spends about $1.2 billion yearly for all health care and it is one of the top two expenses for the state along with K-12 education spending, Pitney said. Education costs, mostly for K-12 school funding provided to school districts, has been growing at 4.6 percent yearly.

“Several possible scenarios could widen the budget gap by hundreds of millions of dollars,” Pitney said. “If healthcare costs, including Medicaid, grow at historic rates rather than simply tracking inflation; if K-12 costs rise at historic rates that than tracking inflation, if the federal government shifts health care costs onto the states, if there is a major disaster or if a market crash hinders the Permanent Fund’s ability to generate returns. Just one of these items changes the picture significantly,” she told the senate committee.

Pitney said that if the growth of health care spending, now at about 5.25 percent yearly, could be slowed to 2.5 percent, which is approximately the current inflation rate, the cost to the budget could be reduced by $200 million per year. If cost increases could just be slowed to 3.5 percent the savings could be $100 per year, she said.

Whether those reductions are realistic is uncertain, “Getting to 2.25 percent will require a major reform effort,” in state health care policies, she said. Those could include cuts in medical benefits to state workers and reductions in payments to health care providers, all of this complex and politically difficult. Retirees’ healthcare benefits in Alaska cannot be changed under current law.

One uncertainty in the health care cost projection is the possible changes on the federal level ordered by President Donald Trump, which could add $100 million per year to the state’s costs, Pitney said.

There are some possibilities for reducing state health costs. The state administration recently released a series of consultant reports which indicate savings if the separate health benefit plans of school districts, and possibly municipalities, were consolidated with the state’s health benefit plan for is employees and retirees and possibly even combined with Medicaid.

The Legislature will consider those ideas in the 2018 session but they are likely to become controversial. Some school districts and local governments may fight to keep control of their own benefit plans along with public employee unions who now administer their own plans that are separate from that for state workers not in bargaining units.

Meanwhile, on the state budget gap Pitney told the senate committee that the FY 2018 (current year) projection is for a $2.5 billion deficit, between revenues and spending. Sen. Anna MacKinnon, R-Eagle River, said there will be insufficient funds in the the state’s main cash reserve, the Constitutional Budget Reserve (CBR), to cover a deficit of the same amount next year, which will occur unless there are new revenues.

“To cover this the Legislature will have no choice but to appropriate money from the Permanent Fund’s earnings reserve,” MacKinnon said.

The Legislature is considering a major change in the state’s fiscal system to deal with the deficits, which have been recurring for several years and which are fast depleting the state’s ready assets. The centerpiece of this is Senate Bill 26, which would use a portion of the Permanent Fund’s annual income to fund the budget, while also preserving a scaled-down Permanent Fund dividend.

Both the Senate and the House passed separate versions of SB 26 during the regular 2017 session, but a consolidated version has not yet been approved, and that will likely wait until the 2019 regular session that begins in January.

The Permanent Fund has been earning substantial returns, with $3.7 billion in cash income during the current year. Under SB 26 about $2 billion would be available for the state budget. That wouldn’t entirely erase the deficit, and Gov. Bill Walker has proposed a new “wage tax”, a levy on earned income, to bring in additional revenue.

Pitney told the Senate Finance Committee last week that if some version of SB 26 is enacted in the special session or regular 2019 session the deficit could be reduced to between $600 million and $800 million, depending on the version of SB 26 finally adopted.

If the governor’s proposed “wage” tax is adopted during the special session or the 2019 regular session this could be reduced by another $300 million. Adoption of a proposed increase in state fuel taxes, also proposed by the governor, could reduce the remaining deficit by a further $70 million, approximately.

If SB 26 or a variation of it is not adopted, and no revenue measures are approved, the deficit would be $2.73 billion in FY 2019; $2.83 billion in FY 2020 and $2.81 billion in FY 2021, Pitney said, and that assumes a status-quo budget.

During the hearing last week Pitney and Sen. MacKinnon said it is important not to drain the CBR account completely, along with another cash account that is already largely depleted, the Statutory Budget Reserve, although this would happen next year if a new revenue measure like SB 26 not approved.

“Preserving a minimum savings balance of at least $2 billion in the CBR or SBR is essential given our state’s size and revenue volatility,” Pitney said. The CBR account is used by the Department of Revenue for state cash management but also must hold reserves for contingencies, to deal with unexpected events, she said.

“Annually the state has large cash expenditures early in the fiscal year prior to revenues being collected that requires more than $1 billion,” she said. In addition, another $1 billion should be kept on hand as reserves for major natural disasters, such as earthquake, fire or floods. Five billion would actually be more prudent,” Pitney said.

The state can always borrow short-term for contingencies but this is expensive. To keep a $2 billion reserve in the CBR some version of SB 26 should be passed in 2019 to allow Permanent Fund earnings to be used for the budget. This would prevent the CBR from being drained.