Alaska’s financial situation heading into the Gov. Mike Dunleavy’s second year in office is looking even worse than his first.
The state’s revenue projections, released on Friday afternoon, anticipate that oil revenue will decline by about $200 million over the coming year, which brings the state’s anticipated deficit to $500 million in the upcoming year. The decline Is expected to continue into the following year, based on the projections.
The decline is based on a combination of slumping oil prices, dropping from an average of about $69 per barrel last budget year, to $63.54 in the current budget year and $59 per barrel in the following. Production is also anticipated to decline during that time.
Much of that is out of state lawmakers’ hands, but it will put additional pressure on the governor and the Legislature as they consider additional cuts, potential new revenues and the size of the PFD in the upcoming legislative session.
But that won’t be the only financial headache lawmakers will be dealing with in Juneau.
Budgeters for both the Dunleavy administration and the legislative finance division say they anticipate a record-setting supplemental budget this spring. Supplemental budgets are typically passed in the spring to cover unanticipated holes in the current year’s budget.
In recent years, those budgets have covered higher-than-expected fire fighting costs or the Legislature’s intentional underfunding of Medicaid. It looks like it’ll be doing the same this year, and it could potentially erase more than half the cuts made by the Legislature and Dunleavy in this year’s budget.
The biggest chunk looks like it’ll come from Medicaid.
This year’s budget severely underfunded the state’s portion of Medicaid spending through a combination of what legislators thought were manageable cuts in one year—about $70 million—and additional vetoes delivered by Dunleavy that pushed beyond that level—another $90 million bringing it to $160 million total.
According to the latest report by the Anchorage Daily News delving into this issue, it appears that what legislators thought would be manageable—about a $70 million cut—might not be achievable.
The administration has already delayed some of the cost-savings changes that were planned when the cuts were made, some of the cuts to provider reimbursement were delayed by a lawsuit and the elimination of the adult dental benefits program was delayed by a quarte of the year.
“Because of those issues,” reports the ADN, “the finance division expects Medicaid spending to drop by only $60 million, and possibly as little as $10 million.”
Whatever the difference between that and $160 million will need to be repaid because Medicaid spending is driven by a federal rules and regulations. If a person with Medicaid coverage uses the program, then it must be paid.
This is precise problem that many raised when the governor was proposing deep cuts to Medicaid. Such deep cuts, many said, would require the state to kick people off Medicaid or reduce benefits, but the administration shied away from such a potentially fraught political issue and leaned on less-certain reductions like seeking efficiencies and waivers from the federal government.
Those changes, as legislators expected, weren’t achievable in a single year and now they’ll be on the hook to find the money to cover it.
It’s not a unique problem, either, the last budget signed by Gov. Bill Walker required a supplemental budget to be passed to cover the final months of the fiscal year. That supplemental budget, itself was delayed, raising fear among providers that their bills would go unpaid while still having to provider services.
While legislators and the governor will have no one but themselves to blame for the additional bill for Medicaid, the state is also anticipating a big bill from this year’s round of firefighting.
According to the latest tallies, the state has racked up $224.9 million in firefighting expenses for 2019 though it only has $25.6 million budgeted for the expense. The state can get some of those bills covered by the federal government, but it may take years for such funding to arrive.
There’s other costs on the horizon, too, like community aid, oil and gas tax credits, the state’s retirement system, prisoner relocation and continued fallout from the 2018 earthquake.
Why it matters
It should be no surprise, but budgets aren’t written in stone. They can and do change pretty wildly throughout the year with shifts in revenue running up against additional costs—both expected and unexpected ones.
The supplemental budget has also long been home for some creative budgeting on the part of legislators and the administration, a vehicle to shrink the main budget that everyone pays close attention to into a budget that many have long seen as a boring formality.
That’s changed in recent years as legislators have balked at big supplementals for Medicaid, but it hasn’t dramatically changed behavior when it comes to supplementals.
All told, the Legislative Finance Division estimates the cost of the upcoming supplemental to be near $200 million but as high as $300 million. If that’s right, it would erase a vast majority of the $390 million in cuts approved by the Legislature and Dunleavy.