Report: Maintaining service levels would leave state short $200 million next year

Legislative Finance Division Director David Teal speaks during a House Finance Committee meeting in February 2017. A report by the division said the state will have to pay $200 million more next year to provide the same level of services. (Photo by Skip Gray/360 North)

Some candidates for governor and the Legislature say they’ll cut the state budget next year. A recent report by the Legislature’s analysts shows why that may be difficult — the state will have to pay more next year for the same level of services as this year.

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The state budget this year includes several items that will raise costs by $200 million next year, according to the Legislative Finance Division. They’re the experts who provide nonpartisan budget analysis for lawmakers.

David Teal, the division director, said the report lets lawmakers know that some of the things the Legislature did this year can’t be repeated.

“It’s a heads-up to the finance chairs and to other legislators that what they did with one-time money, etc., in the prior session can leave some holes,” Teal said.

The biggest hole will be from Medicaid. This year’s budget includes $50 million less than the program is projected to cost. Teal said there isn’t much state officials can do to avoid this cost.

“If you’re eligible and you go get medical services, the state’s obligated to pay those costs,” Teal said. “And you can’t simply tell someone: ‘Spend less,’ because … the bureaucrats don’t control the costs.”

The second biggest budget hole is from the pension obligation. Based on the latest numbers, the state should contribute $38 million more next year to shore up government and school workers’ pension funds.

Another problem is that the Legislature won’t be able to draw on some funds that it used this year. An example is a program that has phased out: the Alaska Comprehensive Health Insurance Fund. There was more than $30 million left in this fund that the Legislature used to pay for other costs. Teal said this was understandable.

“We’re not pointing any fingers at anyone for doing these things,” Teal said. “Some of them are perfectly normal, you know, good ways to spend money. They’re just not repeatable.”

Sitka Republican Sen. Bert Stedman asked for the report. He’s the chairman of the Legislative Budget and Audit Committee. He said the report makes the true size of the budget clearer.

“If you can’t clearly see the problem, it’s difficult sometimes to get the correct solution,” Stedman said.

Stedman said the report highlights the challenge of cutting the budget.

“So the likelihood of the Legislature going in and removing required expenditures … well, it’s going to be politically challenging – put it that way,” Stedman said. “And we haven’t had that discussion yet in the Legislature.”

The report points out an even bigger challenge for balancing the budget in the future. In addition to paying out the $200 million spelled out in the report, it would cost nearly $900 million more to pay the full permanent fund dividends under the formula in state law.

Teal noted that the Legislature passed a law drawing from permanent fund earnings to pay for state government services.

“As soon as we begin drawing from the earnings of the permanent fund and using them for government services, then the dividend competes with those other government services,” Teal said. “There’s no difference mathematically between paying dividends and spending money on K-12 or Medicaid.”

Here’s the 10-page report.