State administration officials and legislators are watching oil prices closely, trying to fathom the size of an expected state revenue surplus this year.
Unless world oil prices suddenly crater, which seems unlikely, the Legislature faces the happy prospect of having several hundred million dollars extra to spend this year. The question is how much.
Officially, the state is estimating a $653 million surplus based on an assumed average price of $43.85 per barrel for North Slope oil. Two weeks ago, state revenue commissioner Bill Corbus said the surplus could drop by $183 million if oil prices, and revenues, wind up being lower than expected.
State budget director Cheryl Frasca said the administration's proposals aren't set in stone. "If the surplus is lower than we expect, we'll have to make changes in our plan," Frasca said in budget briefings in mid-December, when the proposals were released.
Murkowski has proposed saving part of this year's possible windfall, about $301 million, to offset future budget deficits when oil prices are expected to be lower.
Legislators will make their final decisions on how much to spend later this spring, when there will be more certainty about oil prices and the size of the anticipated revenue surplus for the current Fiscal Year 2005 budget year, which ends June 30.
In the meantime members of the Finance Committees in both the House and Senate are digging into the details of almost half a billion dollars of new spending proposals by Gov. Murkowski.
State Reps. Mike Chenault, (R-Nikiski), and Kevin Meyer, (R-Anchorage), who co-chair the House Finance Committee, briefed members of the House Republican majority in Juneau Jan. 25 to highlight several concerns with the administration's proposals.
Chenault has responsibility in the finance committee for the state operating budget proposal made by Murkowski, while Meyer is taking the lead for the committee's work on the governor's proposed capital budget.
One worry of legislators is that many of the governor's proposals are for state program increases that will have to be sustained in future years, Chenault said in the briefing.
About $350 million of the governor's proposed new spending increases are for program expansions that will create recurring operating costs. Through inflation, the cost of the increases will be $400 million in fiscal year 2007, the financial year following the FY 2006 budget that legislators will prepare this spring, according to an analysis presented by Chenault to House Republicans.
The state administration admits the increases effectively undo many of the budget cuts made in the first two years of the Murkowski administration. Materials from the governor's office indicate that the proposed 2006 budget is 3.4 percent higher in dollars (without being adjusted for inflation) and an increase of one state employee from the final budget from the previous administration headed by Gov. Tony Knowles.
Another problem legislators are faced with is the need to put more money into the state employee and teachers' retirements funds so they can meet obligations to fund current and future retirements as well as health care costs.
Public employee and teachers' retirement funds saw huge losses during the 2001-02 bear years on Wall Street and have yet to recover.
At the time, the boards governing the retirement funds should have required higher employer and employee contributions to offset investment losses, but they didn't, Frasca said in a December budget briefing. Now the Legislature must inject money so the funds can meet their obligations.
The requirement will add $28 million to this year's budget, Chenault told legislators in the briefings, with similar increases required next year and increases continuing. "These should be considered permanent," he said.
Murkowski has also proposed giving state funds to local governments to help them meet their responsibilities for higher payments into municipal employee retirement funds, but only for the next two years. "By fiscal year 2008 that money will run out, leaving a $60 million hole in local government budgets," Chenault told the House Republicans.
Another cost hitting the state this year, Chenault said, will be a likely $53 million increase in state support for Medicaid, the government health insurance program for the indigent and disabled. Currently the federal government pays 57 percent of Medicaid costs, with the state funding 43 percent. Next year the federal share will drop to 50 percent, requiring an increase in the state's contribution.
The increase is expected to cost $53 million in FY 2006, but at the projected rates of growth in Medicaid spending the following year, the state will pay $70 million more in FY 2007.
Chenault said the Murkowski administration is attempting to get the federal government to hold the federal share at 57 percent, "but there is little reason to think we can avoid this cost," Chenault said.
"We have to plan a budget, and this is a big-ticket item," he told House republicans.
House Majority Leader Rep. John Coghill said there is also uncertainty over how large the increases will be for the state's share of the Medicaid program.
"The supplemental appropriation request for the current year FY 2005 budget, to be submitted soon by the administration, will give an indication of the required increase," Coghill told legislators in the Jan. 26 briefing.
Medicaid is one of the fastest-growing parts of the state budget. State Health and Social Services commissioner Joel Gilbertson told the House Finance Committee in a briefing Jan. 27 that the aging of the state's population and trends related to health care for the elderly are driving the increases.
About 25,000 Alaskans are now under the state-managed Medicaid program, and if current trends continue, a quarter of the state's population will be under Medicaid, Gilbertson told the finance committee.
