There's good news and bad on the state budget front. The good news is that record oil prices have reduced the expected draw from the state Constitutional Budget Reserve to about $41 million, says state budget director Cheryl Frasca.
The bad news is that the long-term state fiscal gap will be worse than expected because of higher spending on Medicaid and funding to prop up the state public employees retirement system, which was hit hard by losses in the stock market in 2001 and 2002.
Frasca said the final budget for state fiscal year 2005, which begins July 1, ended up at $2.33 billion, with a projected deficit of $358 million.
The problem really begins in FY 2006, beginning July 1, 2005, according to new estimates by the state Office of Management and Budget, which Frasca manages, and the Legislative Finance Division.
Contributions to public employee and teachers' retirement systems and higher Medicaid will push spending levels up faster than expected, according to both agencies.
What was expected to be a $536 million deficit for FY 2006 is now expected to be $882 million, according to Frasca.
The Legislative Finance Division, looking further into the future, estimates additional costs of $567 million in 2010, swelling what was projected to be a $953 million budget gap that year to $1.52 billion. The division, the fiscal-analysis group that supports the Legislature, prepared its analysis in March.
Medicaid is the state-managed health care system for the indigent and children, and its costs are increasing faster than expected mainly because the federal share of the program's expenses are being reduced.
Costs to support retirement programs for state workers and teachers will also be higher, according to the analysis by the OMB. The state is having to increase contributions to make up for losses in the portfolios of the retirement programs when stock markets took a plunge three years ago.
When the increases are added to other new costs, such as those incurred under new state labor contracts, what was to have been a $536 million budget deficit in FY 2006 has become a deficit of $882 million, according to the analysis.
The projection assumes $1.77 billion in revenues with oil prices of $25.85 per barrel, the latest estimate by the Department of Revenue for the FY 2006 budget year.
Frasca said the "base" spending figure is assumed to be $2.3 billion, which is Gov. Frank Murkowski's requested budget for the upcoming FY 2005 budget year, plus $82 million in increased state money to schools and the university approved by the Legislature this year. Using just those numbers, the difference between spending and revenues, the fiscal gap, would be $536 million for FY 2006.
But the increased contributions to the retirement programs and Medicaid, as well as other costs, will add $346 million to the FY 2006 budget, increasing the deficit to $882 million, Frasca said.
The costs of the additional retirement contributions will add $90 million, including $29 million for state of Alaska workers, $22 million for municipal employees who participate in the state-managed public employees retirement system, and $39 million for school workers covered under the state-managed Teachers Retirement System.
Medicaid increases will add an estimated $110 million, resulting mainly from a change in the percentage of costs shared by the federal government from 60 percent to about 50 percent. Increases in costs of other state "formula" programs - which, like Medicaid, are programs where spending levels are set by formulas in state statutes - will add another $50 million to the budget.
There are also additional costs expected from reimbursement of school debt issued by local school districts and other state debt, which will add $20 million to FY 2006 costs, according to the OMB analysis.
Recently negotiated labor contracts will add $11 million, and another $65 million will be needed to replace one-time funds used to finance parts of the FY 2005 state capital budget, the part of the state budget that supports construction.
All of the new costs add up to $346 million. Frasca said the overall budget gap projection of $882 million assumes some earnings of invested funds in the Constitutional Budget Reserve that will offset some of the deficit.
The CBR fund is the state's main ready cash reserve. It now holds about $1.9 billion and is used to fund annual budget deficits the state has incurred since 1991.
