Walker faced with widening deficit scenario

  • By TIM BRADNER,
  • Sunday, December 14, 2014 9:32pm
  • News

Gov. Bill Walker faces a grim budget scenario that may distract the new governor from other priorities, like a natural gas pipeline and an expansion of Medicaid.

A template of a proposed fiscal year 2016 budget will be released Dec. 15, as required by law, but it will be empty of the real numbers Walker will propose to the Legislature in late January, the deadline for an amended budget.

Walker released former Gov. Sean Parnell’s “work in progress” capital and operating budgets Dec. 5 but warned that changes are coming.

The Parnell documents reflect the frustration state budget officials will have in controlling growth of the operating budget while also making cuts to the capital budget.

The total budget of state funds for capital spending was $349.8 million in Parnell’s plan, including unrestricted general funds, designated funds and other state funds. About $1.06 billion in federal pass-through funding, mostly for transportation projects, brings the total capital budget to $1.4 billion.

Although the Parnell budgets are documents for planning only, they show an operating budget expenditure of $10.1 billion in state general funds, an increase over $9.85 billion in total state funds in the current fiscal year 2015 budget.

Parnell did reduce the expenditure of state general funds by 3.8 percent mostly through reductions in personal services, which were undesignated, but “designated” general funds mostly for state formula programs like Medicaid and education were up 5.3 percent and funding for programs funded by “other state funds,” a catch-all category, was up 22 percent.

Federal funds administered through the Parnell operating budget were increased slightly from $2.019 billion for the current year to $2.027 billion for next year. Overall spending in the total budget including all categories would rise 2.1 percent from $11.88 billion to $12.13 billion, according to the budget document.

New state budget director Pat Pitney said the operating budget to be submitted Dec. 15 will be the work-in-progress budget document Parnell prepared, but that a capital budget document prepared by Parnell will be changed, mostly by reducing or eliminating capital project funds the former governor had proposed.

Walker will submit a new capital budget in late January along with a new operating budget.

The state’s fiscal situation will require lean spending plans. A revenue projection prepared by oil and gas consultant Brad Keithley and University of Alaska Anchorage economist Scott Goldsmith predicts that at lower oil prices the current year budget deficit could double to $3 billion if oil prices were to average $80 per barrel for the fiscal year.

Keithley and Goldsmith prepared their analysis for Walker’s transition teams. It was presented to the team Nov. 22. If oil production continues to decline by 5 percent annually, the historic average until last year when production was flat year-to-year, and spending continues at current rates, the state’s cash reserves will be drained by the end of fiscal year 2018, according to the analysis.

However, the price of North Slope oil hit $63.67 per barrel Dec. 9 and if the price average for the year winds up being less than $80, the deficit will balloon further, according to the analysis prepared by Keithley and Goldsmith.

Meanwhile, Parnell’s work-in-progress capital budget includes state matching funds for federal programs supporting highways, airports and village safe water projects, much of which Walker is likely to include in his proposal.

Some hot-button items were in the Parnell capital budget, like $20 million in continued funding for permitting work on the big Susitna-Watana hydroelectric project.

Some $8 million was also included for continued permitting and planning work on the Ambler resource access road, which could be built from the Dalton Highway to mineral exploration areas in the western Brooks Range.

The budget also did not include any money for the Knik Arm crossing, a large project in the advanced planning stage, or the extension of the Alaska Railroad from the railroad’s main track line near Houston to Port Mackenzie on Knik Arm of upper Cook Inlet.

The rail extension is being built in phases, with some phases now under construction.

Village safe water projects would total $51.5 million with the state contributing $8.75 million.

This is a long-running program that is installing water and sewer systems in rural communities still on unsafe “honey buckets” sewage disposal as well as upgrading projects installed years ago.

Since the bulk of these funds are federal the state money is likely to survive in a Walker budget.

Another $9.98 million is for municipal grants for water, sewage and solid waste that is all state-funded. Because there are no federal funds this item will be carefully scrutinized.

Another capital budget state program assisting municipalities is the Municipal Harbor Facility Grant Fund. Parnell proposed $10.4 million in state funds in his budget but there are no federal funds so this proposal will be looked at by Walker.

Although it is part of the operating budget, municipalities will also be watching state funding for municipal revenue sharing. Parnell put $60 million into his fiscal year 2016 operating budget, up from $52 million in the current 2015 budget.

State funds totaling $50 million are pledged as the state match to the federal highway program and another $11.7 million is included as a state match to federal aviation funds. Total surface transportation program funding is proposed by $625 million including the state match, while $210 million is proposed to airport funding including the state match.

These funds will almost certainty stay in the budget.

Parnell also proposed $5.09 million for continued Dalton Highway improvements and while this is a state-funded initiative the importance of this road, which is the vital surface transportation link to the North Slope oilfields, means that the money will likely remain in a Walker budget.

A substantial outlay by the Alaska Housing Finance Corp. of $43.2 million is in Parnell’s budget for grants for public housing, homeless assistance and special needs housing, with most of this supported by federal funds.

As with rural sewage and water, the state portion for these AHFC programs is likely to remain.

However, Parnell proposed $10 million in state funds to continue funding the popular AHFC home energy rebate program, where there are no federal funds, but also zeroed out the AHFC weatherization assistance program.

These allocations could change because the home energy rebate program mainly benefits urban residential owners while the weatherization assistance mainly benefits rural communities.

Given the new sensitivity to rural Alaska in the Walker administration it is likely that some weatherization money will be in the governor’s budget, or if not will be put there by rural legislators.

The Parnell capital budget also includes $38.8 million in major school maintenance project grants, a budget item that recurs almost every year, but no capital funds for new school construction.

There is one rural school left to be funded — Kivalina — in an out-of-court settlement the state agreed to with a group of rural parents in the Kasayulie v. State lawsuit, but the construction of a Kivalina school is delayed by the need for an access road to a new school site for the community.

Other rural schools agreed to in the settlement have been funded and are now in construction.

The Parnell capital budget did include $4.6 million in state funds for Kivalina school design and another $2.5 million for the access road.

If the Kivalina school rebuild is not funded in total within a year or so it may result in a default in the state settlement and a reopening of the Kasayulie lawsuit.

The Legislature ultimately must approve the governor’s budget, almost always with changes.

Tim Bradner can be reached at tim.brander@alaskajournal.com.

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