Summer fires caused Alaska state expenses to surge this year, diminishing budget cut

Last summer’s wildfires and the high cost of health care for sick Alaskans will erase much of this year’s work to balance state revenue and spending, new estimates indicate.

Gov. Mike Dunleavy and Alaska lawmakers slashed the state’s operating budget by almost $390 million this year, but projections from the nonpartisan Legislative Finance Division and information from state agencies indicate that lawmakers will be asked to add back $200 million or more to pay for Medicaid and firefighting.

“That’s going to be one of the largest supplemental budgets in anyone’s memory, if not in the history of the state,” said Speaker of the House Bryce Edgmon, I-Dillingham.

The state can automatically use up to $250 million from savings to cover the expense, but with oil revenue running below expectations, the state’s last remaining savings account, the Constitutional Budget Reserve, will dwindle much more than expected. That means fewer options for the state’s leaders when debate begins on next year’s budget.

“There definitely are some unanticipated costs, some reductions we had hoped to achieve and weren’t able to achieve despite our best efforts,” said Laura Cramer, deputy director of the Office of Management and Budget.

The finance division, which operates under the instruction of the Legislature, suggested that the add-back could be near $300 million, but Cramer — who works for the governor’s finance team — said that number “is probably a little on the high end."

[Fighting Alaska’s wildfires cost over $300 million this year]

The new expenses will appear in the state’s supplemental budget, an annual document that reconciles the state’s budget with what it actually spends during the fiscal year. Cramer said OMB will release a preliminary request next week.

It’s common for the state to add expenses in the supplemental budget, but this year’s supplemental budget will be unusually large.

In the final year of Gov. Bill Walker’s term of office, for example, lawmakers and the governor agreed to spend $4.57 billion in tax dollars and Permanent Fund earnings to fund the operations of state government. Lawmakers and Dunleavy added about $80 million to that total with the supplemental budget.

This year, lawmakers and the governor agreed on $4.18 billion in spending from state dollars, not counting federal spending and fee-funded programs.

One of the biggest differences between last year’s budget and this year’s is the amount spent on Medicaid, the federal-state health insurance program that cares for two-fifths of Alaskans.

For each of the past nine years, the state has spent at least $600 million of its own money on Medicaid.

The federal government pays between two-thirds and three-quarters of the cost of the program, which operates under federal standards that restrict the state’s ability to cut it. If an Alaskan needs care and has Medicaid, the bill must be paid, regardless of what’s budgeted.

To reduce Medicaid expenses, states generally must deliver care more efficiently, eliminate services or reduce the number of people on Medicaid. This year, the Alaska Department of Health and Social Services unveiled a list of service cuts and efficiency improvements intended to reduce Medicaid costs by about $103 million.

But the budget passed by the governor and legislators cut Medicaid by $160 million, and the health department hasn’t been able to make all the changes it planned. Cuts to hospital payments were temporarily blocked by a lawsuit, the elimination of adult dental benefits was delayed, and some efficiency measures won’t take place until after the new year.

Because of those issues, the finance division expects Medicaid spending to drop by only $60 million, and possibly as little as $10 million.

If that happens, the state’s Medicaid program does not have enough money to pay doctors, even though those doctors are legally required to treat Alaskans.

This summer’s ferocious wildfire season is another major concern in the finance division report. Since the state’s fiscal year began July 1, the Alaska Division of Forestry has spent $173.4 million fighting wildfires, far more than the $25.6 million budgeted. Much of the state’s expense — about $67 million — will be reimbursed by the federal government, but the state still needed to pay up front.

“It’s an expense we have to pay, and it’s something we’re going to pay,” Cramer said.

The finance division also speculated that the state could spend an additional $30 million on aid to communities and $70 million on tax-credit payments to oil and gas drillers, but those expenses are theoretical. Cramer said the Medicaid and firefighting numbers are “a bit more predictable.”

“I would say those numbers are closer to accurate, for sure,” she said.