Headache and Headwinds - Alaska Permanent Capital Management

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Headache and Headwinds

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I saw a comment that other day that said, “This January has officially lasted longer than all other Januarys combined.”  I was struck by both the absurdity and the truth of the statement.  There’s been an extraordinary amount of local, national, and international news in the last 30 days with the potential to affect Alaska’s economy. Let’s start locally and expand outward.

Funding for Alaska’s Fiscal Year (FY) 2020 budget is $10.66 billion including all funding sources and approved expenditures. However, just a couple weeks ago we found out that the administration was going to have to come back to the legislature for $532.5 million in additional funding.  This half billion dollars includes $270.5 million in unrestricted general funds (the most precious and flexible of our dollars),  $225.9 million in federal funds (the “free” money which we often try to maximize to make our dollars go farther) with a small amount of expenditures from other sources.  When the legislature adjourned this summer after a protracted budget battle, the approved budget included $250 million in “headroom” authorization for the state to draw unrestricted general funds from the Constitutional Budget Reserve (CBR).  Accessing the CBR requires a ¾ vote of the legislature which is why end of session negotiations can be so messy. This headroom is standard in most of our annual budgets as it gives the legislature and the administration flexibility in case of emergencies or unexpected cost increases.  Basically, the legislature says: “Come back and tell us if you need more money, but we’re authorizing these funds now so we don’t have to go through another CBR fight trying to get to ¾ of the legislators.” 

Astute readers will notice that the requested $270.5 million in unrestricted general funds is higher than the $250 million authorized in last year’s budget vote which means the legislature has to find a source of funds other than the CBR, shrink the request, or hold a successful ¾ vote to access the CBR. Of course, much of this state money leverages federal money so shrinking the request has the potential to shrink the injection of federal money into the economy.  You may be starting to sense what spurred the “headache” in the title.

So, where are the bills coming from?  Well, the largest chunk, $306 million, is dedicated to the Department of Health and Human Services for the Medicaid program.  The Permanent Fund Dividend, K-12 education, and the Medicaid program are top three program level expenditures. The FY 2020 budget made a big bet that they could reduce Medicaid program costs quickly and that hasn’t happened.  Alaska has been very successful at reducing per person Medicaid program costs at the state level over the last half-decade, but recession drastically increased the number of enrollees.  It takes time and focused energy to shift such a large program.  Medicaid supplementals aren’t unusual both because of program growth and a tendency to short fund the program so that the Department of Health and Social Services has to come back to ask for more money (and thus subject itself to additional legislative oversight).  The next largest chunk, $110.5 million, is for the Department of Natural Resources to pay for costs associated with this summer’s forest fires and expected increased costs through this spring.   Of course, much of this money will flow into our economy (or has already “flowed” in the case of some fire money) and will create additional economic activity.

There is also some money in the budget for Alaska Marine Highway System, but not enough to correct the conditions that spawned this headline.  We may be out of recession, but this (see below) is also where we are as a state.

The title of the blog references headwinds and as well has headaches.  The headwind that I’m thinking about is originating out of China and has now been officially named COVID-19.  You probably know it as the “coronavirus”. It remains to be seen how much the fight against this novel virus will affect the international, national, and local economies. The biggest challenge right now for Alaska is that oil prices are down 20 percent from their pre-Coronavirus levels to just above $50 a barrel.  An extended dip will affect the state’s coffers significantly and the state’s economy has exposure in other areas such as tourism, fisheries, and air transportation.

APCM is putting together a special commentary on how they see COVID-19 affecting the world’s economy and equities so watch this space for their insights.

Jonathan’s Takeaway:  It’s not the headwinds and headaches that define life. It’s how we pivot from them and move forward. Here’s hoping that these headaches and headwinds will be just a memory by summer.

Jonathan King is a consulting economist and Certified Professional Coach. His firm, Halcyon Consulting, is dedicated to helping clients reach their goals through accountability, integrity, and personal growth. Jonathan has 23 years of social science consulting experience including 16 years in Alaska. The comments in this blog do not necessarily represent the view of employers and clients past or present and are Jonathan’s alone. Suggested blog topics, constructive feedback, and comments are desired at askjonathan@apcm.net.

2/20/20

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