Alaska fiscal crisis threatens some of Walker's plans

Bill Walker recently became Alaska's governor under some of the worst possible conditions, with plunging oil prices tossing the budget into record-deficit territory.

Now, he and state legislators are scrambling to find savings for a potential $7 billion loss over two years, a gap so huge that every man, woman and child in the state would have to cough up more than $9,000 to close it.

The state still has substantial savings to plug the hole for now but Walker has called the problem a "paradigm shift" that will overshadow his every step. And it's not the only problem he faces. Here's a look at some of the challenges he'll encounter as he moves to implement some of his goals and protect the economy.

Expanding Medicaid

The budget crisis may already be having a ripple effect on one of Walker's key promises, expanding Medicaid to include 40,000 Alaskans without health insurance.

Walker had said during the campaign he'd do that immediately, but it's not so simple. With lawmakers in a cutting mood, it might be impossible.

Walker's new health commissioner, Valerie Davidson, said expanding Medicaid is an excellent return on investment for the state. Studies, including one initiated by the Parnell administration, showed that with federal support between 90 percent and 100 percent over seven years, Medicaid would cost the state tens of millions of dollars.

But it would bring in at least $1.5 billion.


Key House and Senate leaders, who must agree to accept and spend the federal funds, say they're eager to hear Walker's ideas on expanding Medicaid. But with the state losing millions of dollars daily, they warn that now may not be the time to incur additional costs.

Senate President Kevin Meyer, R-Anchorage, said growth in one area necessitates cuts in another.

"I don't know where you cut to make up that difference and still make reductions," he said of expanding Medicaid as well as boosting education spending, another Walker goal but one that was conditioned on a healthy budget.

House Speaker Mike Chenault, R-Nikiski, said he had the same concerns. You can't give money to large cost drivers such as Medicaid and education and still cut the budget, he said: "It's just impossible to do."

Davidson said talk of expansion in the Legislature will go hand in hand with Medicaid reform that will seek to bend down the cost curve of a program that now runs the state about $700 million.

"We recognize the Legislature is our partner in this, and we want to make sure we work with them to manage the cost-spend in Medicaid through meaningful reform in a way that doesn't unnecessarily impact families and Alaskans," she said.

Medicaid expansion will have a similar economic impact to state spending on transportation projects that bring a 9-to-1 return from the federal government. It will also have a health benefit, she said.

"We continue to pay for runway improvements and road improvements because we recognize this infrastructure investment is important to build the Alaska economy and Alaska businesses," Davidson said. "We need to think about investing in the health of Alaskans as another important infrastructure investment."

Cutting the budget

This might sound like an easy thing to do given the staggering deficit.

But Walker will have to tread carefully. He promised a balanced budget during the campaign -- when oil prices were much higher -- but doing that would require slashing state spending by more than half. That would devastate the economy.

"We need to do a slow glide to the ground instead of a crash landing," said Sen. Anna MacKinnon, R-Eagle River, co-chair of the Senate Finance Committee.

On the other hand, finding substantial cuts may not be easy.

The once-huge capital budget is expected to be carved to its bones after this legislative session, leaving little more than the $100 million needed to pull down some $1 billion in federal funding for transportation projects.

The expected savings if that budget is reduced might be more than $400 million. But the estimated annual deficit will remain above $3 billion if oil prices remain as low as they are.

The next target is the $5.5 billion operating budget, with its massive expenses for health care, education and retirement. But those areas are protected by strong constituencies that supported Walker, making cuts politically challenging.

Budget hawks say reducing health care costs is key. One idea that could possibly save tens of millions of dollars is targeting health care procedures to ensure that services for which the state pays are actually making a difference, said Deborah Erickson, executive director of the Alaska Health Care Commission.

Some procedures may not be effective and might do more harm than good, Erickson said: "Overuse of imaging services and exposing patients unnecessarily to radiation is one issue."


Davidson said she's eager to work with lawmakers to implement measures that will reduce health care costs but added that it is too early to say specifically what paths would be taken. However, she said she will pursue ways to increase people's access to preventive care, in order to reduce much more expensive emergency-room visits.

Walker also said during the campaign he'd stop funding for the Alaska Stand Alone Pipeline, calling it uneconomic and an $8 billion redundancy to the state's larger Alaska LNG gas line project.

The Legislature has committed $419 million to that effort through 2016 but it has the support of politically powerful lawmakers such as Rep. Mike Hawker, R-Anchorage, whose support Walker may need.

Generating new revenue

Economists say diversifying revenues to supplement Alaska's oil-dependent budget would help protect Alaska's massive savings and stabilize the economy.

But that could involve taking unpopular steps such as implementing the first state income tax since 1980, creating a broad-based sales tax or tapping the earnings of the $51 billion Permanent Fund.

Walker said diversifying the state's revenue stream is a top goal but he didn't say how. He's also said recently that he's focused only on cuts.

That might be a wise move for now. Any politician worth his or her weight remembers 1999, when Gov. Tony Knowles and lawmakers asked voters for their views on a plan to use a portion of the Permanent Fund earnings to pay for state services. The plan would have reduced the annual dividend check. Alaskans rejected the referendum 83-17, beating the idea to death.

As for a personal income tax, Alaskans begrudgingly supported that idea in 2004, polls showed, but only after years of deficits and mounting cuts under Gov. Frank Murkowski.


But a funny thing happened. Oil prices rose to $35 a barrel and eventually much higher, saving Alaska's skin.

Now, MacKinnon said, most Alaskans want spending cut further before they're asked to pay up.

"Many believe there is waste in government," she said.

Still, the state needs to seriously consider diversifying its income, said economist Gunnar Knapp, director of the Institute of Social and Economic Research.

But the first step is convincing people there's a problem, and that won't be easy, he said. With more than $12 billion in the bank to fill deficits, reality may not sink in until road plowing, troopers and other critical services begin to disappear, Knapp said.

"It's like saying I don't want to get in the lifeboat because it's cold. But if the ship is sinking, we will need to get in the lifeboat," he said.

Working with the oil industry

Oil and gas activity remains a critical bright spot for the economy, state labor economist Neal Fried said recently. That means if he wants to safely negotiate the fiscal crisis, Walker may have to play nice with an industry he's often fought.

Fried said North Slope oil field employment continues to set records and appears to be growing at its fastest pace in years. The state also recently held its third-largest lease sale on the North Slope, potentially setting the stage for more exploration, as long as oil prices don't stay low for too long.

Meanwhile, Alaska and the Big Three oil producers, Exxon Mobil Corp., ConocoPhillips and BP, are working with pipeline builder TransCanada on the Alaska LNG project. Supporters say it's the best hope of diversifying Alaska's economy, though the project remains years from reality.

Some worry Walker will derail those efforts. Walker has filled key positions in his administration with allies who have helped him fight the industry on pipeline valuations or opposed the oil tax rewrite that industry favored, proposing law partner Craig Richards as attorney general and naming former Fairbanks Mayor Jim Whitaker as his chief of staff.

Walker has worked to soothe fears so far, saying he'll keep in place key initiatives that industry supports.

Kara Moriarty, president of the Alaska Oil and Gas Association and a voice for the industry, said things are going well.


"The governor has told me after his appointments that he'll set the policy and his team will have to implement the policy, regardless of their prior positions on industry issues," she said.

She has talked with Walker numerous times, she said, and he's reiterated his commitment to work with industry. He said he'll keep an open line of communication, something that's critical.

"It would be impossible to agree on every issue but that doesn't mean we can't work together," she said.

Alex DeMarban

Alex DeMarban is a longtime Alaska journalist who covers business, the oil and gas industries and general assignments. Reach him at 907-257-4317 or alex@adn.com.