FAIRBANKS — As David Teal, the head of the legislative finance division, drafted his overview of the next proposed state budget, his Juneau staff members found it “pessimistic, even borderline depressing,” Teal told lawmakers Thursday.

He says he doesn’t see it that way at all.

Teal gave a good overview of the budget dilemma facing the state in a House Finance Committee meeting  Thursday afternoon I watched on Gavel-to-Gavel. 

I’m going to go into it in some detail because he hit on the key budget challenges likely to face the state for several years to come.

The challenges start with how to deal with a $3.7 billion surplus.

This is expected to consist of an expected $1.9 billion surplus at the end of fiscal year 2012 and an additional $1.8 billion to be added in the fiscal year that starts in July.

Even in this fairly recent era of state surpluses, those numbers are huge, he told the committee.

At this time last year the fiscal year 2011 to 2012 surplus was $25 million. It grew to more than $400 million by the end of the session. It kept going up as the months passed with oil prices at or near triple digits.

“Oil prices have held that up and we’re now looking at almost $2 billion,” he said. “The $3.7 (billion) that’s available to you is over 25 percent of the $14 billion that you’ve set aside since 2005. So again, the  number is huge in anybody’s reckoning,” he said.

Teal said it’s also good news that the proposed growth rate in the governor's operating budget is 3.2 percent. Since 2005, the state budget has been growing by  7.8 percent a year, which is not sustainable.

If the state kept to that 7.8 percent increase of recent times, deficits would appear by 2015 and the state's cash reserves would be gone by 2025, Teal said.

If the state can revise its habits and hold to the 3.2 percent growth rate, it can hold onto about $20 billion in reserves by 2025.

“The conclusion that I hope you reach from this is that growing at 7.8 percent is not sustainable,” he said.

But growth in state agency operations is not the only thing likely to push up state expenses in the future.

Obligations to the state retirement systems, chiefly the Public Employee Retirement System, or PERS, and the Teachers Retirement System, or TRS, are another.

When the state made a deal with local governments to cap local contribution rates at 22 percent for PERS and 12.6 percent for TRS, the state costs were estimated to be about $200 million a year, tapering off to zero by 2020 or so.

But the poor investment returns following the financial collapse of 2008 ruined those great expectations.

The unfunded liability shot way up. The annual appropriations needed to keep up with the retirement debts for PRS and TRS will mean an increase of from $450 million to more than $600 million for the fiscal year starting in July.

It is expected to become an $800 million budget line by 2016 and hit $1 billion a year by 2025.

The state’s actuary has developed an alternative plan that says by putting $2 billion of state money into the PERS system now, those future debts would be taken care of. The state and the municipal governments would continue to make their regular contributions to the system — this applies only to the extra payments that began several years ago.

In five years, the state would get its $2 billion back because it would not have to put $400 million a year into the fund. The model shows that by 2025, the state would be able to count more than $4.8 billion it didn’t have to shell out for PERS.

Teal said the analysis shows that state reserves would be higher in 2025 if the state makes the lump-sum $2 billion contribution than if the state opts to make annual appropriations.

To repair the TRS system in the same way, the state would have to deposit $4 billion, he said, because that is a “far more broken.”

“The point of this is that the state assistance to retirement is a major budget driver right now and it’s going to become a major budget problem. The good news here is that you do have the resources to make the problem go away. Whether you choose to do that is up to you,” he said.

So if retirement can be fixed, why do the legislative finance analyst think the view of the future is so depressing?

He said there are two reasons.

First, Alaska’s state government is tied to the price of oil and production is dropping.

At any given price of oil in fiscal year 2013, the revenue curve will be $900 million below what it is in the current fiscal year.

For example, the fiscal year 2012 budget is balanced if oil averages $94 a barrel.

If the final fiscal year 2013 budget matches the 2012 budget, the budget will only balance if oil averages $100 for the year.

The governor’s proposed budget is $385 million below that of this fiscal year and it envisions a 40 percent reduction in capital spending. Many of the 288 state positions proposed for deletion are vacant, so that is not a big savings.

In the meantime, the governor plans to add 192 positions at the new Goose Creek Prison in the Mat-Su borough, which is to be the home of 1,000 Alaska prisoners now jailed in Colorado.

If the state manages to stick to that level, the budget will balance with oil at $97.

Gov. Sean Parnell said in the State of the State speech that the proposed budget is $800 million lower, but Teal said that overstates the decline as that number includes more than $400 million in savings.

The other part of the pessimistic vision, he said, is that it will be “very difficult” to hold budget increases to 3.2 percent. The governor’s operating budget does not include several items that are likely to be inserted and the capital budget, which is almost always expanded by lawmakers, was listed at $882 million, 40 percent less than this year.

“I’d be surprised if we stayed at 882, but you determine that,” he told the committee.

In the operating budget there are several missing items that lawmakers might add, ranging from an increase in education to an additional $100 million that the state will be on the hook for under the Alaska Gas Line Inducement Act.

Teal said the states faces a situation in which “the more we save now, the more likely we can avoid a future that includes sales taxes, income taxes, giving up the Permanent Fund Dividend.”

“Now is when you have money and now is when you have to decide how to use it. When you add the revenue decisions to that, it’s clear to me that this fiscal year ’13 budget cycle is critical to Alaska’s future,” Teal said.

Dermot Cole can be reached at cole@newsminer.com or 459-7530.