Few answers as Dunleavy releases budget that nearly depletes state savings to pay PFD, avoid cuts

Gov. Mike Dunleavy lays out his plan to use state savings to avoid significant cuts and pay a large PFD during his budget rollout on Dec. 11, 2019. (Screenshot from Gavel Alaska.)

Gov. Mike Dunleavy gave a short speech announcing his proposed budget for the upcoming year and fielded just four questions from reporters before ducking out just 10 minutes into the news conference.

  • Yes, the dividend is still a priority. He’s not only requesting a full PFD for 2020 but a supplemental to pay back the $1,400 cut from this year’s PFD.
  • No, he’s not proposing slashing K-12 funding by the 25 percent he proposed last year. In fact, he pledged “No cuts to education.”
  • Taxes and additional revenues can be on the table, but it’s up to the Legislature.
  • Dunleavy’s conversations with Alaskans about the budget will start in January and could focus on cutting formula-based programs like Medicaid and K-12 education.

The remaining questions were left to commissioners, who gave vague detail-free answers about specific budgetary questions, and unelected administration officials who spoke in more depth about the governor’s proposed budget.

The budget relies on minimal cuts relative to last year, largely shifting spending around the administration to cover increases to the Department of Corrections, the Department of Public Safety and the Department of Transportation. Total undesignated general spending on agency operations is set to fall by less than 1 percent to $3.89 billion under the new proposal.

On the other hand, increases to the state’s debt payments and state retirement system are expected to grow by more so the total UGF spend is expected to rise slightly, a total of $9.4 million or 0.2 percent.

Essentially, the budget is flat.

The full details of the budget are available on the Office of Management and Budget’s website (we’ll continue to unpack the budget over the coming weeks).

It seeks to make good on Dunleavy’s campaign pledge of fully funded dividends, proposing to pay out a $3,170 PFD along with the $1,400 cut from this year’s dividend.

The governor is not putting forward any proposals for additional revenue, whether it be through last year’s proposal of confiscating oil and gas property tax revenue from local communities or through taxes, which he opposed last year.

To balance the budget, Dunleavy is proposing a $1.5 billion withdrawal from the state’s Constitutional Budget Reserve to cover the deficit in his proposal. For the repayment of the dividend, it would also require the state to break the spending limit set on the Alaska Permanent Fund by the Legislature in 2018.

Dunleavy said he believes the 40-year-old dividend formula should trump the new spending limits.

The fund would be nearly depleted after that withdrawal and would not be sufficient to cover the anticipated deficit in following year’s budget, leaving the earnings from the Alaska Permanent Fund as the last remaining source of money.

Dunleavy, who’s facing a recall fueled by the cuts made in his first budget, and his administration cast today’s budget proposal as just that: A proposal. They said the final spending document will come to shape with input from Alaskans—to be gathered in the coming months—and the Alaska Legislature.

“I want to present all the numbers to the people because they’ll see that our savings are diminishing. That we’re going to have to make some decisions, hard decisions, tough decisions. We began that last year,” he said. “Are we going to reduce services or do the people of Alaska want to ponder revenues? It’s one way or another that you have to pay for this or a combination of both.”

Dunleavy also renewed the push for a trio of proposed constitutional amendments that would enshrine the PFD in the constitution, set a strict limit on state spending and make it nearly impossible for new taxes to be implemented. Dunleavy pitched the amendments last session, but they received little attention from legislators.

While Dunleavy’s budget doesn’t make significant cuts, he acknowledged that many of the state’s biggest budget items are driven by formulas in state law. The two biggest being the state’s budget for Medicaid and K-12 education. A budget official said, though, that there’s no plan to introduce legislation changing those programs.

When asked if the administration would be happy and sign off on the budget proposal if it was returned by the Legislature as-is, Dunleavy Chief of Staff Ben Stevens didn’t give a firm answer. He said the Legislature has its role in the budget.

“The answer to that is ‘We’ll have to wait and see how this debate evolves,’” he said.

Reporters were struck by the lack of cuts in the budget. Asked if the administration had abandoned the cuts-first approach from last year, Senior Policy Adviser Brett Huber said things haven’t changed but that the administration is looking to lead a discussion about the direction of Alaska.

“It’s a beginning point. You don’t cash that check on the day that we do this budget release. I think the governor is open to all conversations (when it comes to revenue). We’ve not identified a single source. We’ve not identified a single answer,” he said. “It’s the governor’s job to help lead us through this discussion and make sure all Alaskans are represented. That means revenues and expenditures, at some point, need to come in line in a sustainable manner and I think everything’s on the table in that discussion.”

It was on that note that the governor’s absence from the meeting became too hard to ignore. Anchorage Daily News reporter James Brooks asked what could be more important than rolling out the budget.

“Brett Huber had just said it’s the governor’s job to lead this discussion. I mean, what meeting did the governor have to go to?” he asked. “What meeting is more important than the budget?”

“He had another obligation, I’m sorry,” replied spokesman Jeff Turner, noting that reporters could also ask questions via email. “We’re outta time.”

Reaction

At the time of posting, only the House bipartisan coalition and Senate Democrats had issued a formal response to the budget. Both blasted the governor for avoiding making any tough decisions with the budget, particularly when it comes to additional revenue.

“The governor’s proposal would drain the Constitutional Budget Reserve, leaving us unable to withstand any unforeseen financial emergencies,” said House Finance Committee Co-Chair Rep. Jennifer Johnston, R-Anchorage. “In the last year alone, we saw a record fire season and the largest earthquake since 1964. It would be reckless to drain our primary savings account for the largest PFD in history.”

“At first glance, it appears the Governor’s budget is not as draconian as last year. Unfortunately, this budget lacks long-term fiscal stability and vision for Alaska,” said Senate Minority Leader Sen. Tom Begich, D-Anchorage. “With a $1.2 billion deficit this year, the state cannot solely rely on its savings accounts.”

The ACLU of Alaska also released a statement saying it’s reviewing the budget for potential problems, pledging to keep its legal battles against the vetoes delivered on the current budget alive.

Why it matters

The budget certainly is less of a shock than last year’s, at least when it comes to cuts. The blowback against his austere initial budget and vetoes helped fuel the recall and formed remarkable bipartisan alliances in the majority-Republican Legislature.

It’s clear that there isn’t the political stomach for such deep cuts, particularly when they would have to reach into popular services like education to balance this year’s budget.

What has yet to be tested is this Legislature’s appetite for new revenues, whether it be an income tax, sales tax or reworked taxes on the resource extraction industry. The division lines drawn on taxes will likely be very different than the ones drawn in this year’s bitter fight over the dividend.

And the dividend itself is still not close to being resolved though there’s been some movement toward reworking the dividend formula.

Dunleavy has cast the upcoming decisions about a discussion about revenue, but it’s likely that the Legislature will first return to a smaller dividend before touching additional revenues.

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