Dunleavy admin says state must rework formula programs like K-12, Medicaid and even the PFD

The Legislature’s finance committees have spent the first week of the session unpacking Gov. Mike Dunleavy’s proposed budget, which calls for essentially flat funding of government, a full dividend, no new revenues and massive spending out of the state’s savings accounts.

It’s raised alarm bells for anyone concerned about the long-term outlook of the state’s savings, and even the administration has acknowledged that this kind of budget is untenable in the long-term.

But where some legislators have renewed the pitch for new revenues or continued cuts to the dividend, Office of Management and Budget Director Neil Steininger told the Senate Finance Committee that the administration is still eying cuts.

They’re just not cuts that can be made in the budget.

“The deficit that is in the budget as it’s proposed right now isn’t something that we can do more than one year. We don’t have enough money in the constitutional budget reserve,” Steininger said. “The way forward is to make meaningful changes and get rid of some of these statutory pressures that are forcing the budget to be as high as it is.”

These would be programs whose spending is determined by formulas that are written in state law like K-12 education, Medicaid, state retirement benefits, state employee costs, bond debt and, yes, the permanent fund dividend.

But the problem, as was encountered by the Senate Finance Committee on Tuesday, is that the governor has offered no direction on how these programs should be changed. He hasn’t offered legislation proposing changes, such as altering Medicaid eligibility or reworking how school funding is distributed, and didn’t outline any such changes during his State of the State address on Monday night.

“Has there been any bills dropped from the administration or is there anything in this presentation that actually gives recommendations on how to decrease the formula and statutory funding that’s creating this statutory deficit?” asked Senate Finance Committee Co-Chair Sen. Natasha von Imhof, R-Anchorage.

“I’m not making any direct recommendations on the changes to these programs,” Steininger replied. “I’m laying out what the factors were that built the operating budget that we’re considering right now. We are definitely here and available to discuss the factors in all of these formula programs to try to come to a solution that works for everyone.”

Senators bristled at the lack of details. Many said it seemed like the governor—who’s facing a recall fueled in part by his initial budget—had abandoned his responsibility to lead on the budget.

“It’s very troubling that there isn’t a plan out there,” said Sen. Donny Olson, D-Golovin. “It sounds like the governor is saying ‘You figure it out.’”

Dunleavy did attempt to cut Medicaid spending heavily this year, but his administration eventually admitted that much of those cuts were unattainable under federal rules on Medicaid. The Legislature is now bracing for a historically large supplemental budget to cover for those errors.

At his budget roll-out, Dunleavy did suggest there should be cuts to formula-driven programs but then, like now, he didn’t plan on proposing them himself.

The hands-off approach didn’t sit well with Sen. Lyman Hoffman, D-Bethel, who also noted that the governor has opposed pretty much any and all forms of significant revenue to the state (the governor did propose a state lottery, but an initial estimate would put annual revenue at about $10 million).

“How are you helping us when you’re giving us no solutions?” asked Sen. Lyman Hoffman, D-Bethel. “Instead of working with us and finding solutions, you’re saying that we will not look at additional revenue from the industry, which is a large amount. It’s going into a fight with one hand tied behind our backs.”

Though they didn’t directly say it during the meeting, any significant cuts to K-12, retirement benefits or Medicaid would be incredibly unpopular and not to mention nearly impossible with the current layout of the Legislature. And that’s not to mention that changes to any of the formulas are, setting aside any of the political considerations, simply difficult policy lifts that crosses over into local governments, federal spending and into the legal realm.

The approach of both the House and Senate majorities, so far, has been to highlight that without the dividend the state would be running a budget surplus this year. Members of the bipartisan House Majority have said that discussions about new revenue can’t easily be had as long as there’s a battle over the dividend.

“Our target as a caucus is to pay the dividend we can afford and not go into savings,” said House Rules Committee Chair Rep. Chuck Kopp, R-Anchorage, in the majority’s response to the governor’s State of the State address. “We know as a caucus that to have a fair discussion about revenue, if we don’t solve the dividend problem it will always muddy the water on what exactly we’re looking at for a deficit. How much revenue do we need? If you leave the dividend question open, the deficit can be $100 million if you pay a $700-$800 dividend or it can be $1.5 billion if you pay a $3,000 dividend plus back payments.”

While the OMB budget presentation largely skirted any significant mention of the dividend as part of the state’s budget—omitting it entirely from the list of formula-driven programs to be cut—von Imhof added her own chart that showed the proposed dividend payout totaling more than $2 billion would dwarf every other department even with the formula spending factored in.

“There is no budget deficit before paying a permanent fund dividend,” she said, later adding, “Are we going to cut education to pay a permanent fund dividend?”

When pressed by Sen. Click Bishop, R-Fairbanks, on whether the administration would include the PFD as one of the formula-driven programs that need to be considered, Steininger had this to say:

“All the formula programs as part of the budget need to be considered.”