Can Dunleavy really replace vetoes with COVID aid? We still don’t know (but it doesn’t look like it)

Last week, Gov. Mike Dunleavy announced hundreds of millions of dollars in vetoes to state spending but promised to take the edge off some of the more significant cuts by substituting in a portion of the $1.25 billion of coronavirus relief aid headed to Alaska.

The plan was immediately met with skepticism. The feds’ rules for how the money can be spent are vague but they are still rules, requiring the costs covered to be related COVID-19 and be unexpected.

Did replacing more than $100 million in school bond payments, money that has long been in the budget, really qualify? How $30 million in community assistance payments? How about $30 million in K-12 funding that’s also in the current year’s budget?

As of today, no one seems to really know if the plan will work—or what will happen if it doesn’t.

U.S. Sen. Lisa Murkowski said during a joint news conference with Anchorage Mayor Ethan Berkowitz that federal guidance on how the money could be used is coming sometime this week. Until then, she said, it’s unclear how that money can be used and she’s not willing to bet on verbal guidance from Secretary of the Treasury Steven Mnuchin.

Murkowski said she had asked if the money could be used to replace lost revenue on the local level, specifically for communities that see revenues dry up due to a non-existent tourism season.

“The Secretary (of the Treasury Steven Mnuchin) in his comments said, ‘I think you’re gonna be OK. I believe we have the flexibility to do that,'” Murkowski recalled. “I don’t want that kind of verbal ‘I think you’re gonna be OK.’ I want to know that the funds (can cover the losses) our local municipality are experiencing now, whether it’s the loss of bed tax because you don’t have a cruise season. We know full well how our local governments are going to be impacted and are going to be impacted right now.”

Dunleavy had offered a somewhat similar argument last week when he defended his plan to substitute in federal money for state funds, arguing that municipalities could be in trouble if people aren’t able to pay their property taxes.

But there’s a significant difference between lost bed tax revenue due to a pandemic-decimated cruise season and local school bond debt reimbursement, a long-standing program where local governments built and renovated schools with the expectation that the state would cover a portion of the debt payments. Dunleavy had already set his sights on eliminating the money and vetoed half of the program last year, directly leading to higher property taxes and cuts on the local levels.

Simply replacing that the school bond debt program with federal money only solves a problem Dunleavy created. It doesn’t directly help communities address new problems or newly lost revenues due to COVID-19.

House Speaker Bryce Edgmon publicly called the move a “gamble” while other legislative leaders sought clarification from the federal government.

Murkowski said the Dunleavy administration, which has already issued the vetoes, has independently reached out to Mnuchin for guidance on how the money could be spent. She said she couldn’t speak to the federal government’s response, but referred to Dunleavy’s actions as “hoping.”

It’s unclear what might happen if the feds find Dunleavy’s plan doesn’t align with the federal legislation, but it would leave several programs without funding. Here’s the programs he vetoed, claiming they “will be funded through the Federal Coronavirus Aid, Relief and Economic Security (CARES) Act”:

• $30 million in payments to local governments under the state’s community assistance program
• $100.1 million in school bond debt reimbursement to municipalities that took out loans for school construction and major renovations with the expectation the state would pick up a portion of the check, as well as $2.3 million in “non-mandatory municipal debt reimbursement”
• $30 million in one-time funding for K-12 schools
• $36.7 million in funding for Regional Educational Attendance Areas
• $2.7 million for Anchorage’s response to COVID-19
• $5 million for the Alaska Housing Finance Corporation’s homelessness grant intended to cope with COVID-19

UPDATE: The Guidance

As Murkowski predicted, the U.S. Treasury released some additional guidance on the money today but it offers little additional clarity beyond the original guidelines placed on the money. Here’s the guidance:

The CARES Act requires that the payments from the Coronavirus Relief Fund only be used to cover expenses that—

(1) are necessary expenditures incurred due to the public health emergency with respect to the Coronavirus Disease 2019 (COVID–19);

(2) were not accounted for in the budget most recently approved as of March 27, 2020 (the date of enactment of the CARES Act) for the State or government; and

(3) were incurred during the period that begins on March 1, 2020, and ends on December 30, 2020.

Takeaway: Let’s just look at the school bond reimbursement program and judge it by the above guidelines. (1) The spending was originally incurred whenever local governments issued bonds, which would have at least been several years ago, and those funds were to build schools, not to deal with any public health emergency. (2) It depends on what you mean by “approved,” but the last operating budget enacted before March 27, 2020 contained half of the bond debt reimbursement money. The budget most recent approved by the Legislature, which Dunleavy vetoed, was all passed and signed after March 27, 2020. (3) The payments could fall into the window of March 1, 2020 to Dec. 30, 2020 but the original spending, as we highlighted in the first point, has all already occurred.

Local level (Original story, continued)

And just what kind of funding local communities can expect—at least beyond the replacement of vetoed funds—from the $1.25 billion coming to Alaska is unclear, too. The state is under no requirement to pass any of that money on directly to communities because it has no cities with more than 500,000 people.

Dunleavy vetoed $2.7 million in state funds the Legislature allocated for Anchorage’s COVID-19 response and another $5 million homelessness grants for COVID-19, pledging to replace both with the federal funds. He’s not outlined any additional spending and claims his administration hasn’t discussed turning the federal funds into a direct cash payment to Alaskans, akin to the Alaska Permanent Fund dividend.

Murkowski said the decision to put the entirety of the money into state hands could change in future legislation. She said she’s advocating for direct aid to local communities in future legislation.

“I’m a strong supporter of that for what it’s worth,” said Anchorage Mayor Berkowitz, who has been on the forefront of responding to coronavirus, ordering the first halt to dine-in restaurants and the first hunker down order in the state.

“I would figure as much,” laughed Murkowski.

“I’m sure I speak for communities across the country,” Berkowitz continued. “If we have the resources, we can disperse them faster than any other level of government.”

Murkowski agreed in the local governments’ role in responding quickly to COVID-19.

“Our local governments can demonstrate a level of nimbleness that we’re not showing that right now,” she said, noting that they’ve been critical in responding to the virus and procuring supplies such as personal protective equipment. “We’ve got good federal partners but it’s unwieldy, unfortunately.”