Dunleavy’s budget plan is filled with uncertainty that even allies can’t ignore

Gov. Mike Dunleavy announces his renewed push to constitutionalize the PFD on May 12, 2021.

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When Gov. Mike Dunleavy rolled out his renewed pitch to constitutionalize the divided and the draw from the Alaska Permanent Fund on May 11, he did it flanked by a large (mostly Republican) group of legislators. To hear from him and the accompanying legislators, the constitutionalization of the dividend at a rate that would make balancing the budget impossible without cuts and/or new revenues is the long-awaited break the state needs to bring resolution to its budget woes.

But three weeks later, whatever momentum there actually was behind the plan has fizzled as legislators have got a good look under the hood of the governor’s vision.

That’s because to make good on forever dedicating 50% of the spendable earnings of the Alaska Permanent Fund to the dividend (paying out a $2,300 dividend this year), the state would need to cut $500 million over the next three years (or raise taxes) and overspend the Alaska Permanent Fund by $4.5 billion (this year’s PFD and the $3 billion in bridge funding to cover the next several years) all while counting on revenue from resource extraction and Alaska Permanent Fund investments to increase every year for the rest of the decade. 

From top to bottom, the plan relies on assumptions that everything goes just right with Alaska’s political world, with oil production and with investment markets. And as anyone who’s even been mildly interested in Alaska politics would tell you, that’s just not going to happen.

First, Dunleavy has already tried and failed to make deep cuts to government after his attempts at draconian cuts in year one resulted in massive political backlash have given way to status quo budgeting. Second, the overspending of the Alaska Permanent Fund has the additional impact of forever reducing annual investment revenue by about $50 million for every $1 billion spent (thus, a $225 million larger hole by overspending). Third, who really believes oil and investment income will suddenly smooth out into a dependable upward climb? If so, I’ve got a pipeline, a bridge and a dam to sell you.

And if things don’t all go precisely as expected, Dunleavy’s team shrugs and says it’ll be up to the Legislature to muster the political capital to make changes to spending or revenue in the future.

It’s all enough to cool enthusiasm for a plan and the Anchorage Daily News’ weekend story “Alaska legislators say new taxes are likely needed before Gov. Mike Dunleavy’s new dividend plan can advance” does a good job at encapsulating the problem. While Dunleavy is promising the near-impossible with his plan, even far-right legislators who’d very much like to pay out big dividends say it doesn’t add up. 

“Is he willing to put forward a sales tax?” Sen. Shelley Hughes, R-Palmer, asked the ADN. “You know, is he willing to really stick his neck out and take some leadership to help get this through?”

While the cold, hard numbers are the big driver of the reluctance to sign off on the plan, I think that the uncertainty is a significant contributor here. In short, Dunleavy’s plan doesn’t do anything to address that uncertainty.

And this uncertainty isn’t just about the political will to get things done, but it could have a very real impact on the overall state of the economy, argues ISER economist Mouhcine Guettabi. 

Guettabi was in front of the Senate Community and Regional Affairs Committee last week to present some work he’s done to understand the economic cost of uncertainty. Pulling together some other studies and economic data, he argues that the failure to pass a stable fiscal plan has driven off hundreds of millions of dollars in private capital investment. In 2019 alone, he says anywhere between $220 million and $660 million was not spent on capital investments by the private industry and individuals because of uncertainty with the state budget.

He sought to frame that figure against the frequent pushback we see to implementing taxes: That taxes will take money out of the economy. He argues money is already staying out of the economy because there’s still significant uncertainty about not just taxes but government services and the dividend. 

“How much more spending potentially would have been in state had there been no uncertainty. Had we resolved questions around taxes and the PFD and spending cuts,” he said. “It shows that waiting is not a cost-less option.” 

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