Dunleavy’s gambit on PCE could have long-lasting consequences for the state budget

Gov. Mike Dunleavy waves to the audience at the Kotzebue High School during his impromptu inauguration on Dec. 3, 2018. (Photo by Matt Buxton/TMS for the Fairbanks Daily News-Miner)

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In one way or another, Gov. Mike Dunleavy’s many trips to the Alaska Supreme Court have—like a velociraptor testing the fence—challenged the already-expansive bounds the Alaska Constitution sets out for the governor.

While he’s lost more than he’s won in front of the court, nearly every case has resulted in long-lasting changes. His administration’s refusal to approve the recall resulted in the courts establishing a largely permissive recall system (it’s up to the voters to decide if something merits removal from office), his veto of the court funding resulted in some actual bounds on the governor’s veto power (it can’t violate the constitution) and his fight with the Legislature over appointments—one of the few that he’s actually won—turned the appointment process on its head, finding that appointees can serve as long as they’re not formally rejected by the Legislature.

But the most consequential of the bunch stands to the lawsuit filed Monday by the Alaska Federation of Natives and a dozen other groups against Dunleavy’s handling of the Power Cost Equalization program.

Setting aside the policy disputes around PCE, the lawsuit is essentially challenging now-former Attorney General Kevin Clarkson’s claim in 2019 that the $1 billion PCE Endowment Fund and several other funds should be included in the annual sweep of left over general fund dollars into the Constitutional Budget Reserve. The sweep is outlined in the Alaska Constitution and requires, essentially, that any withdrawals from the Constitutional Budget Reserve be paid back with whatever funds are left over in the general fund at the end of the year. Clarkson’s opinion sought to radically reinterpret what those left over funds are and what the general fund is.

The traditional test is 1) is the money in the general fund and 2) is the money available for appropriation. While PCE and several other accounts were set up in law as separate accounts from the general fund, Clarkson’s argument was, basically, if money can be treated like it’s in the general fund (meaning it can be spent by the Legislature) then therefore it is in the general fund. It’s this leap of logic that is at the heart of the lawsuit.

“Although the legislature certainly could appropriate monies from the PCE Endowment Fund for any purpose, the PCE Endowment Fund is still not in the general fund; by statute it is a separate fund within the AEA,” argues the filing. “The constitutional test is not whether it is ‘like’ or ‘similar’ to general fund monies, the test is whether it is actually in the general fund.”

As it stands, there are two significant possible outcomes of this case that each have significant implications for how the state budget is managed from here on out:

If the court rules in favor of Dunleavy and finds that, yes, in fact the only standard for whether or not funds should be swept into the Constitutional Budget Reserve is whether or not they can be treated like general fund dollars (meaning they can be spent by the Legislature) then there’s some other significant funds that would likely be affected by this.

The biggest among them is the $12.2 billion of uncommitted cash in the Alaska Permanent Fund’s earnings reserve account. Back in 2019, Legislative Finance Division Director David Teal warned about precisely this, noting that some vagueness in the laws combined with the PFD lawsuit brought by Sen. Bill Wielechowski and Clarkson’s expanded opinion should result in the account being swept into the Constitutional Budget Reserve (Dermot Cole explored the issue in more depth here). He as well as many others noted that if Dunleavy/Clarkson’s reasoning stands, then there’s no clear explanation as to why the Alaska Permanent Fund’s earnings reserve account wouldn’t also be swept. It can be treated just like general fund dollars, after all.

The practical impacts of this is, frankly, hard to imagine, but it would at the very least create some significant headaches when it comes to funding government, funding the PFD and, well, funding whatever other “glidepath” plan the governor has in mind. That said, the money would come pretty close to paying off the deficit in the Constitutional Budget Reserve, thereby ending the automatic sweep.

If AFN and company wins, then it means the Legislature has the power to shield savings accounts from the annual sweep by setting them up in accounts wholly separate from the general fund. This could have big impacts on the Alaska Constitution’s prohibition on dedicated funds, which has generally been pointed to as the reason we can’t have nice things.

Something to keep in mind is that some have started to point out Article IX Section 7 of the Alaska Constitution isn’t quite as bulletproof on the whole “no dedicated funds” issue as we make it out to be. Specifically, the section says “The proceeds of any state tax or license shall not be dedicated to any special purpose,” which might leave some interesting room for investment income.

Why it matters: Like it or not, the state’s budgeting is driven more by precedent and norms than we’d probably like to admit. Looking back over the last serious legislative discussion we had on the sweep, it’s clear that there’s a good deal of uncertainty about precisely how everything interacts together when determining what’s sweep-able, what’s not and what can be dedicated. Whatever the outcome in this case is, it it’s likely to have some significant impacts on things moving forward.

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2 Comments on "Dunleavy’s gambit on PCE could have long-lasting consequences for the state budget"

  1. “… which has generally been pointed to as the reason we can’t have nice things.” WHAT nice things are you referring to? That sentence is so vague as to defy interpretation.

  2. Great work, Matt, thank you. You have a talent for presenting the issues so that they’re digestible.

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