Governor proposes flat budget that spends heavily from savings
Gov. Michael Dunleavy has set up a showdown with the Legislature after proposing a flat budget for the next fiscal year that would spend heavily from savings.
In contrast to his budget in February that had $1.6 billion in proposed cuts, Dunleavy’s December budget for the next fiscal year does not make major reductions to state services.
The governor said the change in approach came after hearing from Alaskans over the past year.
The budget would draw $1.5 billion from the Constitutional Budget Reserve, the state’s main savings account that currently has roughly $2 billion.
Legislative leaders are saying that proposal is a “non-starter.”
House Speaker Bryce Edgmon said, “I think there’s going to be strong resistance to paying down the CBR, our one and only savings account.”
Republican Senate President Cathy Giessel from Anchorage reiterated that saying, “The Senate is not interested in depleting it further, it’s at $2 billion right now, that’s the minimum we should maintain.”
Both Giessel and Edgmon highlighted the challenges in making a long-term fiscal plan.
Senate Minority Leader Tom Begich, a Democrat from Anchorage, said he was “cautiously optimistic” to see that state services were not proposed to be cut but that he also didn’t think the CBR should be drained.
The nonpartisan Legislative Finance Division has said that the CBR should have around $2 billion to pay for unexpected costs such as supplemental budgets. The supplemental budget for the ongoing fiscal year may also be the biggest in the state’s history at between $200-$300 million with payment needed for firefighting and Medicaid.
The governor’s budget proposal leaves major spending areas virtually untouched.
K-12 education funding would be left harmless as would Medicaid. The University of Alaska would see a $25 million cut that follows an agreement signed by the Board of Regents chair and the governor to see a $70 million reduction over three years.
State spending would increase by $24 million for the Department of Corrections and there would be an 18.3% increase for Pioneer Homes.
Nearly $800 million would be saved in fiscal year 2021 by the state not paying oil and gas tax credits.
The governor said he is unable to cut back huge chunks of the budget because they are locked up in formula programs like Medicaid and K-12 education. He is calling on the Legislature to address that.
The budget follows many of the governor’s fiscal priorities: it would deliver a full statutory Permanent Fund dividend in 2020 and back pay a $1,400 dividend payment for 2019 that was not paid by the Legislature.
The governor and his aides say the budget is the beginning of a conversation with Alaskans on budget priorities and whether or not they want to pay taxes to make up for a revenue shortfall.
Edgmon and Giessel both spoke the possibility of new revenues with Giessel saying the motor fuel tax could be raised and an education head tax could also be reinstated.
The governor’s proposed budget would also draw nearly $3 billion from the Earnings Reserve Account of the Permanent Fund to pay for dividends and state services. The ERA has roughly $12 billion and can be spent by a simple majority vote of the Legislature.
In 2018, the Legislature passed Senate Bill 26 that determines the amount that can be sustainably be spent from the ERA for state services and the dividend without endangering the Permanent Fund itself.
The governor’s proposed budget would not spend above that formula in the next fiscal year but it would break the 2019 rules-based system to deliver the $1,400 PFD payment.
Edgmon spoke at a Commonwealth North forum Wednesday afternoon, saying that the House majority was formed on the back of not overspending from the Permanent Fund.
Republican Senate President Cathy Giessel echoed Edgmon’s comments, saying that there is no interest in the Senate to unsustainably spend down the Permanent Fund or the CBR.
Giessel also spoke to the changing nature of Alaska’s fiscal situation. According to the state’s fall revenue forecast, the state would collect $2 billion from oil revenue and nearly $3 billion from Permanent Fund earnings.
“A non-renewable resource is being turned into a renewable resource,” she said.
Edgmon described that almost 60% of the state’s revenue in fiscal year 2021 could come from earnings from the Permanent Fund.
On Tuesday, the governor took to Twitter to say that “the people of Alaska need a real constitutional spending limit that works.”
Edgmon told the Commonwealth North forum that there was a real appetite in the Legislature to impose some sort of a spending limit either through statute or constitutional amendment.