JUNEAU — Lower projected oil prices and a larger Permanent Fund dividend are generating a $1.6 billion deficit in Gov. Mike Dunleavy’s inaugural state budget.
That deficit is likely temporary: The document released Friday, ahead of a legal deadline, is the transition spending plan released earlier this month by Gov. Bill Walker but with a revised revenue forecast and a bigger Permanent Fund dividend of about $3,000 paid under the traditional formula. Under the proposal, total state spending would rise to $12.2 billion from the $11.2 billion approved by lawmakers earlier this year.
Earlier this week, Dunleavy had said his budget would be a revised version of Walker’s proposal. Friday’s document contains no changes to the budgets of state agencies, but OMB director Donna Arduin said it is a work in progress.
“It’s a starting point that shows a $1.6 billion deficit," Arduin said of Friday’s budget proposal.
In a press release following the release of the budget, she said “all items of state expenditures are on the table” when it comes to cuts that resolve the deficit.
Dunleavy said earlier this week that, to him, a “full dividend” includes back payments for payments vetoed by Walker and cut by the Alaska Legislature. But the spending plan released Friday makes no mention of those back payments. Instead, the line item devoted to the dividend is $1.9 billion — enough for a dividend of about $3,000 per person in 2019, not the $6,700 that it would be if back payments were included.
The exact amount of the dividend will vary based on the number of applicants and the investment performance of the Alaska Permanent Fund Corp.
Asked about the back payments, Department of Revenue commissioner Bruce Tangeman said, “Obviously, that’s not included in the FY20 budget, so that will be dealt with in a different appropriation bill or a different manner.”
In an interview after his election win, the governor said he would look to the Permanent Fund — and specifically the reserve account that contains its investment earnings — to fund those back payments. That would violate the sustainable limits legislators set for themselves in legislation last year. Friday’s budget from the governor follows those limits.
Legislation cannot be formally introduced into the Legislature until after it convenes Jan. 15, though lawmakers will begin pre-filing bills before it starts. The governor has until Feb. 13 to complete an amended budget proposal and submit it to the Legislature.
While the dividend represents a significant change from Walker’s proposal, the bigger difference is a revised forecast for the price of oil. Walker’s budget predicted North Slope oil prices would average $76 per barrel during the current fiscal year, which ends June 30, and $75 per barrel next fiscal year.
Because of that prediction, Walker was able to tout his budget as “balanced," even though prices had sunk well below that amount by the time he presented his proposal to the Anchorage Chamber of Commerce in late November.
The new revenue forecast predicts North Slope oil prices will average $68 per barrel this fiscal year and $64 in the fiscal year that starts July 1. That forecast is closer to what the Department of Revenue predicted this spring than the bullish outlook in Walker’s budget.
Under Walker’s forecast, the state would have a small surplus this fiscal year and next. Under the new revenue forecast, there is a $263 million deficit in the current fiscal year (at the time lawmakers passed their budget, the expectation was of a $692 million deficit) and a $1.6 billion deficit in the next.
Given that the governor is expected to significantly revise his own proposal — and that legislators haven’t yet had their say — the size of the deficit could change significantly as debates progress.
If the deficit does remain, lawmakers may find few options. The governor is firmly opposed to taxes that would raise new revenue, and lawmakers last year set guardrails on their ability to draw additional money from the Permanent Fund. (That legislation is not binding and could be changed.)
If those two options are off the table and lawmakers do not cut the budget sufficiently, that would leave only the Constitutional Budget Reserve to cover the spending deficit. As of Nov. 30, that account contained $1.71 billion. The fund contained more than $12 billion at its peak and was accompanied by another multi-billion-dollar savings account, the Statutory Budget Reserve, but years of swelled budgets were followed in 2014 by an abrupt fall in oil prices.
With lawmakers unwilling to impose new taxes, those savings were used to make ends meet while spending declined. Now, those savings accounts are almost exhausted.
“Hard decisions have been pushed off and pushed off. It’s time to address them," Arduin said.
Members of the Alaska Senate Majority, including Senate Finance Committee co-chairs Sen. Natasha Von Imhof, R-Anchorage, and Sen. Bert Stedman, R-Sitka, were in their annual two-day retreat and haven’t yet had a chance to review the “first draft” of the governor’s budget, spokesman Daniel McDonald said by text message.
The two Senate Democrats on the committee, Sen. Donny Olson, D-Golovin, and Sen. Bill Wielechowski, D-Anchorage, praised Dunleavy’s inclusion of a larger dividend.
“I am glad to see that Gov. Dunleavy is going forward with a full 2019 Dividend and hope to work with him to figure out a process to pay back three years of reduced dividends,” Olson said in a prepared statement.
Wielechowski added that while he supports the larger dividend, he would like to see the governor fix the deficit by reducing tax credits given to oil and gas drillers.
“It is time to eliminate this oil tax credit to close our budget gap, instead of forcing working Alaskan families to shoulder the burden of balancing the budget,” he said in prepared remarks.