Dunleavy budget prompts hiring freezes and warnings of local tax increases

City officials around Alaska say deep state budget cuts and policy changes proposed this week by Gov. Mike Dunleavy will likely force local governments to raise taxes or slash services, or a combination of both.

The proposed budget, announced Wednesday in Juneau, cuts hundreds of millions of dollars in state spending. Health care, education and government services were hit particularly hard. Dunleavy and his deputies say the budget is an effort to bring state spending in line with revenues without raising taxes or cutting Permanent Fund dividends.

“The bottom line here is, we’re out of money and we’re out of time,” said Jeremy Price, deputy chief of staff for Dunleavy.

The proposal puts pressure on legislators and local officials to either adapt to cuts or fight them, Price said. Those that want to increase spending for programs will have to find a source for that money, he said.

[Ferries on the chopping block and cuts to Pioneer Homes: A rundown of how Gov. Dunleavy’s budget cuts would affect Alaskans]

While most administrators were still reading through the mountain of budget documents Thursday, a few major concerns began to emerge from provisions in the Dunleavy plan:

• Dunleavy proposed ending a longstanding state practice of reimbursing a portion of school bond debt, which means big bills in larger communities.

• From the North Slope to Fairbanks to the Kenai Peninsula, administrators were facing the loss of millions in revenue from oil property taxes. Price said the question is whether the revenue should be shared with the entire state, as opposed to a handful of local communities.

• A “community assistance” fund that distributes millions to communities each year is being dissolved and absorbed into the general government budget. State budget officials said there are no plans to stop the payments, however.

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In the short term, local administrators have put in effect hiring freezes and put a halt on some capital projects. Some warned of deep cuts and higher property or sales taxes if the proposed budget is signed into law.

Others were critical of how the Dunleavy budget had been characterized as free of new taxation.

“The aversion to new taxes at the state level is a perfectly understandable approach,” said Paul Ostrander, the Kenai city manager. “But I think it’s disingenuous to essentially force municipalities to raise taxes, by removing revenues that the municipalities have had in the past.”

State Sen. Peter Micciche, R-Soldotna, raised the question to state budget director Donna Arduin during a Senate Finance committee meeting Thursday.

"That $15 million cut ... will result in that $15 million being made up on the property taxes or sales taxes of the people of the Kenai Peninsula,” Micciche said. "You do in fact realize that revenue will have to be made up locally?"

"We cannot comment on how local governments are structuring or will structure their budgets,” Arduin answered.

Cities have historically responded to significant cuts with local tax increases, said Nils Andreassen, the executive director of the Alaska Municipal League. The organization has advocated for a broad-based tax in recent years, which Andreassen said would keep local taxes low and stable.

In Dunleavy’s home community, the decision to stop payments for school bond debt will cost the Matanuska-Susitna Borough an extra $20 million each year for almost the next two decades, said borough manager John Moosey. The borough’s total budget is about $390 million.

But Moosey said he did not expect his city council would be keen on raising property taxes. For now, a hiring freeze has started and projects that haven’t started yet are being temporarily halted, Moosey said.

Moosey said he had instructed his staff to come up with smart approaches and not overreact. He said the budget was in line with what Dunleavy promised.

“We view this as the governor saying, ‘We’re going to do government differently,’” Moosey said.

Other administrators said higher local taxes were more likely. The mayor of Fairbanks North Star Borough, Bryce Ward, said his staff was still working through budget documents Thursday morning. He said the biggest hit is the state’s move to block municipalities from collecting oil property taxes.

The borough would also have to come up with a large sum to cover its school debt payments, Ward said. Those payments will fall outside of the borough’s tax cap.

“Ultimately those debts have to be paid, which means our taxpayers are going to have to pay,” Ward said.

Education cuts and school bond debt changes were emerging as top issues in the city and borough of Juneau, said city manager Rorie Watt. He said he had also cautioned staff not to overreact but the options would be limited if the budget remained as it was.

“If this budget goes through, we absolutely have to massively cut services and raise taxes,” Watt said. “That would be impossible to avoid.”

In Unalakleet, a rural Norton Sound hub community of about 700 people, Mayor Wade Ryan said he was concerned state cuts would lead to higher water, sewer and electrical bills for residents.

Unalakleet is among the cities that depend on money from a “community assistance” program, also known as revenue-sharing. The most recent version of the fund has paid out excess earnings from a rural electric subsidy endowment, to the tune of about $30 million. But the amount has declined over the years, forcing cuts. In some places, money from the fund makes up more than 70 percent of local government revenue.

The program is being changed, but not cut, officials said. Laura Cramer, the deputy director of the Office of Management and Budget, wrote in an email that the proposed budget included the $30 million payment in 2020. She said the administration hoped the proposed budget would stabilize expenses and allow the program to continue in the future.

Anchorage Mayor Ethan Berkowitz, a former Democratic state representative, has long railed against cuts in state services and what he describes as a lack of a long-term state fiscal plan. He said in a Wednesday interview the Dunleavy budget was short-sighted and would not relieve Anchorage of its responsibility to respond to emergency calls.

“When we think of what Alaska is supposed to be, we always imagined a future built on the things we’ve done, but this budget devastates the legacy we’ve inherited,” Berkowitz said. “And in order to reconstruct it at some point of the future will be incredibly expensive.”

Price said communities that have been “prudent in their spending habits” will have options. He said some should be able to weather cuts with savings.

In the Kenai Peninsula Borough, which covers unincorporated cities on the Peninsula, managers were planning a conservative budget to cope with losing out on $15 million in oil property tax revenue and another $2.6 million in school bond debt, said Brenda Ahlberg, the community and fiscal projects manager.

The borough has faced cuts in recent years and will be looking at what more it could do, Ahlberg said.

For now, the borough mayor, Charlie Pierce, had ordered a hiring a freeze and a stop on capital projects that aren’t paid by grants, Ahlberg said.

Correction: An earlier version of this story misstated the title of Bryce Ward. He is the mayor of the Fairbanks North Star borough, not the manager.

The Daily News’ James Brooks contributed reporting from Juneau.