As oil and investments earn more for Alaska, the state could see its first deficit-free budget in 10 years

Using higher estimates for oil revenue, millions of dollars in aid from the federal government and a lower amount for the Permanent Fund dividend, Alaska Gov. Mike Dunleavy proposed a state budget on Wednesday that could be the first in a decade to be balanced without spending from savings.

The governor’s proposal includes $6.3 billion for state services, construction and dividends in fiscal year 2023, which begins July 1 and ends June 30, 2023. That’s an increase of about $1 billion from the current spending plan, with the additional funding going to the Permanent Fund dividend. Spending on services is held flat.

The proposed budget calls for the increase to be covered by federal aid and revenue increases from oil and the Alaska Permanent Fund.

“We do have good news. Our fiscals are looking good,” Dunleavy said.

In a written statement, House Speaker Louise Stutes, R-Kodiak, said the governor’s proposal needs to be reviewed carefully.

“It is important to remember that a slight rise in the price of oil, changes in the stock market, and one-time funding from Washington do not fundamentally change Alaska’s fiscal reality. We need to make the tough decisions on a fiscal plan in order to provide sustainability in budgeting and the PFD,” she said.

Under the governor’s proposal, the 2022 dividend would be $2,564, the product of a new distribution formula proposed by the governor but as yet unapproved by the Legislature. It’s the first time since entering office that the governor has not proposed a dividend that follows the traditional — and since 2016, ignored — formula in state law.

The governor is also proposing an additional $1,250 spring dividend (funded by money from higher-than-expected oil prices), the split of the Department of Health and Social Services into two separate agencies, and a $309 million borrowing plan for new construction.

The governor’s ideas are subject to revision and approval by the Alaska Legislature, and Dunleavy’s prior proposed budgets have been extensively revised.

Sen. Bert Stedman, R-Sitka and co-chair of the Senate Finance Committee, said he wants to better understand whether the governor is using one-time federal money to cover recurring costs.

Budget documents published by the Office of Management and Budget indicate the governor’s proposal would use $375 million in federal aid in that way, an act that could create a budget hole in future years.

“We’ll dissect it and start with budget clarity like we did the last couple years,” Stedman said.

Higher oil prices and investment returns boost available cash

Wednesday’s budget proposal relies on a new revenue forecast from the Alaska Department of Revenue that predicts oil prices will average $71 per barrel between July 1 and June 30, 2023.

Since July 1 this year, prices have averaged $76.81 per barrel.

The new FY23 forecast is less than forecasters had projected earlier this fall but much more than they predicted in the spring. The new estimate raises projected oil revenue by $675 million when compared to the spring.

“Petroleum revenue increases for the next two years are largely a function of a higher oil price forecast, as well as an increased outlook for Alaska oil production,” they wrote.

Since 2014, hopes of long-term higher oil prices have been short-lived. In 2018, shortly before he left office, former Gov. Bill Walker proposed a “balanced” budget that relied upon higher oil prices. Those estimates were obsolete within weeks, and Dunleavy was confronted with a continued deficit.

This year’s estimate, unlike the one in 2018, is based on global markets that buy and sell future oil production.

Rep. DeLena Johnson, R-Palmer and a member of the House Finance Committee, said she thinks the revenue estimate is reasonable, and her initial impression of the budget is positive.

“I thought it was straightforward. It looked like a realistic and straightforward, honest budget, I thought,” she said.

Revenue forecasters also raised their estimate for the amount of money that will be available under the annual transfer from the Alaska Permanent Fund. State law calls for that transfer to be limited to a sustainable limit, and the governor’s proposal stays within the limit.

Earlier this year, Dunleavy had called for temporarily breaking the limit in order to pay for a larger dividend.

Higher investment returns by the state’s pension funds have also allowed the state to reduce the amount it must contribute to those funds.

Federal aid bolsters budget

Dunleavy’s proposed budget keeps overall state spending on services flat when compared to what was approved this spring. Federal aid, provided through a variety of programs approved by Congress over the past year, replaces state money in some places.

The Alaska Marine Highway System is a prime example. Dunleavy’s budget proposes funding it entirely with federal money, freeing about $60 million in state dollars for other uses.

The governor’s budget also proposes using $375 million in other federal money to replace state dollars. That allows the governor to propose spending more state money in targeted areas without changing the bottom line:

• The University of Alaska would receive $4 million in extra state funding, ending years of Dunleavy-endorsed budget cuts;

• The state would fully fund school bond debt reimbursement payments to local governments, an increase from the 50% reimbursement previously endorsed by Dunleavy;

• $10 million more for legal action against federal restrictions on mining, drilling and land use;

• The Department of Public Safety would receive a $24 million funding increase, allowing the department to hire more state troopers and implement a public safety program he proposed earlier this week.

“I applaud the governor for his focus on public safety, especially for the victims of domestic violence,” said Rep. Sara Rasmussen, R-Anchorage, a member of the House Finance Committee.

“I think we have a good starting point, and I know this is just the first step as it works its way through the legislative process,” she said.

Proposal includes a $309 million borrowing plan

Speaking to the Alaska Federation of Natives annual conference earlier this week, Stutes said members of the coalition House majority want to see a budget that uses federal money for additional infrastructure work, not just to replace state dollars.

Other states have used federal aid to install broadband infrastructure and reconstruct roads and bridges, among other projects.

Dunleavy’s budget calls for some of that work. Included in the governor’s capital budget — used for construction and renovation — is $200 million for rural airports and $670 million for road construction, as well as millions to replace the ferry Tustumena.

The governor is also proposing to borrow $308.6 million for construction projects across the state, including $22 million for the controversial U-Med road and $175 million for either the Port of Alaska or Port Mackenzie.

The governor proposed a similar borrowing plan last year, but the Legislature rejected it, citing the possibility of federal infrastructure aid.

“I’m looking forward to seeing the general obligation bond package that was put together this year. The administration said they worked hard to make it better and more traditional,” said Rep. Kelly Merrick, R-Eagle River and co-chair of the House Finance Committee.

DHSS split intended

The governor again intends to propose splitting the Alaska Department of Health and Social Services into a state Health department and a state Department of Family and Community Services.

That split was proposed in late 2020 but was withdrawn this spring after legislators uncovered technical problems with the executive order creating the split.

Dunleavy is expected to issue a new executive order once the legislative session begins in January, and the split would take place automatically unless lawmakers specifically vote it down.

Under the health budget, the state will spend $46 million more on Medicaid, while funding for public health and public assistance is held flat. Budget documents show a significant decrease in the federally funded line items for emergency programs, such as the state’s pandemic response.