Dunleavy’s budget proposal includes $3,900 dividend, no increases for education funding and a carbon capture idea

Newly reelected Gov. Mike Dunleavy on Thursday proposed a state budget that includes funding for a full statutory Permanent Fund dividend amounting to nearly $3,900 for every eligible Alaskan, but no increase to school funding despite an ongoing budget crisis plaguing schools across the state.

Dunleavy said in a news conference held in Juneau that the budget proposal, due ahead of the January legislative session, is a starting point and is likely to change after lawmakers weigh in, including with an increase to education funding. The per-student funding formula known as the Base Student Allocation has not increased in over five years, despite record inflation, contributing to budget shortfalls in Anchorage and elsewhere.

“We certainly understand that there are inflationary issues that need to be addressed,” Dunleavy said.

While lawmakers noted Dunleavy’s demeanor indicates he is open to working with lawmakers in the months to come, some expressed disappointment Thursday that education funding increases weren’t part of the governor’s initial proposal — and befuddlement at his decision to propose a large dividend even as the state faces declining oil revenue that may force lawmakers to dip into the state savings accounts to balance the budget.

“In a perfect world the governor would help lead the charge on providing more education funding,” said Rep. Bryce Edgmon, an independent lawmaker from Dillingham who previously served as speaker of the House.

The state House — with a stalemate between members vying for a Republican-controlled majority and those interested in a bipartisan coalition — has not yet organized, and lawmakers have indicated they are unlikely to form a majority before the legislative session begins in January, increasing the uncertainty over the kinds of legislation that could advance when lawmakers convene in Juneau.

Sen. Gary Stevens, a Kodiak Republican set to become the Senate president, said his caucus will take “a more nuanced approach” to crafting the budget. That caucus is a 17-member bipartisan majority that will likely pursue increased education funding.

“I do have some concerns with the proposed PFD amount, no additional resources for education funding, a skeleton version of a capital budget, and the possibility we may need a supplemental budget for FY 2023 because of the decline in oil revenues,” Stevens said in a statement.

Edgmon said he and other House members hoping to form a bipartisan majority would prioritize an education funding increase. Meanwhile, House Republicans praised Dunleavy’s budget, with current House Minority Leader Cathy Tilton, a Wasilla Republican, calling it “judicious” and suggesting increasing education funding by diverting money from health care costs to classrooms.

Dunleavy said the Base Student Allocation is just one part of how education funding is calculated, and that he might push for discussions on other aspects of funding, including energy costs and salaries.

“There will be a number of us — not just myself but in the Legislature as well — that’s also going to want to ensure that there are accountability components in that discussion as well,” said Dunleavy. “We certainly have to fund our educational system. But we also have to demand that we get outcomes that most people — most parents, students and others — expect.”

‘Volatile’ oil prices

Dunleavy’s proposed spending plan includes a reduction in both the operating and capital budgets, which cover state services and infrastructure projects, when compared to the previous year’s budgets. The plan also calls for a draw from the state’s savings accounts amid a drop in oil prices, with a proposed deficit of $264 million. There is currently more than $2 billion in state savings.

“We continue to have prices on oil and gas going up, going down, going all over the place,” Dunleavy said.

In a March forecast from the Alaska Department of Revenue, analysts predicted the average oil price per oil barrel in the 2023 fiscal year would be $101. Department of Revenue Commissioner Adam Crum said Thursday that estimate is now down to $88 per barrel and $81 per barrel in the next fiscal year.

“As we know, oil is volatile,” said Crum. “So this is a number that is going to continue to change.”

The Legislature earlier this year passed a budget that included education funding for the following fiscal year. But because of declining oil prices, most or all of that money will be “zeroed out,” Dunleavy said. If oil prices continue to remain low, lawmakers could be forced to dip into the Constitutional Budget Reserve in order to cover the current year’s budget.

Lawmakers in recent years have become accustomed to dipping into savings to cover budget shortfalls amid dropping oil prices, but last year, with unexpectedly high oil revenue driven in part by the war in Ukraine, was supposed to be the exception. Yet the budget that passed in the spring included record-high payments to Alaskans that didn’t leave much wiggle room.

Now, oil prices are back on the decline and Dunleavy is again proposing what would be the highest dividend payment in state history, driven in part by what he says was the response he got from voters on the campaign trail.

“During this last campaign season, I had countless people come to me, some in tears to be perfectly honest with you, thanking us for the efforts we made to be able to assist them in some very difficult times,” said Dunleavy, a Republican who won his four-way gubernatorial race last month with more than 50% of the vote. “So I’ll always be supportive of the Permanent Fund and the Permanent Fund dividend.”

The statutory formula for calculating the dividend was last used in 2015. Since then, lawmakers have been mired in a long-standing debate over how to sustainably calculate the dividend amount each year. The roughly $3,400 payment sent to eligible Alaskans earlier this year was made up in part by what the Legislature called a one-time energy assistance payment to help offset higher fuel costs. Ahead of the previous legislative session, Dunleavy advocated for changing the statutory formula for calculating the dividend, but that was not part of the plan he presented on Thursday.

“It’s no secret that I support the Permanent Fund. It’s no secret that I got over 50% of the vote as part of that being part of the campaign,” Dunleavy said.

‘A brand-new frontier’

Dunleavy proposed shoring up the state’s finances with a new revenue source from carbon sequestration, the process of capturing and storing atmospheric carbon dioxide. But he offered only sparse details on his proposal, which will be submitted to the Legislature for consideration.

Dunleavy said that by preserving the state’s forests, planting seaweed along the coastline and capturing and storing carbon in depleted oil and gas basins on state land, the state could bring in billions of dollars in the coming decades.

“Alaska has a real opportunity to sequester carbon in many different ways in the state,” Dunleavy said, adding that the new revenue source could potentially rival revenue brought in from oil extraction — which currently makes up a third of the state’s revenue.

“We’re talking several hundred million dollars a year to over a billion dollars a year,” Dunleavy said. “So we’ll be introducing a bill that will enable us to have those discussions with private entities to be able to contract with Alaska.”

Dunleavy called it “a brand-new frontier for Alaska.” Other states have considered carbon sequestration plans, and by at least one measure, the carbon sequestration market is set to grow by billions in the coming years. Several Alaska Native corporations have already capitalized on timber tracts in California’s carbon credits market, which allow forest owners to get paid for keeping lands unharvested for 100 years.

“The scale that Alaska has to offer on this is unprecedented. It’s unprecedented not just in the size of Alaska but in the different methods by which carbon can be sequestered,” Dunleavy said. “We haven’t even begun to calculate the sequestration concept in terms of monetization.”

Dunleavy said he sees a possibility of having revenue from carbon sequestration within the next several months through forest preservation, with additional work needed to figure out other methods of sequestration.

“For years, the conversation on revenue was — whose ox are we going to gore? Are we going to do an income tax on the people of Alaska? Are we going to do corporate taxes? With the advent of monetization of carbon, we have a real possibility of receiving revenue that doesn’t gore any ox,” Dunleavy said.

Lawmakers said Thursday that they were intrigued by the proposal but still lacked the information needed to understand if and when it would change the state’s fiscal outlook.

“I’m a little cautious about saying it’s going to solve all of our problems,” said Stevens.