Dunleavy proposes budget with $1 billion deficit and no new revenue sources

A budget proposal released by Gov. Mike Dunleavy on Thursday includes an estimated $3,400 Permanent Fund dividend per eligible Alaskan and a billion-dollar deficit, but no increase to the state public school funding formula that educators say is urgently needed.

The proposal is the first step of a months-long budget drafting process that will culminate in mid-2024. The Legislature will use the draft as the basis for its budget discussions when it meets in January. Ultimately, the plan shapes every aspect of state services, including education, road maintenance and snowplowing, public safety, and food assistance. It covers the fiscal year that begins July 1.

The funding plan calls for spending around $2.3 billion on dividend payments to Alaskans, while keeping spending on state services largely equal to last year’s spending. Dunleavy said he wants to cover the $1 billion deficit using the state’s rainy day fund, the Constitutional Budget Reserve. As of last month, that account had roughly $2.7 billion in it.

The idea of dipping into reserves was quickly rejected by leaders of the bipartisan Senate majority.

Sen. Bert Stedman, a Sitka Republican who chairs the Senate Finance Committee, said he expects next year’s budget to be “very very similar” to the current fiscal year’s budget, “to the point where we could probably take the current budget and lay it on the table. There’s not going to be a lot of differences.”

House Speaker Cathy Tilton, a Wasilla Republican, did not immediately respond to a request for comment on the budget. House Majority Leader Dan Saddler, an Eagle River Republican, declined to comment.

Rep. Zack Fields, an Anchorage Democrat who is a member of the House minority caucus, said the governor’s draft “is not the budget the Legislature is going to pass.”

“Our economy is really challenged because of underfunding of education and underfunding of basic services like police, public health, snowplowing. So I think that’s really the top order of business with the budget — providing those basic public services so that people want to remain in Alaska,” said Fields.

The House minority caucus, made up primarily of Democrats and nonpartisan lawmakers, played a key role this year in passing the budget. Ten House majority members joined all 16 minority members in voting in favor of the spending plan that was largely crafted by the bipartisan Senate majority.

The primary differences between the governor’s proposal this year and the current year’s budget are in the dividend size and in education funding. Stedman said Dunleavy’s dividend size “is following a statute that is not affordable.”

“It’s not going to happen. If we did it, we’d be out of money in two years, and the game would be over. Nobody would get a dividend,” he said.

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. This year’s dividend was $1,300 per eligible Alaskan.

“We understand that the courts ruled years ago that the Legislature may change that, so we look forward to that discussion,” Dunleavy said. But when asked to comment on two dueling proposals by the House and Senate for a long-term solution to the dividend amount, Dunleavy did not weigh in.

“The devils are always in the details,” he said. “I know that those discussions are going to happen.”

The Republican-dominated House majority favored this year what is referred to as the “50-50″ plan, which would spend half the Permanent Fund earnings on a dividend and half on state services. The bipartisan Senate majority favored a 75-25 split, sending a quarter of the Permanent Fund earnings to the dividend and the remainder to state services.

As has been true in recent years, a transfer from the Permanent Fund is set to be the largest source of funding for state services — greater than oil revenue. The transfer is set to be $3.5 billion for the current fiscal year and $3.7 billion for the following fiscal year.

Revenues outside of the Permanent Fund transfer are forecast to be $3 billion for the current fiscal year and $2.7 billion for the fiscal year that begins in July, the Department of Revenue said Thursday.

Dunleavy said inflation during his tenure as governor is “taking a bite out of everybody’s pocketbook.” State spending during his five years as governor has increased by less than 9%, and spending on public schools and the University of Alaska is down overall since he assumed office.

Despite modest spending increases proposed by Dunleavy on Thursday, including for additional rural public safety positions, overall spending on state services is nearly identical to last year’s spending plan.

In April, Dunleavy said he would propose a sales tax to increase state revenue and make up for waning oil proceeds. But the proposal never materialized, and Dunleavy did not bring it up during this year’s budget proposal.

“We’re now in an election year. I don’t know how much momentum is going to occur this year,” Dunleavy said when asked about the missing proposal.

During the budget presentation, Dunleavy repeatedly blamed the federal government for Alaska’s waning revenues from resource extraction.

“If we were allowed to develop every play we have, every oil play we have, every gas play we have, every mining play we have, every timber play we have — our revenue would double, triple what we have today,” said Dunleavy.

“We’ve got to figure out how to create more wealth rather than taking out of the pockets of Alaskans,” he said.

No change to education formula

Dunleavy’s funding plan includes no increase to the school spending formula, called the Base Student Allocation, or BSA.

The formula has remained largely unchanged for nearly a decade, leading educators and education advocates to raise alarms about ensuing cuts to programs, challenges in recruiting teachers, and increasing class sizes, among other effects.

An increase to the formula for Alaska’s public schools was cited as one of the central goals of the bipartisan coalition that governs the Senate majority earlier this year. That chamber passed a bill in the final days of the legislative session that would have increased spending on public schools by more than $175 million annually, but the House rejected the measure. Lawmakers ultimately added that funding in a one-time boost, but Dunleavy later vetoed half that amount.

Sen. Bill Wielechowski, D-Anchorage, said the Senate majority’s “commitment to securing essential public education resources is still at the forefront of our legislative priorities.”

Stedman said he expects Dunleavy will revise the public school funding amount in his spending plan in February, when his budget amendments are due to the Legislature.

“We’ll see what the administration’s actual position is on the 14th of February. My recommendation is: don’t use this number as the funding number for schools, because there is just going to be panic in the streets,” said Stedman.

Dunleavy said that even though his proposal doesn’t include a formula boost, “that does not mean there won’t be an increase in the BSA. It’s just that in this budget rollout there’s not.”

“As a former educator, I understand that schools cost money, education costs money, there’s no doubt about it,” said Dunleavy, who first moved to Alaska to work as a rural public school teacher. He said rather than increasing the school funding formula, which takes into account the number of students per school, special education needs, and other parameters, education funding could be added “in various forms and various purposes.”

Dunleavy again touted a bill he proposed earlier this year — which was not advanced by the Legislature — which would have given bonuses to teachers ranging from $5,000 to $15,000 per year based on where they taught in the state, for a total of three years. The bill, which could still be considered by lawmakers this year, would cost the state less than $20 million per year, but lawmakers and educators have raised concerns about it, saying that it does not address the full problems created by stagnant education funding in the state.

Dunleavy also touted a recent study that found Alaska’s public charter school students rank highest in the nation, even while Alaska has regularly ranked at the bottom of the nation in overall reading and math scores. Out of Alaska’s roughly 500 public schools, 30 are charter schools, and they educate around 5% of Alaska public school students, primarily in Anchorage, the Mat-Su region and the Kenai Peninsula.

In a joint statement from the Alaska Council of School Administrators and the Alaska Association of School Boards, the organizations said “it was discouraging to realize that the Governor recognizes the impact of inflation on the entire state and yet does not acknowledge the same effects on the operation of Alaska’s Public Education system.”

Anchorage schools Superintendent Jharrett Bryantt said in a statement that he was “disappointed in the lack of emphasis placed on education funding” in Dunleavy’s budget.

“Underfunding of public education in our state is reaching crisis levels. Districts across Alaska are struggling to attract and retain teachers and classroom support positions due to wages and benefits that cannot compete with those offered in the Lower 48. This directly results in lower student outcomes and larger class sizes. ASD has hundreds of open positions that it struggles to fill because of how prospective educators view current conditions of the profession in Alaska,” Bryantt said.

Revenue figures

The spending plan approved by the Legislature in May included a provision that would send Alaska residents a $500 check — in addition to this year’s dividend — if oil prices are sufficiently high, at around $83 per barrel, by the end of this fiscal year. Current projections are slightly below that mark, but could still be enough for a more modest supplemental check.

The revenue figures are based primarily on the revenue department’s estimates for the price of oil and the amount of oil that will be produced in Alaska. Alaska North Slope crude prices are projected by the department to decline in the coming year. The projected price for the current fiscal year is just over $82 per barrel and $76 for the fiscal year that begins in July. Oil prices averaged just under $87 per barrel in the previous fiscal year.

Oil production in Alaska is also set to decline in the short term, according to the Revenue Department. Last fiscal year, production averaged 479,400 barrels per day. In the current fiscal year, production is expected to average 470,300 per year. In the following year, production is projected to decline to 463,800 barrels per day.

The department projected that oil prices will continue to decline in the coming years, stabilizing at $70 per barrel by 2033. North Slope production will climb to 633,000 barrels per day by 2033, according to the projection.

Iris Samuels reported from Anchorage and Sean Maguire reported from Juneau.