Dunleavy introduces first-draft budget with $1.5 billion deficit and more than $3,800 PFD

Gov. Mike Dunleavy released his proposal for the state budget on Thursday. It’s the first draft of a spending plan for the next fiscal year, which starts in July.

Over the next several months, there’ll be lots of back-and-forth with lawmakers as the state Legislature examines the budget in detail before they pass their own version. Alaska News Nightly host Casey Grove spoke with Capitol reporter Eric Stone for a rundown of what’s in store.

Listen:

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This interview has been lightly edited for length and clarity.

Casey Grove: Eric, give us the headlines. What’s in the governor’s budget?

Eric Stone: All in, it’s a $16.7 billion budget. The portion that gets the most focus is unrestricted all-purpose money that can be spent however policymakers like, and that’s about $7.7 billion.

Nearly 60% of the state’s revenue comes from the annual 5% transfer from the Alaska Permanent Fund. And as usual, the biggest single expense is the Permanent Fund dividend. 

As in years past, Dunleavy is proposing a dividend in line with the old formula in state law. $2.5 billion would be allocated to PFDs. That translates to more than $3,800 per Alaskan.

A lot of the rest of the budget is status quo. There aren’t cuts per se, though there is some one-time funding that won’t be renewed — most notably, the temporary boost the Legislature gave to education last year. So to avoid a funding decrease, the Legislature will have to approve at least $175 million above what’s in this budget.

But the flip side of that is, there are some gaping holes in the budget. At the end of the day, it’s a deficit budget. It calls for spending more than $1.5 billion from the Constitutional Budget Reserve. That’s more than half of the current balance of the savings account.

And they need another $150 million in the current budget year from savings. All in, it’s about $1.7 billion in deficit spending this year and next. And the picture gets more grim the longer you project it out. The savings would disappear, and the projections show it being overspent by nearly $1 billion by the middle of 2028, and $12 billion underwater by 2035.

CG: OK, so a deficit budget. Why is that?

ES: It’s a combination of large PFDs, no cuts to spending and no solid sources of new revenue. And Dunleavy is insistent that the PFD should follow the old formula. 

“We’re going to follow the laws and we have the savings. So that’s why you have the budget designed as it is,” Dunleavy said.

Basically, the money he’s counting on materializing isn’t in the budget. And Dunleavy says essentially that future resource development will make up the gap. He’s pointing to things like carbon sequestration and storage, timber, mining, new industries like data farms — and of course good old oil and gas.

“The resource production in the state can more than pay for our way if we consummate great policy as we move forward,” Dunleavy said.

That’s all speculative. And of course, all budgets are speculative. You make projections, and maybe they’re right, maybe they’re not. For instance — this budget is counting on a lower oil price — around $70, that’s down from $85 in the fiscal year that ended this past June.

But this is even more speculative than that. Dunleavy’s vision for the future of the state counts on a bunch of stuff happening that may or may not happen. It looks like we’ll get more oil in the pipeline as the Willow and Pikka projects move forward. But counting on money from carbon credits or carbon sequestration, that’s another story. 

CG: What kind of reaction have you heard to the governor’s budget?

ES: Not everybody’s convinced that the governor’s predictions will pan out. I spoke with Democratic Rep. Andy Josephson — he’s tackling the operating budget as a co-chair of the House Finance Committee.

“What I can’t figure out is why the governor, particularly with two years remaining in his term, doesn’t act boldly to help us by offering us some leadership on the budget question,” Josephson said.

He says it’s clear the governor isn’t interested in non-resource revenue, like taxes. And he’s skeptical that the governor’s bets on things like resource development will pay off.

“So the governor, ultimately, with his budget, is saying, ‘I can’t figure this out. You do it,’” 

And he says the Legislature will figure it out. But he also says the public should be prepared for a dividend that’s a lot smaller than what Dunleavy is proposing. And even smaller than the roughly $1,700 that Alaskans got this year. 

Josephson says the $1.5 billion draw from savings can’t be made up with cuts to state spending. And he says that will leave lawmakers no choice but to take it from the PFD.