This week, Gov. Mike Dunleavy will release his budget proposal for the next fiscal year. It will set the foundation for a bruising 2020 legislative session in which some of Alaskans’ most fundamental priorities come into conflict. The 2019 budget battles, and their struggles over funding for some of the state’s core services, were a wake-up call to many residents who weren’t previously plugged into the state’s lawmaking process. A year later, Alaskans of all stripes are paying more attention, and they should be: In the present budget climate, there is no service, agency or program safe from budget pressure, and those that people don’t stick up for have far less likelihood of being sustained. Here’s what to expect when the budget drops — and what might happen in the months to come.
It’s worse than we planned
When the dust settled on last year’s budget, there were sharp cuts in state funding to many services, representing one of the biggest year-to-year reductions in the state operating budget in Alaska’s history. Yet it still wasn’t enough to make the budget balance: The state withdrew nearly $3 billion from the Permanent Fund earnings reserve, the account used to pay Permanent Fund dividends. Just over $1 billion of that sum was used to pay out this year’s dividend check, meaning almost $2.2 billion was spent from savings when draws from the state’s two budget reserve funds are added in. That’s unsustainable. And it gets worse.
Some of the cuts Gov. Dunleavy made in the budget don’t appear to have penciled out. For instance, implementation of some Medicaid cuts was delayed, and there were significant cost overruns stemming from wildfires in Southcentral Alaska, particularly the Swan Lake and McKinley fires. And it gets worse.
As oil revenue makes up so much of the state budget, Alaska bases its revenue assumptions on the forecast for oil prices. Sometimes that estimate turns out to be low, meaning prices end up higher and the state gets more oil tax revenue. And sometimes the estimate is high, meaning the actual average price comes in lower. That means less tax revenue, to the tune of a roughly $50 million shortfall for each dollar the average price falls below the estimate. This year, that discrepancy is $3 to $4 per barrel, meaning a roughly $150 million to $200 million revenue gap from what was projected.
A rock and a hard place
Throughout the legislative process this year, Gov. Dunleavy said he planned to bring spending down to match state revenue in two years. That would mean far steeper cuts in the coming year than even those made this year. And it’s not clear where that money could be taken from without drastic impacts for Alaskans. The governor attempted a $140 million cut to the University of Alaska this year before walking that plan back and downscaling it to a $70 million cut over three years. That took one big target for cuts off the table.
Of the state’s other major spending avenues, only K-12 education and Medicaid stand out as places where the governor could make cuts on such a major scale, and both of those cuts would have huge consequences. For Medicaid, either we pay the providers (hospitals) less, we remove services Medicaid covers or we reduce the number of people receiving health care through the program. Each option comes with real social and political repercussions. And when it comes to K-12 education, even if the governor is shifting from looking at inputs (funding) to education and instead looking at outcomes, as he has said is his watchword, cutting hundreds of millions of dollars when Alaska students lag well behind national averages in some subjects would be a tough sell.
And there’s one other major fly in the ointment: Gov. Dunleavy’s promise to pay a full PFD under the 1982 formula, which would mean pulling nearly twice as much from Permanent Fund earnings for the checks as happened this year.
The dividend debacle
The 2019 budget fight centered around the PFD, and 2020 looks to be much the same. Gov. Dunleavy is once again promising to pay a “full” PFD, and even a $1,400 back payment to make up for previous reductions. The possibility of balancing the budget if both those promises come to fruition is vanishingly small, even if legislators were to somehow agree to massive cuts that dwarfed those we saw this year. There’s a reason leadership in the Legislature was so strongly against make-up payments and full-formula dividends this year: They make the task of matching revenue with expenditures impossible. And that could lead to some unexpected budget proposals this year.
When it comes to budget possibilities, much depends on next week when we will see the first concrete signs of the governor’s approach. After replacing his closest advisers this fall, let’s hope it’s a more moderate and inclusive course from Gov. Dunleavy, the one he promised when he appeared before the Alaska Federation of Natives convention in October and said he will “work hard to ensure the budget process goes much more smoothly this year.” That Gov. Dunleavy might seek common ground with the Legislature on funding priorities rather than blindsiding legislators and the public with steep, sometimes unexplained cuts.
Finally, would the governor consider revenue measures to solve the budget crisis, whether in the form of broad-based taxes or revision of the PFD formula? For his base, both are politically untenable and it’s hard to imagine either taxes or changes to the PFD formula garnering his support, as he’s argued long and loud against both. But there aren’t many ways to eradicate the state’s deficit, so even as extreme long shots, such a solution is in the realm of possibility.