Dunleavy proposes budget with $1.5 billion deficit, projecting $12 billion deficit by 2035

A proposed budget released by Gov. Mike Dunleavy on Thursday includes a Permanent Fund dividend of nearly $3,900 per eligible Alaskan. The spending plan would lead to a deficit of $1.5 billion, even before accounting for a forthcoming proposal to increase spending on Alaska’s public schools by hundreds of millions of dollars.

The proposal is the first step of a months-long budget drafting process that will culminate in mid-2025. The Legislature will use the draft as the basis for its discussions when it meets starting in January. Ultimately, the plan shapes every aspect of state services, including education, road maintenance, public safety and infrastructure investments. It covers the fiscal year that begins July 1.

Dunleavy has long been a proponent of an existing state statute to calculate the size of the annual Permanent Fund dividend, but that statute has not been applied since 2016. In recent years, the Legislature has increasingly relied on revenue from the Permanent Fund to cover the cost of operating state government, reducing the size of the dividend paid to residents.

According to Dunleavy’s plan, lawmakers would have to agree to draw $1.5 billion from the Constitutional Budget Reserve, the state’s primary rainy day fund, in order to cover dividend payments that would amount to around $2.5 billion. The CBR currently has around $2.8 billion in it, meaning this year’s draw — if lawmakers heed Dunleavy’s plan — would exceed half the fund’s value.

Rep. Bryce Edgmon, I-Dillingham, who is expected to serve as House speaker when lawmakers convene next year, said Thursday it would be “very difficult” to reach the three-quarters vote threshold needed to draw from the CBR.

Senate President Gary Stevens, R-Kodiak, said a CBR draw could be necessary, but would require support from both the majorities and minorities in the House and Senate.

“I mentioned to the governor’s staff that if he truly wants to draw on the CBR, he’s going to have to help us convince the minority to vote for it,” said Stevens.

The all-Republican House and Senate minority caucuses are expected to be more closely aligned with Dunleavy than the bipartisan majorities in both chambers. But the minority leaders — Rep.-elect Mia Costello, R-Anchorage and Sen. Mike Shower, R-Wasilla — declined to say Thursday whether they would support Dunleavy’s proposed dividend size.

Dunleavy is entering his seventh year as governor. During his tenure, inflation has far outpaced increases to spending on state services. Dunleavy again proposed a flat budget this year with few changes to operating expenses.

According to a 10-year plan that Dunleavy is required to produce under law, his vision for the state projects a $12 billion debt by 2035. Asked about his plan for balancing the budget in the long term, Dunleavy said he would look to the Legislature for ideas rather than proposing a comprehensive strategy for creating fiscal stability.

“What he’s saying is, ‘I don’t know how to solve this, you go solve it,’” said Rep. Andy Josephson, D-Anchorage, who is expected to co-chair the House Finance Committee next year.

Dunleavy said the incoming Trump administration could be favorable to additional resource development projects in Alaska that could increase the state’s revenue in the long term. But he was largely dismissive of introducing other forms of taxation, even as his own revenue department projected oil would not bring in enough income to sustain the state in the coming years.

“I believe that the resource base of Alaska is the solution to the future. I believe an income tax on the people of Alaska, a sales tax on the people of Alaska, taking what’s left of the dividend from the people of Alaska — if that’s going to happen I would suggest we all invest in U-Haul, to be honest with you,” Dunleavy said.

Both the House and Senate are expected to be governed by bipartisan coalitions whose vision for the state — including reform to the Permanent Fund dividend, significant increases to state spending on education and changes to the state’s public pension system — have been met with skepticism or outright opposition from Dunleavy.

Lawmakers are expected to devote much of the coming legislative session to discussing a school funding increase that educators say is crucial after Dunleavy vetoed a bipartisan bill earlier this year that would have increased spending on schools significantly for the first time in years.

Dunleavy allowed for a one-time $175 million increase in education spending for the current fiscal year but did not account for a similar increase in next year’s budget, instead promising that a spending boost could come through separate legislation he would introduce at a later date. That legislation would tie the spending to other changes to the state’s education system.

Dunleavy said Thursday that if lawmakers agreed to some of the reforms he sought — which are expected to be directed at boosting charter schools — he would support a permanent $200 million increase to the state’s current $1.2 billion education budget.

According to Josephson, Dunleavy’s proposal still wouldn’t meet schools’ needs, which he said equated to a $450 million increase in state spending.

Dunleavy, once skeptical of Alaska’s natural gas pipeline ambitions, also asked the Legislature to approve $50 million for advancing the Alaska liquefied natural gas pipeline project. Stabilizing the state’s energy supply is also expected to be a major topic considered by lawmakers when they convene in January, but they have indicated there may not be broad agreement on advancing the pipeline.

“The Legislature is somewhat frustrated with the number of times over the course of history that we’ve been told that a gas line is just around the corner, and I think there’s some skepticism that it’s ever really going to pan out,” said Rep. Calvin Schrage, I-Anchorage, who will co-chair the House Finance Committee.

Stevens was also skeptical of the requested funding for the gas line.

“We have had trouble really trying to figure out if it’s going to work. We put millions and millions of dollars in the gas line. So are we going to put another $50 million into it? What do we get out of it?” said Stevens.

A gas line for export has been estimated to cost upwards of $44 billion.

Shower said he was skeptical the project would pencil out economically. But he said he supported the concept of the project as a way to secure Alaska’s energy needs, and for security purposes.

“We just have to find a way – hopefully — with our federal partners to fund it — that’s not going to break the bank,” he said.

Asked about the viability of the gas pipeline, Dunleavy said he thinks “we’ll end up consummating a line in the next year or so.”

Declining revenue

Revenue from the Permanent Fund will again be the most significant source of state income this year, eclipsing oil revenue.

Due to lower-than-expected oil prices and production, the state is expected to have $220 million less in revenue at its disposal than had been previously predicted for the current fiscal year, and $230 million less in the coming fiscal year.

The state’s unrestricted general fund revenue, not including Permanent Fund earnings, was expected to be $2.6 billion in the current fiscal year and $2.4 billion in the next fiscal year, the Department of Revenue said in its official forecast on Thursday.

The now-annual transfer from the Permanent Fund was expected to be $3.7 billion in the current fiscal year and $3.8 billion in the next fiscal year, the department said.

Alaska North Slope oil prices were projected to average just under $74 per barrel in the current fiscal year and $70 in the coming fiscal year. That is $4 per barrel less than the revenue department forecasted in March.

For the past decade, lawmakers have spent much of the annual legislative sessions discussing the size of the Permanent Fund dividend, never reaching consensus on a new calculation formula. But an ever-growing number of legislators agree that the statute on the books is untenable without the introduction of new state revenue sources, such as statewide sales or income taxes. This year’s dividend was roughly $1,700 per eligible Alaskan.

In Dunleavy’s first year in office, he proposed massive cuts to state services in order to afford a statutory dividend. Those cuts — much of which were reversed after public backlash — led to a recall effort against Dunleavy that was aborted during the coronavirus pandemic. Though Dunleavy later abandoned his suggested cuts to state services, he continued to advocate for the statutory dividend.

“He does this every year. He won’t engage in a way to pay for a full statutory dividend,” said Josephson. “He puts this out there, I guess, so he can tell the world, ‘I asked for a full statutory dividend and they wouldn’t give it to you.’”

Last year, Dunleavy’s budget draft included a $3,400 dividend — double the size of the dividend ultimately approved by lawmakers — which would have led to a $1 billion deficit. Lawmakers eventually approved a balanced budget that did not require a draw from savings.

Lawmakers this year have again indicated they would likely shrink the dividend to match the state’s revenue, though they have not set a specific target for the dividend size.

“It’s our responsibility to not just pass a balanced budget, but to make sure that we’re budgeting in a fiscally responsible way that protects our state’s interests,” said Schrage.

Dunleavy said last year that he would introduce a statewide sales tax to help shore up the state’s finances, but that proposal never materialized.

“Am I going to put forward a sales tax or an income tax? I’m not advocating that in the budget,” Dunleavy said Thursday. “However, if the Legislature wants to do that, we’ll have a conversation with them about it.”

Dunleavy also promised last year that a carbon sequestration proposal that he advanced could bring the state “billions” in new revenue. Though lawmakers approved last year’s legislation establishing the carbon sequestration program, it has yet to produce any new income for the state. Dunleavy again said Thursday he expected carbon sequestration to provide the state with additional revenue in the future, though he did not provide specifics on when or how much.

The bipartisan Senate majority favored last year a 75-25 split for a new dividend formula that would send one-quarter of Permanent Fund earnings to the dividend and reserve the remainder to cover the cost of state services. A similar majority is set to govern the Senate next year, but it was not immediately clear whether they would again advance the proposal, which was rejected earlier this year by Republicans in the House.

“If a majority of Alaskans wanted a change in the dividend, we’d have a change,” said Dunleavy.