Senate Finance Committee members pushed back Wednesday, January 23, against Gov. Mike Dunleavy’s early budget philosophy, arguing it could lead to less transparency.
“We are now preparing a budget that for the first time all Alaskans will be able to understand and trust. No more games, no more shuffling numbers. Just an honest, straightforward look at where we are,” he promised.
In a presentation Wednesday before the Senate Finance Committee, Office of Management and Budget (OMB) Director Donna Arduin reinforced the point, saying the FY 2020 budget Dunleavy releases on February 13 will combine all general fund dollars available to spend.
Arduin told Senate Finance she has worked on budgets for six governors in six other states, including Florida.
She quickly showed her inexperience with Alaska budgets in the hearing, telling committee members, “The Alaska Constitution does not allow, as you know, for designated funds.”
A PowerPoint slide repeated the claim.
“That word should be ‘dedicated’ funds,” Senate Finance Co-chair Bert Stedman (R-Sitka) gently corrected.
Article IX, Section 7 of the Alaska Constitution prohibits dedicated funds, with the exception of the Permanent Fund. This prevents earmarking that could favor certain programs over others.
By contrast, the State has dozens of designated funds that statutorily associate, but do not bind, revenues to spending. A full list is available in the Legislative Finance Division’s “Alaska Legislative Budget Handbook: The Swiss Army Knife Guide to Budgets.”
University of Alaska tuition is the primary example. The legislature technically has the ability to spend tuition on something other than the university, but it would violate the intent of the designated funds.
Nevertheless, Arduin said undesignated general funds (UGF) and designated general funds (DGF) will be combined in Dunleavy’s budget.
All funds should be scrutinized at the same level, she told Senate Finance. Otherwise, legislators could play games by moving money from fund to fund, misrepresenting spending.
“In our opinion, all money is green,” she argued. “And it belongs to Alaskans.”
Sen. Peter Micciche (R-Soldotna) expressed concern about the impact on university tuition, while Sen. David Wilson (R-Wasilla) worried about potential misdirection of snow machine trail fees.
Arduin responded that details will be available February 13, a mantra she repeated at least three times.
Stedman said that OMB can occasionally commingle UGF and DGF for presentation purposes, but to do so all the time would confuse legislators and make spending unclear.
“There’s no intention in the Finance Committee to commingle and make that distinction disappear between those two fund groups,” Stedman declared. “We can’t manage the resources of the State without separating them, in my opinion.”
Senate Finance Co-chair Natasha von Imhof (R-Anchorage) agreed, telling Arduin that true accounting must separate DGF.
“To be transparent, that needs to be available to folks that ask for it and should be separately accounted for,” she said.
When committee members wondered how the Dunleavy administration would present revenues and expenditures to budget subcommittees, Stedman assured them, “They don’t have dictatorial control on how they’re going to handle that type of information.”
Teal: We Actually Separate Money to Prevent Games
The legislature’s information filter on the budget is the Legislative Finance Division, headed by David Teal.
Unlike Arduin, Teal has been involved in Alaska State budgeting for 20 years.
Teal argued Wednesday against consolidating UGF and DGF.
“The OMB director believes that that’s a more transparent presentation,” Teal said. “I disagree with that. I think you, Mr. Chairman, are more correct when you say that that information’s critical to making decisions.”
“All money is not green,” he added.
Whereas UGF can be spent without restriction, DGF is worthless without an authorization from the legislature that includes collecting the corresponding receipts.
“All money is green, but all appropriations, all authorization is not green,” Teal clarified.
“The reason we want a separate category, designated general funds, is to prevent games,” Teal told Senate Finance. “You can play games if you combine them.”
Teal used the surplus tuition the university carries as an example.
“Let’s say the Senate Finance Committee cuts that $30 million out of the budget. You all pat yourself on the back and say, ‘We cut $30 million.’ But the truth is you cut what we refer to as ‘hollow authorization,’ or uncollectible receipts. You didn’t prevent the university from spending any money. You haven’t changed the deficit. You haven’t done anything,” he said.
Stedman acknowledged legislators and governors have been guilty of this in the past.
“Your decisions are going to be a lot easier to make and better if you understand your fund sources,” Teal told committee members. “It’s oversimplifying those fund sources that can take you down a path of unintended consequences. Pioneer Homes come to mind.”
Teal was alluding to an embarrassing moment for Micciche.
In 2017, Micciche attempted a last-minute, unallocated cut of $5.7 million from the Department of Health & Social Services, but accidentally cut that amount from the personal services line of the Pioneer Homes allocation. The cut was discovered after the budget passed.
The error forced then-Senate Majority Leader and DHSS Subcommittee Chair Micciche to draft a Sense of the Senate in support of the Pioneer Homes. The budget conference committee subsequently undid the cut.
Teal further explained that DGF’s authorization requirements prevent it from contributing to the deficit, yet another reason that combining it with UGF would create an inaccurate picture of the State’s finances.
Dunleavy’s preliminary budget includes $932 million in DGF spending that would cloud the deficit.
Arduin said DGF has gradually taken a larger percentage of State spending, something Micciche attributed to overall budget reductions.
Senators Express Discomfort With Aspects of Budget Cutting Philosophy
Arduin confirmed Wednesday that Dunleavy intends to close the $1.6 billion deficit exclusively with budget cuts.
Sen. Bill Wielechowski (D-Anchorage) noted that department commissioners have refused to say how much their departments will be cut, instead deferring to Arduin.
“Are the cuts coming from the commissioners and from the administration, or are you proposing the cuts?” he asked her.
While departments are helping, OMB is crafting their budgets, Arduin acknowledged.
Dunleavy’s only administrative order so far has been to consolidate the administrative service director positions within OMB.
“I guess I have a little bit of concern about that. We have commissioners who are selected by the governor, approved by the legislature. You are not approved by the legislature,” Wielechowski told Arduin. “You’ve been in Alaska for about a month, six weeks. I know you plan on leaving Alaska in probably the next few months after we’re done here. So I guess I’m concerned about so much power focused and budget-creating ability placed in your hands.”
Arduin reiterated that while departments will have input, all decisions will ultimately be Dunleavy’s.
“I hope you don’t look at us as hostile toward what’s going on. We’re just trying to brace ourselves for what’s going to be happening because the last thing we want to see is weeping and gnashing of teeth and rioting in the streets,” Sen. Donny Olson (D-Golovin) explained to Arduin while hinting at the impact of $1.6 billion in cuts.
“How’s that weighted per department?” Sen. Click Bishop (R-Fairbanks) asked of the impending cuts. “Are you going to shut down workforce development, which is a critical mission to the state, just because your revenues are down?”
Arduin said OMB is asking every department to prioritize its programs before figuring out what to cut.
Using the Department of Environmental Conservation as an example, she said programs that protect human health will have a higher priority than protecting the environment.
“To me, protecting the environment and protecting human health are one and the same. They’re joined at the hip,” Bishop countered.
The State will be pursuing things like Medicaid waivers and general privatization to drive down the budget, Arduin said.
“We simply shouldn’t be competing with the private sector,” she told the committee.
“I want to make it clear that I am a big fan of the fact that government should not be competing with the private sector, and also of privatization and outsourcing when possible,” Micciche said.
However, Micciche noted that states that proudly announced privatization have quietly walked it back within a few years because it did not actually save money.
Arduin assured Micciche that she will have a team evaluating outsourcing on both ends.
She used data from the Kaiser Family Foundation to argue that Alaska outspends all other states on a per-capita basis.
That is not an “apples to apples comparison,” Stedman pointed out, because of Alaska’s massive geography, sparse population, undeveloped infrastructure, and subsurface mineral rights held in common.
“It’s difficult to compare us to the original 13 colonies with no federal land when we’re basically owned by the federal government,” Stedman noted.
Dunleavy Plan of Full PFD Leaves Legislature With Tough Choices
Teal agreed that a simple per-capita comparison doesn’t paint an accurate picture..
“What about expenditures? Are they the root of the problem?” he asked.
In his presentation, Teal showed that per-capita spending adjusted for inflation is actually in line with spending in the mid-1990s or even the 1970s prior to capital expenditures on the Trans-Alaska Pipeline System (TAPS).
The legislature can’t cut the capital budget further or cut debt service, like retirement.
In fact, Teal said, if Dunleavy maintains his plan to pay a $3,000 Permanent Fund dividend (PFD), there will only be enough money for DHSS and the Department of Education & Early Development (DEED), if he matches revenues and expenditures.
That means no court system, no University of Alaska, and no departments of Corrections, Public Safety, or Transportation. Spending on most of these is legally required.
“The split between dividends and the general fund is critical to the fiscal situation. That’s because every dollar paid as dividends is a dollar that doesn’t wind up in the general fund as revenue,” Teal said. “To be fair, the opposite’s also true; every dollar that you spend on government services is a dollar that you can’t spend on dividends.”
The Dunleavy budget allocates more money for PFDs than any other item. The next largest expenditure is $1.3 billion for DEED.
If the legislature chose not to spend the $1.9 billion necessary for the $3,000 PFD, there would be a $300 million surplus, rather than a $1.6 billion deficit.
That is politically unlikely and would have serious short-term economic impacts.
More likely, since the Dunleavy administration has said there will be no new taxes, is that the legislature shifts costs to local governments or draws more from the Permanent Fund earnings reserve than is sustainable. The latter would result in reduced investment returns and shrinking PFDs until the earnings reserve is empty in FY 2028.
“This is a death spiral,” Teal said.
Teal told Stedman and von Imhof he is glad that they are on record opposing unsustainable spending from the Permanent Fund.
The only other account available is the Constitutional Budget Reserve (CBR), currently holding $1.7 billion. But if legislators empty that this year to fill the deficit and oil prices drop after they pass a budget, they will have to call a special session and restart the budget subcommittee process with even tougher choices in the middle of the fiscal year.
Teal told legislators Legislative Finance is poised to help with data and analysis once Dunleavy’s budget is released.
“The decisions are yours to make,” he said.
Whatever spending decisions legislators do make, Dunleavy holds the final say. Article II, Section 15 of the Alaska Constitution gives him line-item veto authority.
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