Gov. Mike Dunleavy’s administration continued to insist, Thursday, February 14, that his new FY 2020 budget is balanced.  Senators worried about the impact of cuts on Alaskans and whether the unacknowledged deficit would be filled by the Permanent Fund.

The amended budget cuts $1 billion in unrestricted general fund (UGF) spending, mostly from the K-12 education formula, Medicaid, the University of Alaska, and the Alaska Marine Highway System (AMHS).

In a Senate Finance hearing, Office of Management and Budget (OMB) Director Donna Arduin said, “The budget we are presenting is balanced, and expenditures do not exceed existing revenues.”

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Except it’s not, and they do.

Excluding the Permanent Fund dividend, the budget contains $3.3 billion in unrestricted general fund (UGF) revenue to cover $3.7 billion in expenditures.

In order to balance the budget, a fiscal summary from OMB includes $420 million of new revenue not yet adopted by the legislature.

Dunleavy introduced a bill (SB 57) that would repeal the ability of local governments to receive credits for oil and gas property taxes.  According to the Fall Revenue Sources Book, the amount local governments received in FY 2018 from the property taxes totaled $440 million.

Sen. Donny Olson (D-Golovin) noted that 85 percent of the amount goes to the North Slope Borough in his district.

“It’s not new revenue; it’s revenue that’s been confiscated by the State, the administration in particular, away from local government.  That’s where we’ve got the heartburn,” Olson said.

“With many of the cuts that we’re seeing here… what sort of analysis have you done about how much this will increase local property taxes or sales taxes?” Sen. Bill Wielechowski (D-Anchorage) asked Arduin.

Arduin replied that OMB has not conducted any.

Sen. Peter Micciche (R-Soldotna) said the Kenai Peninsula Borough (KPB) has already cut its budget.  The KPB’s portion of the petroleum property taxes is $15 million.

“I think it’s important that, although your budget seems to be working toward not having a need to increase State taxes, you do, in fact, realize that revenue has to be made up locally, and it will more than likely result in higher property taxes to make up that difference locally?” Micciche asked.

“We cannot comment on how local governments are structuring or will structure their budgets and what they may do with their own revenues and expenditures,” Arduin responded.

Sen. Click Bishop (R-Fairbanks) wryly requested that in an upcoming call with credit rating agencies to brief them on the budget, the State should enquire about the impact on local government bond ratings.

Senators Warn Arduin They’re “Going to Keep a Close Eye” on Permanent Fund

Without legislative support for the repeal of local petroleum property taxes, Dunleavy’s FY 2020 budget has a $400 million deficit. 

Arduin noted that the budget does not include a draw from the Constitutional Budget Reserve (CBR), the State’s dwindling savings account that contains about $1.7 billion after years of structural deficits.

“By spending revenues that we don’t have, we’ve been spending our savings accounts,” she said.

If the $400 million deficit is not filled using the CBR, it would likely be filled with an additional draw from the Permanent Fund Earnings Reserve Account (ERA).

Though the Alaska Supreme Court has ruled otherwise, Arduin insisted that only the portion of the ERA pegged to the annual percent-of-market-value (POMV) draw is available for spending.

“The administration considers the… remainder of the Earnings Reserve Account to be reserved for dividends.  It’s a savings account for future dividend payments, not for appropriations in the budget,” she told the committee.

Senate Finance Co-chair Natasha von Imhof (R-Anchorage), whose grandfather Elmer Rasmuson was the first chair of the Alaska Permanent Fund Corporation (APFC) Board of Trustees, was clearly not convinced.

“I’m going to be the protector of the Permanent Fund, including the Earnings Reserve Account,” she declared.  “We’re going to keep a close eye on it.”

Wielechowski and Olson suggested that any additional removal from the ERA would be a de facto tax on Alaskans.

Will Dunleavy veto any amount withdrawn from the ERA in excess of the POMV amount, Wielechowski asked.

“The governor has constitutional authority to veto any item or bill that he chooses.  I will not limit his ability by constraining it, telling you what he may or may not do,” Arduin told him.

Sen. Olson: OMB’s Claims That Private Sector Will Fill Spending Gaps Akin to Hoover Administration

The Dunleavy administration has repeatedly said the budget is $1.6 billion smaller. 

That is based on a comparison to what von Imhof called Gov. Bill Walker’s “Hail Mary budget,” submitted just before he left office.  If the budget is compared to FY 2019 levels, the magnitude of reductions is less, von Imhof said.

A presentation from OMB consistently included Walker’s budget to inflate reductions.

Senate Finance Co-chair Bert Stedman (R-Sitka) called the comparison a “distraction.”

“I think the committee is clearly interested in comparing the Management Plan of ’19 with the current budget on the table, dropped yesterday, and really has little interest in the previous governor’s budget submission of December.  It’s just another confusing column.  Frankly, it’s not really relevant,” he advised Arduin.

Senate Finance had to request additional PowerPoint slides from OMB to provide clarity on its budget and State jobs numbers.  

In her presentation, Arduin noted that job growth is down since 2012 and has been negative since 2015.  She also said that migration has been negative since 2011.

The cuts to State funding in the amended FY 2020 budget are expected to cost an additional $425 million in federal funds.

“Have you analyzed the potential effects on outmigration and unemployment with the magnitude of the cuts that you’re proposing in the state of Alaska?” Micciche asked.

Arduin responded that job loss and outmigration are the result of overspending.

“These numbers would strongly suggest that if we got the budget in order and retained stability that we would see a reverse of these numbers and would start to add GDP and employment to the state,” she said.

“I don’t know that I got an answer,” Micciche persisted.  “I don’t want to make decisions of this size on suggestions.  I’d like to know that we adequately analyzed that effect.”

“Have you done an analysis… of how many Alaskans will lose their jobs because of this budget, or gain jobs?” hammered Wielechowski.  “Has your office done any analysis at all of the impacts of the cuts on Alaskans, on families, on small businesses?  Have you done any sort of analysis at all?  Anything?”

OMB Chief Economist Ed King has done an analysis, Arduin responded, which shows that private sector investment will offset government cuts, including the 625 positions cut in the budget.

(The number of full-time State positions lost is actually 341 because, again, Arduin is inflating the numbers with a comparison to Walker’s lame duck budget.)

“The reliance on the private sector to go ahead and take up the slack that’s going to be happening reminds me of the Hoover administration after the stock market crash of 1929 that resulted in such a Great Depression,” Olson said.  “This one has that same flavor.” 

Arduin did not have OMB’s analysis available for committee members.  King will present to Senate Finance next week.

State Will Lose Thousands of Jobs Due to Cuts

The University of Alaska Anchorage (UAA) Institute of Social and Economic Research (ISER) has conducted an analysis of government spending cuts that completely contradicts Arduin’s claims.  ISER concludes that $1 billion in cuts would cost about 11,000 jobs in both the public and private sectors, not just in government.

Dunleavy’s proposed $3,000 Permanent Fund dividend would add 6,500 jobs, for a net loss of 4,500 jobs.

Wielechowski noted that the budget would cost 1,000 Anchorage teachers their jobs.  Has the administration analyzed the impact on education, he asked.

Arduin responded the State does not run local school districts.

Bishop pointed out the University of Alaska is anticipating 1,300 jobs lost as a result of $134 million in cuts to its budget.

Arduin told the committee the administration did not conduct its own analysis of cuts to the University or what would happen if the University had to double tuition to cover the loss.

Bishop took issue with Arduin’s conclusion that outmigration was the result of overspending.

“I would respectfully disagree,” he said.  “We’re a one trick pony.  It’s tied to the oil commodity.  Those people left because the price of oil went down and the CAPEX [capital expenditures] spending went down.”

“I know you weren’t here during the oil tax debates,” Wielechowski told Arduin.  “I know you’ve only been here for eight weeks now or so?  All of us at this table were here for that debate.  I can tell you what we were promised, and everybody in this room can tell you what we were promised.  We were promised that if we cut oil taxes, and if we increased tax credits to the $1 billion over per year that we’re paying, that we’d see increased production, increased revenue, increased jobs.  Instead, we have jobs at half the level they were, revenue at half the level it was, and production that’s declined and projected to decline for the next decade.”

“So I know you can sit there and tell us that, in theory, cutting taxes and leaving taxes where they are is going to do all these wonderful things, but those of us in this room that have been here have been through this, we’ve experienced it, and it has absolutely not come to what we’ve been told [is] projected to happen,” he concluded.

Wielechowski noted that the language section of the budget bill (SSSB 20) appropriates $254 million for oil tax credits.

$84 million of that amount is designated for FY 2019 and will not appear in the administration’s FY 2020 spending documents.

On Monday, Arduin said she will present a package of bills that would be required to remove programs from statute that the budget cuts.  That would include a plan to eliminate the $1 billion Power Cost Equalization (PCE) Endowment Fund and roll it into the general fund.

Sen. Wielechowski Says VPSO Cut “Looks Like a Surrender”

The only department that Senate Finance had time to examine Thursday was the Department of Public Safety (DPS).

DPS is one of nine departments that see increased spending in Dunleavy’s budget, though that is due to an infusion of federal funds.  UGF spending would decrease.

The biggest cut, $3 million, would be to the Village Public Safety Officer (VPSO) program.

“This is not a comment on the VPSO program,” insisted OMB Division Director Dan Spencer.

Rather, he said, it is a response to several years of lapsed funding for VPSOs, unable to fill vacant positions.

“I don’t understand the rationale here on the VPSOs,” said Wielechowski.  “We have a constitutional obligation to provide public safety, not just to urban Alaska, but to rural Alaska.  The wages and benefits are set so low that you cannot attract qualified VPSOs, so you cut the funding.  That looks like a surrender to me.  That looks like you’re admitting to failure here.”

“We are not admitting to failure,” Spencer argued.  “We are not reducing funding for their salaries.  We are simply saying that, given the historical hiring patterns, they have not been able to fill all their positions and even use the money we’ve appropriated to them.  The governor’s commitment is to not ask for money that’s not going to be spent.”

“I don’t quite agree with you,” Olson told him.

“The problem is what you’re saying is, ‘Don’t even try.’  You’re saying, ‘We’re going to take away the $3 million.  Don’t even try to figure out a way to fix the problem in the next year.’  If they come up with a solution in July or August or September, they don’t have the funds to go ahead and fill those positions,” Wielechowski said.  “What’s wrong with putting the money in there and urging them to try and find solutions?  And then if they don’t spend it, the money gets rolled back into the general fund.  What’s wrong with that philosophy?”

Spencer and Arduin both said Dunleavy would increase spending if it appears that more VPSO positions could be filled than are funded.

Stedman noted that communities in his district, like those on Prince of Wales Island, struggle without law enforcement.

“Those smaller communities come see us as their elected officials and are very concerned about the safety of their kids and their families,” he said.

Stedman expects the budget to be passed in early May.  The Senate Finance Committee will continue looking at individual departments on Friday and into next week as budget subcommittees also start to dig in.

“It might be a little more detailed and time consuming than in previous years,” Stedman acknowledged.

The House finally elected a speaker Thursday, Rep. Bryce Edgmon (I-Dillingham).

House members canceled an informational meeting on the budget Thursday afternoon as they scrambled to establish caucus lines and committee assignments.

It was Day 31 of the legislative session.

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