The president of the University of Alaska (UA) testified Tuesday, February 19, that budget cuts to the University would damage the Alaska economy.  Those cuts are smaller than proposed oil tax credit payments. 

Dunleavy’s FY 2020 budget cuts UA by $154 million systemwide.  A $20 million increase for UA community campuses means a net loss to the university system of $134 million.

“What we see from the data is the community campuses, most of them, are actually quite cost effective.  They’re not the cost driver.  The University of Alaska Fairbanks [UAF] appears to be the large cost driver here,” Office of Management and Budget (OMB) Policy Director Mike Barnhill testified during a Senate Finance hearing.

Barnhill said the cheapest campus in Alaska is the UAF Community & Technical College.

UA President Jim Johnsen explained that the community campus costs can’t be compared to the three major universities because the UA system as a whole bears the community campuses’ administrative costs.

UA has been cut by $195 million in the last five years, resulting in the loss of nearly 1,300 staff.  Johnsen testified that an additional $134 million would see an equal number of lost faculty.

OMB Director Donna Arduin tried to convince Senate Finance that there is only a 17 percent reduction in UA funding.

There is no rational way to reach Arduin’s math.  The cut to UA unrestricted general funds (UGF) is 41 percent.

During his presentation, Barnhill sheepishly hurried past a slide that shows total funding for UA increasing in the budget.

The increase on paper is because of OMB’s insistence on including designated general funds (DGF) when talking about budget totals.

OMB included a $154 million increase in DGF funds to match the systemwide cut to UA, but this is hollow receipt authority without actual funding behind it.  It merely allows UA to bring in that money in tuition or other funds if it can.

“We believe that much of this will remain hollow, but we don’t know how much,” Barnhill admitted.  “That’s kind of on the University to see what kind of additional funding sources they can develop in a short period of time.” 

UA would have to double tuition to cover the cuts and fill the receipt authority.

“We are not suggesting in any way, shape, or form to balance this on the backs of the students.  There is no conceivable way of doubling tuition,” Barnhill acknowledged.

Barnhill estimated the most UA could increase tuition is by five percent.

According to Johnsen’s presentation, UA has already increased tuition every year since 2010.  There have been five percent increases each of the last five years.

Johnsen predicts that rather than filling even a portion of the lost UGF with tuition, UA will see additional losses from students choosing to attend college Outside.

“They will vote with their feet, just as Alaskans have been voting with their feet for the last six years, leaving our state,” he said. “History will show… that when our budgets are cut, enrollment follows because we have fewer faculty, fewer courses, fewer programs.” 

Whereas 80 percent of those who graduate from UA stay in Alaska, only 20 percent who leave for college return, Johnsen testified.

Speaking to the underlying budget and its $1 billion in cuts, Johnsen said, “I’m not a labor or demographic economist, but I do believe if the cuts in general take place, there will be a significant population loss in Alaska, adding to what we’ve already been experiencing, and that will also have a negative enrollment impact and a tuition impact on us.” 

An analysis conducted by the University of Alaska (UAA) Institute of Social and Economic Research (ISER) corroborates Johnsen’s testimony.  Dunleavy’s budget is expected to cost about 4,500 jobs, public and private.

UA President: OMB Making a “Pears to Apples Comparison” for Cuts

Barnhill explained that OMB chose the $134 million reduction by comparing UA to other institutions using data from the State Higher Education Executive Officers Association and the National Center for Education Statistics, a federal agency.  Barnhill said the statistics indicate the State spends more than twice the national average per student.

UAF receives the third-highest percentage of its funding from the State of any land grant university, he said.  

“I think it’s a pears to apples comparison,” Johnsen argued later, noting that even Rhode Island got a bigger land grant than UA.

“That’s really hobbled us for decades,” he said.

Listing some of the other states Barnhill used for his comparison, Johnsen pointed out that Oregon’s land grant was 18 times larger than for UA, while California’s was twenty times larger and Washington’s 100 times larger.

Barnhill argued that the University of California at Davis spends more per student, but receives more of its funding from the federal government, endowments, and donors.

However, UC Davis has 260,000 alumni who are potential donors, more than twice the number of UA graduates.  They include multiple billionaires, astronauts, tech CEOs, biotech CEOs, university presidents, and Hasan Minhaj.

Johnsen noted that Phil Knight of Nike has purchased the naming rights to every new building at the University of Oregon.

“We don’t have any Tim Cooks or Jeff Bezos or Steve Jobs on our alumni boards yet,” said Sen. Click Bishop (R-Fairbanks). “They are big foundation donors to their universities.”

Snowball Effect of Cuts

Johnsen pointed out that for every dollar invested in research at UA, there is a six-dollar return on investment.

“What does this say to potential grantees about investing in research at the University of Alaska?” Bishop asked of the proposed cuts.

Johnsen responded that he expects to lose faculty to Washington and Oregon, which are investing in arctic research.

“Our ability to offer classes will drive enrollment and will drive tuition revenue.  Our ability to hire research faculty will drive our ability to get those research grants and contracts.  So if our core funding from the State is reduced, as is proposed by the governor, I would actually predict an additional reduction in those other categories, not an addition at all,” he said.

Several senators searched for places that UA could cut.

“Do we need to have satellite campuses?  Do we need to do that when we can be doing education online and achieving degrees without necessarily having to have actual physical buildings with physical teachers located across this very vast state?” asked Sen. Mike Shower (R-Wasilla).

Johnsen told Senate Finance that UAF already has over 30 programs that are completely online.

Closing all community campuses would only save $38 million. To close the $134 million gap, the University would either have to close UAF or both UAA and the University of Alaska Southeast (UAS).

“We’re at a place right now in many areas where there is no further room,” he said. “You’ve got to have critical mass to have quality, and we’re getting to a place across the state where that critical mass is-  We may have even crossed the line in some areas.”

Earlier this year, Johnsen testified before Senate Education that UAA’s loss of accreditation for half of its education programs was partly the result of reduced faculty from budget cuts.

Dunleavy has proposed cutting the Department of Education and Early Development (DEED) by over $300 million, which Johnsen said will impact UA’s budget because 3,000 Alaska high school students are dual enrolled.

Ultimately, Johnsen said the University will respond to whatever budget is handed them.

“We will make it work,” he said.  “The deeper the cut, however, the less we will be able to do on behalf of Alaskans and for the Alaskan economy.  There is no great state economy without a strong university.  Period.  End of report.” 

Sen. Wielechowski Suggests Budget Prioritizes Oil Companies

Senate Finance also heard Tuesday about the administration’s statewide proposals, including payment of $254 million in oil and gas tax credits.  There is a balance of $800 million in cashable credits still outstanding.

“If you come to the state of Alaska, invest in exploration, find new production, the State will reimburse some portion of your exploration expenses,” Barnhill explained.

Hearing about the credit payments on the same day as a $134 million cut to UA made an obvious allusion to priorities.

“These are completely discretionary tax credits,” Sen. Bill Wielechowski (D-Anchorage) said.

Wielechowski noted that Gov. Bill Walker proposed paying only $27 million in credits in FY 2020.  

Referencing other administration proposals, Wielechowski continued, “You are seeking in other statutes to not pay back over $100 million to the taxpayers of Alaska who were promised that they would get their school debt bonds reimbursed.  You are seeking to not pay under a statute for the Base Student Allocation that would allocate funds to the schools across Alaska, and yet you are saying, ‘We’re going to take away hundreds of millions of dollars from the people of Alaska, but we’re going to add $227 million in oil and gas tax credits.’  How do I possibly justify that to my constituents?” 

“Asking us what to say to his constituents is not a budget question,” Arduin protested to Senate Finance Co-chair Bert Stedman (R-Sitka), refusing to answer.

“How do you, the administration, justify spending $225 million in additional revenue being spent on this line item and not spending it on education?” Sen. Lyman Hoffman (D-Bethel) pressed on the credits.  “How does that jive in your balancing the checkbook?”

“Difficult decisions before us,” Barnhill replied.  “It is important for the State’s credit story and reputation that we manage our debts appropriately.”

Wielechowski argued that $84 million of the credits, which would be paid in FY 2019 to fulfill a statutory formula, should have been in Dunleavy’s supplemental budget.  Further, Wielechowski noted that the interpretation of the oil tax credit formula focuses on gross value, including $1 billion in deductible tax credits that inflates the final payment.

“That is a bizarre interpretation of the statute.  I don’t think that was ever the intent of the legislature,” he said.

Hoffman observed tellingly that while Dunleavy’s line-item veto authority allows him to cut the budget, he cannot add funds should the legislature decide to reduce the amount of oil tax credits.

Move to Eliminate Designated Funds Would Hamper Legislature’s Future Spending

The Dunleavy administration is proposing to gradually phase out designated funds, including the $1.1 billion Power Cost Equalization (PCE) Endowment Fund, the Higher Education Investment Fund, and the Community Assistance Fund, formerly known as Revenue Sharing.

Like UA tuition, all DGF revenue is statutorily tied to related spending, though the constitution bars that money from being dedicated to one thing.

“The problem with that from an accounting perspective and a budgeting perspective is it decreases the flexibility of the legislature to manage the State’s funds, and it simply is inconsistent with the framers’ intent when the dedicated funds prohibition was considered and put into the constitution,” Barnhill explained.  

“There seems to be a punitive action here for a program that’s years in the making and has been successful,” Sen. Donny Olson (D-Golovin) said in defense of PCE, which helps lower rural energy costs.  “Why would we be sweeping that money so that it can be used for other things besides what it was destined for?”

“This is not intended to be punitive in any way, shape, or form. We’re not attacking the program.  The funding remains in place for the program,” Barnhill responded.  “The characteristics of the Power Cost Equalization program… are good characteristics. They are meritorious.  What we are doing, in a state of fiscal crisis, is trying to increase the legislature’s flexibility to deal with all of the stakeholders.”

“We have to weigh the merits and the needs of the State.  That’s what we’re trying to do here, is return the State’s finances to the way it was intended by the framers in 1955.  Not punitive.  Going back to what was constitutionally intended,” Barnhill concluded.

Barnhill said that while the PCE and other payments would continue, the funds themselves would be moved into the general fund.

“However long it’s taken to save that $1.1 billion… you are proposing that we just put it in the general fund to spend however we want, whenever we want, until it’s gone?” Senate Finance Co-chair Natasha von Imhof (R-Anchorage) asked of PCE.

“I am absolutely not suggesting that this money be frittered away.  If anything, the Dunleavy administration is calling on the legislature to be frugal and a very strict steward of its funds,” Barnhill replied.

“That program [PCE] has been in existence for well over 30 years,” Hoffman said.  “If, in fact, the administration continues to say that… the program would continue, that’s well and good, but I think the people of the state of Alaska… would rather see it there and voted on by the legislature in the fund.” 

Hoffman highlighted Lime Village along the Stony River, where he said diesel fuel costs seven dollars per gallon.

If the legislature did approve Dunleavy’s proposals, about $1.5 billion would be swept into the Constitutional Budget Reserve (CBR), which requires a three-quarter vote of each legislative chamber to access.

Therefore, the practical impact of eliminating the funds would be to make spending more difficult, not to increase legislative flexibility, as Barnhill claims.

Dunleavy has separately proposed three constitutional amendments that would also limit legislative power to appropriate.

Sen. Von Imhof Balks at Claims of “Unleashing Entrepreneurialism”

In addition to eliminating the large funds already listed, Dunleavy is seeking to eliminate several small revolving loan funds, including the Agriculture Revolving Loan Fund and the Mariculture Revolving Loan Fund.  The funds help spur small businesses that have a delayed return on investment.

“We’d like to encourage the private sector to step into this space,” Barnhill explained. 

In OMB’s presentation, elimination of the revolving loan funds fell under a category they titled “Unleashing Entrepreneurialism.”

“I just have to chuckle over the header of ‘Unleashing Entrepreneurialism’ as shutting down State funding in so many areas and hoping that the private sector will pick up the slack. There’s a reason why this State is playing in this space and not necessarily the private sector, because it’s not altogether profitable.  The State is doing more of a service to the community,” von Imhof said.  “Actually shutting off the funds, hoping that the private sector will pick up the slack-  It’s interesting.  Generally, what happens is unleashing entrepreneurialism is more of decreasing regulations, streamlining permits, things of that nature.” 

Dunleavy is proposing to pay the oil tax credits from the Alaska Industrial Development and Export Authority (AIDEA) Fund.

But von Imhof wondered how the State might instead use AIDEA funds, along with PCE, as they’re intended, to spur public/private partnerships.

“Attracting outside investments, outside capital, is clearly one of our goals,” Arduin answered.  “For too long, we have relied on State capital for investments in this state.  We need to unleash entrepreneurialism so that we can attract outside capital and investment.”

Going through Dunleavy’s budget is proving to be an especially time-consuming exercise.

Senate Finance had to extend its Tuesday hearing into the afternoon just to get through the presentation on UA.  Two budget subcommittee meetings on DEED and UA were canceled as a result.

Wednesday, the committee will look at the Department of Military and Veterans’ Affairs and the Judiciary before starting on the Department of Transportation & Public Facilities.

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