Legislative Finance Director David Teal speculated Tuesday, February 26, whether Gov. Mike Dunleavy’s budget is so lacking in justification because it is designed to “create chaos.”

Dunleavy’s FY 2020 budget would reduce unrestricted general fund (UGF) spending by $1 billion.

However, in more than a week of questioning Office of Management and Budget (OMB) Director Donna Arduin and other OMB officials, Senate Finance has heard few reasons for deep cuts to education, Medicaid, and the University of Alaska (UA), or for closure of the Alaska Marine Highway System (AMHS).

“It seems apparent that many of you share my disappointment in the lack of evaluation and analysis to support the governor’s proposals,” Teal told Senate Finance members during a hearing Tuesday.  “I think budgets shouldn’t simply be a math problem, that budgeting and policy are inseparable, and that you cannot make good policy decisions or good budget decisions without full information.  All cuts are not equal, yet the common answers to your questions about, ‘Why are you cutting this particular item?’ have been, ‘We have a deficit’ or “It’s just a proposal.’”

“When I saw the budget, I immediately wondered, ‘These are some major changes in policy.  Where are the supporting documents?’  Looking at the lack of justification, I began to wonder whether the budget was designed in some way to create chaos,” he continued.

Teal, whose low-decibel, fact-heavy testimony has gained him a cult following among budget wonks, came as close as he ever has to a public rebuke, repeatedly referring to Arduin by name.  

“This is the most unrealistic budget we’ve ever seen come down the pike,” Sen. Donny Olson (D-Golovin) said.  “A lot of it is dependent upon proposed legislation that may or may not got through and probably won’t go through.”

Many of the proposed changes would fall in the Department of Health & Social Services (DHSS), which is set for a $337 million UGF cut.  Medicaid would be cut by $710 million, including federal funding.

“We don’t have that analysis done on which bills affect budgets by how much because we haven’t even seen the bills yet,” Teal said.

In addition to the closure of AMHS, Olson listed off a number of budgetary impacts, such as reduced vaccinations tied to cuts to public health nursing.

“How crippling is it to the state of Alaska?” Olson asked of the budget.  “How crippling is this, and how unrealistic is this?  Have you ever seen anything like it in your 20 or 30 years of being with the State?” 

“I’ve never seen anything like this,” Teal replied.

But, Teal added,

These cuts can be made.  The revenue measures can be adopted.  The unrealistic part of the budget, to me, is any expectation that you have enough time to really consider these, especially given the fact that the information’s not available to you now.  I look at this as a case of biting off way more than you can chew, not just on the governor’s part.  There are a lot of proposals, but those proposals aren’t really vetted.  You can’t be presented with position papers with justification at this time.  What that does is throw an unrealistic workload on the legislature, because you would have a difficult time even if all this analysis that you need to make decisions was available right now.  The fact that OMB has implied that that’s not their job to provide the backup, the information that you need-  “It’s your job to vet these proposals.”  I find that completely unrealistic, that in a regular session, which we’re now approaching halfway, that you would be able to get this analysis done, interpret it, and make decisions.

Maybe Dunleavy hopes that by leaving legislators with insufficient time to evaluate the budget, they will simply adopt it, Teal speculated.

“I would say that we still have a fairly weak understanding of where the budget intends to take the State and whether the budget proposals will stand up to scrutiny once we do have time to begin the analysis,” he said.

Despite Core-Based Budgeting, Cuts Hit Education, Health Care, Transportation

Teal referenced a Dunleavy press release titled, “An Honest Budget: Sustainable, Predictable, Affordable,” that preceded release of the budget.  According to that press release, the first principle upon which the budget was built is that “expenditures cannot exceed existing revenue.”

“In recent years, expenditures have exceeded revenue,” Teal acknowledged.

However, his presentation shows that Dunleavy’s budget would be the smallest in 43 years, adjusted for population and inflation.

“The question isn’t, do expenditures exceed revenue; it’s, do expenditures exceed revenue because expenditures are too high or because revenue is too low, historically low?” Teal asked.  “The OMB director said that the answer is obvious, that expenditures must be too high because they exceed revenue.” 

Teal noted the answer could just as easily be that revenues are too low, while oil prices are unpredictable.

“If expenditures equal revenues and you’re going to set that as a guiding principle, and revenue is volatile, as we know it is, how will the budget be any more predictable than oil prices themselves?  Are we going to cut expenditures every time revenue falls?  Are we going to increase the budget every time revenue goes up?” Teal asked.  “I don’t see how simply setting expenditures equal to revenue makes things more predictable.”

Arduin’s approach to budgeting has often been confused with zero-based budgeting, Teal said.

“It is not zero-based budgeting.  If it were zero-based budgeting, your questions about the analysis of fiscal impact would be answered,” he told committee members.

Instead, Arduin described her approach as core-based budgeting, prioritizing programs that are core services.

Yet the budget cuts $300 million from K-12 public education and $134 million from UA, in addition to the cuts to DHSS and the ferry system.

“The cuts hit the big money programs pretty much as we anticipated,” Teal said.  “Where the money is is what many people would classify as core services.  As Senator [Lisa] Murkowski [R-Alaska] said, the core services are education, health care, access to transportation.  And this budget hits those core services hard.” 

According to a document provided to the Department of Education & Early Development (DEED) budget subcommittee, the $300 million cut would cost the Anchorage School District $86 million, the Mat-Su Borough School District $40 million, the Fairbanks North Star Borough School District $29 million, and the Kenai Peninsula Borough School District $21 million.

The education funding formula limits how much local governments can voluntarily contribute to their school districts based on State spending. 

Therefore, Arduin’s suggestion that local governments can make up the difference is inaccurate, Teal said.  Communities, like Anchorage, that contribute to the cap would be unable to adjust.

“In addition to losing State funds, you’re also losing local funds,” he explained. “With this level of cut, I would say it’s highly likely that you would get a lawsuit regarding the adequacy of education funding if the governor’s budget were to go through.”

Yet Teal noted that HB 287, which the legislature passed last year as part of a budget compromise, forward funds K-12 education in FY 2020, so the $300 million is only jeopardized if the legislature adopts a different number for education funding this year.

“You don’t need to make an appropriation for K-12 this year at all.  It’s forward-funded,” he told committee members.  “Because it was funded last year, if you simply reject that repeal and reject the replacement of new money, the money that was appropriated last year remains in the FY ’20 budget.” 

HB 287 also included $20 million for one-time FY 2019 education funding that the Dunleavy administration has not dispersed.

“What’s the latest date that those funds have to be dispersed to those school districts after it’s been appropriated, passed by the legislature, signed by the governor?” Senate Finance Co-chair Bert Stedman (R-Sitka) asked.

As he told House members prior to organization, Teal said Dunleavy can hold the $20 million until the last day of the fiscal year, June 30.

The Alaska Supreme Court ruled in State v Fairbanks North Star Borough that a governor cannot indefinitely withhold funds that have already been appropriated, even if, as in that case, oil prices suddenly drop.

“If the money can be spent, the governor can’t unilaterally hold that money,” Teal said.  “It must be spent as the legislature appropriated it.”

However, he clarified, “There is no trigger for” release of the money prior to June 30.

Sen. Bill Wielechowski (D-Anchorage) pointed out that because of the cuts to AMHS, the ferry system is not taking reservations beyond the end of September.

“Can the governor just do that on his own?” Wielechowski asked.  “Can the governor just go ahead and unilaterally stop the ferry system from taking reservations after September 30?” 

“He did.  I don’t know what to tell you on that one,” Teal responded.

Teal went on to say the legislature may appropriate more, but Dunleavy’s argument at this stage is that it shouldn’t.

“He could also veto it.  I think that’s highly likely,” said Sen. Lyman Hoffman (D-Bethel).

While Dunleavy’s budget might allow profitable ferry routes, like the summer run between Bellingham and Juneau, Teal said it doesn’t seem to allow for the subsidized routes after September.

“I don’t know how that allows any other options besides shut down because, under the budget, there’s simply no money to run the coastal runs,” he said.

Teal Asks, If Dunleavy Has Broken Some Principles, Is He Flexible on PFD?

“Despite campaign statements that $200 million or more could be cut with no impact on services because agencies had funded but unfilled positions, we could achieve efficiencies, and several other savings that he hoped to accomplish, I believed that cutting $200 million from agency operations would be a big stretch.  The governor exceeded my expectations,” Teal told Senate Finance.

Dunleavy cut $260 million from agency operations, discounting K-12 and Medicaid formula funding.

Some of those cuts won’t hold up, Teal said.

The plan for the Department of Corrections to send at least 500 inmates Outside is an example.  Teal wondered about the transportation costs to the State, where the inmates will be located, and what costs the State will incur moving prisoners within Alaska so facilities can be closed, none of which OMB has answered.

“We don’t have good numbers on this,” Teal said.  “I wouldn’t be surprised to see a supplemental request of $7 million or more for the Department of Corrections, assuming things go as the governor proposes.” 

OMB has proposed to offset cuts to the University with increased designated general funds (DGF), presumably tuition, but Teal pointed out the University is unlikely to actually bring in $134 million in additional tuition.

“DGF turns into money if you can collect it,” he explained.  “That cut of UGF is real money to them, while the ability to offset those cuts by increasing tuition is fantasy money.”

Even if K-12 and Medicaid are included, Dunleavy’s budget only cuts agency operations by $650 million to fill a deficit of over $1 billion.

“Agency budgets were not good hunting ground for finding $1.6 billion in cuts,” Teal said.  “If agency operating budgets weren’t the means of balancing the budget, what was?”

Despite one of the budget principles being “maintaining and protecting our reserves,” the budget pulls $170 million from Alaska Industrial and Economic Development Authority (AIDEA) funds to pay FY 2020 oil and gas tax credits.  An additional $84 million is paid for FY 2019.

Further, the DHSS budget has backstop language that if the federal government doesn’t approve a variety of waivers, the costs of the programs will be partially paid with $172 million from the Statutory Budget Reserve (SBR) savings account.

“It’s, in our opinion, highly unlikely that these approvals would come during the fiscal year, certainly not by July 1,” Teal said of the waivers. “We see the $172 million in reserve use as being near certain.”

Teal expects an additional $70 million DHSS supplemental beyond the $172 million.

“The governor suggested that he didn’t want to use reserves, yet the bill pulls $172 million from the Statutory Budget account and it pulls $264 million from reserves held by State corporations,” Teal noted. 

The money from the SBR would be applied to FY 2019 so it does not appear to increase FY 2020 DHSS spending.

“The governor cuts $249 million from Medicaid, but then he restores much of the money in a way that’s less than transparent,” Teal explained.

“How much would be left in the SBR?” Hoffman asked.

“Zero,” Teal told him.

“It’s intended to be used as a shock absorber,” Teal said of the SBR.  “Our recommendation is that you do not use the budget reserves.”

Teal said that AIDEA will also not be able to pay tax credits after this year, making that line item an unsustainable, one-time move. 

“The numbers work, but they only work for one year,” Hoffman said.

Teal said that using AIDEA money for tax credits would make that capital unavailable for supporting private development.  He added that use of AIDEA funds, which are typically returned to the general fund after a return on investment, makes the budget less transparent.

“As the budget is laid out now, AIDEA funding doesn’t appear as revenue.  It doesn’t appear as UGF spending.  It’s simply invisible money,” Teal said.

“Despite saying that the governor wanted to preserve and maintain our reserves, he is, in fact, using them,” Teal concluded.

He also noted that Dunleavy’s budget includes $420 million from a repeal of petroleum property taxes, though that does not qualify as “existing revenue.”  It would cost the North Slope Borough about $400 million.

“You may ask whether the remainder of the budget proposal is consistent with the governor’s principles,” said Teal.

Teal seemed to suggest that Dunleavy, who has championed a full Permanent Fund dividend (PFD) and has submitted bills to pay the balance of the PFD from the last three years, is engaging in a Machiavellian maneuver to get people to beg for PFD cuts to avoid cuts to services.  Dunleavy has already proved flexible on taxes and use of reserves.

“Maybe creating chaos is just a clever way to force a conversation that he believes needs to happen in order to move forward,” Teal speculated.

Teal: “You’re Looking at Significant Job Loss.”

Perhaps the most striking numbers from the Legislative Finance documents are the comparisons between FY 2019 UGF spending and Dunleavy’s proposed FY 2020 budget.  

Dunleavy’s operating budget is only $33 million smaller, less than one percent.

The difference is the PFD, which would cost $1.9 billion under Dunleavy’s plan.  That’s about $1 billion more than Dunleavy proposes to spend on K-12 education, the next largest item.

“The dividend consumes 37 percent of our revenue.  That’s, to me, an astonishing number; that we could spend over a third of all the money that’s available to us is handed out as dividends,” Teal said Tuesday.

Teal noted that as a result of proposed cuts, there will not be 350 jobs lost, as Arduin has suggested.

“We’re really looking at 5,000 jobs,” he said, adding expected losses to AMHS, the University, and teachers at the district level.  “You’re looking at significant job loss.”

“We don’t know if the UA system or the school districts will actually cut those 4,300 jobs; we just know that’s the amount of the proposed cuts,” Sen. David Wilson (R-Wasilla) protested to Stedman.  “We can frame this conversation in many ways, Mr. Chair.  I just think that sometimes we frame it in the most drastic and nuclear option there is for shock and appeal.”

Wilson may be the first person to accuse Teal of being “drastic and nuclear.”

Teal accepted Wilson’s criticism, saying he was extrapolating based on one job lost per $100,000 in cuts.

In seeking to avoid a vote that would require three-fourths approval of each chamber, Dunleavy has not included language that would tap the Constitutional Budget Reserve (CBR) in the event of a sudden drop in oil prices.  Such a vote would give bargaining power to a minority caucus, but Teal warned avoiding it could end up causing a special legislative session to make up the difference.

A drop of only 50 cents below the $64 forecast oil price would result in a deficit, Teal said.

“The CBR has no access.  The SBR is gone,” he said, presuming the DHSS backstop remains in.  “You have no automatic way to fill the deficit, which brings you back in special session, apparently, in order to address a shortfall in revenue.” 

Failing to address the CBR also could result in a “nightmare” accounting scenario because it doesn’t include a reverse sweep. 

At the end of the year, money that sits unspent in various State funds has to be swept into the CBR, a requirement of the constitution.  The reverse sweep restores that money to its sources, something Teal says has historically been an uncontroversial accounting decision.

Legislators can add that to the list of things they may want to address in the budget.

With the conclusion of Teal’s presentation, attention turns to budget subcommittees.  They will analyze information provided by OMB and the departments, then make a funding recommendation to the full Finance Committee.

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