Analysis: Legislature convenes Jan. 19 with plans to take up governor’s budget, proposed large PFDs

The state Legislature meets in Juneau Tuesday, Jan. 19 to begin its 2021 session. Lawmakers have yet to agree on organizing both the state House and Senate, so there will likely be delays in getting down to business, the most important item being the state budget for Fiscal Year 2022, the financial year beginning next July.

Gov. Mike Dunleavy’s budget proposal for next year, FY 2022, has some reductions for state agencies but major programs like the K-12 foundation program will be steady in per-pupil support. Overall spending on schools is expected to be down somewhat because of changes in enrollment patterns with a shift from in-class instruction to correspondence and home-schooling that happened this year.

However, the governor has several non-budget proposals that will be challenging for the Legislature and which will have big fiscal implications for FY 2023 and beyond. These include proposed larger Permanent Fund Dividends, including the extra supplemental PFD of $1,900, proposed to be paid in March, and a regular 2020 dividend estimated now at $3,057 to be paid in October using an existing formula in statute – the so-called “fully-funded” PFD. Almost $5 billion will be injected into the state’s economy in 2021 if the two PFDs are paid.

The result on this for FY 2022 will be an estimated $2.024 billion overdraw on the Fund’s earnings reserve in excess of the authorized 5 percent Percent-of-Market-Value, or POMV, draw of $3.07 billion from fund earnings to help pay for state operations.

The governor acknowledges the earnings overdraw from the 5 percent allowed in statute but describes it as a one-time event that will stimulate the state’s economy. Also, the Permanent Fund is having a very good year from gains in financial markets, and Duneavy feels it appropriate to share some of the windfall with the public during difficult times for the economy.

Also, the governor is planning that a second proposal, changing the way the dividend is calculated to 50 percent of the POMV, would take effect the following year and would continue. It is assumed that the 50-50 split of the POMV, at its 5 percent draw based on the Fund’s total value, would fund both the PFD and support for government operations in FY 2023 and beyond.

But while the plan would bring the annual draw, for government and the PFD combined, back to 5 percent, it all results in half of the annual draw going to the dividend instead of to government, resulting in an estimate $1.2 billion deficit in FY 2023.

Under current projections the $1 billion annual deficits would continue into the future, assuming PFD payments continue. To fill the gap, new revenues, most likely from taxes, budget cuts, continued overdraws on the Fund earnings or some combination of these, would be needed.

The governor has also vowed to ask the public’s permission to make any change in the PFD, and a special advisory election this spring has been suggested.

The current situation• Since FY 2013 $16 billion has been withdrawn from two state savings accounts, the Constitutional Budget Reserve and Statutory Budget Reserve. These transfers have replaced oil revenues lost due to the late-2015 oil price crash.

• The Constitutional Budget Reserve, or CBR, will have an estimated $1.074 billion remaining on June 30, the end of FY 2021, the current fiscal year. About half of the $1 billion remaining in the CBR, at least $500 million, must be kept on hand to meet state operating cash demands, such as payroll and cash advances needed for federally funded construction projects and health programs where the state is eventually repaid.

Since revenues, and federal reimbursements, are often out of sync with expenses, the state uses the CBR as a kind of checkbook to make payments through the year with funds reimbursed as revenues or federal money comes in.

• The state recently implemented its Percent-of-Market-Value, or POMV, mechanism to stabilize revenues. This is the first use of Permanent Fund earnings to help support the state budget, and it has been successful in providing new revenues to offset swings in income due to volatile oil prices. Oil prices and revenues remain low, however, and the POMV now pays for most of the state general fund budget.

In upcoming FY 2022 the POMV’s $3.1 billion contribution will fund about 71 percent of Undesignated General Fund (UGF). Traditional oil revenues – taxes and royalties – will fund about 29 percent. In previous years oil paid for as much as 90 percent.

Cost drivers in the budget• Medicaid: The state’s share of Medicaid, the health services for medium-to-lower income Alaskans, is projected at $610 million in FY 2021, or 14.2 percent of the operating budget. This is up 7.7 percent over the last 10 years. The total Medicaid budget is larger, but the federal government now pays most of it.

• K-12 school district support: This is estimated at $1.247 billion in FY 2022. There has been a $72.2 million, or 6.1 percent increase over the last 10 years.

• Payroll for state employees: This is expected to total $812 million in FY 2022, or 18.9 percent of the operating budget. This is $900,000 per year less, or 0.1 percent, over the last 10 years, but the number of positions funded are down 1,319 over the 10 years, to a projected 17,149 in FY 2022.

Meanwhile, there are places where FY 2022 spending is being reduced:

• Division of Public Assistance: A $4.9 million reduction is projected mainly through the elimination of 122 positions. This will occur through normal attrition, with fewer replacements but no layoffs. Turnover is high in this agency, at an average 25 percent. Additional savings are seen through more efficient methods of processing applications developed this year.

• General administration: Savings of $713,000 are estimated through reduced travel, with more meetings done through videoconferencing; $909,000 in reduced commodity purchases and 44 vacant positions are being eliminated.

• Pension costs: A $43 million reduction is anticipated by shifting some of the pension for state employees in federally funded positions to the federal government. There would be no change in benefit levels, but new legislation is required

• Alaska Marine Highway System: A $3.4 million reduction is done basically by not allowing money added to the FY 2021 budget by the Legislature, and which the governor vetoed. The FY 2022 budget is essentially flat with FY 2021 actual spending.

The capital budgetState capital spending is estimated at $120.2 million for FY 2022, down from $177.5 million in the current FY 2021 and $168 million in FY 2020. The governor’s budget itself proposes only $58.5 million for a capital budget but $101 million will be added through the sale of revenue bonds by the Alaska Housing Finance Corp. The AHFC bond proceeds will be used to pay required state matching funds to federal transportation and village safe water and sewer funds. AHFC would pay for the bonds with fund from the annual payment (about $50 million per year) the agency makes to support the general fund budget. This reduces state general fund revenue by the same amount. Use of AHFC bond proceeds for FY 2022 is likely a one-time provision.

The amount of capital budget funding in recent years has been inadequate to keep up with the increasing deferred maintenance on state, university and school buildings. Funds in the capital budget are typically used to provide state matching funds for major federal programs, to pay major maintenance or reconstruction on state facilities and to fund any special one-time state projects.

Deferred maintenance now totals about $2 billion, half in University of Alaska buildings, and the amount is estimated to be increasing by $40 million to $60 million per year.

General obligation bond issueA $355 million capital projects general obligation bond issue is being proposed by the governor. The projects to be included are still being developed. Legislators must approve the bill, so they will add their own projects. A General Obligation (G.O.) bond bill passed by the Legislature cannot be vetoed by the governor, so Dunleavy will have to negotiate with lawmakers on which projects will be included and which not. The bill will also have to have regional balance, or projects for different parts of the state, to get the support needed across different communities.

G.O. bonds must be approved by voters in a statewide election, and if the bonds bill becomes too heavy with “add-ons” by the Legislature there is a good chance voters will reject it, so a G.O. bonds capital projects bill is not a sure thing.

Education funding is down because of lower student countsEducation funding overall will be down next year because of shifts in enrollment patterns, although funding to school districts (K-12) through the education foundation formula is maintained at $5,930 per student. Since the money for K-12 under the formula is based on student counts in schools the amount of money disbursed will drop in FY 2022.

Average Daily Attendance (ADM) in K-12 public schools, according to the OMB presentation, is expected to drop from 114,762 in current FY 2021 to 108,133 in FY 2022, a loss of 6,629 students. Enrollment in correspondence courses, however, is projected to increase from 14,161 in this year (FY 2021) to 18,798 next year, in FY 2022, a gain of 4,637 students. It’s unclear, in OMB’s projections, where the missing 1,992 students are going (the difference between the projected ADM in public school and those in correspondence study).

In monetary terms through the foundation formula this results in a $6.63 million loss in funds to the regular K-12 program but a gain of $4.636 million in support of correspondence study, for a net reduction in FY 2022 of $1.99 million. One aspect of this change is that the required local effort to school budgets from municipal government drops $11.98 million. The total drop in school funding in FY 2021 from state and local sources is projected at $19.8 million.

School debt support; community assistanceSchool debt support in FY 2022 is proposed at 50 percent of municipalities’ outlay, or $41.8 million. There was no school debt support paid for FY 2021, the current year, and 50 percent paid in the prior FY 2020. For community assistance, $12.4 million is proposed to be paid in FY 2022. There were insufficient earnings in the approximate $800 million Power Cost Equalization Fund to fund the $30 million in traditional annual community assistance, Steininger said.