Governor’s state budget has some good news for Mat-Su, but outlook for large Permanent Fund Dividend is cloudy

Some good news for Mat-Su is that Gov. Mike Dunleavy has included full-funding for municipal school bond debt service in his state budget proposed for next year. This is important because if the state doesn’t come through with the money in the final budge when the Legislature adjourns next, local taxpayers pick up the tab.

Having the money in the budget by the governor is a good start. About $17.2 million is needed to pay interest on bonds sold by the Mat-Su Borough to build schools. The state usually chips in to help pay that, although there’s no guarantee of that. The pressures of rising costs and lower oil revenues creates uncertainties.

“This year the State short funded $4,614,596.23 from what we expected,” borough manager Mike Brown said. “It’s ironic, with an increase this year to the Base Student Allocation for school funding coming in, on one hand for education, and then taking away $4.6M through school bond debt reimbursement.”

“Giveth in one hand, and taketh away in the other,” he said.

It will be another tight year for money, with oil prices expected down along with oil production, but there appears to be enough money to pay most of the state’s bills including a Permanent Fund Dividend, or PFD, of about $1,000, the same amount paid this year. This is according to an analysis by the nonpartisan Legislative Finance Division. There could even be a small $130 million surplus, but unexpected expenses could consume that.

The governor is pushing for a large PFD but that would throw the budget seriously out of balance, requiring a large draw from state emergency savings. The size and politics of this make the large dividend almost impossible, however. Withdrawals from the CBR require a three-quarters vote in the House and Senate, which is highly unlikely given the current partisan makeup of the two bodies.

Democrats and moderate Republicans are in the leadership positions in both bodies. However, the governor’s desire for a large dividend, in his final year in office, will have effects the Legislature’s deliberations on the budget. The governor has championed a large PFD every year since being elected in 2018. The legislative politics are against him this year but the governor has a lot of influence. He could threaten to use his line-item veto power to cut enough from spending for a PFD larger than $1,000, although a very large dividend seems unlikely.

Meanwhile, the budget as proposed is close to being balance without the large dividend. Total Undesignated General Fund spending, the amount the Legislature controls in approptiatioons, is $6.085 billion in the budget plans against revenues of $6.216 billion. The estimate includes the governor’s capital budget number of $159.6 million and a 3% inflation increase of $50.7 million in K-12 school funding, according to the Legislative Finance Division.

However, the spending plan so far does not to include several key items, so the expenditure total will rise. For example, the capital budget number includes only the required match to federal funds and no has capital projects for state agencies or school districts. The budget also appears to understate the state contribution to public employee retirement by $37.7 million compared with the amount recommended by the Alaska Retirement Management Board, the analysis said.

In addition, no assumptions are included for state employee union contracts still under negotiation; there are no increases shown for state Medicaid due to federal changes; and the state Community Assistance Program has a $14 million addition to its fund, which would result in a lower $18 million distribution to communities in the upcoming FY 2027.

The governor has also said he will propose a long-range fiscal, or spending, plan to be presented to the Legislature in January. He said he will propose new revenue measures. While many people believe a state personal income tax is the most effective way for bringing in substantial income but it would be politically difficult, if not impossible, in 2026, an election year.

A state sales tax appears the next best option although it has its complications. It will cause complications because of sales taxes exist in most Alaska municipalities including in the Mat-Su, so there is a potential for “pancaking” in sales tax with a state tax added to a local tax. In Palmer, for example, a 3% state sales tax added to that city’s existing 3% sales that would create a 6% tax on local purchases, which is consideres enough to drive consumers to on-line retailers or to municipalities with lower taxes.

Also, various exemptions are typically allowed by political necessity in sales taxes such as for medicines and groceries. These could cut substantially into the revenue a sales tax could bring in.

Meanwhile, the state’s fall, 2025 revenue forecast, published in summary form last week, shows a mixed outlook for revenues for the current budget year FY 2026 and the upcoming Fiscal Year 2027, which begins next July 1. Petroleum revenues are down, an effect mainly of lower production and deductions against production taxes of major investments in new oil fields. That is a net profits-type tax that allows capital investments as deductions against income.

Oil production, which drives revenues, is estimated to be down by 7,000 barrels/day against estimates for the current FY 2026 due mainly to greater declines than expected for the large “legacy” producing fields of the North Slope but this is anticipated to be up 28,400 barrels/day for upcoming FY 2027 due to new oil production from the Pikka field to be completed in early 2026. That will more than offset the declining production.

Other oil taxes (petroleum property tax, oil corporate income tax) have a mixed outlook, with many modestly up. Unrestricted General Fund revenue, which the Legislature has control over, is now estimated at $2.1 billion for current year 2026 and $2.2 billion for FY 2027, the budget that will be prepared this spring.

Oil prices, however, are expected to continue to decline. Current-year FY 2026 is now expected to average $2.52/barrel lower than forecasted and upcoming FY 2027 is expected to be down $5/barrel from the previous forecast done last March. The long-term oil price outlook is is a bit more favorable, and foresees $75/barrel based on current futures prices.But oil markets are volatile and this will change. Non-petroleum revenues are also stable or somewhat increased, indicating a generally stable economy.

However, the bulk of revenues to support the state budget now comes from earnings from Alaska’s $85 billion Permanent Fund, and this income is up. In FY 2026, the current budget year, the Fund paid $3.8 billion to support the budget. This will rise to $4 billion next year, in the FY2027 budget year.