Legislators look at how budget might impact state programs

Legislators in Juneau are looking at how Gov. Mike Dunleavy’s new budget, with its reductions, will affect high-priority state programs like education, health and social services and natural resource protection.

They’re also viewing with caution the governor’s proposals for expanded Permanent Fund dividend payments, which would divert revenue that could be used to support the budget.

Dunleavy’s proposed amendments to Gov. Bill Walker’s budget, introduced Dec. 15 as a “placeholder” to meet legal requirements, were to be delivered to the Legislature Feb. 13 and are to be explained in briefings to lawmakers beginning Thursday, Feb. 14.

The scale of Dunleavy’s proposed spending cuts may come as a shock for many but a senior administration official said the Legislature can add money back to the budget over time if additional revenues can be found.

The governor’s first goal, however, is to scale back spending to match revenues, revenue commissioner Bruce Tangeman told the Senate State Affairs committee last week. “We need to focus first on what services can be delivered for $3.2 billion,” which matches expected revenues, Tangeman said. “And then Alaskans can decide what programs they want added back.”

“We can’t say yet where new revenues would come from,” to pay for any add-backs to the budget, Tangeman said. The focus now should be on having a sustainable budget. “Alaskans need to have the confidence that the budget can be reduced before we talk about where new revenue will come from,” the commissioner said.

Meanwhile, substantial reductions in health and social services spending will be complicated by potential losses of federal funds, which finance the bulk of the state Medicaid program, for example.

With education, the complication is the state’s constitutional obligation to provide for public schools. If cuts are too large the door could be opened to lawsuits.

There are other complications for education. For example, a cut in state support for local schools, either through reductions in the formula that allocates state money to school districts or in funds for pupil transportation – mostly school buses – will just pass those obligations on to municipal governments and local taxpayers.

Reductions in school bus money would hit particularly hard in regions like the Matanuska-Susitna Borough and the Kenai Borough, which cover large, sparsely populated geographic areas and require extensive transportation systems for school children.

As for natural resources, both sport and commercial fishermen, as well as sports hunters, depend on the ability of managers and biologists at the Department of Fish and Game to do scientific field work needed to determine sustainable yields before they authorize harvests. The state Constitution requires harvests at sustainable levels. If the field research data is inadequate the only alternative for the scientists and managers is to manage the resource very conservatively, meaning harvests would be cut back.

While legislators will be grappling with budget issues for the remainder of the 2019 session the governor’s proposals for larger Permanent Fund dividends, which take money that would have been available for the budget, will be a complicating factor.

Under Dunleavy’s proposal the PFD will be the state’s biggest spending program, by far outstripping education and health and social services, the next most costly state programs.

Assuming the governor’s proposals are adopted the PFD outlay in Fiscal Year 2020, the budget year that begins next July, will be $1.9 billion compared with about $1.3 billion spent to support schools, and about $1.8 billion in health and social services spending. The figures are calculated by the legislative finance division.

Last week the Senate State Affairs committee, chaired by Sen. Mike Shower, R-MatSu, held initial hearings on three bills introduced by the governor that would expand the dividends by appropriating funds for “full-funding” of PFDs, according to a formula set out in a state law, for the next three years as well as to make retroactive, or supplemental dividends, in payments for three years, from 2016 to 2018, where the PFDs were funded at less than amounts specified in the formula in law.

If Dunleavy’s bills are passed the state would distribute about $2.465 billion in PFDs later this year, or $1.9 billion for the normal dividend that is fully-funded and an additional $565 million for a retroactive payment, according to Ed King, director of a special economics group in the Office of Management and Budget.

Under Dunleavy’s proposal the back payments would be staged over three years so that the 2019 regular dividend would be accompanied by an added check for the underpayment in 2016; the payment in 2020 would combine the PFD for that year with the calculated underpayment in 2017 and the final 2021 payment would have an added amount for the underpayment in 2018.

The additional check for this year has been estimated at about 1,061, King told the senate committee. The check added in 2020 is estimated at $1,289, and in 2021 the additional check in estimated at $1,328. The amounts of the regular PFDs for those years cannot now be estimated but they are likely to be about $2,000 in each year.

To receive the supplemental payments a person must be qualified for a PFD not only for this year but also the year of back payment, or 2016, 2017 and 2018.

Questions from members of the state affairs committee showed reservations among some senators. Sen. Lora Reinbold, R-Eagle River, is worried that the extra PFD payments will draw down the Permanent Fund’s Earnings Reserve account.

“We’ll be spending $11 billion over three years on (the regular) PFDs and the ‘paybacks’ (underfunded past PFDs), and I see this as dragging down the Permanent Fund,” she said.

Having a reserve fund for emergencies is important too, she said. Unlike the principal of the Permanent Fund the earnings reserve fund is liquid and can be drawn down in an emergency. “I’m concerned about a natural disaster, or an international threat,” Reinbold said.

Sen. Peter Micciche, R-Kenai, said the added money taken from the Earnings Reserve for the payback will push the draw above the 5.25 percent limit agreed on by the Legislature last year I Senate Bill 26, which set a framework for structured draws of Fund earnings to help support the state budget.

“This becomes an ‘unstructured’ draw,” outside the agreed formula in SB 26. One year after the Legislature set itself a limit on using earnings from the Fund it is violating that limit. “I believe unstructured draws will put the Permanent Fund at extreme risk,” in the long run, Micciche said.