Those impacted to proposed state budget cuts continue to react

Shock waves from Gov. Mike Dunleavy’s draconian new state budget are being felt around the state. Dunleavy introduced his spending plan Feb. 13 for state fiscal year 2020, which starts in July.

As expected, Dunleavy took an axe to the budget. Total state general fund spending is cut to $4.63 billion from $6.09 billion in a “placeholder,” budget prepared in late November by outgoing Gov. Bill Walker.

If the state Legislature goes along with Dunleavy, which is doubtful, state money for school districts around the state would be chopped 25 percent, or by $333 million; spending for health and social services would drop 31 percent, with most of this from state support for Medicaid, or $271 million; the state ferry system as it now exists would end, with $60.9 million in state support eliminated, and the University of Alaska would suffer a 40 percent reduction, from $327 million in state funds this year to $193 million next year.

University of Alaska president Jim Johnsen said there is no way the university can absorb a cut like that without a major restructuring including closing campuses in smaller communities around the state and reducing programs including workforce training and research.

Cutting state funds for research would actually cost large amounts in lost federal matches. Research by scientists mainly at the University of Alaska Fairbanks, brings in six federal dollars for every one state dollar spent.

One other result of the governor’s plan is the loss of about $700 million in federal funds supporting Medicaid, which are dependent on the state contribution.

The governor says the state has been running big deficits for too long, ready cash reserves (not including the Permanent Fund) have been drained to low levels, and that the flow of red ink should end this year.

“This is the start of a discussion,” Dunleavy said in introducing the budget, a seeming invitation for a negotiation with the Legislature. There is an implication that legislators could add funds if they can find new revenues, meaning taxes.

Dunleavy said he won’t propose any new taxes but he has been silent on whether he would veto new taxes passed by the Legislature.

A big card the governor holds is that if lawmakers add funds back, which they are likely to do, he can simply veto them. Overriding the veto will require a three-fourths majority of the Legislature, or 45 of 60 lawmakers. That is a high hurdle.

However, one big card the Legislature holds is Dunleavy’s desire for a larger Permanent Fund dividend. It is the Legislature that sets the PFD amount, not the governor.

The increase for the larger PFD proposed by Dunleavy totals $900 million, over half the projected $1.6 billion deficit.

If lawmakers appropriate less than what Dunleavy wants for the dividend there is little he can do. The governor can reduce funding through his veto but he can’t add money to the budget. Only the Legislature can do that.

Meanwhile, school districts and municipalities are scrambling to understand the effects if even some of the governor’s spending plan is approved. A big reduction in the Base Student Allocation in the formula for allocating state education funds would leave school districts with big holes in their budgets.

Where schools are within municipalities, as is the case in the Mat-Su and Anchorage as well as Fairbanks, Juneau and other communities, the local governments would be asked to contribute funds and most would be hard-pressed to do so in the amounts needed. Also, there are caps in local contributions to schools in place brought by federal rules to equalize spending among communities so that a wealthy community cannot greatly outspend a poorer community.

In rural communities the governor proposes to roll a special fund set up to support a minimum level of power costs for households into the state general fund. While the program of power cost support would continue in theory, the fact that there is no longer an endowment to support the payments puts the future of the program into question.

If the payments are ended the cost of living in small, outlying communities, already stressed by high costs for heating and transportation fuels, would rise, making some communities unviable. People from those villages would move into larger communities.

The Matanuska-Susitna Borough has already seen an influx of rural Alaskans in recent years as economic conditions in small communities have deteriorated.

Dunleavy’s cuts to health and social services are likely to be some of the most controversial because the reductions in Medicaid, a state-federal program that provides medical assistance to lower-income Alaskans, will transfer many costs to the state’s hospitals, driving up health costs for all users of hospital services.

That’s because if people are taken off Medicaid they have no where to go for health care than hospital emergency rooms, which by law, cannot deny service. The cost for unpaid care is absorbed into the hospital’s overall costs and added to the bills everyone else paid.

But a perverse effect of cutting Medicaid and other state health programs, is that state support for drug and alcohol addiction, particularly in prisons or among inmates being released, could be curtailed.

That makes it unlikely that a released inmate afflicted with substance-abuse addiction or mental illness will be able to reenter society, and 60 percent of inmates now in Alaska’s prisons do suffer addiction or mental illness, according to the Alaska Mental Health Trust Authority.

When released inmates cannot rejoin society they typically return to crime and are arrested and jailed again, which means prison costs keep going up.

Another of Dunleavy’s proposals that is stirring controversy is his plan to usurp the authority for municipalities to tax oil and gas properties, reserving that tax base to the state.

This would add about $400 million to the state General Fund but it would seriously damage the finances of the North Slope Borough and the City of Valdez, which are heavily dependent on property tax revenues tied to oil, but also the Fairbanks North Star Borough and the Kenai Borough, which also have oil properties.

It would also mean that the Matanuska-Susitna Borough would be unable to levy property taxes on a planned large natural gas pipeline built from the North Slope to southcentral Alaska.

However, an immediate problem, likely unforeseen by the new state administration, is how this idea could disrupt access to credit markets for other Alaska municipalities as well as damage the state’s own credit rating.

That’s because the proposal would likely cause the North Slope Borough to default on its general obligation bonds, and could likely impair the ability of Valdez to service its own outstanding debt.

Were this to happen the bond market would immediately look to the state to pay the borough’s debt service, arguing that the state, as the superior Alaska government, has a moral obligation to support debt of its subsidiary municipal governments. If the state were to fail to do so it could cause severe damage to the Alaska’s reputation on Wall Street, which is already shaky because of a historic overdependence on oil and reluctance to enact any taxes on citizens.

A state action to impair municipal property tax authority is unprecedented in Alaska. State law does prohibit municipalities from levying severance taxes on oil and gas production, a type of tax reserved to the state since statehood, but by long tradition property taxes have been left to municipalities.

That the proposal affects a large industrial tax base like oil and gas production facilities and pipelines, and was done developed in haste with no warning, will raises red flags on Wall Street, sources familiar with bond markets tell us.

“This would have a disastrous effect on the North Slope Borough and would look particularly bad because of the ham-handed way it was done,” Eric Wohlworth, a former state revenue commissioner, a senior Alaska bond attorney as well as a former Alaska Permanent Fund trustee.

“It would deny these local governments access to tax base that has been in place since the 1970s. A sophisticated governor or Legislature would never allow something like this to happen,” Wohlworth said.