Dunleavy offers $7.3 billion Alaska budget, opening negotiations with wary legislators

Alaska Gov. Mike Dunleavy speaks at a news conference on Thursday, Dec. 15, 2022, at the Alaska State Capitol in Juneau. (Photo by James Brooks/Alaska Beacon)

Gov. Mike Dunleavy introduced a first-draft $7.3 billion state budget on Wednesday, meeting a legally required deadline but acknowledging that the document is likely to change significantly as the administration negotiates with lawmakers in the upcoming legislative session.

“This budget that we’re submitting, as always, is a talking point with the Legislature,” Dunleavy said. “It also reflects values, what our revenue picture looks like, and where we’re headed.”

The biggest single expense is $2.5 billion for Permanent Fund dividends — enough for a payment of about $3,860 per recipient this fall.

To accommodate that cost, the governor’s proposal relies on some spending from savings. It also cuts the state’s capital budget — used for construction and renovation projects — by two-thirds and proposes no increases to spending on K-12 education, something sought by school districts and many legislators.

The proposed budget covers Fiscal Year 2024, which begins July 1 and runs through June 30, 2024. Lawmakers will begin considering the proposal when they convene in January.

“There’s some definite needs that are not being addressed,” said Sen. Bert Stedman, the Sitka Republican who chairs the Senate Finance Committee on operating budget issues.

Stedman said it would be fair to think of the governor’s proposal as a starting point for further negotiations.

If oil prices remain flat, the proposal puts legislators in an awkward bargaining position: Increasing school funding or the amount spent on maintenance and construction would require either spending from savings or reducing the size of the dividend.

New revenue plans, such as a carbon sequestration program proposed Thursday by the governor, would require years to implement.

The draft budget unveiled Thursday includes no major cuts to ongoing services but does allow one-time funding increases to expire, shrinking some agencies. The University of Alaska, for example, would see its budget shrink by $17.3 million, or more than 5%, because of the end of one-off programs.

In a prepared statement, university President Pat Pitney noted that without increases, “it does not include priorities including cybersecurity, rising costs and urgent deferred maintenance.”

She said the university will continue to advocate for those priorities during the upcoming legislative session.

State revenue expectations are down

Oil accounts for between one-third and half of the state’s general-purpose revenue, depending on prices and production, and a new forecast released Thursday alongside the budget shows a significant decrease in oil revenue.

In the upcoming fiscal year, the forecast projects $6.9 billion in general-purpose revenue, a drop of $700 million from a preliminary projection this spring.

The Department of Revenue also lowered expectations for the current fiscal year. This spring, the state had forecast $8.3 billion in revenue for Fiscal Year 2023, which started in July and ends in June 2023. That’s been lowered to $7.2 billion.

The reduction affects the upcoming Fiscal Year 2024 as well. This spring, lawmakers allocated an extra $1.2 billion for education funding, effectively saving that money to cover K-12 schools in FY24. With oil prices and production lower than forecast, that savings has all but evaporated. The state Office of Management and Budget expects only $48 million of the $1.2 billion to actually survive.

Education spending likely to grow, Dunleavy says

Though his budget contains no increases to K-12 funding, something that school administrators have requested to combat years of flat-funding and real budget cuts once inflation is considered, Dunleavy said he expects negotiations with the Legislature to result in increases.

It’s “highly likely, yes,” Dunleavy said.

When asked why he didn’t include some increase to start with, Dunleavy responded that any figure that he picked would be the wrong one.

“For me to put a number in the budget, some would say it’s too little, some would say it’s too much,” he said. “Right now, it’s a blank piece of paper for all of us to work on.”

Dunleavy suggested that changes to the state’s foundation formula — the amount the state pays school districts per student — could be in the works, possibly including changes to the amounts used to calculate energy and salary costs.

He personally would want to include an “accountability component,” he said, some mechanism to require improved performance.

Budget subject to change

Dunleavy called Thursday’s proposal a “beginning budget” and said the final version will depend on the price of oil as well as the result of negotiations with the Legislature.

“Next week, we could be up another 17%, 20% in oil prices and revenue, depending on the chaotic conditions in the world. We could be down 20%. So this, again, is a beginning budget and we look forward to the discussions,” he said.

Alaska Beacon

Alaska Beacon is part of States Newsroom, a network of news bureaus supported by grants and a coalition of donors as a 501c(3) public charity. Alaska Beacon maintains editorial independence. Contact Editor Andrew Kitchenman for questions: info@alaskabeacon.com. Follow Alaska Beacon on Facebook and Twitter.

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