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We Build Alaska

Brad Keithley’s Chart of the Week: Our first look at Gov. Dunleavy’s FY25 Budget & 10-year Plan: Part 2

This week, we publish Part 2 of our initial look at Governor Mike Dunleavy’s (R – Alaska) recently proposed Fiscal Year 2025 (FY25) Budget and 10-year Plan. Last week’s Part 1 focused on projected revenues and, because of their impact on revenues, oil production levels.

This week’s Part 2 focuses on proposed and projected spending and deficit levels, as well as the consequences of the administration’s failure to include any proposals for closing the resulting deficits past FY26.

In both Parts, we discuss how the Dunleavy administration addresses each component in both its FY25 proposed budget and 10-year plan. To us, the 10-year plans are as important as, if not more important than, the more detailed budget for the coming year.

As we explained last week, the purpose of the 10-year plan is to chart the rocks, shoals, and icebergs ahead on the state’s current fiscal course and to identify and suggest course corrections that minimize the difficulties of that journey. As in any navigation, making small course corrections now can avoid needing big ones later.

UGF Spending Levels

While others writing on the subject have focused helpfully on the details behind some of the proposed initiatives included on the spending side of the Dunleavy administration’s budget, our focus is on overall unrestricted general fund (UGF) spending levels, particularly those projected in the 10-year plan.

Many Alaskans – including some in the Legislature – often lose track of the state’s overall fiscal forest by focusing mostly on some of the trees. Our purpose in this column is to help bring the overall forest back into perspective.

To be blunt, like most that have preceded them during the Dunleavy administration, the most recent budget and 10-year plan are almost useless in that effort.

This chart tracks the projected UGF spending levels included in the five 10-year plans published during the course of the Dunleavy administration following the first one for FY20. We don’t include that one in this comparison because it mixed UGF and designated general funds (DGF) together, making its numbers “oranges” compared to the “apples” included for the other years.

From FY21 through FY24, the solid dark blue line represents actual UGF spending levels. After FY24, that line represents “current law” UGF spending levels projected last year in the Legislative Finance Division’s (LFD) “Overview of the Governor’s [FY24 Budget] Request” (LFD FY24 Overview). Despite being published early in the session, after accounting for the roughly $300 million in fiscal reserve included in the enacted FY24 Budget, LFD’s “Overview” predicted almost exactly the final, enacted UGF spending levels subsequently passed by the Legislature and signed by the Governor Dunleavy.

Compared to that, the Dunleavy administration’s budgets and 10-year plans have never come close to projecting the actual UGF spending levels to which Dunleavy has ultimately agreed, even for the year they are published. The FY21 budget and 10-year plan came closest, but even that projected a level 6.2% below the FY21 spending level ultimately signed by the Governor. It also vastly underprojected the actual spending levels to which the Governor ultimately agreed for subsequent years by between 22% (FY24) and 32% (FY23).

The FY22, FY23, and FY24 budgets and 10-year plans didn’t even start out close. The FY22 spending level projected in the FY22 budget and 10-year plan was 19% short of the level the Governor ultimately agreed to in the final FY22 budget, the FY23 spending level projected in the FY23 budget and 10-year plan was 24% short of the level the Governor ultimately agreed to in the final FY23 budget, and while closer than those, the FY24 spending level projected in the FY24 budget and 10-year plan was still 11% below the level the Governor ultimately agreed to in the final FY24 budget.

In short, even looking solely at the year ahead, the Governor’s budgets and 10-year plans have failed even remotely to predict the spending level the Governor will ultimately sign. In the end, he has consistently agreed to much higher spending levels than projected in his proposed budgets and 10-year plans.

For that reason, in an effort to calculate realistic projected spending and deficit levels in both this and other columns, we have started regularly using the “current law” UGF spending levels projected by the LFD. While they likely will also be wrong to a degree, their record much more closely tracks reality than those projected by the Governor in his budgets and 10-year plans.

In addition to his past track record, we also take issue with the Governor’s claim in his latest 10-year plan that “when revenues fall, administrations and legislatures make the challenging, but necessary, policy decisions to prudently curtail State spending ….”

While traditional UGF revenues have grown at a compound rate of less than 1% between the year Governor Dunleavy took office and FY24, UGF spending has grown at a compound rate of 3.1%. The state has run a current law deficit every year over that period, yet overall spending has continued to go up.

The Legislature, with the Governor’s concurrence, has made up the difference largely through cuts in the Permanent Fund Dividend (PFD) – what long-time Institute of Social and Economic Research (ISER) Professor Matthew Berman has called “the most regressive tax ever proposed.”

While the Governor might hope that “administrations and legislatures make the … necessary policy decisions to prudently curtail State spending” when revenues remain static or decline, the facts, even on his watch, are otherwise. Increased spending has simply been offset by increases in regressive taxes, passed by the Legislature and signed by the Governor.

Looked at objectively, the overall UGF spending levels included in Governor Dunleavy’s proposed budgets and 10-year plans largely have been works of fiction, designed to look good to his political base and to avoid the responsibility of proposing additional revenues to close the resulting deficits, while the reality has continually moved in the opposite direction.

We would note one other data point when looking at projected FY25 spending levels. Earlier this week, the Alaska Landmine ran a poll on X (formerly known as Twitter), asking, “What do you think the Legislature will approve for the 2024 PFD?”

Two responses stand out. The first, by Representative Jesse Sumner (R – Wasilla), is “2183;” a second, from an unverified X account bearing the name of “Will Stapp” (a Republican state representative from Fairbanks), is “2185.” Both imply a cut of roughly $1,245 per PFD (or $780 million overall) from current law (statutory) PFD levels.

Adding that cut to the $2.65 billion in traditional revenues and $1.35 billion in the portion of the percent of market value (POMV) draw available for government under current law implies total UGF revenues of roughly $4.78 billion, short by $700 million (13%) of the $5.48 billion in FY25 UGF spending projected in the LFD’s FY24 Overview.

UGF Deficit Levels

We calculate projected baseline FY25 and 10-year deficit levels by deducting UGF revenues projected in last week’s column from the relevant UGF spending levels contained in the LegFin FY24 Overview projected above. Here’s the result (deficits are in red):

Over the period, projected current law deficits rise from $1.39 billion in FY25 to $2.43 billion in FY33. Despite the administration’s claim about how it and legislatures act when deficits are looming, in no year is the budget even remotely in balance.

The following chart compares those deficits over the same period (in blue) to the deficits projected in the Governor’s 10-year plan (in red):

The higher – but more realistic – deficits in our analysis are largely driven by the higher UGF spending levels included in the LFD FY24 Overview compared to those included in the Governor’s FY25 budget and 10-year plan, somewhat offset by the slightly higher revenue levels implied by current oil futures market prices compared to those used in the administration’s FY25 analysis.

Even at the lower levels projected in the Governor’s FY25 10-year plan, the deficits are still huge when expressed as a percent of spending, rising from 19% in FY25 to 26% in FY33. They run at even higher levels, rising from 25% in FY25 to 33% in FY33 when using the more realistic spending levels included in the LFD FY24 Overview.

To provide some perspective, on a percentage basis, these state-level deficits are significantly larger even than those projected over the same period for the federal budget.

Closing the Deficits

The Governor’s approach to dealing with projected deficits in this year’s 10-year plan differs from that his administration used in every other plan before this. In those, the Governor proposed some means for balancing the budget. While some proposals have been speculative to the point of being hugely unrealistic – such as last year’s proposal to fill in the gap with revenues from various types of carbon credits – at least the Governor put forward some plan for balancing the budget.

This year is different because the Governor hasn’t made even an unrealistic proposal to balance the budget past FY26, the point at which this year’s 10-year plan projects the state will have fully depleted the Constitutional Budget Reserve. As is clear from this summary chart included as part of the Governor’s submission, his most recent 10-year plan just gives up past FY26.

As we briefly explained in last week’s column, we believe such an approach likely violates AS 37.07.020(b)(2), which requires that the 10-year plan submitted by the governor “must balance sources and uses of funds held while providing for essential state services and protecting the economic stability of the state.” As is clear, past FY26, this 10-year plan fails to propose any sources that balance the proposed uses. Instead, it just artificially drives an already drained CBR balance deeper and deeper into the red.

It is unclear to us what the strategy is behind this approach. In a previous 10-year plan, the Governor proposed closing the then-projected deficit using what he termed a “balanced approach.” As he explained then:

The past several legislative sessions have illustrated that solutions need to be moderate to earn the people’s approval. Previous proposals involving budget reductions, PFD decreases, and taxes faced skepticism when the Alaskan citizenry believed that they went too far. Proponents of a balanced approach suggest that everyone give a little so that no group of Alaskans faces undue harm.

He seemed to reiterate the same general approach last year during a press conference during the legislative session, saying this:

To simply ride oil in a do-or-die situation for the state of Alaska is folly. It’s probably not a good idea. … [Instead,] a broad-based solution that doesn’t gouge or take huge parts from one sector (of Alaska) or another, or penalize one sector for another is probably the most important thing we can do.

Yet, “riding oil to a do-or-die situation” is exactly what Governor Dunleavy’s current budget and 10-year plan proposes. From a fiscal standpoint, it is a complete abdication of his responsibilities as the state’s chief executive.

Moreover, the abdication isn’t limited to the Governor; it is spread throughout the administration. Last year, the Department of Revenue (DOR) accompanied the release of its Spring 2022 Revenue Forecast with an update to its Fiscal Plan Model, which included a number of options for closing the projected deficits, including changes in oil taxes, a sales tax, the addition of state-sponsored gaming and other potential revenue measures.

Under new Department of Revenue Commissioner Adam Crum, however, both this year’s Spring and Fall versions have eliminated almost all of the options, leaving only PFD cuts and unspecified “new revenues” as a means of balancing the budget.

The resulting message from the Dunleavy administration to Alaskans is, “we aren’t going to propose how to balance the budget (other than for continued PFD cuts), and we aren’t going to help you do it, either. We claim we support full PFDs, but we aren’t going to help you understand how to achieve them.”

Especially looking past FY26, the proposed budget is a mess. We honestly don’t understand why Governor Dunleavy ran for the job if he isn’t going to do it.

Brad Keithley is the Managing Director of Alaskans for Sustainable Budgets, a project focused on developing and advocating for economically robust and durable state fiscal policies. You can follow the work of the project on its website, at @AK4SB on Twitter, on its Facebook page or by subscribing to its weekly podcast on Substack.

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