In addition to the upcoming holidays, as the calendar hits December, we start thinking also about the upcoming “Budget Day,” the day by which the Governor is required by statute to make public his proposed budget for the coming fiscal year. This year, that day is next Friday, December 15, a week from this week’s column.
Actually, the day is more than “Budget Day;” it’s more like “Fiscals Day.” That’s because the Department of Revenue’s (DOR) Fall Revenue Sources Book, the Office of Management and Budget’s (OMB) 10-Year Plan, and, more recently, updates to DOR’s “Fiscal Plan Model” also are typically published on or near the same day.
Combined, the information is intended to provide legislators and the public with sufficient information with which to analyze not only the fiscal impact of the current year’s budget but also the state’s fiscal outlook over the next 10-year period, together with, through DOR’s “Fiscal Plan Model,” the ability to consider the effect of various changes in revenue and spending levels on both.
We look forward to the day because it provides an opportunity not only to compare and, if needed, update our own analysis of the state’s fiscal situation but also to evaluate how the then-current administration proposes to deal with it.
To us, we always hope to see an honest assessment of the state’s current fiscal situation and a balanced approach to resolving it.
We have something of a head start on the process. By closely following the oil futures market as well as periodic updates by the Permanent Fund Corporation (PFC) of its projections of statutory net income (SNI), percent of market value (POMV) distributions, and statutory inflation proofing, we publish weekly (as part of our regular Friday afternoon charts) our view of what the 10-year outlook looks like at any given point in time.
Here is the most recent as of the time we are writing this week’s column:
Traditional revenues are derived by applying current oil futures prices to DOR’s “Price Sensitivity Analysis” prepared as part of each revenue forecast. “Current law POMV for government” is the amount of the annual POMV draw available for government based on the application of current statutes (“current law”) to the PFC’s most recent projections. The spending levels are taken from the Legislature’s Legislative Finance Division’s (LFD) “Overview of the Governor’s [FY24] Request,” the most reliable indicator we have found among the options of current and projected future spending levels.
Looking at the remainder of Fiscal Year (FY) 2024 forward, the outlook shows what the LFD refers to as “current law” deficits throughout the entire period. Over the period, the projected deficits average $1.63 billion annually, or, using other measures, roughly 28% of spending or 5% of projected adjusted gross income (AGI), including Alaska-sourced AGI received by non-residents.
Of course, the budgets and 10-year plans published by OMB over the last five years have seldom looked like our projections.
That’s because, under AS 37.07.020(b), the governor’s fiscal plan “must balance sources and uses of funds held while providing for essential state services and protecting the economic stability of the state.” In addition, under AS 37.07.020(c), “[p]roposed expenditures [reflected in the budget] may not exceed estimated revenue for the succeeding fiscal year.”
In short, the governor’s proposed budget and fiscal plans must be made to balance.
That’s where politics often has overtaken the process. Since its first budget, the Dunleavy administration has wanted to avoid dealing with the steps necessary to close deficits of the size Alaska realistically faces. So, to do that, OMB typically has plugged in projected (but largely unrealistic) spending cuts or caps that reduce the deficits its current and 10-year plans would otherwise show.
In the first budget during Governor Mike Dunleavy’s (R – Alaska) first term, for example, his administration projected achieving balance largely through significant reductions in both near- and long-term spending. That didn’t go well, however, and so, since that time, the administration has used various other approaches.
Sometimes, when high oil prices result in the projection of relatively high traditional revenues, his administration has proposed closing the remainder through more moderate spending cuts or caps on the rate of growth. Other times, when traditional revenues are less robust, his administration has proposed closing the remaining gap in addition to spending cuts through some additional revenues, either in the form of the diversion of a portion of the Permanent Fund Dividend (PFD) to government spending (through the administration’s proposed “POMV 50/50” approach), the use of accumulated earnings from the Permanent Fund Earnings Reserve Account, or, last year, largely through the addition of hypothetical “new revenues” in the form of the sale of carbon credits.
But none of those approaches have used either realistic projected spending levels or revenue approaches that deal with them.
In our view, the closest the Dunleavy administration ever has come realistically to addressing the state’s situation was in its FY 2021 “Budget Overview and 10-Year Plan.” There, after straightforwardly acknowledging the state’s challenging fiscal position in its “Budget Baseline,” the plan outlined five alternative responses.
Four were extremes, basically balancing the budget in turn entirely through spending reductions, taxes, PFD cuts, or draining savings, and then after they were gone, ad hoc draws from Permanent Fund earnings.
The fifth, however, took a different approach. Titled the “Balanced Approach,” the premise was this:
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.
In many respects, that approach foreshadowed the so-called “comprehensive approach” subsequently proposed by the Legislature’s 2021 Fiscal Policy Working Group. It also reflected an approach that Governor Dunleavy himself reiterated last session when discussing a potential sales tax: “Dunleavy said he now believes that ‘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.’”
But a proposal for a realistic, balanced approach “that doesn’t gouge or take huge parts from one sector or another, or penalize one sector for another” has been almost non-existent, both from the Dunleavy administration and the Legislature.
Instead, both the administration’s proposed budgets and the Legislature’s final actions have largely been based on a “winner take all” approach, using one of the extremes that heavily favors a select few sectors and gouges and penalizes most others.
The administration’s proposed budgets, for example, largely have relied on the “spending cuts” approach, which avoids the need for revenue but reduces services many in the state value. The Legislature, on the other hand, largely has relied on using PFD cuts, what long-time University of Alaska – Anchorage Institute of Social and Economic Research Professor Matthew Berman calls the “the most regressive tax ever proposed,” and which pushes the burden almost entirely to middle and lower-income Alaska families.
As 18th Century English poet Alexander Pope wrote in his Essay on Man, however, “hope springs eternal in the human breast.”
Given the size and persistence of the deficits the state continues to face in the years ahead, we can hope that this year, the administration is straightforward with the state’s outlook and Governor Dunleavy lives up to the goal he set in his press conference last session and proposes “a broad-based solution that doesn’t gouge or take huge parts from one sector (of Alaska) or another.” And, if he does, the Legislature takes it seriously.
We will be watching closely and, as we always have, provide our perspectives along the way.
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.