While Governor Mike Dunleavy (R – Alaska) has not acted on the FY24 budget passed by the Legislature (it has not yet been transmitted to him), the “Adjournment Budgets,” as the Legislative Finance Division (LFD) refers to them, nevertheless provide a useful point at which to stop and reflect on some of what this year’s budgeting process has produced.
We start by putting this year’s budget in historical context. The following charts unrestricted general fund (UGF) spending over the past ten years. Agency, statewide and capital spending for each year are reflected in the bar on the left. The level of the current law (statutory) Permanent Fund Dividend (PFD), the portion of the PFD paid, and the portion of the PFD cut (or as Professor Matthew Berman of the University of Alaska – Anchorage’s Institute of Social and Economic Research (ISER) puts it, the portion of the PFD “taxed”) are on the right.
While not the largest spending level during the period, the FY24 budget nevertheless is the third largest, behind only FY14 spending, the last budget of the Parnell administration, which was driven by a $3 billion transfer from the Constitutional Budget Reserve (CBR) to the PERS/TRS (retirement) systems, and last year’s, FY23 budget, which was driven by what, in retrospect, was a temporary surge in oil prices.
At $2.2 billion, the FY24 statutory PFD level also is the third largest, behind only FY23 ($2.7 billion) and FY22 ($2.2 billion).
At $1.4 billion, the level of the FY24 PFD cut – the amount of the statutory PFD diverted (taxed) to government – is the second largest for the period, behind only FY22 ($1.6 billion). In terms of the percentage cut (the percentage of the current law level PFD taxed by government), FY24 (at a cut of 61%) is the third largest for the period, behind only FY21 (64%) and FY22 (63%).
While FY14 and FY23 have higher overall spending levels, the FY24 Agency Operating Budget is tied for the largest during the period (with FY15) at $4.5 billion, which in turn sets the stage for continued spending growth in future years.
The problem with that projected growth is that it’s not matched by traditional revenues, which, in fact, are in decline.
Here’s a look at the relationship going forward, using the projected baseline spending levels from the LFD’s most recent “Overview of the Governor’s Request” (the bars on the left), and the most recent “current law” revenue levels (the bars on the right), using recent oil price futures and the most recent projections from the Permanent Fund Corporation of percent of market value (POMV) and statutory net income (SNI), which is used to calculate projected current law PFD levels.
While UGF spending climbs over the period from $5.34 billion (FY24) to $6.48 billion (FY32) – a compound annual rate of 2.45% – traditional revenues decline from $2.83 billion (FY24) to $2.41 billion (FY32). Supplemented by the portion of the POMV draw remaining for government under current law (after payment of the statutory PFD), total revenues over the period still decline from $4.13 billion (FY24) to $3.72 billion (FY32).
The resulting current law deficit over the period (in red) climbs from $1.21 billion (FY24) to $2.76 billion (FY32), a compound annual rate of 10.9%.
As the first chart in this column demonstrates, over the past eight years, the response to deficits by successive legislatures has been to use PFD cuts (taxes) to close the budget. But at the projected deficit levels, the ability to continue to do so is narrowing.
The following chart uses the same spending and traditional revenue levels as before, but rather than using only the portion of the POMV available to government under current law, it uses the same ad hoc approach as incorporated in the FY24 and previous budgets – using as much of the POMV draw as needed to close the deficit, with only the remainder available for the PFD, the approach some refer to as the “leftover PFD” approach.
The results are reflected in the hi-lited portion at the bottom. While this coming year (FY24), 29% of the POMV draw remains available for distribution after closing the deficit, by FY32, only 2% does.
This year some argued that allocating 25% of the POMV to the PFD and 75% to government should become a standard approach to budgeting going forward. But at projected spending and revenue levels, that only works for FY24. By FY25, the year after next, the split is 22/78; by FY28, in five years, the split is 13/87. On its current track, by FY32, the end of the period, the split is 2/98.
To provide some perspective, the following tracks the PFD over the same period using the current law, POMV 50/50, POMV 25/75, and “leftover” approaches. All other than the “leftover” approach will require either supplemental revenues, spending cuts, or a combination of both to close the gap between the level indicated and the “leftover” approach
Some claim that the FY24 budget is “balanced.” That is true in the technical sense, that revenues equal spending. But that is always true. Even when potential deficits are closed by drawing on savings – i.e., excess revenues from prior years – the budget is always technically “balanced.”
But this year’s budget is far from balanced where it matters most: its impact on Alaska families.
Here is the distribution of the financial impact on Alaska families of closing the FY24 budget through PFD cuts, which Professor Berman calls the “most regressive tax ever.”
As a share of income, the lowest 20% of Alaska families are incurring a tax rate of 19.4% and middle-income Alaska families 6.7%, while the top 20% incur a rate of 2.2%, the top 5%, 1.1%, the top 1%, 0.5% and non-residents receiving Alaska-sourced income, zero.
Compared to using a flat tax which would result in all Alaska families contributing roughly the same share of income toward government costs, the lowest 20% of Alaska families are overpaying 16.5% and middle-income Alaska families 3%, while the top 20% are underpaying 1.9%, the top 5%, 2.8%, the top 1%, 3.4% and non-residents receiving Alaska-sourced income, 4.1%.
By overpaying their share, the bottom 80% of Alaska families – those in the low, lower middle, middle, and upper middle-income brackets – are subsidizing the top 20% and non-residents. Those who have the least are contributing the most; those with the most are able to contribute a trivial share because the bottom 80% are subsidizing them.
That is the legacy of the FY24 budget.
As we’ve explained in previous columns, not only is that result hugely imbalanced, but of all of the various options, using PFD cuts to fund government has the “largest adverse impact” on the overall Alaska economy.
Legislators who claimed during their campaigns to prioritize “working Alaska families” – those in the middle and lower income brackets – should be aghast at the results. Any “balance” in the budget has been achieved entirely at a significant cost to those in those income brackets. And on its current trajectory, the impact will only worsen going forward.
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.