Gov. Mike Dunleavy

By Tim Bradner

Will 2020 bring us a kinder, gentler Gov. Mike Dunleavy?

Maybe, maybe not. The governor introduced new state budget with hardly any reductions, a sharp contrast to his aggressive budget-cutting last spring.

Dunleavy also seems willing to now talk the “T-word” so dreaded conservative Republicans – taxes.

Is this for real? Some think not, and that will last only as long as it takes for a feisty recall campaign against the governor to fizzle out, or at least Dunleavy hopes it will fizzle.

Alternatively, the governor may have decided to just kick the problem to the Legislature as to how to fill a projected $1.5 billion deficit in the governor’s budget for state Fiscal Year 2021, the budget year that begins next July 1. That way legislators take the heat, not him.

New state taxes also appear to be on table for discussion as legislators and Dunleavy figure out how to deal with the deficit. The Legislature and the governor must approve the budget, including how to cover the funding gap, before June 30.

Dunleavy is now “open to a discussion” on new revenues, said Laura Cramer, Deputy Director of the governor’s Office of Management and Budget. Those could include higher fuel taxes or a state sales tax, she said.

Cramer spoke in a Dec. 18 briefing to Commonwealth North, an Anchorage policy group.

Dunleavy himself said he expected the Legislature to engage the tax topic and that he would discuss new revenues in a public dialogue over spending for programs and possible new revenues next year. The governor’s comments came as he released his proposed FY 2021 budget Dec. 13.

Cramer said, “There are no revenue increases (in the new budget) but the governor is open to a conversation. He will put no ideas forward, but he is willing to have the discussion.

Is this a Dunleavy more generous toward public spending? Some think the governor hasn’t backed off from his original plan but is only biding his time until state courts rule on the validity of the recall. If the recall is denied the governor may ramp up his actions to make sharp reductions.

For now, the governor’s funding plan in the Dec. 13 budget has the $1.5 billion coming from the Constitutional Budget Reserve, or CBR, a savings account. If the withdrawal were made it would bring the balance of the CBR down to about $500 million.

This is unwise, many legislators feel, because a healthy balance, between $1.5 billion and $2 billion, must be maintained in the reserve account to fund the state’s cash needs during the year, like payroll, and for emergencies.

In bucking the problem to legislators Dunleavy wants to make them decide where to get the money, from the CBR or the Permanent Fund’s earnings reserve – which would affect the popular Permanent Fund Dividend – or by making the kinds of deep budget cuts Dunleavy attempted last spring.

The governor was able to cut about $450 million to $500 million in the current year budget, a little less than half of the his target of $1.2 billion, but the reductions will partly be offset by supplemental appropriations needed for agencies experiencing shortfalls, such as Medicaid, and unexpected state expenses like the 2019 wildfires in Southcentral and Interior Alaska.

Dunleavy also said Dec. 13 he will push again for “full funding” of the Permanent Fund Dividend, or PFD, referring to a formula in a state law that guides how the PFD is to be calculated. But that’s only if the Legislature decides to authorize a PFD, and if the funds are available. This will set off another fight with the Legislature on this, as it did last spring.

If the statutory formula is followed the PFD would be about $3,000. The Legislature, however, authorized a payment of $1,600 for FY 2020 (it was actually paid in 2019, in October). In the Commonwealth North briefing Cramer also said the governor will seek a supplemental appropriation to the current year budget to pay the difference between a $1,600 PFD and $3,000 dividend in an additional payout, which would amount to $847 million if it is paid.

Meanwhile, for next year, or FY 2021, the $1.5 billion gap between revenues and state expenditure is covered by a withdrawal from the Constitutional Budget Reserve, a state savings account. That’s just a “placeholder” action, state officials acknowledge, because by law the governor must submit a balanced budget.

Ben Stevens, the governor’s Chief of Staff, said there will be discussions with the Legislature as to how to cover the deficit.

If legislators do not fund the $3,000 PFD, and instead pay the same $1,600 this year, it would reduce the deficit by about half because less money would be spent on the dividend. Although the deficit would be cut in half the Legislature will still have to fund the remaining gap either by reducing spending or raising new taxes.

On other budget issues Cramer said the governor proposes to pay municipal school debt reimbursement at 50 percent what would be paid under existing law, as was authorized in the current budget. Last year Dunleavy had proposed cutting all municipal school debt payments by the state but then agreed with the Legislature on a 50 percent reimbursement,

Legally, the obligation for payments on local school bonds rests with the municipality that issued them – the state reimbursement for part of the costs is not binding. However, it does leave local governments like the Matanuska Susitna Borough stuck with the difference between full and half payment.

For the current years the borough was able to cover the difference by drawing on reserves and cutting other spending and avoiding the need to increase property taxes. That may be difficult to repeat next year.

Cramer said there were few reductions to state agency budgets in the governor’s new spending plan and increases in some programs where expenditures are tied to formulas, such as for state K-12 school funding and public employee pensions.

However, the administration is aggressively pursuing a number of efficiency measures that will result in savings, mainly through consolidations are sharing of services like information technology and human resources.

Dunleavy also has an assumed amount of supplemental appropriations built into his budget released Dec. 13 but Cramer acknowledged these are just educated guesses. More precise figures for programs like Medicaid will be available in early February, when the governor must submit a request for supplemental appropriations, she said.

One of the reasons for the need for a Medicaid supplemental is that the state Department of Health and Social Services, “was unable to achieve $120 million in reductions,” for which it had set a goal. Based on the planned reductions the Legislature reduced the Medicaid appropriation and the governor cut more though a line-item veto. The result was an underfunding of Medicaid and now the need for a supplemental.

Medicaid is a joint federal-state program where the eligibility for low-to-modest income Alaskans and the disabled are set out in federal law. Service cannot be denied until the requirements are changed by the federal government.

Changing the federal Medicaid rules will be a lengthy process that could take several years, health care specialists familiar with the program say. The state Department of Health and Social Services has not said it has started this process, known as a “waiver” of federal rules, although discussions have been held between state and federal officials.

One continuing problem is the lack of a significant state capital budget. The proposed FY 2020 budget would see $135.6 million in state undesignated general funds appropriated for capital needs, much of it as the required state match to federal construction funds for highways, airports and rural safe water and sanitation projects.

The proposed amount is down from $146.8 million spent this year.

The capital budget has no money for the state’s deferred maintenance backlog on public buildings, which now totals about $2 billion and growing. About half of the deferred maintenance, or about $1 billion, is in University of Alaska facilities.

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