Gov. Mike Dunleavy chose not to propose big budget cuts in his proposed state budget for next year after a bruising fight with the Legislature in 2019. On the other hand, the governor again proposed a “full” Permanent Fund Dividend at about $3,000, compared with a $1,600 PFD paid this year.

If that is paid, the budget may be $1.5 billion under water, unless the money is taken from state savings.

Since the governor must submit a balanced budget, Dunleavy proposed tapping the Constitutional Budget Reserve, or CBR, for the $1.5 billion. The problem is this would deplete funds in the CBR to about $500 million, which is at an unsafe level.

The state uses the reserve account as a kind of checkbook for its ongoing cash needs during the year, for expense like payroll. Expenses don’t typically align with revenues coming in, so there are times when the expenses temporarily exceed cash on hand, so the state borrows money from the CBR and then repays the money when revenues like oil royalty payments come in.

A balance of about $2 billion needs to be kept in the reserve fund to cover these temporary draws as well as for an emergency reserve.

Legislative leaders are skeptical of such a hefty draw. “The governor’s proposal would drain the Constitutional Budget Reserve, leaving us unable to withstand any unforeseen financial emergencies. In the last year alone, we saw a record fire season and the largest earthquake since 1964,” said Rep. Jennifer Johnston (R-Anchorage), co-chair of the House Finance Committee.

“It would be reckless to drain our primary savings account for the largest PFD in history,” she said.

In the case of the fire expenses, the state has to pay for wildfire fighting out of pocket and then be reimbursed, and only for part of it, by the federal government for firefighting on federal lands.

The governor’s chief of staff, Ben Stevens, said the $1.5 billion draw was kind of a placeholder, a device to make the budget plan technically balance. “The $1.5 billion draw is a beginning point for a robust conversation we’ll have with the Legislature (on how to really pay for it),” Stevens told reporters Wednesday, as the governor’s budget was released.

“The governor is open to other options. We haven’t ID’d (identified) a single source (other than the CBR). Everything is on the table,” Stevens said.

Rep. Neal Foster (D-Nome), the other House Finance cochair, was critical of Dunleavy’s failure to provide a realistic funding source for the $1.5 billion. “The governor’s budget takes a short-term view. He is detailed about what he wants to spend but is shortsighted in his plan to pay for it,” Foster said.

Nevertheless, lawmakers will work cooperatively with the administration, he said. “The Legislature will hit the ground running in January, and we will work diligently with the administration to complete our work within 90 days,” Foster said.

In his own remarks on Wednesday the governor said he intends to initiate a conversation with the public over more service program cuts or possible new revenues, meaning taxes. He said he expects the Legislature to engage in a tax discussion next spring.

The budget proposal itself calls for expenditures for state operations of $4.396 billion in “Undesignated General Funds,” or UGF, which is money the Legislature has control over in appropriations (there are also “designated” or restricted funds) over which the Legislature has less control.

Dunleavy has proposed a slight increase compared with $4.38 billion in UGF spending for the current budget year.

For agency operations, within the overall operations total, the governor has slightly reduced spending to $3.89 billion, down from $3.93 billion this year. Separate from this, however, there are increases over which the Legislature and governor have effectively no control.

Pension costs, for example, will be up to $345 million next year from $307 million this year. Debt service on outstanding bonds will also rise, from $123 million this year to $135 million next year.

The governor also said he will not reduce funding for education or the Base Student Allocation, a formula that guides the amount of state money provided to school districts. There had been reports Dunleavy would seek reductions in funds for schools.

In his remarks last Wednesday Dunleavy said he will push education initiatives including a major program to improve reading skills in schools, and in new state relationships with tribes on education. The draft of a bill on reading is expected to be available soon.

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