Alaska Legislature faces a $200M-plus deficit as it weighs school funding, dividend

JUNEAU — The Alaska Legislature is facing a substantial deficit in the upcoming fiscal year, due largely to diminished oil revenue.

The nonpartisan Legislative Finance Division has projected that a status quo spending plan would see a $200 million-plus deficit. Added spending in areas like state firefighting could see the deficit balloon to well over $300 million, according to forecasts.

That means this year’s Permanent Fund dividend could be reduced from last year’s $1,703 check, legislative leaders say.

The state’s main $3 billion savings account — the Constitutional Budget Reserve — also may be targeted to balance the budget, but legislators are broadly trying to avoid that.

Kodiak Republican Senate President Gary Stevens said Tuesday that the deficit projections are “really eye-opening.”

House Speaker Bryce Edgmon, a Dillingham independent, discussed crafting this year’s budget on Thursday and said that “it really is gonna be challenging.”

In December, Gov. Mike Dunleavy proposed a largely status quo spending plan that included a full statutory Permanent Fund dividend of roughly $3,900. The cost: $2.5 billion.

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Dunleavy’s budget would require drawing $1.5 billion from state savings to fill the projected deficit.

“There is no way that we can afford that,” said Bethel Democratic Sen. Lyman Hoffman on the first day of the legislative session.

In addition to being used as a savings account, the Constitutional Budget Reserve, or CBR, is used as a cash management tool by the state.

With gloomy oil revenue projections in the near-term, Sitka Republican Sen. Bert Stedman said Thursday that spending heavily from the CBR would be “downright stupid.”

PFD vs. schools

Legislators have broadly said that substantially increasing school funding is a top priority this year.

Education advocates say a $500 million annual funding boost is needed to make up for over a decade of losses from inflation. Bipartisan House majority members recently introduced a measure to increase school funding by a similar amount over three years.

Dunleavy unveiled a sweeping education package on Friday at a cost of roughly $181 million per year. The measure includes around $60 million in teacher bonuses per year over three years.

Anchorage Democratic Rep. Andy Josephson, who manages the House’s operating budget, said a major funding boost is needed this year as school districts are in crisis.

“We feel like we’re being austere by proposing $300 million,” he said.

But current revenue forecasts could make a school funding increase of that size untenable.

The $200 million plus projected deficit already factors in big-ticket items — the same school funding boost as last year and a $1,440 PFD.

Legislators last year appropriated $175 million in one-time education funding on top of the normal $1.2 billion in formula funding.

They also approved a $1,403 dividend with an extra $298 added to the check for “energy relief.”

The $1,403 dividend came from the “75-25″ formula the bipartisan Senate majority has previously favored: Three-quarters of an annual draw from Permanent Fund earnings is directed to state services and the rest goes to the PFD.

Under that formula, the dividend this year would be roughly $1,440. The cost to the state would be $950 million.

Josephson said he had believed the 75-25 dividend formula would be sustainable for the long-term. But it does not appear possible this year based on current oil price projections, he said.

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”I think a $1,000 dividend is manageable,” he said.

A PFD of that size would free up close to $300 million in state revenue. Edgmon said that could be used to pay for a big funding increase for education.

”Can we take it all from the dividend? That’s kind of what it’s coming down to,” he said.

Deficit projections and oil

The Alaska Department of Revenue forecast in December that the price of North Slope oil would be $4 per barrel lower than projections made in March.

The price drop is expected to see a $220 million revenue hit for the fiscal year that ends June 30, and a $230 million revenue hit for the fiscal year that starts July 1.

Major new developments such as the Pikka project are expected to raise new state revenue in coming years. But they are also expected to cost the state treasury — oil companies can deduct the costs of developing new fields from their state taxes.

“We can see increased production coming at us, but not increased revenue,” Stedman said.

The result of lower-than-expected oil revenue has been significant.

Alexei Painter, director of the Legislative Finance Division, said Tuesday that current oil company deductions are expected to cost the state $800 million this fiscal year, and $450 million next fiscal year.

The budget for next fiscal year is expected to be over $200 million in deficit, he added. But it is then expected to balloon.

Not included yet: anticipated salary increases for public sector employees, or additions by lawmakers for capital projects.

The Legislature last year approved a capital budget using $550 million in state dollars. A focus was on school maintenance with complaints of crumbling facilities, particularly in Western Alaska.

But this year’s state maintenance and infrastructure spending is expected to be substantially lower.

Stedman, who manages the Senate’s capital budget, said more funding would need to be added to maintain schools and University of Alaska facilities.

“You’ve got to keep up on your basic maintenance or it just snowballs on you,” he said.

House and Senate majority members have said there is no appetite to overdraw the Permanent Fund to pay for the budget. They also are striving to write a spending plan that does not require a draw from state savings.

Three-quarters of legislators need to approve spending from the Constitutional Budget Reserve, which would give the Republican minority caucuses leverage.

But not all minority members are excited by that possibility.

Fairbanks Republican Rep. Will Stapp, who serves on the House Finance Committee, said he wouldn’t favor drawing from savings to pay for government operations.

“Because then I would get worried,” he said. “Right now the balance in the CBR is healthy enough where the cushion is there, as it should be, like a rainy day account.”

Unless the price of oil spikes, Palmer Republican Rep. DeLena Johnson said policymakers have few options.

“If they’re going to add a lot to the budget, they’re going to have to make some decisions on what they’re going to take out,” she said.

Clarification: A previous version of this article erroneously implied that Santos — the operator of the planned Pikka Unit — was currently deducting construction expenses from its state production taxes.