THE PERFECT STORM
Gov. Mike Dunleavy sounded the budget alarm two years ago, stepping away from the Senate Majority when he could not vote for the budget that was too big, in his calculation. Or for a Permanent Fund dividend that violated Alaska Statute.
Then he ran for governor on promises to get spending under control, follow statute on the Permanent Fund dividend, and lock up repeat criminals.
Now that he’s governor, has not been able to get the Legislature to go along with much in the way of budget cuts, or the full Permanent Fund dividend, or program and budget restructuring, although the Legislature did support him on criminal justice reform.
His relationship with the Legislature’s political leadership has been strained, to say the least.
As luck would not have it, the price of Alaska North Slope oil just dropped into the mid-$30s.
Even if it doesn’t go lower, there’s not enough revenue coming in to pay for the current $4.5 billion budget, much less the $300 million supplemental budget that is on the table.
At $30 a barrel, only $1.1 billion in revenue would come into the treasury, forcing the Legislature to consider breaking the statutory formula created by Senate Bill 26, which passed in 2018 to stabilized the draw from the Permanent Fund Earnings Reserve Account.
It took three years to get that bill passed. SB 26 was going to solve at least some of Alaska’s budget problems going forward, as it promised a “structured draw.”
But it was deeply flawed, because it did not address another existing statute, which is the formula for the Alaska Permanent Fund dividend. That statute has been broken, first by Gov. Bill Walker and then by subsequent Legislatures; Walker vetoed, and then the Legislature only appropriated half of the dividend, rather than the full statutory amount.
This year, it seems likely that the Permanent Fund dividend will be shaved to just 20 percent of available revenues, rather than a 50-50 formula. Meanwhile, budget leaders in the Legislature are trying to grow the Permanent Fund corpus to $100 billion at a time of great volatility.
The budget ball is in their court, and specifically, the operating budget is in the Senate Finance Committee.
For now, its nearly a flat budget and they have not nearly enough money to pay for it. There are bills to grow the budget, such as House Bill 236 offered by Rep. Andi Story, which would add another $60 million in education spending over the next two years.
There are add-ons for the ferry system, and add-ons for Medicaid; will the Legislature pass those?
There was the legislative effort, led by Democrats, which succeeded in hobbling the efforts of the governor’s Alaska Development Team, which was supposed to help diversify the economy.
Will the governor make drastic vetoes again, which would fuel the hopes of those trying to have him recalled?
Gov. Dunleavy has had perhaps the worst set of circumstances to deal with of any Alaska governor in his first 15 months of office, at least since Gov. Bill Egan governed during the aftermath of the Great Alaska Earthquake. For Dunleavy, it has been like winning a cross-ocean voyage on the Titanic:
- A major earthquake just after the election
- Expensive wildfires in the summer of 2019
- A ferry union strike during the high season for tourism
- Ferries break down due to years of mismanagement
- Crashing oil prices
- BP exiting the state, and the loss of hundreds of high-paying jobs
- Coronavirus and its unknown economic and health impacts
- An advisory from the U.S. government that people avoid cruise ships
- A legislature unwilling to hold the line on spending
- An oil tax measure going to the ballot this year that would make Alaska uneconomic for oil companies
- And, of course, a recall petition by those who blame Alaska’s problems on the current governor
Alaska is a living its reality of the state government’s dependency on oil, and a public that may be unwilling to accept less money, less revenue sharing for communities, and fewer state services.
The price of Brent crude could drop into the $20s this week; Alaska tracks slightly higher than Brent, but could still see oil selling below $30.
That is forcing a crisis just ahead, as expenditures far exceed the ability of Alaskans to pay for their government, even if there was a personal income tax or a still-higher oil tax to pay for it.