Governor Dunleavy released his proposal for the Fiscal Year 2022 budget last week. It will serve as the starting place for the legislature as they begin work in January. According to the Office of Management and Budget (OMB) documents, the proposal includes $294.6 million in reductions. Unfortunately, people often speak first and sort out the details later. It turns out, the reality is much different than the perception. Let’s look a little closer.
Locating the $294.6 million cuts
Let’s start from the beginning. Where are those cuts in the budget? From the fiscal summary, we can pin that down to four sources.
- $200.6 million in agency operations
- $6.4 million in statewide items
- $54.2 million in capital projects
- $43.3 million in legislative proposals
It’s easiest to take these in reverse order. Let’s dig a little deeper.
The $43.3 million reduction from legislation comes from a proposal to change the way we pay down our unfunded pension obligations. Right now, we have a statute that says that employers don’t have to contribute more that 22% of payroll toward retirement plans. Part of that money pays for the employee’s retirement and the rest goes toward paying down the past accrued liability that is currently short-funded.
The statute also says that the State of Alaska will fill the gap between what employers must contribute and the full amount required to bring the funding up to snuff. That number is currently around 30% of payroll. In other words, the employer pays 22% of payroll toward retirement plans (current and accrued) and the State of Alaska kicks in another 8%.
Here’s the tricky part. The State of Alaska is the employer for a large chuck of the participants in the plans, with local governments making up most of the rest of those employers. The 22% cap is supposed to limit those municipalities from bearing the full impact of fully funding their past employees’ retirements, with the state picking up the tab. But, the way the law is written, the 22% cap also applies to the State of Alaska as an employer, leaving the State of Alaska to pick up the other 8% as “state assistance.” Weird, right?
The problem is that the extra 8% ends up coming out of the general fund, even if the employee’s salary (and the 22% retirement contribution) is funded by Federal dollars. This bill would remove the State of Alaska as an employer from the 22% cap — Leaving it in place for the municipalities.
The result? About $43.3 million of PERS contributions shifting from general fund dollars to other fund sources that pay for the positions. In other words, this is merely a change in the color of the money that pays the same bills. It’s not a budget cut at all.
On its face, the proposed capital budget calls for $58.5 million in FY22 versus $112.6 million in FY21 (a reduction of $54.2 million, accounting for a rounding error). However, that’s not the whole story. The total proposed capital budget calls for $1.433 billion in FY22 compared to $1.255 billion last year (an increase of $178 million).
The difference comes from higher spending levels in the fund sources other than the Unrestricted General Fund (UGF). There are $25 million of increased Designated General Funds (DGF), $102 million of increased Federal funds, and $105 million of increased “other” funds.
Those “other” funds are the important part. That money is coming from a proposed revenue bond through the Alaska Housing Finance Corporation (AHFC). In other words, what appears to be a $58.5 million budget cut is actually a $50.6 million budget increase in spending. It’s just paid with borrowed money instead of general funds. Oh, and this is separate from the $350 million general obligation bond that is also proposed.
Statewide items are things like debt service payments and grants to local governments. These are non-departmental spending items. In the FY22 budget proposal, there are a total of $483.1 million of UGF payments compared to $489.5 million in the FY21 budget. However, that FY21 figure includes $12.8 million of supplemental requests that haven’t yet been approved. In other words, the FY22 “cut” is only relative to an assumed increase that hasn’t happened yet. If you compare the FY22 budget proposal to what was enacted for FY21, it’s actually a $6.4 million increase.
There are a lot of other interesting things going on in the non-UGF fund sources for statewide items. But, that’s a conversation for another day.
Now the fun part. We already established that the “cuts” in the rest of the budget don’t actually exist. But, what about the $200.6 million reduction to agency operations? Where are those cuts? Here are the highlights:
- $140 million cut to Health and Social Services
- $27 million cut to education
- $20 million cut to the University system
- $16 million cut to Transportation
There are other meaningful increments and decrements across other departments, but I don’t want this article to get too long. Let’s just take a closer look at these $203 million of budget cuts.
Health and Social Services
The $140 million reduction in HSS funding sounds like a lot. But, upon closer inspection, it’s not what it appears to be. The bulk of the change comes from a reduction in emergency services related to public health. Can you think of a public health emergency in 2020 that won’t require quite as many resource next year? I can. This isn’t a “budget cut” so much as a (thankfully) non-recurring expense that isn’t staying in the budget.
The reduction in education funding is also not what it appears to be. The number in the proposed budget is the outcome of applying the same funding formula to new enrollment data. Because student population has shifted quite a bit over the last year, the formula generates a different number. Namely, the shift from in-person instruction to correspondence school results in a $27 million reduction in the funding formula.
Of course, there’s no way to know if those students that migrated to homeschooling will stay there once the schools reopen. So, the legislature is probably going to want to place some contingency funding in escrow just in case enrollment shoots up in the middle of the fiscal year. But, this isn’t a “cut” to education in the way it sounds. It’s just the output of the funding formula.
The University of Alaska and the Governor signed a compact a couple of years ago. It provided a step down funding approach to give the University time to transition to a lower level of state support. The FY22 budget includes the final step in that process — A $20 million reduction. This is a budget cut. But, it’s one that everyone has been expecting and planning around.
Finally, the reduction in the Department of Transportation’s UGF budget is also not what it seems. The majority of this reduction is the result of Federal COVID money being carried over to next fiscal year and supplanting UGF funds for aviation maintenance. It is a temporary fund source change, not a budget cut.
The Governor also made some proposals around the Permanent Fund Dividend. In short, he suggests that the legislature appropriate the full POMV draw to pay for the UGF budget items he’s proposed. Then, he is asking for two additional draws on Permanent Fund earnings to make distributions to Alaskans.
Most economists agree that such a plan would provide much needed economic relief for struggling Alaskans and would support flailing local businesses. And, most economists agree that the long-term lost investment revenue associated with using those funds is more than offset by the urgent need for such assistance.
Yet, there are many people that object to “overdrawing” the earnings reserve. Of course, that assertion misses the point. When your house is on fire, you don’t grab the fire extinguisher and run outside to save it for later. You address the immediate threat, then buy a new one. The governor isn’t talking about using the earnings we’ve saved to build AstroTurf soccer fields. He’s talking about protecting Alaskans from financial ruin during an unprecedented time.
Keep in mind that so far in FY21, the Permanent Fund has already earned nearly $6 billion. The FY21 budget used $3 billion of those earnings. What the governor is proposing is that we distribute those other $3 billion of earnings to Alaskans rather than save it for later. While there is a need to start preparing for a future without oil revenues, the governor is simply suggesting that the middle of a public health emergency and economic crisis is not the right time to grow our account balance.
Despite all the knee-jerk reactions, the Governor actually put forward a very reasonable opening bid. While there are a lot of programs facing increments and decrements, the budget is effectively flat funded. There aren’t actually $300 million in cuts that will cost people their jobs.
The legislature will have a lot of work ahead of it to ensure the appropriations align with our priorities. But, that’s more a question of moving money around than it is fighting for more.
There are also some big fights coming. The PFD issue is going to be wildly contentious again this year. It’s highly unlikely that the Governor’s plan progresses. And, there’s a blinding lack of progress dealing with our revenue shortfall. That conversation is already decades past due. The fact that the Governor didn’t propose any new revenue measures while acknowledging the need for them is beyond disappointing. There’s a lot of work to do.