Dunleavy's budget 'surplus' based on sleight of hand, using federal disaster funds to hide giant deficit

(In the original version of this column I said the Dunleavy budget added $90 million to public safety. That was wrong. The current fiscal year shows total public safety spending of $237 million. The Dunleavy proposal is to increase that to $274 million, an increase of $37 million.

What I should have said was that $90 million of the entire public safety budget is to be paid for with one-time federal disaster relief funds provided by Congress and President Biden. The $90 million, shown here as the ARPA revenue replacement UGF funding, represents one-third of the entire public safety budget. Dunleavy has not explained what would happen to public safety funding in the year that follows, when the federal money is gone.)

The proposed state budget from Gov. Mike Dunleavy is a marvel of smoke and mirrors, a campaign document that will not be approved by the Legislature.

He says the state can pay $2.5 billion in Permanent Fund dividends, fully fund lots of public services that have been cut under Dunleavy, improve the ferry system and add $24 million to public safety. All this with no new taxes or higher taxes and a surplus of $26.7 million.

Don’t believe it.

The imaginary Dunleavy surplus is largely a product of using more than a half-billion dollars in one time only federal disaster funds to underwrite regular agency operations for the fiscal year that starts next July.

In addition to this sleight of hand, he is proposing a major cut in the capital budget and a plan to borrow more than $308 million for construction projects.

Taken together, these gimmicks create upwards of $700 million in deficit spending for the year that follows the election, with no plan to pay for them.

Candidate Dunleavy is trying to avoid facing the reality of state finances once again. He wants to be able to claim there is a painless way to pay a total of nearly $3,700 per person in dividends in 2022—with about $1,200 of that for what he claims is the “overdue 2021 payment.”

The temporary federal subsidies are propping up the “People First” public safety and family services initiatives that Dunleavy made a big show about this week. The bonus federal money is also the key to improving ferry service.

While it is true that oil prices are higher than envisioned last spring and investment returns have been strong, the increase in federal money is not sustainable.

A big chunk of the federal money, $375.4 million, is listed on the budget summary as part of “Unrestricted General Funds,” not as federal money. That is what is left over from the American Rescue Plan Act, a COVID-19 relief bill that passed Congress in March with no Republican support.

Despite the opposition of Alaska’s congressional delegation, the federal aid disproportionately benefited Alaska and other small states, mainly because of the insertion of rules that required minimum payments to each state, regardless of population.

“I helped secure an increase to the minimum amount of state and local funding for all states—Alaska was originally slated for $800 million and that is now increased to $1.25 billion,” Sen. Lisa Murkowski said last March, adding that she opposed the bill.

Sen. Dan Sullivan said some specifics would help Alaska, but too much of the bill “has nothing to do with pandemic relief.”

The Dunleavy plan to spend about a half-billion has nothing to do with pandemic relief.

It has everything to do with running a reelection campaign in which he never has to confront voters with bad news about cutting services, dividends or raising taxes, the same formula he ran on in 2018.

The budget he released Wednesday is a campaign fantasy that will fall apart upon examination by the Legislature, where many of the people on the finance committees are not easy to fool.

To continue the proposed operations beyond one year, the state would have to enact hundreds of millions in new taxes in 2022, something that Dunleavy opposes.

The real deficit would surpass $700 million without the federal money or the bond issue for construction. There is no surplus.

Dunleavy is proposing cutting general fund spending on the capital budget in half, from $336 million to $155 million, which is another way of appearing to reduce the overall budget, because the bond doesn’t show up as general fund spending.

He is proposing that the state borrow $308.5 million through a general obligation bond for construction projects across the state.

I think there is no chance that the Legislature will go along. The opposition is sensible.

The state needs a fiscal plan that includes taxes to avoid deficits that would appear by the summer of 2023, even assuming strong investment earnings and high oil prices.

Sitka Republican Sen. Bert Stedman, one of the sharpest legislators on budget matters, said the new Dunleavy budget shows no sign of restraint.

“It appears to me that they’ve spent all the funds they can get their hands on,” Stedman told KTOO and Alaska Public Media. “Like a bunch of drunken monkeys putting a budget together in a case of euphoria.”

Stedman is far more accurate about this than Dunleavy, whose campaign released a puffed-up lie saying the budget is “fiscally conservative and sound” and that he is fighting “East Coast liberals.”

“During my first term, I've been personally invested in reining in big-government spending by eliminating the state's deficit,” Dunleavy said. He praised himself for proposing no new taxes.

This budget is in many ways an attempt to erase the memory of Dunleavy’s so-called “Honest Budget” in 2019.

Back then he proposed cutting the health department by $848 million, while taking $332 million from schools, gutting the University of Alaska, shutting down the Alaska Marine Highway System and confiscating hundreds of millions in oil and gas property taxes and fish taxes from local governments. He said that was his “permanent fiscal plan.”

His permanent fiscal plan led to the recall campaign.

His reelection campaign budget isn’t fiscally conservative or sound and he hasn’t eliminated the state’s deficit. He’s just hiding it under hundreds of millions of temporary federal dollars and putting Alaska’s financial future at risk.

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