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Dunleavy presents the case for his budget

Daily News Staff Writer

Gov. Mike Dunleavy this week in Ketchikan laid out how he arrived at the conclusion that his 2020 budget proposal is necessary.

Dunleavy had an attentive audience at Monday’s Greater Ketchikan Chamber of Commerce luncheon as he went step by step through his perspective of the state’s financial history to former Gov. Bill Walker’s attempt to eliminate deficit spending and then to his own proposal.

Walker inherited a $3.7 billion budget deficit. Four years later when Dunleavy became chief executive, the deficit had declined to $1.6 billion.

Dunleavy presented a budget in February to the state Legislature that removes the entire deficit in the first year of his term.

His main point Monday was that Alaska’s spending is on an unsustainable incline.

Back in the 1960s, Dunleavy began, Alaska had a population ranging between 225,000 and 300,000. By the late ‘60s, the budget came in at about $175 million annually.

The population today is about 737,000. According to Dunleavy on Monday, Alaska’s general fund budget is $5.7 billion for fiscal 2019.

The North Slope’s Prudhoe Bay oil field — the largest in North America — was discovered in 1968. State revenue increased dramatically to $900 million as a result, Dunleavy said, pointing out that spending started to increase, too.

At the time, Alaska didn’t know what to expect or for what duration in terms of oil and revenue, he said.

With the uncertainty and the wealth came amendments to the Alaska Constitution, the governor continued. The first established the Alaska Permanent Fund to provide for future generations. Because Alaskans had become concerned about the governor’s and the Legislature’s spending of oil revenue, an appropriation limit was adopted, although the limit is liberal, he said.

As Alaska’s mega oil fields began to produce in the 1970s, the United States initiated an embargo on Arab oil, Dunleavy said. This caused oil prices to skyrocket in the Lower 48, to Alaska’s financial benefit.

Then the price per barrel fell from $32 a barrel to $9 per barrel in the mid ‘80s.

“I was in rural Alaska (teaching),” Dunleavy said. “… I remember administrators coming into our classroom in a small village saying, ‘This is serious. We don’t know what’s going to happen. As a result, we’re going to have to tighten our belts. We’re going to have to reduce travel. We’re going to have to consolidate classrooms. We’re going to potentially lay off folks. We’re going to have to do this, but we’ll get through it.’

“We didn’t know what was going to happen. We didn’t know whether (the oil wealth) was going to come back,” he said.

The recession lasted two years, he continued. “The recession we’ve been in lately has lasted four and a half years. This is the longest recession in the state’s history.”

Around 2006 a bumper sticker started showing up on Alaska motor vehicles; it said: “Please, God, give us another Prudhoe Bay.”

Essentially, it happened, he said. The price of oil skyrocketed to $155 a barrel.

“When you think of $8 a barrel or $9 a barrel in the ‘80s,” Dunleavy said, “and we thought it would never come back …

“We didn’t learn from the last episode,” he said. Instead of budget increases at 2% or 2.5%, between 2007 and 2014 Alaska started having annual budget increases of 15%, he added.

“There’s no economy on the planet that keeps up with 15% a year,” he said. “As our spending is increasing, our economy is not necessarily growing. It’s actually stagnant at this time. China’s economy grows at about 6 percent a year; they’ve got one of the hottest economies, if not the hottest economy.”

With Alaska’s economy not growing, but budget increases of 15%, the state was “living off the high old prices, but we start to bank some revenues,” he continued.

The price of oil suddenly crashed again in 2014, down to $26 a barrel, he recalled. “We start to reduce our budgets, mainly our capital budgets, not our operating budgets.” In terms of capital spent, it declined from about $2 billion a year.

Then because of lower oil prices, he said, Alaska started spending its savings, spending $14 billion out of the Constitutional Budget Reserve Fund.

“At $14 billion, we could’ve probably provided electricity for all Alaskans for eternity at an incredibly low rate,” he said. “We could have paid off (Alaska) pension obligations. We could have paid down (Alaska’s) bond debt as a whole. …

“And now here’s where we are today,” Dunleavy continued. “We have what they’re referring to as a structural deficit, meaning our revenues and the price of oil and production revenues that come from that, it’s not enough to service our expenditures.”

Last year, Dunleavy said, the Legislature added money to the budget without revenue to support it.

This year Alaska has about $2 billion left in its CBR, down from a high of $16 billion, and about $177 million in the Statutory Budget Reserve Fund.

“Both the CBR and the SBR will be gone in 14 months if we don’t arrest this incline of spending,” he said.

Dunleavy has three bills introduced in the Legislature that, if acceptable to Alaskans, he said that they would be necessary to begin arresting the spending incline to 2% to 2.5%.

“There’s a chance we can get out of this (situation) because in the next five years” new oil is coming, he said. “And it’s not just the imaginary; they’ve explored. They have found; they are actually in the process of developing and actually producing oil as we speak. And the estimates are (200,000) to 300,000 barrels through what’s happening in the National Petroleum Reserve.

“But we still have to close (the deficit),” he said.

Then Dunleavy said that former Gov. Walker tried to close the gap with new revenue — PFD reductions and tax proposals rejected by the Legislature. Walker also made budget cuts.

Dunleavy’s presentation didn’t include discussions of other potential revenue sources, or reductions in oil tax credits, as ways to reduce the deficit.

“Our approach is to try to … get our expenditures more in line with our revenues through reducing the budget dramatically,” Dunleavy said. “And there is no doubt that that approach is causing a great discussion in the state of Alaska. What is it that we want to pay for? How do we want to pay for it; when do we want to pay for it?”

Dunleavy noted that there is $64 billion in the permanent fund. It could have been $127 billion presently, he said.

The $127 billion might have been realized if a spending cap had passed the Legislature 20 years ago, he said. It also would have allowed for a $6,400 permanent fund dividend, plus $6.2 billion to pay for state government, compared to $3,000 and $2.9 billion, respectively, this year, he figured.

“If we had saved our money and we didn’t spend it all … it would be spinning off enough money to pay for the budgets we have today,” he said.

Dunleavy cited Senate Bill 26, which was passed last year and allows a legislative withdrawal of 5.25% of the average five-year market value of the permanent fund earnings annually, split between government and the PFD. But, he said, if Alaska continues to spend and nothing else changes, the PFD will be gone in four years. Both the government’s share and the PFD will be gone, he added.

“So the enemy of the future of Alaska, just like the enemy of the past in terms of savings, is our incline of spending,” he said.

Then he addressed the idea of a state income tax to fill the gap.

“If you estimate that on 300,000 people working, that’s $5,300 per person. So, if you’re a working couple, that’s almost $11,000 just to fill the $1.6 billion (budget deficit),” he estimated.

“If your spending rate continues, … you have to chase that with additional taxation,” he said.

Dunleavy, who is attempting to eliminate the deficit while issuing full PFDs at the same time, pointed out that reducing or taking away the PFD also has ramifications. For example, for a single mother with three children who depends on the PFD that amounts to $12,000 a year with a $3,000 per person payout, the number being utilized by both Dunleavy and the state House for the upcoming dividend. If the mother doesn’t receive the PFD, he said, it’s possible she might need to turn to the government to make up that difference.

Dunleavy has proposed three amendments to the constitution.

One caps annual state spending; a second requires a ballot measure to increase broad-based taxes, and the third enshrines the PFD in the Alaska Constitution.

As the governor closed his presentation with an invitation for audience members’ questions, he said: “I’m looking for your ideas as well. …We’re all in this together. We want a solution and, in the end, we will get a budget.”

Dunleavy’s full audio presentation can be found through Ketchikan Public Utilities, and KRBD and KTKN.