Wrangell Sentinel -

Gov. Mike Dunleavy introduced a first-draft $7.3 billion state budget last week, meeting a legally required deadline but acknowledging that the spending plan is likely to change significantly as the administration negotiates with lawmakers in the upcoming legislative session.

“This budget that we’re submitting, as always, is a talking point with the Legislature,” Dunleavy said. “It also reflects values, what our revenue picture looks like, and where we’re headed.”

The biggest single expense in the entire proposed state budget is $2.5 billion for Permanent Fund dividends — enough for a payment of about $3,860 per recipient next fall, which would set a record. This year’s payment was $3,284.

“It’s no secret that I support the Permanent Fund. It’s no secret that I got over 50% of the vote (Nov. 8 re-election) as part of that being part of the campaign,” Dunleavy said in presenting the budget Dec. 15.

To accommodate the cost of a larger PFD, the governor’s spending plan relies on withdrawing from savings. It also cuts the state’s capital budget — used for state and municipal construction and renovation projects — by two-thirds and proposes no increases to spending on K-12 education. School districts and many legislators have been pushing hard for a boost in education funding.

The Wrangell School District is among several across the state that have called for an increase in state funding, which covers about two-thirds of local school operating budgets. The state funding formula has increased by just half a percent in the past six years.

The proposed state budget covers Fiscal Year 2024, which begins July 1 and runs through June 30, 2024. Lawmakers will begin considering the proposal when they convene in January.

“There’s some definite needs that are not being addressed,” said Sen. Bert Stedman, the Sitka Republican who chairs the Senate Finance Committee on operating budget issues.

Stedman said it would be fair to think of the governor’s proposal as a starting point for further negotiations.

Some lawmakers expressed disappointment that the governor is not proposing an increase in education funding. “In a perfect world the governor would help lead the charge on providing more education funding,” Rep. Bryce Edgmon, from Dillingham who previously served as speaker of the House, told the Anchorage Daily News.

If oil prices remain flat, the governor’s plan puts legislators in an awkward bargaining position: Any substantial increase in school funding or the amount spent on maintenance and construction would require either spending more from savings or reducing the size of the dividend.

The draft budget includes no major cuts to ongoing services but does allow one-time funding increases to expire, shrinking some agencies. The University of Alaska, for example, would see its budget shrink by $17.3 million, or more than 5%, because of the end of one-time programs.

In a prepared statement, UA President Pat Pitney noted that the governor’s plan “does not include priorities including cybersecurity, rising costs and urgent deferred maintenance.” She said the university will continue to advocate for those priorities during the legislative session.

Though his budget contains no increases to K-12 funding — something that school administrators have requested to combat years of flat-funding and real budget cuts once inflation is considered — Dunleavy said he expects negotiations with the Legislature to result in increases.

It’s “highly likely, yes,” Dunleavy said.

When asked why he didn’t include some increase to start with in his budget, Dunleavy responded that any figure he picked would be the wrong one. “For me to put a number in the budget, some would say it’s too little, some would say it’s too much,” he explained.

Dunleavy suggested that changes to the state’s foundation formula — the amount the state pays school districts per student — could be in the works, possibly including changes to the amounts used to calculate energy and salary costs.

He personally would want to include an “accountability component,” he said, some mechanism to require improved student educational performance.

Complicating the budget is the fact that crude oil prices last week were at their lowest of the year, cutting about $1.7 billion from state revenue estimates for this year and next.

Oil accounts for between one-third and half of the state’s general-purpose revenue, depending on prices and production, and a new state forecast released Dec. 15 alongside the budget shows a significant decrease in oil revenue.

In the upcoming fiscal year, the forecast projects $6.9 billion in general-purpose revenue, a drop of $700 million from a preliminary projection this past spring.

The Department of Revenue also expects about $1 billion less in oil revenue for the current fiscal year, which ends June 30, 2023. This spring, the state had forecast $8.3 billion in revenue for Fiscal Year 2023. That’s been lowered to $7.2 billion.

Oil markets now indicate a price in the high $70s or low $80s per barrel, well below expectations earlier this year and lower than the state Department of Revenue’s interim estimate one month ago.

Oil prices are being driven lower by market worries over a global recession and weaker demand in China, which has been locked down by zero-COVID policies and is now getting hit with large outbreaks of the virus, shutting down industrial activity and travel.

From a high of almost $128 a barrel in early June, Alaska North Slope crude was down to the mid $70s last week, a fall of about 40%.

The budget that passed the Legislature this spring was built on an estimate of $102 per barrel of oil. That’s an average for the entire fiscal year, which runs from July 1 through June 30 the following year. Through last week, prices have averaged $96, according to figures collected by the Department of Revenue.

Most of the state’s general-purpose revenue continues to come from the earnings of the Alaska Permanent Fund, and for Fiscal Year 2024 that figure appears solid: $3.5 billion, according to the Alaska Permanent Fund Corp.

The Alaska Beacon is an independent, donor-funded news organization. Alaskabeacon.com.