While Gov. Mike Dunleavy (R – Alaska) has not acted on the FY24 budget approved by the Legislature (it has not yet been transmitted to him), the “Closing Budgets,” as the Division of Legislative Finance calls them ( LFD), nonetheless providing a useful point to pause and reflect on some of what this year’s budget process has produced.
We begin by putting this year’s budget in historical context. The chart below shows Unrestricted General Fund (UGF) spending for the past ten years. Agency, state, and capital expenditures for each year are reflected in the bar to the left. The level of the current law (statutory) Permanent Fund Dividend (PFD), the portion of the PFD paid out, and the portion of the PFD cut (or as Professor Matthew Berman of the University of Alaska – Anchorage Institute for Social and Economic Research (ISER), the “encumbered” portion of the PFD is on the right.
While not the largest level of spending during the period, the FY24 budget is the third largest, trailing only FY2014 spending, the Parnell administration’s last budget, which was spurred by a transfer of $3 billion from the Constitutional Budgetary Reserve (CBR) to the PERS/TRS (retirement) systems and last year’s FY23 budget, which was prompted by what, in hindsight, was a temporary increase in prices of the oil.
At $2.2 billion, the FY 24 statutory PFD level is also the third largest, behind only FY 23 ($2.7 billion) and FY 22 ($2.2 billion). ).
At $1.4 billion, the level of the FY24 PFD cut (the amount of legal PFD diverted (taxed) to the government) is the second largest for the period, behind only FY22 ($1.6 billion). In terms of the percentage cut (the percentage of the current statutory PFD taxed by the government), FY24 (with a 61% cut) is the third largest for the period, trailing only FY21 (64%). %) and fiscal year 22 (63%). .
While FY14 and FY23 have higher overall spending levels, the agency’s FY24 operating budget is tied for the largest over the period (with FY15) at $4.5 billion, which in turn sets the stage for further growth. continuation of spending in future years.
The problem with that projected growth is that it doesn’t match traditional revenues, which are, in fact, declining.
Here’s a look at the relationship going forward, using the LFD’s most recent “Governor’s Request Overview” projected benchmark spending levels (the bars on the left) and the most recent revenue levels from the “current law” (the bars to the left). right), using recent oil price futures and the most recent projections from the Permanent Funds Corporation of percentage of market value (POMV) and statutory net income (SNI), which is used to calculate grading PFD levels current projected
While UGF spending increases over the period from $5.34 billion (FY24) to $6.48 billion (FY32), a CAGR of 2.45%, traditional revenue declines from $2.83 billion (FY24) to $2.41 billion (FY32). Supplemented by the portion of the POMV draw that remains for the government under current law (after payment of the statutory PFD), total revenue during the period continues to decline from $4.13 billion (FY24) to $3.72 billion (FY24). 32).
The resulting current law shortfall during the period (in red) increases from $1.21 billion (FY 24) to $2.76 billion (FY 32), a CAGR of 10.9%.
As the first chart in this column demonstrates, for the past eight years, the response to successive legislatures’ deficits has been to use PFD (tax) cuts to close the budget. But at projected deficit levels, the ability to continue to do so is shrinking.
The following chart uses the same traditional revenue and spending levels as before, but instead of using only the portion of the POMV available to the government under current law, it uses the same ad hoc approach as incorporated in FY24 and previous budgets: using as much of the POMV draw as necessary to close the deficit, with only the remainder available for the PFD, the approach some refer to as the “leftover PFD” approach.
The results are reflected in the illuminated part at the bottom. While this coming year (FY24), 29% of the POMV draw remains available for distribution after closing the shortfall, for FY32, only 2%.
This year, some argued that allocating 25% of the POMV to the FPD and 75% to the government should become a standard approach to budgeting in the future. But at projected revenue and expense levels, that only works for fiscal year 24. For fiscal year 25, the following year, the split is 22/78; for fiscal year 28, in five years, the split is 13/87. On your current trajectory, for fiscal year 32, at the end of the period, the split is 2/98.
To provide some perspective, the following tracks PFD over the same period using current law, POMV 50/50, POMV 25/75, and “leftover” approaches. Anything other than the “leftover” approach will require additional revenue, spending cuts, or a combination of both to close the gap between the indicated level and the “leftover” approach.
Some say the FY24 budget is “balanced.” That is true in the technical sense, that income equals expenses. But that is always true. Even when potential shortfalls are closed by drawing on savings, that is, excess income from previous years, the budget is always technically “balanced.”
But this year’s budget is far from balanced where it matters most: its impact on Alaskan families.
Here’s the distribution of the financial impact on Alaskan families of the FY24 budget shutdown through PFD cuts, which Professor Berman calls the “most regressive tax.” ever.”
As a share of income, the lowest 20% of Alaskan families incur a 19.4% tax rate and Alaskan middle-income families 6.7%, while the top 20% incur a rate 2.2%, top 5% 1.1%, top 1% 0.5% and non-residents receiving Alaskan income zero.
Compared to using a flat tax that would result in all Alaskan families contributing roughly the same share of income to government costs, the bottom 20% of Alaskan families are overpaying 16, 5% and Alaska middle income families 3%, while top 20% lowest paying 1.9%, top 5% 2.8%, top 1% 3.4% and non-residents receiving Alaska income, 4.1%.
By overpaying their share, the bottom 80% of Alaskan families (low, lower-middle, middle, and upper-middle income people) are subsidizing the top 20% and nonresidents. Those who have the least are the ones who contribute the most; those with more can contribute a trivial part because the bottom 80% are subsidizing them.
That is the legacy of the FY24 budget.
As we’ve explained in previous columns, not only is the outcome hugely unbalanced, but of all the various options, the use of PFD cuts to fund the government has the “greatest adverse impact” on Alaska’s overall economy.
Lawmakers who claimed during their campaigns to prioritize “working Alaskan families” (those in the middle and low income brackets) should be horrified by the results. Any “balance” in the budget has been fully achieved at significant cost to those at those income levels. And on its current trajectory, the impact will only get worse in the future.
Brad Keithley is the Managing Director of Alaskans for Sustainable Budgets, a project focused on developing and advocating for lasting and economically sound state tax policies. You can follow the work of the project on its website, at @AK4SB on Twitter, on his Facebook page or by subscribing to his weekly podcast on Substack.
