OMB director: Budget must match revenues

  • Gov. Michael J. Dunleavy holds his first cabinet meeting on Dec. 4 after being sworn into office the day before in Kotzebue. After campaigning on paying a statutory-funded Permanent Fund dividend and reducing government spending, Dunleavy's budget director is tasked with addressing a $1.6 billion projected deficit for the fiscal year that starts July 1. (Photo/Courtesy/Office of the Governor)

Alaskans should expect a balanced state budget next year, at least as long as Donna Arduin has a say in it.

The new Office of Management and Budget director said she wouldn’t be doing her job if she didn’t draft a budget to present to the Legislature that matched revenue expectations. The alternative would mean relying on speculative income growth or require future government cuts; that’s work she doesn’t plan to leave on the table.

“I don’t believe in budgeting towards hoping revenues go up,” Arduin said in a Dec. 28 interview. “The budget should be steady and predictable, so we shouldn’t budget hoping that we’re going to get more revenues next year.”

The $5.7 billion fiscal year 2020 general fund budget proposal Gov. Michael J. Dunleavy’s administration released Dec. 14 — mostly crafted by former Gov. Bill Walker’s team as often happens when state leadership changes hands — is projected to result in a deficit of more than $1.6 billion after a roughly $300 million deficit this year.

By the numbers, the current fiscal 2019 budget is very similar to the 2020 placeholder plan. The single biggest difference is a much larger Permanent Fund dividend appropriation in the 2020 proposal, which, coupled with an lower oil price forecast from the Department of Revenue, adds up to $1.6 billion more in spending than the state is likely to collect over the year.

The 2020 fiscal year begins July 1.

Shortly before leaving office Walker released his budget as balanced, but that was based on a $75 per barrel average oil price forecast; a number derived in October when Alaska North Slope crude prices averaged $80.02 per barrel, according to the state Tax Division.

New Revenue Commissioner Bruce Tangeman curbed the $75 per barrel projection to a $64 per barrel average for 2020 as prices for Alaska crude, which is priced to the international Brent benchmark, have retreated to the mid-$50s.

Dunleavy is ardently averse to new or higher taxes and dedicated to paying statutory formula-based Permanent Fund dividend that would collectively be about $920 million more than the latest PFD payout of $1.02 billion, according to OMB documents.

That means reducing government spending by $1.6 billion — or 28 percent of a $5.7 billion budget — in other areas is pretty much the only remaining option.

On the prospect of making those spending cuts, Arduin said, “If you don’t do them this year you’re going to have to do them next year. It doesn’t get any easier.”

Legislators have found spending cuts of that size unworkable in recent years following several years of cuts totaling more than $3 billion, as state budgets have stabilized roughly at the current level over the past three fiscal years.

Several recent annual deficits were so large there was little expectation the gap would be closed in a single year, and the Legislature drew down some $14 billion from state savings accounts in order to cover the gaps.

The vast majority of the structural budget gap was filled last spring when legislators approved Walker’s landmark legislation to establish a 5.25 percent of market value endowment-style draw from the Permanent Fund, while additionally setting dividends below the statutorily calculated amount.

Making those tough spending decisions is nothing new to Arduin. The conservative budget fixer has led the crafting of budgets for Republican governors in Michigan, New York, Florida and California over the past 25 years in addition to consulting roles for other Republican politicians across the country.

Arduin agreed to join the Dunleavy administration because transforming state spending plans “is what I enjoy doing,” she said.

“I enjoy the challenge and working with fiscally conservative governors to make sure that — in most state it’s taxpayers; here it’s dividend recipients and hopefully not future taxpayers — are first and foremost at every policy table and every policy discussion,” Arduin explained.

Alaska’s budget structurally isn’t all that different from other states, she said, aside from the fact that most of the revenue comes from oil and other obvious differences such as the PFD.

Arduin, who arrived from her home state of Michigan in late November, said she has received great help from OMB staff and other administration officials. The Office of Management and Budget now includes the administrative services directors who were who apart of 13 executive branch departments. Dunleavy made the staffing change, which Walker’s administration considered but didn’t implement, through a quiet early December administrative order.

Those individuals were largely in charge of the department budgets and detailed operations and were moved to OMB “precisely for the reason that we can work through every detail of what the agencies do and know who to talk to within the agencies and how to analyze their functions,” she said.

“I have an amazing team at OMB,” Arduin continued. “I was able to recruit — even prior to the inauguration — some of the most talented people around state government and then we moved the (administrative services directors) here so the Budget Office doesn’t look like it did a month ago.”

Laura Cramer, a former chief of staff to Finance Committee co-chair Sen. Anna MacKinnon is Arduin’s deputy OMB director.

The office is currently conducting a policy driven analyses of everything the state does.

She declined to discuss the possibility of major changes to state operations in order to close the gap.

Arduin also couldn’t say when the Dunleavy administration would release its first original budget, but it has a Feb. 15 deadline to do so.

She reiterated a point the governor has emphasized when asked how she views the Permanent Fund is best utilized.

“We need to follow the law,” she said, in reference to the fact that the statutory PFD formula has not yet been changed despite that it hasn’t been followed recently.

Arduin later added, “The Permanent Fund is designed to invest and grow. The Constitution and statute tells us which revenues go into the fund and once earnings are realized how much of those earnings can be used and that the first use of those (earnings) is for the statutorily calculated dividend.”

The 2020 POMV draw is projected to be roughly $2.9 billion, which would leave about $1 billion available to support government services and pay down the deficit. About $1.7 billion in fund earnings is being used for that this year.

The Revenue Department expects nearly $2.2 billion in other unrestricted revenue to be available in fiscal 2020, versus about $2.7 billion in the current year, adding to the expected deficit.

On less pressing matters, Arduin said she tries to apply all of her prior experiences across the country to her current work.

“We can learn so much from each other. It’s just been very valuable to me having worked in other states where everything is slightly different,” she said. “On the other hand, I can anticipate what may happen in the future based on my experience.”

She has had less success anticipating Juneau’s weather, but she’s still warmed to the city.

“I love Juneau. I love all the boots that I’ve now acquired,” Arduin joked. “If only someone out there could invent one that converts from rain to snow to ice during the same walk — I enjoy it. The people are nice; the city is charming and it’s beautiful.”

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Elwood Brehmer can be reached at [email protected].

Updated: 
01/02/2019 - 9:31am

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