The Associated Press

and the Wrangell Sentinel

Gov. Mike Dunleavy last week outlined what he called a responsible budget proposal that doesn’t dip into savings, bolsters law enforcement and calls for direct payments of about $3,700 to residents amid an unsettled dispute with lawmakers over the future of the state’s dividend program.

But the budget relies on high oil prices to help pay the bills and is heavily dependent on one-time federal pandemic aid dollars to help cover the cost of public services usually paid out of state funds, such as the Alaska Marine Highway System.

The budget plan, a starting point for lawmakers to consider when they reconvene in Juneau on Jan. 18, proposes a supplemental Permanent Fund dividend next year of about $1,200 to residents, which would be on top of the $1,114 PFD paid this fall. Dunleavy had wanted lawmakers to consider a supplemental dividend during the fourth special session of the year, which ended last month with little business being conducted and the issue withering.

Dunleavy’s budget plan for the state fiscal year that starts July 1 also calls for a larger dividend next year of about $2,500 as part of his PFD-focused approach to state spending that lawmakers rejected this year.

The governor is seeking reelection next year, as are most legislators.

House Speaker Louise Stutes in a statement said her coalition supports a number of the priorities and projects Dunleavy outlined. But, she added, “It is important to remember that a slight rise in the price of oil, changes in the stock market and one-time funding from Washington do not fundamentally change Alaska’s fiscal reality.”

Referring to the yearslong, unresolved debate over the state’s financial future, Stutes said, “We need to make the tough decisions on a fiscal plan in order to provide sustainability in budgeting” and the dividend.

The state, heavily reliant on oil revenue for decades, has come to depend on investment earnings from the oil-wealth Permanent Fund as North Slope production is down 75% from its peak of the late 1980s.

The state is expected to draw about $3.4 billion from Permanent Fund earnings for the upcoming fiscal year under a 2018 law that limits withdrawals to protect the fund from excessive draws so that it can continue growing. The withdrawal from the fund will cover about 60% of the cost of public services and dividends under the governor’s budget proposal.

Dunleavy’s budget would increase the number of village public safety officers that could be hired by at least 10, said James Cockrell, commissioner of the Department of Public Safety. It also calls for an increase in state troopers and the modernization of the department’s aircraft fleet, he said.

The governor said the state’s “fiscals have improved dramatically’’ and that oil prices are doing well.

Prices, which were in the mid-$80-range per barrel in early November, were around $75 this week as oil markets reacted to the possibility that the latest COVID-19 variant could constrict global economic activity and demand for crude, driving prices lower.

The state Department of Revenue’s own estimate of oil prices for this year dropped by $6 a barrel between the department’s preliminary fall forecast at the end of the October and its official fall forecast Dec. 15.

A steep drop in oil prices could create an instant budget deficit under the governor’s spending plan.

Dunleavy faced backlash during his first year in office in 2019 over deep cuts proposed to public services, with that anger fueling a recall effort that fizzled out earlier this year. Dunleavy said his actions then were a recognition of a deficit and that the latest budget proposal recognizes Alaska’s current situation.

The budget released Dec. 15 does not include many community-specific grants or public works projects, which usually are added later in the process by legislators.

Dunleavy’s bet on higher oil prices and reliance on federal dollars to boost spending on dividends and popular state programs, such as reimbursing school districts for a share of construction costs, has drawn criticism in the political world.

“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,” wrote Dermot Cole, a decades-long reporter and editor in Fairbanks who now publishes his own blog.

The governor also proposes that the state borrow more than $308 million for construction projects, rather than draw on the checkbook this year, Cole wrote. “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.”