A Q&A with the governor

Dunleavy talks state budget, fiscal future and oil prices

Gov. Mike Dunleavy spoke with the Clarion via cellphone Monday afternoon about the state’s budget after his Soldotna chamber luncheon and Kenai Peninsula town halls were canceled due to growing need for the state to plan for the possible arrival of COVID-19.

Clarion: Your proposed budget released a few months ago focuses on mostly flat funding across the board, while also drawing about $1.5 billion from the Constitutional Budget Reserve, leaving only about half a billion in the CBR. As a fiscal conservative, do you believe spending down the CBR is a better option for the state’s fiscal future than reducing permanent fund dividend checks and/or introducing new revenues? Editor’s note: The CBR is a 30-year-old savings account that held an account balance of $2.20 billion at the end of February, according to the Department of Revenue.

Dunleavy: We laid out a budget last year and we worked through that very robust discussion. We put on the table some spending limits as well, in terms of taxation without a vote of the people, spending limits savings rule, no change of the PFD without a vote of the people. We believe those approaches as well others would get us on a more sustainable path. We received some criticism last year for trying to reduce the budget. The issues we laid on the table, the possible solutions I just mentioned, moved to some extent. But basically the reductions took the oxygen out of the room. We’re also told that if we reduced to the level that we did that it would crater the economy. So, when we decided to put a budget together this year, what we wanted to do is make sure that reductions didn’t once again get in the way of having a discussion. The only savings account we have outside the ERA (Earnings Reserve Account) is the CBR and as we know, we’ve been spending out of that for several years. The approach to reduce the budget was met with opposition — although we were able to reduce the budget by several hundred million dollars. Again, we lay out a flat budget to give the Legislature an opportunity to put their ideas on the table. They’re the appropriators. They’re the ones who decide where the money is going to come from to pay for government. We submitted a budget. We are having conversations with them. We are hoping they coalesce around some ideas that will give us a budget this year. Hopefully, more importantly, one that’s going to be somewhat sustainable going into the future. We are engaged with them and we are waiting for some of their ideas.

Clarion: Are you in favor of drawing that much out of the CBR or did you put that out in your proposed budget as an option for the Legislature?

Dunleavy: I’m required by the constitution and the law to submit a balanced budget. That was the funding available. If the Legislature comes up with alternative funding that they have a majority of votes for, then we’ll certainly consider what they put forward. We put out a budget as required. They’re always discussion pieces when they’re first rolled out. But we’re hoping that the Legislature comes up with some ideas, some creative ideas. We offered small revenue possibilities through our lottery, which is several million dollars starting out, as well as people trading their PFD for land, which would put money into the treasury. Our hope is that the 60 folks in the Legislature, a number of them, will come forward with some ideas and we’re looking forward to having those discussions in the next several weeks.

Clarion: Do you have a plan for the CBR for the long-term if such a significant draw actually ends up happening?

Dunleavy: We’ll probably have to contain our spending. We all should be getting around to supporting resource development in the state of Alaska, so we get more investment and get more resources. Once again, our state’s existence was predicated upon the mandate in our constitution to develop our resources to pay for government. There’s a number of things we have to get around to support to grow the private sector, as opposed to growing the public budget — the government.

Clarion: Banks are pulling their investments out of the fossil fuel industry, some because of the pressure from climate activists. BP sold their Alaska assets to focus on a model using more renewable energy. What role do you think climate change is going to play in Alaska’s long-term economic future?

Dunleavy: I think some banks, because of their changing business models, will not want to invest in the Arctic especially. BP has made a conscious decision to change their business model as well. The world is still going to need our resources. The world is still going to need our oil. It’s going to need our gold. Gold is doing well in this environment here today. It’s going to need our rare earths, our graphite. It’s going to need, probably, our timber in the future too. I’m less concerned about some of these banks pulling out, because it’s a strategy. They feel their shareholders, and others, feel it’s best to invest elsewhere and that’s their prerogative. But, there’s still going to be, in my opinion, plenty of investors who want to make money in Alaska. There’s always going to be an opportunity for investors to make money in Alaska that we can partner with that we can also get the benefits of job creation and also revenue.

Clarion: Local Republican lawmaker Ben Carpenter told the Clarion last month that Alaska is in a state of transition.“The current system that we have for dealing with the permanent fund earnings is not adequate for where we’re headed,” he said. Carpenter is referring to the fact that the state’s revenue these days is coming more from investment returns in the financial sector than oil production, which has historically carried most of the burden. Do you agree with that assessment? How does this change with events in the last couple of days?

Editor’s note: In the last several days, there has been a drop in oil prices and stock market plunges from COVID-19 fears.

Dunleavy: You’re always going to have ups and downs. This always happens. The dip occurred in 2008 and 2009, but in the last several years, there’s been a pretty good market. A lot of wealth has been created. So you’re always going to have these ups and downs in the market. The underlying fundamentals of the United States as a place to vest are pretty solid. In Alaska being part of the United States, the underlying fundamentals here are pretty good too. For example, we don’t oftentimes see a lot of reports on this, but this past year, the GDP for the first three quarters — it increased in all three quarters. We have record unemployment rates, personal income is the highest it’s been in 10 years, we have billions of dollars of investment coming into Alaska. It was just reported to me on Friday by Alaska Housing Finance Corporation that they recorded a 50-year low in foreclosures. One or two days doesn’t determine the future of a state or a country, or for the world for that matter. There’s a bit of an oil price battle going on between Saudi Arabia and Russia. I think that’s going to impact the fracking industry more so than it’s going to impact the conventional oil plays that we have. The oil companies up here are in it for the long term and their investments are for the long term. I think that’s going to bode well for Alaska. Gold is going to go up in price. That’s going to bode well for the folks that extract gold. I think this is a temporary issue. I think the market is temporary. I think once the Saudis and Russia get done fighting over a price, we’ll know prices going forward. I think over the short term — whether that’s a week, two weeks, three weeks — it will be interesting to watch. The permanent fund — investors will certainly take advantage of opportunities to purchase stock bonds and other types of investments and they’ll make money. So in the end, I think we’re just seeing it play out. It’s something probably temporary. But, in the long haul Alaska’s fundamentals, as well as the United States’, are still pretty strong.

Clarion: Do you expect to return to a point where the majority of the state’s revenue comes from the oil and gas industry?

Dunleavy: It’s always tough to predict the future, but I would say there is a possibility that we could add 2-3,000 barrels, depending on the data we’ve been seeing in terms of the investments on the North Slope. Will that exceed investments in the stock market or the permanent fund? I don’t have the answer to that. My hope would be to see income coming from both — an increasing amount of income coming from both. I think that would be good for Alaska. I don’t think those days are behind us at all, in terms of resource extraction. I think we got some great days ahead of us in terms of permanent fund investment. I’m also looking at diversifying this economy and I think we’ve got tremendous opportunities. That’s why I’m really bullish on this state and I believe what we’re going through right now is just a temporary bump in the road.