The Draft Budget is Out

Pay No Attention to the Funds Behind the Curtain


Medium Grind – News and Analysis

Today the House Finance Committee released its draft revision of Governor Bill Walker’s FY 2017 state operating budget. At first blush the FY 17 House Finance draft reduces the governor’s Unrestricted non-formula appropriations by about $245.6 million and reduces formula UGF by about $173.4 million, for what appears to be, in numbers and language-related reductions about $418 million less than Walker proposal, or about a 9.3 percent reduction.

Numbers are funny things, though, and when it comes to large scale budgeting, they can be downright silly – see Grinder News “Budget Basics for the Rest of Us” Feb. 15. Aside from the different kinds of money and the standard complications inherent in the system explained in that article, there is another lens that refracts the numbers and may lead to some confusion. That lens is simply time.

The Legislature is currently working on the FY 17 budget, and if it were isolated we’d have a much easier time understanding what they’re doing. The problem, or the reality for perhaps a better term, is that we’re still living inside the FY 16 budget, and that means it’s a living budget. As long as it’s still FY ’16, the budget that was drafted last year is merely an approximation. There are supplemental budgets still out there that will change it, and there are some supplemental changes that haven’t even been requested yet. The way some of those supplements will be handled will have an impact on the FY ’17 budget, meaning the two budgets are linked in some ways ... and FY ’17 will also be linked to FY ’18 in the same way. It’s a fluid process that is hard to pin down sometimes. Our own personal budgets are kind of that way, too. Financial decisions we make this year will affect our taxes next year. The more money we have, and the more diversified it is, the more difficult it becomes to separate one year from the next.

That’s important when observing the state budget for many reasons, but one of the most important is that it can greatly impact what we think are budget reductions. The number above is true. It’s also ... not true. Here are a couple of reasons why. Grinder News hasn’t had an opportunity to “mark up” the entire budget bill yet, so these are just some quick first impressions.

One of the ways the years can be connected is through the process of fund capitalization. The state has several funds that are semi dedicated, despite the constitutional prohibition against dedicated funds (another time). These funds can be used as sources to fund certain government operations and programs ... next year or this year. So, part of the FY ’17 draft budget includes some fund transfers in 2016. If you make the mistake of thinking the 2016 budget is history, and you can put it in the books, you’d have a false impression of the state’s fiscal situation.

This year the draft budget proposes to transfer $80 million from the General Fund (that pays for government) into the higher education fund – a supplemental appropriation. Then as part of the FY ’17 proposed budget they use that money to pay for part of the state’s retirement obligation. It’s a way to change undesignated funds into designated funds. It means those funds that could be spent for anything in 2016, will be designated for retirement in the FY ’17 budget. Et Voilá. Fiscal refraction. It’s not exactly money laundering, but if you’re trying to keep your general spending down, but you really want to put some GF money toward a dedicated appropriation, this is one way to “clean up” the process.

Another switch happens in the Public Education Fund between the years, with a $435 million supplemental appropriation this year and an FY ’17 deposit reduction of $145 million. In this case, FY ‘16’s budget gets bigger, and FY ‘17’s budget looks smaller. It’s not that the money isn’t being spent, it’s simply a matter of when it shows up on the books. It’s not unusual for an administration or a legislature to use fund transfers in this way, but because most people assume the FY ’16 budget is locked down, the effects are often missed.

Another potential point of confusion for the FY ’17 budget process is that the governor’s proposed budget included a lot of money that is contingent on legislation separate from the budget. All of Walker’s proposed changes to taxes, credits and the re-plumbing of the Permanent Fund are separate bills. As each of those bills is passed (assuming any are), it will impact the FY ’17 budget. So the current House Finance draft is merely a base budget that will likely change, maybe dramatically, before the session is over. House Finance is taking public testimony on the budget this week in the evenings, but that testimony will only be on this base budget. As public testimony is taken on the governor’s bills it will be important for Alaskans to remember that each of those decisions is also a budget decision.