State lawmakers have tough choices ahead as they look to balance the budget while also pursuing the priorities of the House and Senate’s Democrat-dominated majority caucuses.
That’s according to legislative budget analysts, who recently told House and Senate budget writers that the same old, same old won’t cut it this year.
Back in December, Gov. Mike Dunleavy proposed his version of the budget. It came with a full, statutory Permanent Fund dividend of about $3,800 per Alaskan. It also came with a $1.5 billion deficit — which, as it happens, is about half of the balance in the state’s primary savings account.
Dunleavy’s budget director, Lacey Sanders, told the Senate Finance Committee last month that the governor doesn’t see much choice but to propose mega-dividends, given that the formula remains in state law. But even Sanders said the billion-and-a-half-dollar deficit isn’t ideal.
"The fiscal picture is not looking great when you are depleting over half of it in one year," she said.
Senate Finance Committee co-chair Sen. Bert Stedman, R-Sitka, characteristically, put it a bit more bluntly.
"In private enterprise, it would be called a company-ending event," he said. "In government, it's called, I don't know, stupidity."
Lawmakers haven’t followed the PFD formula for nearly a decade. Since oil prices dipped in the mid-2010s, and a court case in 2017, the Legislature has set the PFD on a basically ad-hoc basis — whatever the state can afford that year.
For the last two years, though, lawmakers have settled on something of an informal formula for setting the PFD amount: 25% of the state’s annual drawdown from the Permanent Fund goes to dividends, with the other 75% going to regular state services like state troopers, roads and public schools.
This year, using that same 75-25 formula would leave the state with a $30 million surplus — basically balanced, but right on the edge. However, that’s before counting some baseline priorities for the Legislature.
After adding in status quo education funding to keep up with one-time funding last year, plus some expected increases in Medicaid expenses and labor contracts, Legislative Finance Division Director Alexei Painter said lawmakers are facing a $197 million deficit in the coming fiscal year's budget.
"You're going to have to either find other budget reductions, reduce the dividend further, or explore new revenue options," Painter told the House Finance Committee last month. "You can't just do that one thing and it's solved, which has worked kind of the last two years."
To be clear — this is not the situation lawmakers thought they would find themselves in when they left town last year. Legislative leaders said they had balanced the budget, and even left a small surplus.
But Alaska is a state often at the mercy of the markets, and in 2025, things don’t look quite so rosy. Oil prices and production are down slightly, and that — plus a bump in tax-deductible oil and gas lease spending — means that small surplus has turned into another deficit in the current fiscal year of roughly $179 million, including a $50 million fast-track request from Dunleavy to backstop engineering a design work for a natural gas pipeline from the North Slope to Southcentral.
And though Dunleavy and President Donald Trump have talked a lot about increasing oil and gas production, that might, paradoxically, be bad news for oil prices in future years.
"If the direction out of Washington, the new administration, is to increase oil supply across the nation, there's a reasonable chance that oil prices will have downward pressure than upward pressure, and we could be in trouble fast in a year or two," Stedman said.
After all, it’s expensive and difficult to drill in the Arctic — and though the winds are changing, projects have also faced numerous legal hurdles that add to the cost. Pumping more out of the Permian Basin in Texas is a heck of a lot easier. And that’s if companies even want to boost production when prices are already fairly low and global demand is moderating.
So those are the options: Reduce spending, raise revenue, cut the dividend, or draw from savings.
Senate President Gary Stevens, R-Kodiak, said the last option — drawing from savings — likely won’t get support from his caucus.
"We're not going to do it, I don't believe," he said at a recent news conference.
There’s also a political dimension to avoiding tapping the Constitutional Budget Reserve — drawing on savings would require support from minority Republicans in both chambers, since it takes a three-quarters majority to spend from the account. That could give Republicans leverage that the largely Democratic bipartisan majorities would rather avoid.
As for revenue, there hasn’t been much movement on bills that could bring more money into the state.
"I hear 99 things people want to spend money on, but I'm a little shocked I haven't seen any new revenue bills or tax bills come out of the majority, or anything like that, yet," said Rep. Will Stapp, R-Fairbanks, at a recent House Finance Committee meeting.
That doesn’t mean major revenue bills won't eventually emerge, but revenue is not something the majorities have said is a major priority in the same way as other things like public-sector pensions and education funding.
And speaking of education funding — that’s an area where majority lawmakers would like to see state spending expand rather than shrink. The leading House education bill, House Bill 69, would add roughly $150 million to education spending compared to the status quo.
That’s pushing budgeters like Senate Finance Committee co-chair Sen. Lyman Hoffman, D-Bethel, to tamp down expectations.
"The appetites in this building need to be ratcheted down," he said. "Otherwise we're not going to be able to balance the (fiscal year 2026) budget."
But for now, some are holding out hope for a lucky break,
"I will be crossing my fingers regarding the price of oil," said Rep. Alyse Galvin, I-Anchorage.
