This is the second in a two-part series on understanding Alaska’s state budget for the next fiscal year beginning in July of 2025. The governor released his proposed budget on December 12. If you haven’t read part one in this series, about where Alaska’s revenue comes from, you can find it here.

Understanding how our state government allocates money in the state budget is complex, and I apologize in advance. This article attempts to make a complex subject a little easier for the average Alaskan to understand, and to show some direction in where we might work to get a balanced budget. If you need more in-depth information, please talk to your state representative or senator.

The governor’s budget proposes spending $16.8 billion dollars and will have a deficit $1.52 billion dollars. In order to have a balanced budget the state would need to cut spending by about 9%. Unfortunately, since spending cuts are an anathema to politicians, and the spendthrift Democrat party is in control of both houses in our legislature, do not expect any meaningful cuts to spending. If anything, the legislature will probably try to increase spending over what the governor has proposed.

When discussing the budget and where to find potential cost savings, the most important thing to remember is that there are two beneficiaries for every dollar of state spending; they are state employees who collect paychecks and second, the recipients of government grants who benefit from the money the state passes out. When any cuts to government are proposed, you can expect forceful pushback from both of these two constituencies and reducing the budget will become a near impossibility using conventional approaches.

I have gone through most of the budget documentation the governor released back in December and tried to make it a little easier to understand. Spending in the governor’s budget is summarized in Table 1 below.

This table lists the Operating budget for each state department ranked from highest to lowest, with the departments getting the most budget allocation at the top. I have also included the expenses for our annual PFD checks and the capital budget expense. This table contains all proposed government expenditures for the next fiscal year.

To understand the budget, the discussion should begin with the four departments with the largest proposed budget shaded yellow in Table 1. Like Willie Horton said when asked why he robbed banks, “That is where the money is.”

Department of Health – $3.529 billion

The Department of Health has the largest funding of any state department, and its single biggest expense is Medicaid payments. Medicaid is a federal program that provides medical care to low-income individuals. Strangely enough, although Medicaid is a federal program, it is administered by the state who must comply with federal guidelines on running the program. It is also not fully funded by the feds; the state must pay part of it. Although the federal government gives Alaska a significant amount of funding, they only cover about 80% of the costs of this program. That information can be seen in Chart 1 below.

If you look at the chart, you will notice a big increase in the data about 2015. That is the biggest problem with our current Medicaid program. The eligibility was greatly expanded in 2015 by Alaska Governor Bill Walker, as of part of President Obama’s Affordable Care Act, and more recipients means a more costly program.

At the time Governor Walker wanted to support Obamacare, but the legislature opposed increasing the number of eligible recipients and refused to advance legislation to adopt the program. Instead, Governor Walker used an executive order to implement the program without the legislature. The legislature sued the governor saying his actions were illegal, but the state supreme court sided with the governor and Obamacare’s Medicaid expansion became the law in Alaska.

When Medicaid expansion was implemented in 2015 there were about 150,000 enrollees. The governor indicated that only ~40,000 additional low-income Alaskans would become eligible for the program. He was wrong. Today, despite a population decline in the state since 2016, there are almost 300,000 Alaskans enrolled in Medicaid; almost double the number when the program was expanded in 2015.

The program has more enrollees than was originally intended and today almost 40% of Alaskans qualify for Medicaid and the number continues to grow. This is not sustainable, and if the federal government should cut back on their cost sharing, Alaska may find itself paying an even bigger portion of this federal program. It is time to return benefits to the pre-2015 levels to get the spending on this program under control.

Capital Budget – $2.8 billion

The capital budget is one program that actually produces tangible results and delivers benefits to every resident in the state. It pays for repairs to infrastructure like state-maintained buildings, highways and airports which need periodic maintenance and upgrades. I went through the governor’s proposed capital budget and didn’t see any extravagant projects, of course the Democrat led legislature has not yet added their ideas to the capital budget, so that may change.

It is hard to argue against a capital budget that is only 18.4% of the state budget, and that fixes problems everyday Alaskans have to deal with. As long as the capital budget isn’t being pumped up by legislators or being used to pay for wasteful green energy boondoggles, like foolish solar panel farms somewhere in Alaska, I support the capital budget as written.

Permanent Fund Distribution – $2.58 billion ($3,892.00 For Each Alaskan)

The third biggest expense in the state budget is the Permanent Fund. Surprisingly, the Permanent Fund is both a source of revenue and a budget expense item. The governor has proposed a draw from the fund to pay for state government, while at the same time plans to pay Alaskans a full statutory PFD check this year that would total $3,892.00.

Despite what they say when campaigning for office, every legislator in Juneau would secretly like to eliminate the PFD distribution to Alaskans if they could do so without angering the voters. If they did so, the state’s budget deficit of -$1.52 billion dollars would magically go away and be replaced by a budget surplus of over one billion dollars. Every greedy politician in the ruling caucuses in the house and senate would love to get their hands on that money, and you can bet in private they are having conversations about just how small they can make this year’s PFD amount before it starts to cost them votes in their next election. Despite the PFD amount in the governor’s planned budget, I doubt that we will get the full statutory amount this year. I’m betting the Dems/RINOS take an additional 1.5 billion from the PFD claiming they are doing so to balance the budget, give us the remaining 1 billion, which would give each Alaskan a PFD check for $1,350.00. That’s my prediction for the size of this year’s PFD, you heard it here first.

Department of Education and Early Development- $1.62 billion

The third rail in Alaska politics is school funding. Every year there is a big battle over what the Base Student Allocation (BSA) number is going to be. The BSA is a number that the state government uses, which is multiplied by several fudge factors to determine how much money the state gives to each school. These fudge factors are based on school size and location. I don’t want to get bogged down talking about the BSA number. The important thing to understand about the BSA is that students in Alaska are not funded equally.

Small schools in rural parts of the state get much more money per student than those in urban areas. Maybe that is justified because of the costs in rural Alaska, but at its core, treating students unequally is an inherently unfair way to fund schools and the battle over the size of the BSA that is fought every year is just a symptom of this inequality.

The BSA and its fudge factors will never please every Alaskan parent of a public-school student. Those unhappy with this funding system should take it up with their legislator. If you want to learn more, there are two excellent articles on how school funding in Alaska works and what the BSA means, I recommend you go here or here to read more about it. If you believe in fairness and despise socialism, these articles will blow your mind.

So, let’s avoid the BSA battle completely and instead look at the problem of school funding from a different angle. According to Deena Bishop, Commissioner of the Department of Education and Early Development, in the 2024-2025 school year, students in an Alaska public school cost over $21,000 on average to educate. Where that money comes from is shown in Table 2 below, along with the costs to educate a home school student.

Two things stand out in Table 2. It cost over $21k to educate a student in public school in the 2024-2025 school year and only about 10% of that to educate a home school student. This school year there were 127,931 school students in Alaska, and about 20,900 of them were home school/correspondence students. About 16% of students in Alaska are home schooled, and the number is growing. My own daughter is home schooled, and she loves it. Her grades are better than when she was in public school, and she is taking more difficult classes. She is getting a better education at a much lower cost to the state than the students in public schools, and I don’t have to worry about a public school turning her into a lesbian communist by the time she graduates from high school.

To save money, the state should look at expanding the home school/correspondence program, especially in the expensive rural school districts with low student numbers. This will be challenging, as the educational unions will not support further reduction in public school students because it would reduce schoolteacher staffing. For a union, that is a terrible thing. However, this could be a meaningful way to greatly reduce spending on education and deliver that large BSA number the liberals in blue communities care so much about.

Other State Departments

If you go back to Table 1 and look at the biggest expenses for all of the remaining departments in state government, you can see that the single biggest expense for every department is personnel. It costs money to employ people, and it is no surprise that the operating budget is spent predominantly on staff. While every person in a state job probably thinks their job is sacred, it is time to find ways to reduce staff to reduce costs. This won’t be popular, and you can expect significant pushback. That is where the final step in addressing our state budget deficit comes in.

I have written about the miracle in Argentina before, and it is time for Alaska to learn from that country’s lesson. Two years ago, they had the same financial problems that Alaska is now facing. Argentina was a financial disaster. Inflation was running over 25.5% per year, and the poverty rate in the country was 49.5%. Argentina ran huge budget deficits and it’s government leadership didn’t have the courage to deal with them. Each timid politician just kicked the can down the road and said that nothing could be done, leaving the problem to his successor.

Finally, the voters had reached a breaking point. In response to these problems, they elected a wild man who promised to take a chainsaw to years of socialist bureaucracy. Javier Milei was not a politician, he was a radical economist with ideas on how to reform the economy, and he had the most important thing the voters were looking for, that was courage to act.

Milei slashed regulations, eliminated entire government departments, and cut the budget. His radical actions saved his country’s economy. Inflation is now down to a reasonable 2.7 percent and the country ran a budget surplus this year for the first time in decades.

It is possible for Alaska to take similar actions to recover from our current deficit spending problems, but it will take bold leadership. We need someone to demonstrate the courage to address our financial issues before it is too late.

The Democrats and their RINO allies in ruling caucuses in both houses of our legislature aren’t looking to become fiscally solvent. They will continue to spend money we don’t have and run budget deficits until someone puts a stop to it. That person should be Alaska Governor Mike Dunleavy. Unfortunately, Governor Dunleavy has demonstrated a remarkable timidity in the face of political opposition. If I could tell the governor one thing, it would be that it is now time to either provide bold leadership for the remainder of his term or to get out of the way. If the governor is unable to act now, well he is term limited and there is a gubernatorial election in 2 years. Alaska will be looking for someone like Javier Milei to solve this mess for us.

The views expressed here are those of the authors. Read more posts at Seward’s Folly substack.

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