Senate Finance hears OMB outline of Governor Dunleavy’s FY2026 budget; committee warned of deficit and CBR drawdown

Lacey Sanders, director of the Office of Management and Budget for Governor Mike Dunleavy, told the Senate Finance Committee on Jan. 27 that the governor’s proposed fiscal 2026 budgets would require drawing on the state’s rainy-day account to balance the books.

Sanders said the governor’s FY2026 package consists of four appropriation bills — operating, capital, a combined mental-health appropriation, and a fast-track supplemental bill — and that the administration included supplemental requests totaling $75 million. She told the committee the budget uses the most recent Department of Revenue forecast and that the state faces an overall deficit that, as presented, would be reduced by withdrawals from the Constitutional Budget Reserve (CBR).

The nut graf: The presentation framed a budget shaped by statutory spending requirements and the governor’s stated priorities — public safety, education, a balanced budget and attracting outside investment — while warning lawmakers that supplemental costs and formula-driven programs will increase the pressure on unrestricted general funds and reduce the state’s reserves.

Most important details first: Sanders said unrestricted general fund (UGF) revenue in the governor’s proposal is smaller in FY2026 than FY2025 and that the governor is proposing the full statutory permanent fund dividend, which by law must be submitted at the statutory amount. The presentation showed major cost drivers remain K‑12 foundation funding, the statewide school transportation program and Medicaid; those formula programs together account for roughly 38% of operating budget UGF spending. Sanders noted roughly $100 million in contractually negotiated salary adjustments are included in the governor’s request, about $62 million of which is UGF.

Committee members pressed Sanders on the fiscal gap. Senator Stedman asked whether the committee’s reading was correct that, if lawmakers restored the $175 million base-student allocation (BSA) funding that was one-time in FY2025, ‘‘we’re almost $170 million underwater.’’ Sanders said that if the legislature increases appropriations beyond the governor’s submission, the deficit will grow and the legislature will have to address it through amendments and other actions during session.

Several senators raised the size and purpose of the CBR. Sanders said the CBR balance provided by the Department of Administration as of Dec. 12 had been adjusted and cited a balance in the roughly multi‑billion range; she warned that drawing large portions of the CBR in a single year would make future budgeting more difficult. Multiple senators urged caution about reducing the state’s reserve, citing oil-price volatility and the constitutional requirement to balance the budget.

Agency highlights and supplementals: Sanders walked the committee through selected operating and capital items in the governor’s request. Among the items she cited: - A $50 million supplemental, requested as a multiyear appropriation to the Alaska Industrial Development and Export Authority (AIDEA) to support front‑end engineering toward a final investment decision on an Alaska liquefied natural gas project. - A request to restore operating funding for the Alaska Gasline Development Corporation (AGDC) related to continued project work; the administration characterized the AGDC request as a restoration of previously one‑time funding. - Department of Corrections increments for employee pay items and programs, including a peer-support and wellness program and expanded vocational programming estimated to serve about 2,500 inmates across multiple institutions. - Education items including making teacher recruitment and registered-apprenticeship funding base-level (after two years as one-time items), continued career and technical education investments, and a one‑time electrician and plumbing career-pathway curriculum development request. - Health items including full funding for the recently extended senior benefits program, expanded childcare assistance tied to changes in eligibility from prior legislation, and funding to support a crisis call center aligned with the national 988 model. - Public safety and transportation capital requests including restorations of trooper posts and aircraft and targeted maintenance and safety investments on the Dalton Highway and other routes. - University of Alaska requests for research and program expansions; the governor did not include the university’s $60 million deferred‑maintenance ask in the governor’s submission, Sanders said, though the state’s ongoing deferred‑maintenance capitalization from the Alaska Capital Income Fund continues to provide annual funding for maintenance.

Schedule and next steps: Sanders told the committee that some items — specifically Medicaid adjustments and other technical items — were expected to be handled through amendments later in session (15th and 30th day amendment processes). The administration will provide additional data and the committee will consider amendments, agency subcommittee work, and follow‑up reports (for example, a corrections study interim by April 30 was noted). The committee scheduled further budget work, including a 10‑year fiscal outlook briefing.

Ending: No formal committee action was taken at the Jan. 27 hearing; the presentation was an informational briefing to frame the coming budget deliberations and amendments. The committee will receive additional, agency‑level information and technical amendments as the session proceeds.