The Institute of Social and Economic Research (ISER) recently released its FY 2015 update estimating how much Alaska’s state government can afford to spend from the unrestricted General Fund (UGF) in the coming fiscal year. In this year’s report, author Scott Goldsmith estimates that the state can afford to spend about $5 billion from the UGF in FY15. This is a decrease of $.5 billion, or roughly 10 percent from the FY14 estimate. This is mainly due to declining oil revenues. The estimate is based on the state’s current $139 billion petroleum nest egg, which is a combination of $65 billion in financial accounts and $74 billion in expected oil revenue. Goldsmith notes that by saving incoming oil revenues above the $5 billion level and growth only as fast as population and inflation, the state could build up the Permanent Fund and other financial assets faster than the decline of petroleum revenues. This would allow the state to rely on petroleum earnings much longer than what is currently sustainable. If spending continues at its current rate and grows at an annual rate just 1 percent faster than population and inflation, cash reserves will be exhausted by 2024 and the fiscal gap could reach $3.5 billion.
Goldsmith continues the report by outlining the differences between business as usual spending and maximum sustainable yield (MSY) spending, arguing that MSY spending is the way to solve the budget problems that are arising from lowered petroleum revenues. If the state continues on the business as usual spending path, revenue will need to be made up after the cash balance runs out in 2024. This can be done by using the Permanent Fund and/or new taxes. Both would be needed to fill the budget gap, but would drain the corpus of the Permanent Fund.
Maximum sustainable yield spending allows the state government to determine how much can be sustainably spent from its petroleum wealth by viewing the wealth as an endowment belonging to all Alaskans. The sum of the endowment comes from future petroleum revenue and the state’s financial assets accumulated from saving a portion of petroleum revenues from past years. Goldsmith believes that if properly managed, the endowment, or nest egg, would generate an annual return which could be drawn off for current spending. By limiting this annual draw to the MSY, the nest egg would be sustainable and future generations would share equitably with the current generation in Alaska’s petroleum wealth.
Throughout the update, Goldsmith outlines his plan for MYS and how it would benefit Alaska, not only now, but for future generations. Implementation would take patience and transitioning to a sustainable spending path would be difficult. It would require a cut in spending. Delaying this cut would only postpone the inevitable. The sooner spending issues are addressed, the better. It is going to be easier to make small cuts now, rather than much larger cuts in the future to make up the deficit. Serious consideration needs to be taken when looking at the state’s budget. The concept of maximum sustainable spending is one way to avoid depleting the state’s cash reserves in the near future.
This research is funding by a grant from Northrim Bank. To view the full report visit- http://www.iser.uaa.alaska.edu/Publications/webnote/2014_01-WebNote16-MaximumSustainableYield.pdf
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