AD Header Dropdowns

AD Main Menu

Alaska economist warns of fiscal reckoning if state doesn't hold spending

Cordova Times
Aaron Jansen illustration

A University of Alaska Anchorage economics professor is cautioning state government not to overspend in fiscal year 2014, saying it must hold the line at $5.5 billion, based on a petroleum nest egg of about $149 billion.

That's the most recent estimate of the level of general fund spending the state can sustain over the long run, said Scott Goldsmith, professor emeritus of economics at UAA's Institute of Social and Economic Research.

"Right now, the state is on a path it can’t sustain," Goldsmith wrote. "Growing spending and falling revenues are creating a widening fiscal gap."

The petroleum nest egg is a combination of $60 billion in state financial assets, including the Permanent Fund and cash reserves, and the estimated $89 billion value of petroleum still in the ground. The size of the nest egg fluctuates, depending on the state's forecast of petroleum revenues, earnings on investment, and other factors.

If the state overspends, it could face a severe fiscal and economic crisis after 2023, even if it adds revenues from natural gas production and new oil production, Goldsmith wrote in "Maximum Sustainable Yield: FY 2014 Update." 

Goldsmith said in the paper that his research also finds that the state has overspent in recent years, putting it on the path to major fiscal and economic problems in the years ahead. The state can get back on track by saving much more and restricting the rate of spending growth, he said.

The paper estimates that if the state could double its financial assets by 2023, from $60 billion today to $117 billion , it would be on the path to sustainable spending far into the future.

"Maximum sustainable yield (MSY) is the amount the state can spend each year from its petroleum endowment, or nest egg, and still sustain the value of that nest egg for future generations," he wrote. "The nest egg is a combination of the state’s financial assets and the estimated value of petroleum still in the ground. 

"In both FY 2012 and FY 2013, actual spending exceeded the MSY, creating a fiscal burden for future generations. The nest egg estimate for FY 2014 is $11 billion lower than last year’s estimate, mostly because the Alaska Department of Revenue’s forecast of petroleum revenues between FY 2014 and FY 2022 is $8 billion lower than it was last year."

This article was originally published in The Cordova Times and is reprinted here with permission.