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Goldsmith counsels state to trim spending University economist surveys Alaska’s savings and expected oil revenue and predicts calamity with ‘business as usual’ budgeting Wesley Loy For Petroleum News
Scott Goldsmith, a University of Alaska Anchorage economist, long has warned the state government not to overspend.
Recently, he repeated that admonition in an update to his “maximum sustainable yield” research series.
Goldsmith endeavors to estimate how much Alaska’s state government can afford to spend without risking sudden big budget deficits and a painful economic recession.
In general, he says, the state has overspent. And if it continues “business as usual,” it will outstrip its lifeblood oil revenue and deplete its billions of dollars in savings.
Most worrisome, perhaps, is his conclusion that not even new taxes on the citizenry could save the day.
His advice: Spend less, save and invest more.
Are legislators listening? Goldsmith’s advice is timely, as the Alaska Legislature is in session now, crafting the budget for fiscal year 2015.
The session is scheduled to conclude on April 20.
In his research paper, Goldsmith says the state government can afford to spend about $5 billion from its unrestricted general fund in 2015. It can then increase that amount in subsequent years commensurate with population growth and inflation.
Goldsmith bases his recommendation on an analysis of the state’s expected revenue from oil and gas yet to be produced, combined with the Alaska Permanent Fund and other savings accounts.
His 2015 spending recommendation is nearly 10 percent lower than his guidance of $5.5 billion for fiscal year 2014.
Two factors account the decrease: a big drop in the state Department of Revenue’s projection of future petroleum revenues from conventional oil, and a large draw on the state’s cash reserve to cover the 2013 and 2014 deficits.
Coming into the legislative session, Gov. Sean Parnell proposed a fiscal 2015 budget of $5.6 billion, down considerably from the prior year, Goldsmith writes.
Goldsmith projects the final budget will be about $6 billion after legislative add-ons. Spending at that level, he says, is “not sustainable.”
$74 billion in oil revenue “If this year’s spending is $6 billion (“business as usual”), and it grows at an annual rate just 1 percent faster than population and inflation, the cash reserves (not including the Permanent Fund) would be exhausted by 2024 and the fiscal gap could reach $3.5 billion,” Goldsmith writes. “But if the fiscal year 2015 budget were $5 billion, and it grew only as fast as population and inflation (“maximum sustainable yield”), the cash reserves would last much longer and a growing petroleum nest egg could produce enough earnings to sustain the state budget long into the future.”
Goldsmith says the state has two revenue sources available for general fund spending once the cash balance runs out in 2024 — new taxes and the Permanent Fund. (One might also imagine higher taxes on oil production.)
“But adding both a statewide income and a statewide sales tax at rates comparable to other states would not bring in enough new revenue to offset the loss of the cash reserve,” he writes. “Spending would still need to fall to the level of available revenues. The simultaneous combination of new taxes and less public spending ... would knock the economy into a sustained recession and put it permanently onto a slower growth path.”
Goldsmith’s study includes an estimate of the state’s future petroleum revenue, expressed as “net present value.”
The total is about $74 billion, broken down this way: $47.4 billion from conventional oil produced from known fields through 2064; $9.8 billion from unconventional and new oil; and $16.5 billion from natural gas.
Goldsmith’s 16-page paper is available at http://bit.ly/1jcBxj5.
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