|
Declines cutting into ‘sustainable yield’ ISER interactive model allows public to see how changes in revenue forecasts, spending plans, would impact state’s fiscal health Eric Lidji For Petroleum News
As lawmakers head into a session where declining oil revenues promise to drive budget talks, the University of Alaska has introduced an interactive model of fiscal policies.
The online tool - available at iser.uaa.alaska.edu - allows the public to see how various revenue forecasts and spending plans would impact the fiscal health of the state.
The Institute of Social and Economic Research believes the state could spend $4.5 billion this year - “and every year, long into the future” - without depleting petroleum assets.
Each year, ISER calculates this “sustainable yield” using a combination of current savings, future revenues and expected returns. The estimate changes each year as those market conditions change. Last year, ISER estimated a sustainable yield of $5 billion.
Under current market conditions, the state can expect to have $135 billion available from its “nest egg” - the assets available from petroleum development, according to ISER
ISER produced the report using a grant from Northrim Bank.
$135 billion available The report is meant to guide policymakers as they decide where to spend money.
The $135 billion nest egg includes $66.2 billion in current savings and $68.8 billion in projected revenues. ISER expects a 5 percent rate of return, of which it recommends reinvesting 1 percent to offset inflation and population growth. At a 4 percent rate of return, the state could spend $5.4 billion this year without eating into the principal of its savings. With approximately $1.4 billion needed to pay the permanent fund dividend - a rough calculation from ISER, not an actual figure - and $500,000 available from other revenue sources, the state can expect to have approximately $4 billion to spend this year.
ISER produced the report using revenue projections from the Alaska Department of Revenue. ISER also calculated the sustainable yield using scenarios where oil prices and production are higher and lower than currently anticipated. The low case would leave only $3 billion available this year. The high case would leave $5.7 billion available.
In all three cases, current trends in spending would deplete state coffers between 2019 and 2021. “A fiscal gap, the difference between business as usual spending and available revenues, would open wide and grow,” wrote ISER Economist Scott Goldsmith.
Uncertain times The report is always a snapshot. This year, though, the image is particularly blurry.
Oil prices have fallen by more than half over the past year, which not only reduces the value of oil from currently producing fields but also threatens undeveloped fields.
The “middle case” scenario ISER used to create the current forecast envisions future oil production from the Arctic National Wildlife Refuge, the Outer Continental Shelf, heavy and viscous oil and shale oil. All those projects would likely require oil prices to rise.
The middle case scenario also envisions revenues from natural gas development, which would require the construction of a hugely expensive pipeline and liquefaction terminal.
The “high case” would have oil prices increase to $100 per barrel by fiscal year 2017, higher natural gas revenues and oil production from ANWR and the OCS. The “low case” would have oil prices increase to $70 per barrel by fiscal year 2017 with no revenue from gas production and no additional production from either ANWR or the OCS.
This range of possibilities suggests that the state is facing a “structural problem” as it plans budgets in the near future, according to Goldsmith. “The deficit is not a cash flow problem that will cure itself if the state uses a ‘wait and see’ fiscal strategy,” he wrote.
Spend? Cut? Tax? Unfortunately, the problem is hard to fix.
Either spending cuts or tax increases in the short term would harm the economy, according to Goldsmith. But delaying necessary changes would harm the economy even more, he added. “First, the longer the delay, the larger the adjustment - and the larger the adjustment, the more likely it will have more severe effects. … Second, the longer the delay, the less new investment in economic development there will be,” he wrote.
Put more starkly: “there is a real danger that delaying the move toward sustainable spending will lead to gradual depletion of the Permanent Fund,” Goldsmith wrote.
| 