Research Matters No. 67. Maximum Sustainable Yield: FY 2014 Update
Alaska's state government can afford to spend about $5.5 billion in fiscal year 2014 (July 2013 to June 2014). That's the most recent estimate of the level of General Fund spending the state can sustain over the long run, from a new paper by Scott Goldsmith, professor emeritus of economics at ISER. The $5.5 billion figure is based on the state's current petroleum nest egg of about $149 billion.
That nest egg is a combination of $60 billion in state financial assets (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 over-spends, it could face a severe fiscal and economic crisis after 2023, even if it adds revenues from natural gas production and new oil production.
But the paper also finds that the state in fact over-spent in recent years, putting it on the path to major fiscal and economic problems in the years ahead. Still, the state can get back on track by saving much more and restricting the rate of spending growth. 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.
To read the paper, Maximum Sustainable Yield: FY 2014 Update, by Scott Goldsmith, click here. The research was funded by a grant from Northrim Bank, as part of ISER's Investing for Alaska's Future research initiative.
Download the paper (PDF, 950KB).