A Serious Wake-Up Call from ISER: “In fiscal year 2014, Alaska’s state government can afford to spend about $5.5 billion.”

Web Note 14The University of Alaska – Anchorage’s Institute of Social and Economic Research (ISER) today issued its FY 2014 update on sustainable spending levels.  The conclusion, “[i]n fiscal year 2014, Alaska’s state government can afford to spend about $5.5 billion.”

The comparable number in the Governor’s proposed budget is $6.5 billion, and the Governor has said that he would accept the Legislature raising that number even higher (to $7 billion).

In essence, the Governor proposes to pass on a “fiscal burden” (to use ISER’s term) or tax (my term) of at least $1 billion and potentially $1.5 billion to future Alaska generations.  Fiscally conservative?  Not even close.

We will write more about this in the coming days, but for now we simply repeat the first page of ISER’s report.

In fiscal year 2014, Alaska’s state government can afford to spend about $5.5 billion. That’s an estimate of the level of Unrestricted General Fund spending the state can sustain over the long run, based on the current petroleum nest egg of about $149 billion—a combination of state financial assets (the Permanent Fund and cash reserves) and the value of petroleum still in the ground.

The size of that nest egg fluctuates, depending on the state’s forecast of petroleum revenues, earnings on investments, and other factors. This Web Note presents the latest in a series of estimates of the maximum amount the state can spend and still stay on a sustainable budget path.

Right now, the state is on a path it can’t sustain. Growing spending and falling revenues are creating a widening fiscal gap. In its 10-year fiscal plan, the state Office of Management and Budget (OMB) projects that spending the cash reserves might fill this gap until 2023, as the adjacent figure shows. But what happens after 2023? 

Reasonable assumptions about potential new revenue sources suggest we do not have enough cash in reserves to avoid a severe fiscal crunch soon after 2023, and with that fiscal crisis will come an economic crash. The figure on the right shows the growing General Fund fiscal gap—even assuming new revenues from natural gas production and more oil production—if spending increases at a rate of 4.5% annually. 

What can the state do to avoid a major fiscal and economic crisis? The answer is to save more and restrict the rate of spending growth.  All revenues above the sustainable spending level of $5.5 billion—including Permanent Fund income, except the share that funds the dividend—would be channeled into savings.

If Alaska had $117 billion in cash reserves and the Permanent Fund by 2023, the state would be on the path to sustainable spending far into the future. But as the adjacent figure shows, that’s twice what the state has in financial assets today. So the state needs to sharply step up its savings rate, starting now.”