In an editorial Sunday, the Fairbanks News-Miner focused on fiscal reform, the issue that, in my opinion, is the most important this coming legislative session (yes, even more important than oil tax reform, although that is a close second).
I have only one disagreement with the editorial — the assertion that “the crisis is not yet upon us.” As the graphic from the ISER study discussed in the editorial makes clear, the deficits are clearly in sight and the only time to address them is now, while oil revenues remain relatively high. But other than for that matter of perspective, the News-Miner gets it. The full editorial follows:
Rational numbers: Budget analysis offers legislators sound advice
Posted: Sunday, January 6, 2013 12:00 am
Fairbanks Daily News-Miner editorial
Alaska doesn’t have a spending problem on the scale of the federal government today, but it will within a few years if we don’t make some significant changes.
Three numbers illustrate the challenge:
- $7.63 billion — the amount of unrestricted general funds the Legislature authorized to be spent in the current fiscal year.
- $6.54 billion — the amount of similar funds Gov. Sean Parnell has proposed to spend in the coming fiscal year.
- $5.5 billion — the maximum amount of such money that should be spent, given the state’s assets.
The first two figures, of course, are facts. The third is an opinion.
It’s a wise and well-informed opinion, though. Economist Scott Goldsmith, with the University of Alaska Anchorage’s Institute for Social and Economic Research, suggested the figure in his most recent assessment of the state’s long-term spending trends.
Goldsmith arrived at the number by calculating what he calls the state’s “maximum sustainable yield.”
“Maximum sustainable yield 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 explained in an updated paper posted Thursday on ISER’s website (http://www.iser.uaa.alaska.edu).
By “nest egg,” Goldsmith isn’t talking just about the state’s savings accounts and the Alaska Permanent Fund. He’s talking about those plus the estimated oil that remains in the ground.
All that is worth about $149 billion. If the nest egg can be managed to sustain a 5 percent return, he calculated, it will generate about $5.95 billion in state unrestricted general funds annually. Take out a billion or so to pay for Alaska Permanent Fund dividends and add a half-billion in non-petroleum state revenues and the state would be left with about $5.5 billion to spend in the coming fiscal year.
The maximum sustained yield analysis is a clear, comprehensive lens that clarifies how much the state of Alaska should be spending. Unfortunately, the view from the lens easily becomes blurred by tears falling from a thousand constituencies crying for the Legislature to answer their wants. We’re all complicit in the blurring process.
Legislators should do their best to focus on the long view, though. The governor’s annual budget is a good place to start. While he proposes to spend $1 billion less in unrestricted general funds than this year, he would get most of those savings by slashing the capital budget — the Legislature’s playground. That will be difficult to achieve. Cutting another $1 billion to get to Goldsmith’s maximum sustained yield figure will be even more difficult.
The difficulty is enhanced because the crisis is not yet upon us. The state estimates it will take in $7 billion in unrestricted general funds in the coming fiscal year. So it’s easy for everyone to ignore the underlying illness.
Goldsmith doesn’t pull any punches in his prescription, though, and he makes sense. If the state doesn’t pull back spending and ramp up savings, it will fall off its own fiscal cliff within a decade. Even using the body of the permanent fund, which is now constitutionally off limits, would only buy another 15 years beyond that cliff.
“What can the state do to avoid a major fiscal and economic crisis?” Goldsmith writes. “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,” he wrote.
As legislators open the coming session, they should heed this advice. It’s based on one of the most rational methods of looking at where the state budget is and where it should be going.