Maximum Sustainable Yield: FY 2016 Update and Model

Abstract

Plummeting oil prices in 2014 and projected huge budget deficits have focused more attention on a question we began examining several years ago: how much can Alaska’s state government afford to spend, without risking the petroleum assets that supply most of its income? Sustainable annual General Fund spending is currently an estimated $4.5 billion. That’s how much the state could spend for general expenses this year and every year, long into the future, without depleting Alaska’s nest egg: state petroleum assets. It’s less than last year’s estimate of $5 billion, partly because expected oil revenues are smaller. The state should begin moving toward sustainable spending now. At this time we don’t know how much the state will spend this year. State officials are re-thinking planned spending, given the drop in oil revenues. Budget cuts will affect the economy, which relies heavily on state money—so the cuts should be gradual rather than precipitous. This paper introduces an interactive model to help people understand the fiscal challenges Alaska faces (see page 5). Users can download it from ISER’s website and investigate for themselves the implications of different assumptions about state revenues and fiscal policies Alaska’s petroleum nest egg is currently an estimated $135 billion—$66 billion of money in the bank and $69 billion of expected future petroleum revenues from various sources. As market conditions change, the size of the nest egg will continue to change—it has fallen in each of the four years we’ve been estimating its size. So the sustainable spending level changes somewhat as well, but it provides a reasonable guideline for building the budget.