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Economist says state spending too much of its oil money

Elizabeth Bluemink

A leading state economist says Alaska is saving too little of its oil wealth for future generations.

The good news is that Alaska is rich enough -- in oil wealth savings and in petroleum reserves -- that it can afford to spend $5 billion of its oil wealth every year, even after the oil fields die away, said Anchorage economist Scott Goldsmith.

The bad news: The state is likely to spend more than $5.5 billion in petroleum dollars in the coming budget year, he wrote in a report published by the University of Alaska Anchorage's Institute for Social and Economic Research on Tuesday.

Think of it like saving for retirement. You need to save enough money to ensure you don't go broke in your 70s and 80s.

"We have to be careful that we don't spend so much (money) today that we don't have anything when Prudhoe Bay runs out," he said.

Production from Alaska's aging oil fields has dropped to a third of its 1988 peak and will continue to fall, even with new oil discoveries, according to his report.

So far, Goldsmith said, Alaska has saved up an adequate amount for the future but that's only because it's been lucky with recent high oil prices and because much more oil has been produced than expected when Prudhoe, the nation's largest oil field, began operating.

"Our tax base isn't sustainable so we shouldn't treat it like it is," Goldsmith said.

The Alaska government is already saving for future generations by investing a portion of its oil income in the state Permanent Fund and other savings accounts. Under state law, the Permanent Fund deposits cannot be touched, but the interest they generate after being invested in stocks, bonds and real estate is used to pay annual dividends to Alaskans.

As state leaders have amassed $45 billion in savings so far, the policy makers have not answered the basic question of how much savings is enough for the era after oil runs out, Goldsmith said. That's the question he tackled in his new report.

According to his simple math, Alaska has about $81 billion dollars worth of oil and gas in the ground besides the $45 billion in various savings accounts -- $39 billion of it in the Permanent Fund. That's a total of $126 billion in oil wealth.

The state should spend no more than $5 billion in oil dollars each year to allow that wealth to grow at the same rate as the population, he calculated. That required him to make some assumptions about the future. Goldsmith's analysis assumes, for example, that the value of the state's oil and gas assets won't change much and that the state's population will continue to grow at a rate of about 1 percent per year.

His $5 billion benchmark doesn't require the state to cap all spending at that level. Spending above the benchmark, however, should be funded by non-petroleum taxes and other revenue, he said.

State revenue officials did not respond to a request for comment about Goldsmith's analysis on Tuesday.

FISCAL UNCERTAINTY

Goldsmith's analysis comes as some legislators are still grappling with the idea of creating a fiscal plan to guide state spending -- an effort that has been plagued by fits and starts for decades.

State business group interests have advocated for a fiscal plan for years. Goldsmith's analysis is part of an ISER research project called Investing for Alaska's Future. The project was funded by a grant from Anchorage-based Northrim Bank.

Alaska faces an impossible task, one legislator said Wednesday in response to Goldsmith's report.

For years, state leaders have improperly defined living within the state's means as spending as much money as the state takes in, said state Rep. Mike Hawker, R-Anchorage.

"Our only significant revenue source is declining precipitously. We have been in a situation for (roughly) the past six years that the decline in oil production has been masked by the high oil prices. It has allowed a lot of legislators to bury their heads in the sand," Hawker said.

An informal state House Finance Committee working group published state fiscal policy recommendations in January. The group did not suggest any new spending policies or immediate spending cuts. Instead, the group suggested spending $500,000 to study the state's fiscal status and begin public outreach on the topic. The group also suggested that legislators focus their attention on portions of the state budget that are driving most of its growth, such as education, public-employee retirement and Medicaid.

PDF: Read the Goldsmith report
PDF: Legislative fiscal policy recommendations
By ELIZABETH BLUEMINK
ebluemink@adn.com