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.Northrim Bank

Goldsmith, Oliver Scott

English

After nearly a decade of explosive growth, federal spending in Alaska has turned flat, except for
the temporary boost from the stimulus package—the American Recovery and Reinvestment
Act—that pumped more than $2.2 billion into the state economy in 2009 and 2010. (Shown in
black in the figure below.) Total federal spending in Alaska was $11.2 billion in 2009 and $10.9
billion in 2010, compared with about $9.4 billion in 2008. But without the stimulus funds,
federal spending in 2009 and 2010 would have been no higher than in the previous four years.
Alaska was first among the states in per capita stimulus funds, with more than $3,000 per capita,
or nearly four times the national average.
Spending is no longer growing for either defense or grants—the largest categories of federal
dollars coming into the state. Still, the special characteristics that have historically kept Alaska
near the top of the state rankings for federal funds per capita will continue to guarantee a strong
role for federal dollars in the economy.
Here we discuss the composition of federal spending in Alaska, comparing it with spending in
other states, and also review stimulus spending and provide examples of the importance of
federal funds to particular sectors of the state economy. In an appendix, we correct a serious
reporting error in data from the U.S. Department of Commerce on federal spending in Alaska.
Because of the difficulties in sorting out temporary stimulus spending in 2009 and 2010—and
because of errors in federal data for those years—2008 spending provides the best picture of
recent federal spending in Alaska.Northrim Bank

ScholarWorks@UA

Web Note No. 11

Last year the Alaska Legislature made a controversial change in the oil production tax, the state’s largest source of oil revenue. The old tax, known as ACES (Alaska’s Clear and Equitable Share), was replaced with MAPA (More Alaska Production Act, or SB21). How much money the production tax brings in is a big issue: oil revenues pay for most state government services, and the industry accounts for roughly half of all Alaska jobs.

Supporters say the new tax will stimulate North Slope oil investment, leading to more oil production—and so to higher oil revenues and new jobs. Critics say the oil industry doesn’t base investment decisions on tax structure, and that the revised tax is a give-away to the industry. They cite as evidence the $2.1 billion drop in the Alaska Department of Revenue’s forecast of expected 2014 oil revenues after the new law was passed.

Alaskans face a choice between the old and the new tax structures this August, when a
referendum on the primary election ballot will ask them whether to keep or repeal the new
structure. This paper is intended to help Alaskans understand the two systems, which have the same tax base but differ in their tax rates, credits, and treatment of certain new production.Northrim Ban

Web Note No. 17

Thirty-five years ago, on June 20, 1977, oil from state-owned land on the North Slope began
flowing through the trans-Alaska pipeline. Since then, the state has collected $170 billion in oil
revenues, in today’s dollars.i Petroleum (both oil and gas) still in the ground might generate
another $100 billion for the state.ii What has Alaska done with its oil wealth so far?Northrim Bank

 Page 1 of 5  TAPS at 35: Accounting  for the Oil Revenues by Scott Goldsmith Web Note No. 12   •  July 2012 Thirty-five years ago, on June 20, 1977, oil from state-owned land on the North Slope began flowing through the trans-Alaska pipeline. Since then, the state has collected $170 billion in oil revenues, in today’s dollars.i  Petroleum (both oil and gas) still in the ground might generate another $100 billion for the state.ii  What has Alaska done with its oil wealth so far?  • About $45 billion (26%) went into savings accounts—the Permanent Fund and other accounts—and $125 billion (74%) was spent through the General Fund, for government services and programs.  • The savings accounts have generated $46 billion of investment earnings over the years. iii About $34 billion of that was spent and $12 billion was reinvested in the savings accounts.  • Total oil wealth saved to date is about $57 billion—the $45 billion initially deposited in financial accounts and the $12 billion of earnings reinvested in the accounts.   • Total oil wealth spent so far is about $159 billion—$125 billion in oil revenues and $34 billion in earnings from the savings accounts created with oil revenues.   • About $133 billion of the oil wealth was spent for broad government operations, including not only services like education and transportation but also loan funds and investments. The other $26 billion was paid directly to Alaskans in Permanent Fund dividends—which are annual payments to all residents, based on earnings of the Permanent Fund.     This research is part of ISER’s Investing for Alaska’s Future research initiative, funded by a grant from Northrim Bank.     INSTITUTE OF SOCIAL AND ECONOMIC RESEARCH   Page 2 of 5   Oil Revenues and Non-Oil Revenues Since 1977, a combination of oil revenues and earnings generated by accounts built with oil revenues has paid for most state spending. Figure 2 shows how oil revenues, earnings from financial accounts, and non-oil revenues have contributed to total state spending in the past 35 years. • Total state spending—from oil wealth and non-oil revenues—from 1997 to 2012 was $177 billion (in 2011 dollars). iv That consisted of $159 billion from oil-related sources—as we discussed earlier—and $18 billion from non-oil revenues. • Oil-wealth spending—both revenues related to production and earnings from funds created by those revenues—accounted for 90% ($159 billion) of total state spending since 1977.  • Non-oil revenues accounted for the remaining 10% of total state spending.  • General Fund spending since 1977 was about $151 billion, from a combination of $125 billion in oil revenues, $18 billion in non-oil revenues, and $8 billion in earnings of the General Fund. (Revenues held in the General Fund are invested until they’re needed for spending.) • The state so far has spent $26 billion of Permanent Fund earnings to make direct payments to Alaska residents. The Permanent Fund is a savings account established by Alaska voters in 1976, and by law a share of state petroleum revenues are deposited in the fund. The legislature can’t spend the principal of the fund, but since the early 1980s it has spent part of the fund earnings for annual payments known as Permanent Fund dividends.       INSTITUTE OF SOCIAL AND ECONOMIC RESEARCH   Page 3 of 5  History of Oil Revenues Oil revenues were high in the early years of pipeline operation, because both the throughput and the price of oil were high.  In the seven-year period from 1980 through 1986, the state collected $47 billion in revenues, measured in today’s dollars. But in the last seven years revenues have been higher, in spite of lower throughput, due to a combination of the highest oil prices on record and a restructured production tax.  Between 2006 and 2012, the state collected $52 billion in revenue. It collected close to $12 billion just in the peak year of 2008.   Figure 3. State Petroleum Revenues (Million 2011 $)   In early years, all the financial savings went into the Permanent Fund, but the state later established the Constitutional Budget Reserve and the Statutory Budget Reserve, which since 1990 have also become important savings accounts.  Today 26% of total petroleum revenues have accumulated in these three accounts.   Figure 4. Cumulative Share of Petroleum Revenues Saved in Financial Accountsv      	  $-­‐	  $2,000	  $4,000	  $6,000	  $8,000	  $10,000	  $12,0001977 1982 1987 1992 1997 2002 2007 20120%5%10%15%20%25%30%1977 1987 1997 2007Permanent	  FundConstitutional	  Budget	  ReserveStatutory	  Budget	  ReserveINSTITUTE OF SOCIAL AND ECONOMIC RESEARCH   Page 4 of 5  Oil Revenues as Share of General Fund Revenues Of the $170 billion in oil revenues the state has collected since 1977, most—$141 billion—were initially deposited in the General Fund, accounting for 85% of state General Fund revenues since 1977.  The share in 2012 was 92%—the highest it has ever been.vi     Figure 5. Petroleum Share of General Fund Revenues   Some of those General Fund petroleum revenues were transferred to state financial accounts: $12 billion was deposited in the Permanent Fund, augmenting the direct deposit of royalties, and $4 billion went into the Statutory Budget Reserve.  The remaining $125 billion of General Fund petroleum revenues—as shown in Figure 1—has been invested, spent, distributed, and loaned to Alaskans.  General Fund spending has also been financed since 1977 by $8 billion of General Fund investment earnings and $18 billion of non-petroleum revenues (Figure 2).  Revenues from non-petroleum sources have been around $800 per capita since the state eliminated the personal income tax in 1980.  Figure 6. Real Per Capita (2011 $) General Fund Non-Petroleum Revenues      0%10%20%30%40%50%60%70%80%90%100%1960 1970 1980 1990 2000 2010$0$200$400$600$800$1,000$1,200$1,400$1,600$1,800$2,0001960 1970 1980 1990 2000 20102011 $INSTITUTE OF SOCIAL AND ECONOMIC RESEARCH   Page 5 of 5  The state collects modest revenues from natural resource production other than petroleum—primarily fish and minerals.  Petroleum accounts for 98% of all state natural resource revenues.   Figure 7. Share of State Natural Resource Revenues from Petroleum   Spending from Financial Earnings Since 1977, the state has spent $34 billion of financial earnings—$26 billion of Permanent Fund earnings for annual Permanent Fund dividends, and $8 billion of General Fund earnings for General Fund spending. The figure below shows annual dividend spending since the legislature established the program in the early 1980s. Figure 8. Permanent Fund Dividend Spending (Million 2011 $)vii  Endnotes                                                 i The sum through fiscal year 2012. ii This is its value if all the revenues could be turned into cash today (the net present value). iii That $46 billion is in addition to the earnings retained in the Permanent Fund to protect it from inflation. iv Excluding spending funded from restricted sources—state restricted funds and federal funds. v Between 1993 and 2010 funds were borrowed from the Constitutional Budget Reserve to pay government operating costs. vi If revenues indirectly dependent on petroleum-related economic activity were included, the share would be even higher. vii This excludes special payments from the General Fund of $1,000 per eligible Alaskan in 1982 and $1,200 in 2008. The 1982 payment marked the first year of the dividend program, and the 2008 payment was to help cover rising energy costs. 0%10%20%30%40%50%60%70%80%90%100%1960 1970 1980 1990 2000 2010$0$200$400$600$800$1,000$1,200$1,400$1,600$1,8001977 1982 1987 1992 1997 2002 2007 2012

Web Note No. 12

This is the third update of a series we began in 2012, estimating how much Alaska’s state government can afford to spend, without risking sudden big budget deficits and economic hardships for Alaskans in the near future. Those problems are looming because oil revenues currently pay almost all the bills for public services—and oil production has been dropping since the late 1980s. But Alaska can extend the benefits from oil, by adding to the Permanent Fund and other financial accounts—so the earnings from financial accounts can increasingly take the place of petroleum revenues. Those revenues are expected to keep dropping, even with revenues from new oil sources and from a potential gas pipeline.Northrim Bank

Web Note No. 16

Web Note #7 (How Much Should Alaska Save? February 2011) suggested we should think of
Alaska’s petroleum wealth as an asset from which we should spend only the earnings—thus
preserving that wealth for future generations, while at the same time providing a sustainable
annual flow of income for current Alaskans.
Based on the value of state financial assets and a projection of future petroleum revenues, in
early 2011 we estimated total petroleum wealth—the Petroleum Nest Egg—to be $126 billion.
That total could generate an annual sustainable flow of income, or Maximum Sustainable
Yield, of $5 billion.
That year actual state spending from petroleum revenues, along with the Permanent Fund
dividend, was $5.5 billion, or $.5 billion more than the sustainable amount. This put a Fiscal
Burden on future generations of Alaskans because it reduced the size of the nest egg. The state
could have avoided that burden either by increasing non-petroleum revenues $.5 billion, or by
reducing spending that much. Doing one or the other would have added $.5 billion of saving to
the nest egg and so maintained its value.
This Web Note revisits the calculation of the Petroleum Nest Egg, the Maximum Sustainable
Yield, and the Fiscal Burden, taking into account both changes in expectations of future revenues
and the size of the state budget. The estimated size of the nest egg has increased since last year,
to $155 billion, because of higher oil prices and more optimistic production assumptions, so the
estimated sustainable yield is up to $6.2 billion a year. But that growth has been more than offset
because spending of petroleum revenues has also increased. The FY 2012 state budget exceeds
the Maximum Sustainable Yield by $.8 billion, passing a Fiscal Burden of that amount on to the
next generation of Alaskans.
Looking beyond FY 2012, continued spending growth would have dramatic effects on the Nest
Egg and Sustainable Yield. For example, if spending growth of 6% a year were to go on year
after year and the growth was funded by petroleum revenues, the currently estimated Nest Egg
would shrink at an accelerating rate and the Fiscal Burden would grow at an increasing rate. The
Maximum Sustainable Yield for the next generation of Alaskans would drop by half in 20 years.
Looked at another way, sustaining spending growth of 6% a year would require a Nest Egg of
$350 billion—more than twice the current estimate. To put that amount in perspective, $350
billion is more than half the current size of the Norwegian government’s pension fund.Northrim Bank

Web Note No. 10

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

Web Note No. 19

Web Note No. 14

https://scholarworks.alaska.edu/bitstream/11122/3926/1/2012_05_09-WebNote11FederalSpending.pdf

Web Note No. 14

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