Alaska is blessed with an abundance of natural resources, most importantly oil. Ask any old timer what oil has meant to the state. What was it like and where would we be without all that crude flowing through the pipeline? Prudhoe Bay was a game changer.
From time to time there is talk of the need to diversify, but into what? Alaska is a long way from civilization. Manufacturing won't work up here given the high transportation costs and small market, unless someone develops a Star Trek, like beam-me-up-Scotty transporter. Our harsh climate doesn't help matters either.
We wring our hands about this and yet if the truth be told there's not much we can do about it and we know it. It reminds me of an old joke retold in the movie "Annie Hall."
A guy runs into his doctor's office yelling, "Doctor, doctor my brother is nuts," he thinks he's a chicken." The doctor responds, "Then why don't you have him committed?" The guy says, "I can't," I need the eggs."
We need the oil -- or the interest off the revenue it produces. Fortunately we have done a fair amount of savings via the $40 billion (and counting) Permanent Fund. The fund was originally set up to translate a depleting non-renewable resource (oil) into a constant stream of renewable investment earnings. It's in the Permanent Fund's literature and on their website time and time again.
We have also accumulated almost $15 billion in reserves elsewhere due to the spike in oil prices. Unfortunately, a large portion of that is pretty much offset by the burgeoning unfunded deficit at PRS and TRS. The Pew Center recently reported that our 61 percent funding status is among the worst of the 50 states. But I digress. Nothing to see here, move along.
Well, have we done enough? Have we put aside enough savings to ensure prosperity in the future when the oil runs out? Work published recently by UAA Professor Scott Goldsmith at the Institute for Social and Economic Research suggests that we've done a decent job.
He asks the question, how much should Alaska save so that "every Alaskan -- current and future -- should benefit equally from our petroleum wealth"? He takes as given that intergenerational equity is a good thing. He not only considers current savings, but also wealth still in the ground.
Using Department of Revenue forecasts, he estimates the present value of state wealth in the form of petroleum in the ground at $81 billion. Needless to say there is considerable uncertainty associated with this figure. If you add other state assets to this, including the Permanent Fund, you get $126 billion.
Goldsmith calculates that the $126 billion can sustain an annual payment of $5 billion (about $7,200 per person) on an inflation adjusted basis in perpetuity. That would maintain the wealth of the state across generations on a per capita basis. He refers to this annual payment as the "wealth preserving draw" benchmark.
Paraphrasing Professor Goldsmith, if we draw more than the benchmark, we are shortchanging future generations. If we draw less, our wealth and future earnings increase so much that future generations will be better off than the current generation.
The detailed calculations are complicated and way above my pay grade, but the result gives us a benchmark to judge how we are allocating resources between current and future generations of Alaskans. It's a model our legislators should embrace.
Goldsmith believes we have done a pretty good job of preserving wealth across generations with one big caveat: A good portion of the savings is due to soaring oil prices and unexpectedly higher North Slope oil production.
He reckons the 2012 state budget will draw about $5.5 billion from petroleum wealth. That's higher than the wealth-preserving draw, so we are "putting a fiscal burden on future generations." He cautions that we should save more and build up a buffer, just in case the long term forecasts are off base.
You can go to ISER's website and check it out: www.iser.uaa.alaska.edu/Publications/presentations.htm
Jeff Pantages is an investment adviser. He lives in Anchorage.
By JEFF PANTAGES