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With $65 billion in financial accounts

With $65 billion in financial accounts

The “maximum sustainable yield” is a theory that Alaska’s oil resources should be looked at as a long-term endowment that belongs as much to future generations as to the present. The endowment takes the form of resources in the ground as well as financial assets, chiefly the Alaska Permanent Fund, that have been built up with oil revenues, said Scott Goldsmith, a professor emeritus of economics at the University of Alaska Anchorage.

A year ago, the ISER report put a total value of $139 billion on the state assets, with $65 billion in financial accounts and $74 billion in future oil revenues. Goldsmith said the 2015 update, based on lower oil prices and other economic factors, puts the nest egg value at $135 billion.

The drop would have been greater, but the Permanent Fund earnings were strong in 2014, he said.

While many in Alaska politics see the budget as a cash flow problem, Goldsmith's model makes the case that it is a structural problem, one that will not go away even if oil prices spike back up to triple digits or if a gas pipeline eventually gets built. With an economy based on a resource that is nonrenewable, Alaska still has the opportunity to save enough to create financial assets that will be renewable income producers, according to the ISER research.

The ISER model estimates that $4.5 billion is the maximum that can be spent in a year and still retain significant earnings potential for the future. In essence, the exercise is an attempt to set a framework for long-range financial planning based on the transformation of nonrenewable assets into a continual source of cash from investments. It has met with limited interest by many political leaders in Alaska, but that may be changing as the state grapples with the question of how best to respond to the collapse in oil prices.

Reinvestment of financial assets is necessary to generate growth that could sustain government operations as oil resources dwindle. The challenge is how to manage the demands for current spending with future planning.

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