Smaller dividends should inspire a change to “percentage of market value” formula for calculating the Permanent Fund payout


This year Alaskans received a dividend of $878, not bad compared to all the other states, but this dividend is the smallest since 2005, and it is only the second time in more than 20 years that the dividend has been below $900 per person. Alaska’s Permanent Fund Dividend (PFD) needlessly fluctuates widely. This year’s dividend is 25 percent smaller than last year’s dividend of $1,174, and it is 57 percent smaller than the 2008 record-high dividend of $2,069 (not counting the one-time supplement of $1200 that was added to that year’s dividend).

The declining dividend does not mean that the PFD is in trouble. Actually the Alaska Permanent Fund (APF), which financed the PFD, is at near-record high levels. It closed the 2011-2012 fiscal year at 40.3 billion dollars. The dividend was low this year because the state uses a complex formula averaging the returns over a five-year period to determine yearly returns. The five-year average was chosen to smooth out fluctuations in market returns to create a more stable dividend, but—as Alaskans can easily see—a five-year average is not enough to do that job. Markets tend to have stable long-term trends, but they can have occasionally large yearly fluctuations (either up or down) that can dwarf a five-year average. The mid-2000s market boom, and the 2008-2009 market bust were just such fluctuations. Now, several years later with the boom returns falling out of the calculations but the decline still in, the 2008 market bust affects the dividend the more than it did at the time.

There’s a better, more stable way to calculate the dividend. It’s called percentage of market value (POMV). Most financial managers agree that an individual can afford to withdraw up to 4 percent of a well-invested diversified portfolio and still expect it to grow in real terms over time.

If Alaska used this rule to calculate the PFD, this year’s dividend would have been $2,380. It would have been a record-high dividend, because the APF closed the fiscal year at a record-high level. Suppose then there was a major sell-off in the markets and the fund declined by 25% to $30 billion. The dividend would decline by 25% as well, to $1,846. Suppose instead it rose by 25% to $50 billion. The dividend would rise by 25% as well, to $3,076. Because 25% is an unusually large fluctuation, we can expect this to be an unusually large change in the dividend. Most often it would change by less than 10% from year to year, and in most years it would increase.

Perhaps Alaskans should be more conservative. The goal of the fund is not just to payout as much as possible. It is also to save for the future. The more the APFC pays out in dividends now, the slower the APF and the PFD will grow over the long term. So, perhaps a POMV rule of 3% would be better—a little more cautious—than the 4% rule. If so, payouts this year would have been $1860. Payouts after a 25% decline to $30 billion would be $1,395. Payouts after a rise to $50 billion would be $2325, and Alaska could expect to larger reinvestments by the APFC to help the APF get to $50 billion much more quickly.

POMV just makes sense. Nobody likes the big fluctuations. No one wants their dividend to be less than half of what it was a few years ago. POMV stabilizes dividends, making it easier for Alaskans to plan, and it can be part of a conservative payout strategy that will keep the fund growing over time.

-Karl Widerquist, Doha, Qatar, November 2012

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Fox News Praises the Alaska Model


Last February two conservative commentators, Bill O’Reilly and Lou Dobbs, from the Fox News Network, praised the Alaska Dividend as “a perfect Model” of what America should be doing with its resources. It is amazing that prominent conservatives can praise a policy that redistributes income from the wealthiest Americans to all Americans unconditionally—without means test or work requirement.

O’Reilly began by saying, “It is my contention that we, the people, own the gas and oil discovered in America. It’s our land, and the government administers it in our name.”

Later, Dobbs added (as O’Reily nodded and voiced agreement), “All of the vast energy reserves in this country belong to us, as you said. In Alaska there’s a perfect model for what we should do as a nation. We should have—what it’s called there is a Permanent Trust. Let’s call it the American Trust. And the oil companies, that pay about $10 billion per year in fees and royalties—have that money go into this trust fund, not to be touched by the Treasury department or any other federal agency, but simply for the investment on behalf of the American people (citizens). A couple things happen. One is, it reminds people whose oil this is, whose coal this is, and what the rights of an American citizen are. And it even puts a little money, a little dollar sign, next to what it’s worth to be a citizen. Have dividends disbursed and distributed every year. … [The other thing is] Peg [the royalties] to the price of gasoline … and that money go into that trust fund for the American people. I think you’d see a lot of people start to pay a little different attention to what people think and respect citizens a little more.”

It was a very good statement of what the Alaska model is for and how it ought to work.

But I doubt the two commentators realize how subversive their words were. If the government realized that the land belongs to all the people and truly began to administer it for everyone’s benefit, many changes would happen. If all the oil, coal, and natural gas of America belong to all Americans equally and unconditionally, so do all the gold, silver, bauxite, fish, timber, land, and groundwater. So do the atmosphere, the broadcast spectrum, and many other things worth an awful lot of money. If everybody who asserted private ownership of any of these things had to pay into the kind of public trust fund O’Reilly and Dobbs endorse, that fund would finance the most massive redistribution of wealth from rich to poor in the history of the United States (if not the world), and it could probably support a basic income large enough to permanently end poverty in America.
-Karl Widerquist, South Bend, Indiana, August 2012

Video of Bill O’Reilly and Lou Dobbs discussing the Alaska fund and dividend is online at: http://www.foxnews.com/on-air/oreilly/index.html#/v/1472237953001/government-

For more on the Alaska model, including cost estimates of the potential value of the natural resources the government gives away for free see the following two books:

Alaska’s Permanent Fund Dividend: Examining its Suitability as a Model, co-edited by Karl Widerquist and Michael W. Howard (Palgrave-MacMillan, 2012):

http://us.macmillan.com/book.aspx?isbn=9780230112070

Exporting the Alaska Model: Adapting the Permanent Fund Dividend for Reform around the World, co-edited by Karl Widerquist and Michael W. Howard (Palgrave-MacMillan, 2012)

http://us.macmillan.com/book.aspx?isbn=9781137006592

Or contact me: Karl Widerquist <Karl@widerquist.com>

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Interesting times for Alaska’s Fund and Dividend


Alaska’s basic income is cursed with interesting times. The Permanent Fund Dividend (PFD) is a small, variable basic income given yearly to every Alaskan who meets the state’s residency requirement. The size of the dividend is determined by several different factors, all of which are facing increased uncertainty and possibly moving in different directions.

The PFD is financed not by current oil revenue, but by past oil revenues that have been saved and invested in the Alaska Permanent Fund (APF). The size of the dividend depends on the returns to the fund’s investments and on the size of the fund, and the size of the fund in turn depends on the international market price of oil, the amount of Alaskan oil sold on the international market, and the tax rate on oil companies selling Alaska’s oil. Those four factors (among others) affect the size of the dividend, and all of them seem to be moving in different directions and facing increasing uncertainty right now.

Oil prices and returns to the fund’s investments have been high recently, helping bring the APF’s principal to record high levels. According to Amanda Coyne of the Alaska Dispatch, the fund ended March with $41.5 billion—the highest month-end figure to date. The state is expected to deposit nearly $1 billion into the APF this year. But while oil prices are high, oil exports from Alaska are declining; the governor of Alaska is pushing for lower taxes on oil exports; and the rate of return on the APF’s investments is facing increased uncertainty in the next few years.

To begin, consider the APF’s rate of return. According to Pat Forgey, of the Juneau Empire, executives of the Alaska Permanent Fund Corporation (APFC) expect lower earnings for the rest of this year, and perhaps for several years, thanks to the outlook for stocks, bonds, and real estate. Alaskans have come to expect a very healthy return of 8 percent or more, but Forgey quoted Greg Allen, of the advisory firm Callan Associates, “Getting a 5 percent (real) return is going to require people to take more risk than they’re used to.” The APFC has a strong responsibility to avoid unnecessary risks with the people’s APF, and so they are likely to stick with a more conservative investment strategy. Lower returns will translate into lower dividends over the coming years even if oil revenues remain constant.

And oil revenues are not likely to remain constant. Alaska’s oil exports (measured in barrels of oil) have been gradually declining for 20 years, but rising oil prices have kept the state’s oil revenues up. The increase in oil prices in the first months of 2012 have been an enormous help to the state’s fiscal position. Oil revenues have also been increased by higher tax rates on oil companies, enacted in 2008. But the gradual decrease in the number of barrels exported each year will sooner or later outstrip the effect of higher revenues per barrel of oil, and the effects of the decline might be felt sooner rather than later.

According to the Fairbanks Daily News-Miner state projections indicate that declining revenues could put the budget into deficit within the next three years. For most states a budget surplus with a possible deficit three years off would be a great fiscal position. But Alaska is used to budget surpluses, and because oil is by far its main source of revenue, any decline in oil output is worrying.

Alaska governor Sean Parnell has responded to the prospect of declining oil exports by asking the legislature to decrease oil taxes. The idea is that lower taxes will encourage greater oil exports. The difficulty with this strategy is that to increase oil revenue lower taxes would not only have to increase oil exports but increase them so much that the greater number of barrels exported makes up for the smaller revenue on each barrel. It’s a questionable strategy that has certain benefits only for oil companies. Other oil exporters with high oil taxes find oil companies willing to drill and sell it. There are other things the state could do to encourage greater oil exports, such as introducing use-it-or-lose-it leases. Current law allows oil companies to lease the right to drill for oil in a certain area and then choose not to do so. Many leases today are simply sitting unused.

In sum, at the moment we have: oil prices up; returns on investments up (for now); oil taxes probably going down; and oil exports down. All that could change, in the short and medium term. The only certainty is that oil exports will eventually decline over the long term, because there is only so much oil in Alaska. It seems that the downsides are looking larger than the upsides at the moment, but I make no prediction of whether the APF and PFD will be up or down in the next few years.
-Karl Widerquist Tel Aviv, May 2012

Recent articles on the APF & PFD include:
Forgey, Pat (Feb. 24, 2012) Juneau Empire, “Permanent fund warned of lower earnings”

http://juneauempire.com/state/2012-02-24/permanent-fund-warned-lower-earnings

Pat Forgey (February 23, 2012) Juneau Empire, “Permanent Fund to continue securities lending: Alaska protected from risks, advisers tell fund trustees”

http://juneauempire.com/state/2012-02-23/permanent-fund-continue-securities-lending

Pat Forgey (February 23, 2012) Juneau Empire, “CIO suggests new permanent fund options: Investment chief Jay Willoughby says state should capitalize on fund’s strengths”

http://juneauempire.com/state/2012-02-23/cio-suggests-new-permanent-fund-options

Maureen Farrell (February 29, 2012) CNN Money Markets, “Alaska’s oil windfall”

http://money.cnn.com/2012/02/29/markets/alaska_oil/

Amanda Coyne (Apr 20, 2012) “Alaska Permanent Fund makes a comeback as markets rebound,” Alaska Dispatch.

http://www.alaskadispatch.com/article/alaska-permanent-fund-makes-comeback-markets-rebound

Kevin Olsen (April 23, 2012) “Alaska Permanent Fund nets 1.9% return over 9 months”
Pensions & Investments (PI online):

http://www.pionline.com/article/20120423/DAILYREG/120429976/alaska-permanent-fund-nets-19-return-over-9-months

Lisa Demer (February 27, 2012) “Alaska Legislature: Senate panel tackles multiple amendments to oil tax bill”
Anchorage Daily News: http://www.thenewstribune.com/2012/02/24/2040560/senate-panel-tackles-oil-tax-bill.html

Fairbanks Daily News-Miner Editorial Board (March 4, 2012) “Deficits loom: Alaska’s cash will erode quickly in coming years,” Fairbanks Daily News-Miner

http://newsminer.com/view/full_story/17726357/article-Deficits-loom–Alaska%E2%80%99s-cash-will-erode-quickly-in-coming-years?instance=home_opinion_editorial

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How Alaska Can Avoid the Third Stage of the Resource Curse


The resource curse, as I see it, comes in three different forms. Alaska has avoided the first two, but whether it avoids the third remains to be seen. The first-stage resource curse occurs when resource exports drive up the nation’s exchange rate and drive other industries out of business. The phrase “Dutch Disease” was coined to refer to this kind of resource curse. The second-stage resource curse occurs when the influx of cash from resource exports fosters corruption, graft, and sometimes dictatorship, so that all or most of the oil revenue is used against the people rather than for their benefit.

The third stage of the resource curse occurs when the resource windfall creates temporary prosperity for all or most of the people, only to lead to depression and economic deprivation as soon as the resource revenue disappears. A large number of factors can contribute to the third-stage resource curse. It can happen if the resource-exporting community invests in an infrastructure suited only to resource exports and is either too large or the wrong kind of infrastructure for the economy that will need to be in place when the resources are gone. Probably the most important reason for a third-stage resource curse is too much spending on immediate needs and not enough savings.

The first two forms of the resource curse will be apparent during the boom, and clearly Alaska has escaped them. But we cannot know for sure whether it has escaped the third stage until the resource is gone. How well is it doing to avoid the third-stage resource curse?

Three strategies to avoid this third kind of resource curse are savings, investment, and the hope that resource revenue will never end. Although Alaska oil production has been slowly and steadily declining for twenty years, the hope remains that natural gas, newly discovered oil reserves, or some other resource discovery will replace what is being lost. This hope will never die, but it can substitute for cautious preparation.

Alaska has made some good investment spending on schools and infrastructure, and it has managed to save some money. According to Commonwealth North, Alaska has saved $66 billion dollars: about $40 billion in the Alaska Permanent Fund (APF), $10 billion in the Constitutional Budget Reserve (CBR) and the rest in other funds and saving mechanisms. Compared to most other U.S. states, struggling with budget deficits, these saving figures are impressive, but they’re not as impressive compared to other resource exporters. After exporting similar amounts of oil, Norway has amassed a fund of $560 billion dollars.

Instead of saving the bulk of its oil revenue, Alaska has devoted almost all of it to current spending. This decision has put Alaskans at risk of the third kind of resource curse. If the state government had to draw on the interest of its savings to make up for a shortfall in oil revenues, all the funds together could not be counted on to cover even one-fourth of the state’s annual budget, and most of the interest on Alaska’s savings (after inflation-proofing and reinvestment) is already rightly dedicated to paying dividends. If and when oil exports come to an end, Alaskans will need and deserve the returns to their savings more than ever.

The Alaska Permanent Fund (APF) and Dividend are working just as intended. They are Alaska’s best savings plan. They constitute a model that other places should be following. When savings are most needed, the state shouldn’t abandon that model; it should build on it. If the fund was large enough, the interest on it could support both a substantial dividend and some or all of the state’s regular spending. The solution for Alaska is to save more money now, while oil prices are high and production is healthy and to treat more of its resources the way it treats oil. The state can’t save more for the future without making some sacrifices in the present, but I want to show you that a much larger fund is feasible.

First, let’s consider what might have been. When oil revenue started flowing into Alaska, one proposal was to save all of it and spend only the interest. Of course, we can’t change history now, but it is valuable to look back with the benefit of numbers that weren’t available looking forward. According to Gregg Erickson and Cliff Groh’s chapter in Alaska’s Permanent Fund Dividend: Examining Its Suitability as a Model, the state received a total of $103.5 billion in oil revenue by 2010 (adjusted for inflation). It invested $19.1 billion (18.2 percent of its oil revenue) in the APF. Most of the remaining $84.4 billion (81.8 percent) went to the general state budget. Even though the APF has paid 30 years of dividends, the principal has increased by a total of 217 percent to about $40 billion.

Suppose, for the sake of argument, that Alaska had saved all of its oil revenue into the APF, using half of it for regular revenue and half of it for the PFD. If this larger fund did just as well as the actual fund has over the last 35 years, the APF would now be worth about $225 billion. It would have $9 billion available this year. Suppose it used half dividends and half for spending. If all 700,000 Alaskans applied for the PFD, $4.5 billion would finance a dividend of more than $6,000 per person, or more than $24,000 for a family of four. The remaining $4.5 billion dollars would cover about 43 percent of the current state budget of $10.5 billion.

But this is not all that might have been. According to Erickson and Groh, oil produced in Alaska has generated more than $300 billion in total revenue, two-thirds of which has gone to oil companies. Although fees, royalties, and taxes on Alaska oil have recently been increased, they have historically been very low by world standards. Some nations capture as much as 80 percent of oil revenue. Even though the oil was discovered by state geologists on state land, and the oil companies were brought in only as hired help, the state has let the oil companies walk away with most of the profits. Had the state captured two-thirds of oil revenue instead of only one-third, and saved all of that, Alaska could now have an APF of $434.8 billion. It would have $17.4 billion available this year, $8.7 billion for the general budget and $8.7 billion for dividends. The share going to the state budget would cover 83 percent of state expenditure. The state would only need to raise only $1.8 billion in taxes to cover all other current spending. Assuming the population of Alaska remains unchanged at 700,000 (which is admittedly a very big assumption at such a large dividend level), every Alaskan would receive a dividend of more than $12,000 per year. Poverty would no longer exist in Alaska, and everyone, rich or poor, would have a large springboard for opportunity.

The figures could be even higher if the state had treated more resources the way it treats oil, but I think you get my point. Even if the state needed to spend some of that money as it came in on badly need projects, it has much greater capacity to save than it has taken advantage of. It could have waited to get rid of the income tax until was replaced by permanent returns to the state’s savings (rather than temporary oil revenue). It could have driven a harder bargain with the oil companies. And it could have treated more resources the way it treats oil and mining. It would now little to fear from the coming decline in the oil revenue.

We can’t change the past; where can we go from here? Alaska has increased taxes and fees on oil companies in recent years, and it needs to resist oil company pressure to reduce them. Several proposals on the table right now would increase the APF. Senator Johnny Ellis proposes moving $2 billion from the CBR to the APF, and Representative Mike Doogan proposes $10 billion. These proposals are a start, but it is not enough simply to protect some of the savings Alaska has accumulated. Alaska needs to save more — a lot more.

The state government takes in about $9 billion in oil revenue per year. Suppose the state saved $8 billion of that each year for the next 10 years and its investments do as well over those years as the APF has on average in the past. If so, by 2022, that savings alone would accumulate to more than $90 billion. The APF would grow to $50 billion, or $62 billion dollars with Rep. Doogan’s additional $10 billion were moved from the CBR. Combining that savings would make the APF balance $152 billion. It would produce $6 billion dollars of returns ready for use. If all of that revenue were devoted to the PFD, each Alaskan would receive a dividend of more than $8,000. If half of it were devoted to the PFD, it would have $3 billion dollars per year of permanent income to relieve pressure on the state budget, and it would still be able to pay dividends of more than $4,000 per person per year.

Such an ambitious short-term savings plan is probably not politically possible, but it is possible to move in that direction. Continuing to live off temporary revenue will leave the state vulnerable to the third-stage resource curse. Even $1 billion a year in additional savings would be a good start in protecting Alaska’s future.

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Two Memoirs Tell the History of the Alaska Dividend


A Review Essay

Alaska’s Permanent Fund Dividend is closer to a basic income than almost any other policy in the world today. The lessons of how it was created and how it became so popular and successful are extremely important to the basic income movement. Two autobiographies available now tell different parts of the story of the Alaska Dividend. One is by Jay Hammond, the governor who, more than anyone else, is responsible for creating the fund and dividend. The other is by Dave Rose, the first executive director of the Alaska Permanent Fund Corporation.

Each book tells the story of its author’s life. These stories are interesting in their own right, reflecting the experience of many latter-day pioneers who came to Alaska from the lower 48 states before or in the early years of statehood. Hammond moved to Alaska after being a World War II pilot, and he lived the Alaskan experience as a “bush” pilot, a wilderness guide, a homesteader, a legislator, a small-town Borough President, and governor. Followers of current U.S. politics will be interested to know that Sarah Palin took the name of her television show from “Jay Hammond’s Alaska,” which ran for seven years in the late 1980s and early 1990s.

But followers of the basic income movement will be most interested the inside accounts of how the Alaska Dividend was created and became the sound and solidly supported program that exists today. Although the Alaska Permanent Fund (APF) is the source of revenue for the Permanent Fund Dividend (PFD), many non-Alaskans are unaware that the two are different programs created at different times by different kinds of legislation.

The events leading up to the creation of the fund began in 1955 when Alaska called a constitutional convention in advance of statehood. The constitution that was finally adopted proclaims that all the natural resources of Alaska belong to the state for the benefit of the people.

One of the most important events toward the development of the fund and dividend happened quietly in an office in Juneau in 1963. At that time, negotiations with the federal government over which lands would be transfered to full state ownership and which would remain federally owned had dragged on for several years. A geologist named Tom Marshall (according to Hammond) and/or the commissioner of natural resources, Phil Holdsworth (according to Rose), persuaded then-governor Bill Egan that there might be oil in far-northern Alaska. Egan then finished the land negotiations with the federal government by agreeing to take a “large, barren and unpopulated wasteland on Alaska’s Arctic Slope, near remote Prudhoe Bay.” In 1967, oil was discovered under that barren, unpopulated wasteland.

Jay Hammond was elected governor in 1974, when, he says, “the scent of anticipated oil revenues wafted like musk in the halls of the state legislature.” Hammond was possessed with the idea of putting as much of that money as possible into a permanent fund that would pay dividends to Alaskans. The concept had been with him for a long time. Years earlier, as mayor of the small municipality of Bristol Bay Borough he had tried unsuccessfully to create a similar program at the local level using fisheries revenue.

Hammond had many reasons for favoring the fund and dividend. He thought that the temporary windfall should be saved rather than spent as it came in. He was afraid that the government would waste the windfall on poorly designed programs or projects that would benefit only special interests or favored constituents. He wanted to make sure that every Alaskan would benefit from their jointly owned oil resources. And he hoped the dividend would help the poor.

After reading his book and speaking to him at the 2005 USBIG Congress, I still cannot say for sure how this idea came to Hammond and how he came to be so obsessed by it. He appears to have been influenced by the guaranteed income movement of the 1960s, but this does not fully explain where he got the idea for a state-owned fund paying dividends to all citizens.

Although Hammond was not the only person responsible for the creation of the fund and dividend it is clear that it would not have happened without his single-minded pursuit of it for his entire eight years as governor. He made it his top priority. It was the object seemingly of every budget compromise he made from 1974 to 1982. Largely the existence of the Alaska Dividend owes to the right person being in the right office at the right time.

The time was right not only because money was beginning to flow, but also because of public perception. Five years before he took office, in 1969, the state government had received an initial windfall of $900 million (six times the size of the state budget at that time) from the sale of leases for the right to drill. Some people at the time, including then-governor Keith Miller, argued that the state should invest the money and spend only the interest. But by 1974 all of that money was gone, and there was a widespread (if exaggerated) belief that most of it had been wasted. Thus, there was strong support for saving at least part of the expected oil windfall when Hammond because discussing the ideas of a fund and a dividend with the legislature.

In 1976, after a series of compromises, Alaskans passed an amendment to the state constitution dedicating at least 25 percent of each year’s oil royalties to the new APF. It was a fraction of what Hammond wanted. Although he discussed many different figures, he at one time had hopes of dedicating 50 percent of all oil revenue to the fund. Royalties make up only about half of the state’s oil revenues. Therefore, the APF is only one-fourth as large has Hammond had wanted.

The biggest missing piece, from Hammond’s perspective, was the dividend. There as no mention of it in the amendment, which simply states that at least a minimum amount of certain kinds mineral revenue would go into a fund of “income producing investments.” It did not specify what these investments should be or how the returns would be used. Although these omissions were a disappointment to Hammond, according to Rose, the vagueness of the APF amendment was instrumental to its passage. It drew support from diverse groups that would not all have supported a more clearly defined plan dedicating the returns to a dividend or anything else.

By both Rose and Hammond’s account the dividend proposal was not popular with the public or with members of the legislature when Hammond started pushing for it in the late 1970s. The dividend got through thanks both to the strength of governor’s office and to a long series of compromises made by a few dedicated legislators.

After a court challenge about how dividends were to be distributed, the final version of the dividend bill was passed and went into affect in 1982. It dedicated roughly half of the APF’s returns to the PFD. Unlike the fund itself, the dividend is not protected by a constitutional amendment. It is created by a simple majority vote of the state legislature. It is protected today, mostly, by its enormous popularity. According to Rose, a legislator proposed to do away with the PFD only six months after the first dividends went out. Rose writes, “His proposal had ample support in the Legislature, but when the public heard about it, everyone ran for cover.” After one dividend check the PFD has a strong political constituency. After three or four checks, it became politically inviolable.

But the fund was still not fully secure from diversion. The principal only had to be held in “income producing investments.” There are many risky, politically motivated projects that can count as income producing investments. Many politicians wanted to use it for subsidized loans or infrastructure projects. Some wanted to restrict the APF to invest only in Alaskan assets. The legislature still has the power intervene on any of these issues, but for the most part they have not. These issues have been resolved largely by the Alaska Permanent Fund Corporation (APFC), a body that was created in 1980 to manage the fund and dividend.

David Rose became the first executive director of the APFC in 1982. He made it his goal to follow the “prudent investor rule,” a legal doctrine in which those who invest on behalf of other must seek the highest returns consistent with the safety of the investment. Investments with almost any other political goal are ruled out by the prudent investor rule, because they tend not to be the safest and most profitable. This rule was nominally established in APF legislation in 1980, but the law has title teeth. It takes discipline of the managers and the oversight of public opinion to keep it in place. The state set up other programs for subsidized loans and development projects. By the time Rose left office in 1992, the prudent investor rule was well established in precedent. The Alaskan public, weary that some bureaucrat might be blowing the source of their future dividends, paid close attention to the fund’s performance.

Even Rose felt the temptation to use the fund for political objectives. He tells one story from the late 1980s when the manager of Kuwait’s sovereign wealth fund came to him privately and suggested that the Kuwait fund, the APF, and two pension funds from the lower 48 states should pool their assets and buy a controlling interest in British Petroleum (BP). Rose turned it down, of course, but not without some hesitation and daydreaming. It would have been a political move—not the move of a prudent investor.

These two books together lay out the long series of events between 1955 to 1992 that led the place in which the APF is established in the Alaskan state constitution; the PFD is established by law; the prudent investor rule is established by law and precedent; and all are protected by public opinion. At the time of this writing (January 2011), the APF is at more than $38.4 billion. The most recent PFD (October 2010) was $1,281 for every man, woman, and child in Alaska.

The dividend is safe for now because it continues to be one of the most popular programs in Alaska, but that might not be true forever. The legislature has recently made several attempts to redirect the principal of the fund toward political projects, such as infrastructure investments, which show reduced commitment to the prudent investor rule. Alaskans were surprisingly resigned to the $12 billion the fund lost in the financial crisis of 2008-2009.

Furthermore, Alaska faces difficult budgetary times ahead thanks to decisions made when the oil started flowing. Back when Hammond was trying to create the dividend, he reluctantly and regretfully signed a bill to eliminate the state income tax. Looking at short-term effects only, the elimination of the income tax seemed like a great idea. The state simply didn’t need the tax; it was making far more money in oil revenue than it needed to run the state budget. Hammond thought it would be much better to dedicate more oil revenues to the permanent fund and continue to finance most government spending through regular taxes. Eliminating the income tax would benefit Alaskans unevenly and temporarily. Dedicating an equal amount of addition money to the APF (and an accompanying dividend) would benefit all Alaskans permanently. Instead the state decided to live off temporary oil revenue.

Today nearly 85% of the Alaska state budget is funded by oil. When those revenues run out there will be enormous pressure to redirect the PFD and perhaps even APF principal toward supporting the state budget. Furthermore, the state will be in the position of needing to find new tax sources just when the industry that dominates the state economy will be contracting. Perhaps, natural gas will create a new resource boom just as the oil money begins to run out. Perhaps some other part of the Alaskan economy will take over. But it is clear that Alaska is in a more precarious position than it would have been if the state had saved more of its oil revenues.

It’s tempting to think what might have been, if Alaska had saved all of its oil revenue in a best-case scenario. Suppose the state had kept the income tax, put all its oil revenues into the APF, and spent only the interest. The APF would now be something in the neighborhood of eight-to-ten times its actual current size of $38.4 billion. For a best-case scenario, say $400 billion. Most financial analysts agree that one can withdraw up to 4% or 5% per year from an investment fund and still expect it to grow over time in real terms. Suppose the state was able to withdraw 5% each year, using half of it for dividends and half for the state’s operating budget. That would produce a dividend of $15,000 per person per year and $10 billion for the state budget. Current total state spending is only $10.5 billion per year. Thus, the state would only need to raise $0.5 billion from other sources this year, and it would be able to envision the day when returns to the fund financed the entire state budget.

Enticing, but it is a best-case scenario, relying on the most optimistic assumptions on every issue. It ignores all the financial risks and political, economic, and demographic barriers to maintaining such a system. It also ignores that the state needed to spend some of the oil money as soon as it came in. It was a poor state with weak infrastructure and poor schools; it no longer is—thanks to the oil boom. Although some of the oil money was wasted, some of it was well spent. As Rose argues, “Until basic needs are met, such as education and public safety, the government has no business saving for the future.” Alaska had to spend a lot to meet its needs at the time, but it could have saved much more than it has. If Hammond had gotten his way, the fund and dividend would be four times the size they are now.

The APF and PFD give us a model on which we can improve. The memoirs of Hammond and Rose help us understand how we can get it done.

-Karl Widerquist, Doha, Qatar, January 25, 2011

The books discussed in this essay are:

Rose, Dave and Charles Wohlforth. 2008. Saving For the Future: My Life and the Alaska Permanent Fund. Kenmore, WA: Epicenter Press.

Hammond, Jay S. 1994. Tales of Alaska’s Bush Rat Governor. Kenmore, WA: Epicenter Press.

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