The Alaska Permanent Fund

Mattie Gregor '10

 

A
laska
's economy is largely dependent on the petroleum industry. In preparation for the depletion of their oil reserves, the people of
Alaska
have established a trust fund known as the Alaska Permanent Fund. There were three main purposes or goals established for the Permanent Fund at its conception: to check wasteful government expenditures, to cushion the state from the "boom and bust" shocks of Alaska's volatile oil economy, and to provide for the inevitable day when the state will run out of oil. However, due to a particular aspect of the Permanent Fund, the Permanent Fund Dividend, this last goal has not been met today.
Alaska
is currently suffering from major monetary problems, and the situation will not improve when the state runs out of its one major source of revenue. The only option is for the state to impose some form of a tax on its citizens, or else it will be economically destroyed when
Alaska
's oil dries up.

 

The Alaska Permanent Fund was established in 1977, in response to what most Alaskans felt was an irresponsible state government. In 1969, a massive oil field was discovered in the state-owned
Prudhoe Bay area. The ensuing oil lease sale in September of that year earned the state $900 million in one day (Brown 41). To the horror of the public, the money was almost entirely gone within three years (Lewis 32), having been (according to popular perception) "frittered away" by the legislature (
Anderson
58). To put this in perspective, the state's annual budget at the time was only slightly over $100 million (
Anderson
58). The Permanent Fund was instituted partially as a measure to prevent the potential similar waste of future oil revenues. After the
Prudhoe Bay incident, Alaskans had a great deal of distrust in their government's money-management ability, and were anxious to "[place] a portion of the state's oil revenues beyond the reach of day-to-day government spending" (Olson 605).

 

In addition to being a check on government spending, the Permanent Fund was established out of concern for future generations of Alaskans. The Alaska Permanent Fund founders understood that the oil revenue stream was only temporary, and that eventually other sources of government income would be needed. The Permanent Fund was a "savings account ... designed to convert a part of the depleting petroleum asset into a permanent and sustainable financial asset" (Goldsmith 550).

 

Finally, the Permanent Fund was also intended to help insulate
Alaska
from the inevitable economic "boom and bust" cycles created by the varying price and availability of oil. The petroleum industry accounts for 85% of government revenue; Alaska's fortunes are so closely tied to oil prices that even a minor dip can cause "serious economic downturn" (Brown 39). The Permanent Fund would, in theory, provide a source of income to help carry the government through the "bust" part of the cycle. It would help tide individual citizens over as well, by means of the Permanent Fund's most unique feature, the Permanent Fund Dividend, which will be discussed in detail later on.

 

To understand how the Permanent Fund met two of its goals, it is necessary to understand the structure of the Fund. There are thousands of government trust funds in the
United States
. Examples include the Unemployment Trust Fund, Social Security, the Highway and Airport Trust Fund, and any of the many tribal trust funds for Native Americans. These are all federal funds, but states can (and do) administer trust funds as well (
Anderson
65). The Alaska Permanent Fund is one of these, but it is different from most other trust funds in existence. In fact, it is highly unique.

 

To establish the Permanent Fund, Alaskans had to change their state constitution. The
Alaska
constitution required that all state revenues go to a general fund for the state, and prohibited any revenues from being dedicated for a specific purpose.
Alaska
approved a constitutional amendment in 1976 to remedy this. It reads:

            At least twenty-five percent of all mineral lease rentals, royalties, royalty sale proceeds, federal mineral revenue sharing payments and bonuses received by the State shall be placed in a permanent fund, the principal of which shall be used only for those income-producing investments specifically designated by law as eligible for permanent fund investments. All income from the permanent fund shall be deposited in the general fund unless otherwise provided by law. (Alaska Constitution, article IX, section 15)

The constitutional mandate that the Permanent Fund's principal could not be touched ensured that the Fund would continue to grow and be a source of income for the state of
Alaska
. In fact, since the Permanent Fund's inception, not one cent of the principal has been spent (Lewis 32). As of today, the Fund is worth $35,235.7 million (APFC, Financial Report.)

 

The main reason for the Permanent Fund's initial success was the Permanent Fund Dividend Program. The Dividend Program makes the Alaska Permanent Fund unique among government trust funds, and is the source of the Permanent Fund's popularity today. At the time of the Permanent Fund's conception, there was great concern that the Fund wouldn't survive unless the citizens had a direct interest in preserving it. The solution was to give an annual dividend to every Alaskan, from the income generated by the Permanent Fund investments. That way, each citizen would have a vested interest in the Fund's future. The dividend was approved in 1980, and today every man, woman and child in
Alaska
receives an annual check from the government (assuming they meet the criteria of having lived in
Alaska
for a year) (Lewis 32; Hsieh 398).

 

To determine the dividend amount, the Permanent Fund's statutory net income is first averaged with those of the previous four years. "This five-year average allows for a 'smoothing' effect against year-to-year realized earnings volatility" (APFC). Then the average is divided in half. A portion of one half is added to the Permanent Fund's principal, to "inflation-proof" the Fund and prevent it from losing value. Any remaining earnings from that half go to the Permanent Fund's earnings reserve account, which the Legislature is free to spend (APFC). The other half of the average goes to the people of
Alaska
, in the form of dividends (after program expenses). The dividend checks are significant. The 2006 dividend amount was $1,106.96 (AK Dept. of Revenue), and to date, the Alaskan government has sent out over $13.5 billion in dividends since the program began (AK Dept. of Revenue 2005 Report). 

 

The dividend program succeeded in turning the citizens of
Alaska
into staunch defenders of the Permanent Fund. The people have become extremely attached to their annual checks. Public opinion polls conducted during the first decade of the dividend program showed  "90% public support for the continuation of the dividend program" (Olson 612), and high levels of support continue today. One Alaskan legislator estimates that "...the dividend is worth about 20% of the votes in legislative races. If a candidate supports any plan that whiffs of tapping into the Permanent Fund or reducing dividends, his chances of getting elected are seriously jeopardized" (Lewis 33).

 

The dividend program also meets the original Permanent Fund goal of helping support Alaskans through boom-and-bust cycles, and it provides important subsidies to many Alaska Natives who pursue the traditional subsistence lifestyle (Brown 43). In 2002, the poorest 20% of Alaskans relied on their dividend for 25% of their total income (Lewis 80).

 

Additionally, the Permanent Fund as a whole has successfully avoided falling victim to irresponsible government spending, which was the second original goal of the Permanent Fund founders. This is because the Permanent Fund is kept as far away from politicians as possible. The principal of the Fund cannot be touched, except to be used for the "income-producing investments" mentioned in the constitutional amendment. The management of those investments is handled by an independent group, the Alaska Permanent Fund Corporation, whose only goal is to maximize the Permanent Fund's earnings. The group has no political interest in what happens to the Permanent Fund. The corporation is not a branch of the state treasury, and has no say in how the Permanent Fund's earnings are spent (APFC). Over the years, it has put the Permanent Fund into "safe" investments, specifically, into "...obligations of the
U.S.
government, CD's of federally insured commercial banks, [and] corporate investment-grade securities. More recently, the fund has begun to be invested in real estate and stocks" (O'Brien 142). Additionally, 95% of Permanent Fund investments are outside of
Alaska
(Brown 43). This prevents the success of the Fund from depending on
Alaska
's unpredictable economy, and also prevents any possible conflict of interest for those in charge of the Fund's investments. This separation of the management of the Permanent Fund and the politics of how its earnings are spent is one of the major reasons the Fund has managed to thrive.

 

The dividend program also helps check government spending by reducing the phenomenon of "fiscal illusion."
Alaska
has no state income tax or sales tax (O'Brien 146); the state government finances its expenditures primarily with the oil revenues it doesn't put into the Permanent Fund. (Recall that only 25% of oil revenue is put into the Permanent Fund). This can create fiscal illusion - the people do not realize the true cost of government because they are not asked to help finance it, and so they vote for higher levels of government expenditure than they otherwise would (O'Brien 146).  By reducing its spending, the legislature can (and historically has chosen to) move funds from the Permanent Fund earnings reserve account back into the Permanent Fund principal, which means larger dividend checks. To the people of
Alaska
, these extra dividend dollars are the opportunity cost of government spending (O'Brien 146). This awareness of the cost of government expenditure reduces fiscal illusion, and leads, in theory, to responsible fiscal voting.

 

However, the Permanent Fund has failed to meet its third original goal of preparing for
Alaska
's future. Currently, oil is
Alaska
's economy. Out of all fifty states "
Alaska
has the most unbalanced and least diversified economy" (Brown 39), but they have little choice but to have a resource-based economy. There are presently no good alternatives, due to the harsh climate, high cost of labor, and poor infrastructure. Attempts to diversify in the past have not succeeded; the
Alaska
agriculture movement in the 1980s failed dismally (Brown 40). Historically, oil, furs and fishing have been
Alaska
's main industries (Lewis 32). However, these last two resources unfortunately ran out, which is what will eventually happen to
Alaska
's oil supply. When this happens,
Alaska
's lack of diversification will be a severe problem.

 

The Alaska Permanent Fund's creators recognized this eventuality. At the time of the Permanent Fund's institution, they hoped that "...the principal of the Permanent Fund would accumulate to a level sufficient to assist in the diversification of
Alaska
's economy..." (O'Brien 141), and that in this way the Permanent Fund would provide for
Alaska
's future. Today, however,
Alaska
feels differently. Almost 70% of Alaskans feel that the Permanent Fund should not be invested in "commercial and industrial development" at all, and 74% feel it shouldn't be invested in this manner if it means "future dividend checks would stay the same or get smaller" (Doogan 55). The Alaska Permanent fund Corporation itself lists the fact that "the Fund is not used as an economic development bank" as one of the reasons the Permanent Fund is successful (APFC). Clearly, the people of
Alaska
have "more short-term concerns than when the program was first implemented" (Olson 604). They are more concerned about their dividend checks than they are about the Permanent Fund's original purpose and its potential to aid the state. This has led to drastic monetary problems for the state.


 


Alaska
has the highest per capita state expenditure in the
US
, but this doesn't necessarily mean that the state is well off (Brown, 38). The harsh natural environment in the state makes spending necessary.
Alaska
currently needs at least one billion dollars just to deal with the harbors, boats, and roads in "significant disrepair" (Gorsuch 42). In a state where many places can only be reached by water or air, this is a big problem. There is also a lack of adequate social services in
Alaska
; social workers are actually leaving the field because they are overwhelmed by the workload (Gorsuch 38). Moreover, according to one Anchorage School Board member, there is "...a great need for an education endowment fund...We can't appropriately fund education, we can't appropriately fund health and human resources... we can't build a jail..." (Kelly Haney qtd. in Gorsuch 34). In addition to
Alaska
's great need for infrastructure and program funding, the budget deficit continues. In 2004, the deficit was $896 million (NOW), and it is expected to increase to over a billion in the coming years (Felchner).
Alaska
needs to spend money, but it refuses to tap into the Permanent Fund. Economist William Brown compares
Alaska
to "...the miser who hoards money under the bed but will not dip into his stash, even though he is hungry and needs new clothes" (43). In an October 2003 poll by Dittman Research Corp., 64% of Alaskans believed that they were entitled to a dividend check, even if
Alaska
has a budget deficit (Lewis 81).

 

Today this sense of entitlement has reached the point where it's actually working against the original goals of the Permanent Fund program. Instead of voting for politicians who promise to reduce state spending, the people vote for whichever candidate seems most likely to protect their dividend "rights." In fact, "[a]ny politician who even suggests considering a policy that might adversely impact the size of the annual distribution had best look for another career" (Goldsmith 557). Because it has a direct impact on almost everyone in the state, the dividend has become one of the most important issues in Alaskan politics. It is "political suicide" to even consider reducing (let alone eliminating!) the dividend (Stauffer 27).

 

The actions of the
Alaska
legislature reflect the political impact of the dividend program. Since 1980, the legislature has voluntarily put earnings reserve money back into the Permanent Fund's principal, thereby increasing the dividend amount. In 1987, when Governor Steve Cowper suggested using the earnings reserve to help reduce the budget deficit, he received virtually no legislative support (O'Brien 144). In 2000, though there was a large deficit, the legislature appropriated an extra $250 million for the Permanent Fund principal from the earnings reserve (
Anderson
63). The problem with this situation is that
Alaska
needs this money. Not only is there a perpetual budget deficit,
Alaska
is in desperate need of funding for infrastructure development, education, health care, and many other areas of society.

 

Dividend entitlement is not the only factor contributing to this apparent apathy toward the needs of the state. Part of the reason for this sentiment is that not every Alaskan suffers during a state financial crisis. Government workers and others who manage to remain employed "are little affected by the crisis; and, with their annual dividend, they can carry on as usual" (Brown 43). This unaffected population is rather large; 30% of the workforce in
Alaska
is employed by the government (Brown 39). Also, "[a]bout 5 percent of the economy of
Anchorage
... (where half of the state's population lives), is dependent on the two military bases there" (Brown 40). In times of financial crisis due to oil prices, these people are fine. They don't recognize the extent of the economy's (or their fellow Alaskans') dependence on oil, so they are unwilling to dip into their dividends or the Fund itself. Others simply do not trust the legislature to spend the money wisely. Still others are part of
Alaska
's large transient population and don't intend to live in the state for long or have children there. They have no interest in the future of
Alaska
at all, but enjoy receiving annual checks from the government.

 

Regardless of the reason behind Alaskans' unwillingness to part with their money, ultimately the citizens will have no choice in the matter.
Alaska
's oil will not last forever. The only solution to
Alaska
's current and impending monetary problems is for the people to help pay for their government. This can only mean a tax. Adopting a tax now would prepare
Alaska
for the future by paying for economic diversification. An expanded and improved education system, for example, could attract industries requiring highly skilled labor to
Alaska
's economy (Gorsuch 36). This could overcome the problem of
Alaska
's economy being so heavily resource-based. 

 

Reducing the dividend would be a form of a tax, but this would be very unpopular, and Alaskan voters would strongly protest it. The other problem with directly cutting into the dividend amount is that many Alaskans depend heavily on it and base their personal budgeting decisions on it. As I mentioned earlier, some Alaskans depend on their dividend for up to a quarter of their yearly income (Lewis 80), especially Native Alaskans, who make up 15% of the population (Gorsuch 45). Those in poverty brackets and many of those living a subsistence lifestyle cannot afford to lose the dividend as a source of income.

 

Another solution would be an income tax, which would not affect those who cannot afford to pay, as opposed to a dividend reduction, a sales tax or even a property tax. A state income tax would also spread some of the cost to non-Alaskans. Approximately "...one-third [of an income tax in
Alaska
] would be paid by non-resident or seasonal workers, and all would be deductible against Federal tax liabilities..." (Stauffer 28). However, it is unlikely that an income tax would be popular either. The people of
Alaska
are simply too used to receiving money from their government to happily accept a reverse in the direction of the flow of cash.

 

Critics of the Alaska Permanent Fund say it "...has fostered a sense of entitlement with no responsibility connected to it" (Peg Tileston qtd. in Gorsuch 35), and that "[t]he Permanent Fund Dividend is a colossal policy blunder and should never have been done" (Lewis 33). While the Permanent Fund was founded with the intention of preventing financial crisis in
Alaska
, the Dividend Program seems to have gradually clouded the judgement of the Alaskan people to the extent that the Permanent Fund cannot be used to save
Alaska
's economy as was intended.
Alaska
needs money now for its deficit, development, and economic diversification, but the Permanent Fund has evolved into a nest egg that cannot be spent. The only way to save the situation now is some kind of tax on the Alaskan people, but at this point their unwillingness to adopt one is dooming the economy. The state's economic future is at stake, but unless the people start supporting
Alaska
, they will be unable to save it.

 

References

 


Alaska Department of Revenue Permanent Fund Dividend Division. 2006. 5 Dec. 2006 <https:// www.pfd.state.ak.us/>.

 

 Alaska Permanent Fund Corporation. 2006. 5 Dec. 2006 <http://www.apfc.org>.

 

AlaskaState. Alaska Permanent Fund Corporation. Monthly Financial Report for October 2006. 5 Dec. 2006 <http://www.apfc.org/reportsPublications/mo_financials.cfm>.

 

---. Department of Revenue Permanent Fund Dividend Division. 2005 Annual Report.
Juneau
: Alaska Department of Revenue, 2005. 5 Dec. 2006 <https://www.pfd.state.ak.us/

annualreports/index.aspx>.

 

Anderson, Jonathan. "The
Alaska
Permanent Fund: Politics and Trust." Public Budgeting and Finance 22 (2002): 57-68.

 

Brown, William S., and Clive S. Thomas. "The
Alaska
Permanent Fund: Good Sense or Political Expediency?" Challenge 37.5 (1994): 38-44.

 

Doogan, Mike. "Forum Gives Citizens a Rare Chance for Thoughtful Discussion." Trustees' Papers 6 (1999): 29-52. 5 Dec. 2006 <http://www.apfc.org/reportspublications/tp6.cfm>.

 

Felchner, Morgan. "Looking Beyond
Wisconsin
Puts Budget Deficit in Perspective." The Badger Herald 22 Jan. 2002. 5 Dec. 2006 <http://badgerherald.com/news/2002/01/22/ looking_ beyond_wisco.php>.

 

Goldsmith, Scott. "The
Alaska
Permanent Fund Dividend: An Experiment in Wealth Distribution." Promoting Income Security as a Right:
Europe and
North America. Ed. Guy Standing.
London
: Anthem, 2004. 549-561.

 

 

Gorsuch, Lee. "Principles and Interests Roundtable Discussion: The Future of the Permanent Fund." Trustees' Papers 6 (1999): 29-52. 5 Dec. 2006 <http://www.apfc.org/reports publications/tp6.cfm>.

 

Hsieh, Chang-Tai. "Do Consumers React to Anticipated Income Changes? Evidence From the
Alaska
Permanent Fund." The American Economic Review 93 (2003): 397-405.

 

Lewis, Tony. "Devoted to the Dividend."
Alaska
Sept. 2004: 30+.

 

 

NOW. 2004. PBS. 5 Dec 2006 <http://www.pbs.org/now/politics/budgetmap2.html>.

 

O'Brien, J. Patrick, and Dennis O. Olson. "The
Alaska
Permanent Fund and Dividend Distribution Program." Public Finance Quarterly 18 (1990): 139-156.

 

Olson, Dennis O., and J. Patrick O'Brien. "The Great Alaskan Money Give Away Program."  Economic Inquiry 18 (1990): 604-615.

 

Stauffer, Thomas. "
Alaska
's Nest Egg." Trustees' Papers 6 (1999): 25-28. 5 Dec. 2006 <http:// www.apfc.org/reportspublications/tp6.cfm>.