Although Alaska currently has a not-entirely-deserved reputation of being very wealthy, our history is quite different.
In the territorial era, Alaskans struggled with a high cost of living (mainly due to shipping costs) and seasonal extraction-based employment. When Alaska became a state in 1959, we were the poorest state in the union and it didn’t look like that would change anytime soon. And then explorers found oil on the North Slope in 1969 and we started the long slog forward to build a pipeline to get the billions of barrels to market and make some money.
History of Alaska’s Permanent Fund
The State of Alaska made a record $900 million with the Prudhoe Bay oil lease sale. To understand the enormity of this — the entire state budget at the time was less than $118 million.
The Alaska Legislature celebrated by spending every dime on everything. They gave drunken sailors a bad name. Like people spending their paycheck on a three-day drunk, by 1975, the money was gone, but anyone with good sense could see that the taxes on the pipeline and oil carried by it promised to bring in way more money than that to the state coffers. The Legislature offered no plans for curtailing their spending in the future until Governor Jay Hammond had a come-to-Jesus meeting with the Legislature. He proposed the creation of a sovereign wealth fund — a long-term savings account for the state. Because Alaska has an extremely socialist constitution, such a measure would require a constitution amendment, which had to be authorized by a statewide citizens’ vote after the Legislature proposed it. Voters passed the measure establishing the Alaska Permanent Fund (Alaska Constitution, Article IX, Section 15) in November 1976. In February 1977, the first deposit of $734,000 was placed in the account, invested entirely in bonds.
Then the debates started about what sort of investments were best and what would the proceeds be used for. It became pretty clear, pretty quickly, that some people wanted all the money to go to growing a bigger State government while others thought it should be a secured rainy day fund for the future, while others were beginning to ask why the private economy of Alaska was still lagging far behind other states when the State was selling the collectively owned resources.
In 1980s, the Alaska Legislature created the Alaska Permanent Fund Corportation to manage the investments of the Permanent Fund. At Governor Hammond’s urging, it passed the Permanent Fund Dividend (PFD) program, providing annual payments to Alaskans from the interest earned by the fund. The thought was two fold:
If Alaskans had a personal stake in the Fund, they wouldn’t let the Legislature squander it.
The mineral wealth of Alaska is owned by the people of Alaska collectively. In the Lower 48, the landowner earns an income from the lease of his land to mineral development companies. Alaskans should also
Two years of legal arguments about who should be eligible for payments ensured before the first checks were distributed to Alaskans. The original configeration was that every adult Alaska resident would get $50 for every year of residency since Statehood in 1959. In 1982, the US Supreme Court ruled this unconstitutional because two lawyers who had been in the state for only a short while felt it was unfair that people who had invested decades in the state should get more than they did. Due to the Zobel v Williams case, a lot of people who had no intentions of remaining Alaskans became eligible for the PFD, which has undoubtedly suppressed the value of the Fund over time as a lot of PFDs go to military families who no longer live in the state, but still claim residency.
The corpus of the Permanent Fund is protected by law, but the State also maintains the Constitutional Budget Reserve (CBR), a separate savings account established in 1990 after a legal dispute over pipeline tariffs generated a one-time payment of more than $1.5 billion from the oil companies. The CBR is run similarly to the Permanent Fund, but the money from it can be withdrawn as loans to pay the state’s budget. While there were billions in the CBR at the end of the Palin administration, profligate spending by subsequent administrations has depleted it.
There have been a lot of tweaks applied during the subsequent 40 years, some of them good and some of them not. Dividends have ranged from a few hundred dollars to a few thousand dollars. Meanwhile, the State of Alaska has a multi-billion dollar budget that few Alaskans actually benefit from and a lot of us wonder why.
Getting the Short End of the Stick
So oil revenues come into the State of Alaska coffers and most directly go to State services. Twenty-five percent must be placed in the Permanent Fund which is invested, largely, in the stock market. The Permanent Fund Board does a good job and the corpus of the Fund has grown substantially. The earnings go into a special fund. At the end of the fiscal year, that fund is supposed to be cut in half. One half goes to the PFD program and the other half goes to the State of Alaska for operating costs and inflation proofing the Funding.
For most of the four decades of the PFD, this was automatic. The Alaska Legislature understood that the oil revenue really belonged to the people. Oil revenue ran about $60 a barrel for two decades and there was rarely any argument that the people were somehow defrauding the government of its due revenue. The State had enough money to pay its bills and the PFD did a lot to invigorate the economy of Alaska. According to a 2010 report by Institute of Social and Economic Research (ISER) authored by Scott Goldsmith, University of Alaska-Anchorage (UAA) Professor of Economics, while the dividend represents a small share of total person income for Alaskans, it has a significant impact on the economy. The 2009 dividend was only $1,305, adding 3% to average per capita income of $42,603.12. However it added $900 million in purchasing power to the economy, roughly equivalent to the total wages of state government or the retail trade sector. The PFD is like adding an entire new industry to the economy, which acts as a stabilizing force.
Goldsmith’s study showed that Alaskans view the PFD has a distribution of earnings, not a welfare program. Until 2016, when the Walker administration began messing with the distributions, Alaskans viewed the PFD as a permanent increase in their annual income, thus they would spend their dividend income much like they spend their ordinary income. While people do spend their dividends (particularly in high years) on durable consumer goods and vacations, a significant portion of it goes to savings and debt reduction. It also helps to offset the high cost of living in a remote state where every consumer good is marked up with shipping costs. In other words, most dividend payments find their way into the Alaska economy to increase employment and income. Goldsmith estimated macroeconomic effects of this increase in purchasing power to be 10,000 additional jobs, 15-20,000 additional residents (who mostly come for the additional jobs), and $1.5 billion in additional personal income — in a state with about 700,000 people. This bolsters the stability of a resource-based economy which is inherently unstable.
The income flow from the dividend is independent of all the other sources of income coming into the economy, and this additional diversity provides stability when other sources fluctuate, Goldsmith said.
The equal distribution of the dividend to all residents and being treated as taxable personal income by the federal government contributes to a leveling effect on the distribution of income.
One thing it doesn’t seem to do, according to the ISER report, is provide significant “grubstake” to start businesses. This is probably owing to the relatively low dollar value of the annual distribution.
In other words, cuts to the PFD payments undermines the poor, who need it the most, while the relatively small amount of dividends prevents the better off from using them to establishes businesses that would further grow the Alaskan economy.
Not Universal Basic Income
Although the media loves to point to it as some sort of experiment in UBI, the PFD is far from that. The dividend establishes a floor below which the cash income of residents cannot fall, but it is not large enough by itself to provide a basic income. Nobody can live on $1300 a year in America, and certainly not in Alaska. The federal poverty guidelines of the U.S. Dept of Health and Human Services defined the poverty level for a two-person household in Alaska in 2009 to be $18,210.21. Programs providing “safety net” protections like Social Security, the Earned Income Tax Credit, unemployment insurance, and food stamps help lift people above the poverty income level.
The dividend is particularly important in rural parts of the state where the economy is largely a mixture of government cash-based transfers and subsistence activities and where wage-paying employment is scarce. Households are cash poor and the subsistence harvests can fluctuate dramatically from year to year. Under these circumstances the cash provided by the dividend is important primarily because it is predictable.
I need to get my fishing boat repaired before the commercial fishing season. My family gets $8000 in PFDs in October. Can you do the repairs now and I’ll pay you then? A fictional conversation that happened a hundred times this year.
Not An Entitlement
A lot of Alaskans have a lot of unfounded ideas of what the Permanent Fund is and how it works. This is partially the fault of Alaskans who know how it works not being clear on the subject. Thus, an entire generation of Alaskans has been raised receiving a thing they call a “dividend” annually since birth without necessarily understanding the purpose for which it was created. You’d think the word would be enough, but in our economically-illiterate era, most people just gloss over why we call it a “dividend”. It’s not an entitlement. It really is an inadequate payment for our resources.
It’s also been most of a generation since Alaskans paid for state services through taxes because petroleum revenues have covered all costs. This has fostered a distorted sense that the role of the state is to provide public services at no cost and also to hand out cash to all citizens. Some people think of Alaskans as “trust fund babies”. Furthermore, because there are no personal taxes and receipt of the dividend carries no public responsibilities, the two together undermine the sense of community that comes from the need to collectively choose and fund public services, while it also fosters a disconnect between government and residents, leading to a deterioration of the quality of government.
You see that in ever-increasing State budgets amid screams that we’re not paying enough. We pay substantially more per student in education than any other state — and we score in the bottom three of states. That’s just one example of where our costs are high and our product is poor and the State insists it’s a problem of inadequate funding. And Alaskans believe their propaganda because they never google “What’s the statewide funding for education in the most highly rated state and what’s the statewide funding for education in Alaska?”
Since they don’t do that, they scream we need to cut the divididend to pay for the schools, when the schools are overfunded and simply failing. We don’t address the failure problem by throwing more money at it when they’re already overfunded.
Media Obfuscation
Then we’re told by Alaska media that the Permanent Fund will be out of money soon. But that’s not true either. The corpus of the Permanent Fund is protected by the Constitution. It’s fine and still growing. The problem is that the State of Alaska has been taking a larger percentage of the Earnings Reserve, so that there is not enough money in that account to pay both the dividend as the law requires and State services. When this problem started in the low-oil price years of the Walker administration, a state court judge ruled the governor could set the amount of the annual dividend however he chooses to — which is anathema to what Hammond and his fellow lawmakers envisioned. This allowed Governor Bill Walker to make the earned dividends of the Permanent Fund part of the budget-making process and turned it into a political football.
What’s really needed is a long-range fiscal plan that forces the Legislature to stop making hasty decisions. Cutting the dividend has allowed them to continue to spend money without having that plan in place. It allows them to pretend to balance the budget on the backs of low- and middle-income Alaskans.
I believe there is enough money for a statutory dividend payment without imposing taxes on Alaska, but the Legislature needs to grow a pair and cut the budget, which is nearly double what it was when Sarah Palin left office.
This is not a revenue problem. It’s a spending problem.
The collectivized ownership of our mineral wealth has not worked out well for individual Alaskans, who still struggle to start and grow business because they can’t leverage their land’s true value for that purpose like people in the Lower 48 do. The dividend payments took some of the sting away, but we go back to a colonial economy if even that’s removed from the people’s grasp. And the State of Alaska promises to replace it with…government services that most of us don’t qualify for and therefore get zero benefit from. And then, when their overspending continues and they consume the entirety of the Earnings Reserve, they’ll demand Alaskans pay an income tax. You can do the math. Right now that would be about 30% of our income, but in a couple of decades, at current rates of government growth it would be at least 60% of our income.
I don’t kow about you, but I can’t live on 40% of what I make.
Lela Markham is an Alaska-based novelist and commentator who believes collectivization always has negative long-term consequences.
Catch my latest novel - Four Seasons of Winter - just dropped today.
Thank you, fascinating information about Alaska.