The Alaska Permanent Fund: A Model of Resource Rents for Public Investment and Citizen Dividends
by Alanna Hartzok
This article was published in the Spring 2002 issue of Geophilos, a publication of the Land Research Trust. For further info, email: metaman@compuserve.com.
It was also one of the five winning essays of the There Are Alternatives Project of the McKeever Institute of Economic Policy Analysis.
Summary:
Wars are often fought over the ownership and control of land and natural resources. Inequitable ownership and wasteful, unsustainable use of the earth's resources are root causes of both the unjust wealth gap between the rich and the poor and the depletion and collapse of our natural resource base.
This paper describes the form and function of the Alaska Permanent Fund as a model governmental institution for collection and distribution of natural resource rents, particularly oil, and makes suggestions for improvement of the Fund. It also presents an analysis of fundamental issues regarding natural resource and territorial claims and urges the establishment of a Global Resource Agency to collect and distribute transnational resource revenues.
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If you were a third grade student in the state of Alaska, one day in school you would play a game called Jennifer's Dilemma. The game tells the story of a little girl who has discovered a box of valuable coins. Her dilemma is deciding what to do with an unexpectedly large amount of money. It is a way for young children to learn about their own yearly windfall fortunes from the Alaska Permanent Fund. In the year 2000, each one received a dividend check for nearly $2000.
The Alaska Permanent Fund1 is a case study in a new concept of the role of government - that of agent to equitably distribute resource rents to the people, thereby securing democratic common heritage rights to land and natural resources.
Purchased from Russia in 1867, Alaska became the 49th state in 1959. Under the Alaska Constitution (Article VIII. Section 2. General Authority) all the natural resources of Alaska belong to the state to be used, developed and conserved for the maximum benefit of the people. Ten years after statehood the first Prudhoe Bay oil lease sale yielded $900 million from oil companies for the right to drill oil on 164 tracts of state-owned land. Compared to the 1968 total state budget of $112 million, this was a huge windfall.
By legislative consensus, the original $900 million was spent to provide for basic community needs such as water and sewer systems, schools, airports, health and other social services.
Although the oil fields were proving to be the largest in North America, Alaskans came to agree that a portion of this wealth should be saved for the future when the oil runs out. In 1976 voters approved a constitutional amendment, proposed by Governor Jay Hammond and modified by the legislature, which stated that at least 25% 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.
The Alaska Permanent Fund was thus established as a state institution with the task of responsibly administering and conserving oil and other resource royalties for the citizenry.
There are two parts to the Fund: principal and income. The principal is invested permanently and cannot be spent without a vote of the people. Fund income can be spent, decisions as to its use being made each year by the legislature and the Governor.
The Fund was established as an inviolate trust, meaning that the principal of the Fund is to be invested in perpetuity. The Fund thereby transforms non-renewable oil wealth into a renewable source of wealth for future generations of Alaskans.
Oil started flowing through the Trans-Alaska Pipeline in 1977, at the time the world's largest privately financed construction project. In February of that year, the Fund received its first deposit of dedicated oil revenue of $734,000.
All income from the Permanent Fund was to be deposited in the state general fund unless otherwise provided by law. What to do with the earnings generated and how they would best benefit the present generation of Alaskans engaged Alaskans in debate for the two decades following the establishment of the Fund.
Like Jennifer with her box of coins, the dilemma was what to do with the growing income from the Fund. Would it best be saved for the future or managed as a development bank for Alaska's economy? After a four year debate the Alaska State Legislature decided in 1980 in favor of a savings trust for the future. The Alaska Permanent Fund Corporation was created to manage the assets of the Fund.
The same year the Legislature also created the Permanent Fund Dividend Program, retroactive to January 1, 1979, to distribute a portion of the income of the Permanent Fund each year to eligible Alaskans as a dividend payment. By the end of 1982, after a couple years of wrangling with the U.S. Supreme Court over constitutional details, all residents of Alaska - every woman, man and child - who applied for and who were found eligible (must be at least one-year resident) received their first dividend which was $1000. This was the historic beginning of an annual program paying to Alaskan citizens a fair and equal share of the wealth from publicly owned resources.
In 1987 the Permanent Fund Dividend Division was created within the Department of Revenue to consolidate responsibilities for the administration and operation of the dividend program. Through the dividend distribution program, the Fund puts more new money into the state's economy than the total payroll of any industry in Alaska except the U.S. military, petroleum and the civilian federal government. Compared to the wages paid to Alaskans by basic industry, dividends make a greater contribution than the seafood industry, construction, tourism, timber, mining and agriculture. For a considerable percentage of Alaskans, the dividend adds more than 10 percent to the income of their family. This is particularly true in rural Alaska.
Those who received dividends each year from 1982 - 2000 have received a total of $18, 511. There were 582,105 citizens who received a total of $1,143,172,725 in dividends in the year 2000, which amounted to an individual dividend of $1963 per person. Overall, the dividend program has dispersed more than $10 billion into the Alaskan economy. The principle of the Fund was nearly $26 billion as of June 19, 2001.
There is strong citizen interest in the Fund's operation and investment activities. Earnings of the Fund undergo special public scrutiny since any expenditure of such earnings must be subject to the legislative appropriation process. Beautifully designed and printed literature is available which describes in detail the various components of the Fund. An Annual Report is distributed each year. Under the policy guidance of the Fund's six trustees and the executive director and staff selected to execute it, there has developed an extensive accountability program and open meetings with opportunity for citizen participation.
The Alaska Permanent Fund Corporation website (www.apfc.org) keeps current all investment and distribution activities of the Fund. The history of the development of the Fund, its incorporation, details concerning its management, along with up-to-date information on the Fund portfolio and dividend pay-out amounts can all be found on the website.
Also posted therein are lesson plans that can be downloaded for teachers to use in their classes such as Jennifer's Dilemma, other teaching stories, and puzzles and games to further education and interest in the Fund. From the website one can email any questions and receive a direct reply from a knowledgeable Fund trustee or employee.
The Alaska Permanent Fund is a well-managed, transparent and democratic institution. It is a remarkable pioneering model of a fair and effective way to secure common heritage wealth benefits for the people as a whole. While undoubtedly an institution worthy of replication worldwide, there are, however, aspects of the Fund which upon close examination reveal the beginnings of another dilemma.
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