Fund is proof Alaskans can do something right

May 7, 2011 

Alaskans seem glum these days. Legislators are fighting over the budget and oil taxes. There's declining oil production. Our big gas pipeline dream seems down the tube.

With all that, let's ponder something we can feel really good about.

That is our Alaska Permanent Fund. It's now back above $40 billion in market value and throwing off well more than billion dollars a year in cash income, not even considering gains in value. The fund took a big hit in the recession, dropping a third in value like our own 401(k)s, but it's now recovered the lost ground, and more.

Let's give credit to the good folks we've hired to manage the fund. It has been so successful that we take it for granted.

How could we have done this so well but mangled other things so badly, like our gas pipeline policy? Remember AGIA? Most of us want to forget that now.

Enough about those things. Let's look back 35 years to when the Permanent Fund was conceived.

Interestingly, its creation wasn't a sure thing. The idea of saving part of our natural resource revenues has been around since the 1960s when Cook Inlet oil production started, and Gov. Keith Miller first spoke of a savings fund for North Slope income in 1969, although he thought of it as an economic development fund.

Alaskans are a cautious bunch, though, and the idea of walling off some of our income and limiting our options, such as for emergencies, was not received well. The memory of the 1964 earthquake, which wrecked many Alaska communities, was still fresh in people's minds.

Further, the state was virtually broke in 1975 and 1976 before the pipeline was finished and the oil fields started. The bills were paid through a forced loan from the oil companies (the Legislature had enacted a tax on oil reserves that was credited against future severance taxes -- in effect, interest-free financing.)

It wasn't easy, but a group of legislators and then-Gov. Jay Hammond overcame the doubts. The Legislature finally approved creation of the Permanent Fund in 1976. Voters adopted it later that year as a constitutional amendment.

Big decisions were still pending, however. One was how the fund was to be managed -- as a fund for economic development financing or as an endowment, like a trust fund.

The debate over the Permanent Fund's management in 1979 and 1980 is now largely forgotten but it was intense. The Senate passed a bill requiring it to be used in development projects, admittedly higher-risk but intended to diversify the economy. Rural legislators particularly wanted this. The House wanted, basically, a trust fund, invested in safe, out-of-state securities. The trust concept won, but by a razor-thin margin.

Had the vote gone the other way, I believe our Permanent Fund would be long gone, dissipated in politically popular big projects. In hindsight, Alaskans owe a big debt to those legislators in 1980 who had the courage to resist the intense lobbying of the big-project crowd.

The dividend, interestingly, came later. Hammond had always been intrigued with the notion of giving Alaska citizens a personal stake in the fund, partly to safeguard it from political pressures. But the idea of giving away money through a dividend didn't sit well with legislators or the public.

It took considerable arm twisting by Hammond, and real threats of vetoes of capital projects, to get the bill authorizing the dividend through the Legislature. The original proposal was to award dividends based on length of Alaska residency but this fell afoul of the courts because it treated residents differently. The law was changed so any Alaskan with two years' residency gets the dividend.

The one decision not made was what to do with the fund's earnings, now well over a billion dollars a year.

When voters approved the constitutional amendment in 1976, they bought into the idea that the Permanent Fund was to save a portion of our oil revenues to help sustain public services when the oil ran out. The prediction then was that the oil would be gone by 1999 and we'd have rolled up the pipeline by now.

A decade later, the oil fields are still going strong, although production is now declining.

We still haven't decided what to do with the income and that's OK for now. Part of the income, of course, is now used for the dividends and part of it is invested in the fund principal, which can't be spent. The rest just accumulates.

The Legislature can change this at any time but there hasn't been a need to -- the state's overall revenue picture looks pretty good for the short term. Thanks to high oil prices, we're running a big budget surplus and we have about $12 billion in other savings accounts, in addition to the $41 billion Permanent Fund.

Thanks to the foresight of Hammond and the Legislature in the 1970s and the good management we've had for the Permanent Fund, we're in a good position.

Let's also give credit to Elmer Rasmuson, the founder of National Bank of Alaska (now Wells Fargo Alaska), who was the first chairman of the fund's board of trustees in 1980. Rasmuson, a conservative banker, established the fund's cautious management policies that have served it so well and kept up public confidence.

Now back to those other, sticky things. We need to get more oil flowing through the pipeline. We need a gas pipeline. We need the Legislature to agree on a capital budget.

What a contrast, then and now.


Tim Bradner writes for an Alaska economic reporting service. He also consults for private clients and writes for business publications. His opinion column appears every month in the Anchorage Daily News.

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