The Opportunity Costs of the Alaska Permanent Fund Dividend

The Alaska Permanent Fund was established by the State of Alaska in 1976 to save a portion of windfall revenues resulting from the discovery of the large Prudhoe Bay oil field. The Permanent Fund Dividend program, established in 1982, pays out about half the earnings of the Fund to each resident. The dividend was intended to both create a constituency for sound management of the Fund, and directly distribute the State’s resource wealth to its citizens. The dividend has achieved great popularity, and has succeeded in allocating resource rents to boost jobs and personal income, and reduce poverty, while the Fund itself has grown. It has also protected the Fund from frivolous practices. But other sovereign wealth funds without dividends have also prospered. There have been trade-offs associated with the dividend, some of which have become more obvious with the Alaska economy grappling with the impact of chronic low oil prices. These include foregone earnings, political complexity, income inequality, and the question of public vs. private spending.


12).
Through 2016 about $21 billion has been paid out in annual amounts ranging from about $300 to $2100 per Alaskan (Note 13). As of May 2017 the fund had grown to $55 billion from royalty deposits (Note 14), investment earnings, and additional deposits by the Legislature in years of surplus state General Fund revenues (Note 15).

The Achievements of the Dividend Program
Judging by its popularity and growth the Alaska Permanent Fund Dividend program appears to have been successful. It is not difficult to understand how giving away money would be received (Note 16).
The money has been used for the spectrum of college to retirement savings, to consumer durables and non-durables, to essentials and non-essentials.
As Hammond predicted, this has created a considerably strong constituency to defend the Fund, "… to encourage contributions into the investment account and to protect against its invasion by politicians by creating a militant ring of dividend recipients who would resist any such usage if it affected their dividends" (Note 17). The other associated result Hammond desired was to maximize returns from resource wealth.
In 1999 an advisory ballot initiative asking whether Permanent Fund earnings should be used to balance the budget, after paying dividends and inflation-proofing, was opposed by 83 percent of the electorate. As Goldsmith pointed out, "The fact that the governor called for an advisory vote on this question is particularly significant because the legislature already had the authority under law to appropriate not only the funds in the contingency account, but all the earnings of the fund" (Note 18) (Note 19).
To date no substantial amount of Fund earnings has been spent other than for dividends (and inflation-proofing) (Note 20). To do so would reduce dividends.
Hammond also correctly anticipated that the dividend would promote healthy resource development per the following criteria: Is it environmentally sound? Do most Alaskans want it? Can it pay its own way and not require state subsidies? Does it provide maximum benefit to the people (Note 21)?
Hammond believed these criteria would be satisfied and citizens would support development when resources were profitable and paid royalties, which enriched the Fund and enhanced dividends.
The Fund has also contributed benefits to the economy. Goldsmith and Wanamaker found that in 1988 the dividend contributed 4.6 percent of personal income and 2.4 percent of total jobs (Note 22).
In addition, as Alaska wrestles with budget issues surrounding low oil prices, in analyzing the short-run impacts of various revenue options Knapp, Berman, and Guettabi found that dividend cuts (as opposed to budget cuts, new taxes, or cuts in state jobs or salaries) would have the greatest short-run impact on individuals' income (Note 23). Long-run impacts are discussed below.
Moreover, for rural areas, with high costs and low employment opportunities, and for other low-income www.scholink.org/ojs/index.php/jepf Journal of Economics and Public Finance Vol. 3, No. 3, 2017 433 Published by SCHOLINK INC.
Alaskans, Berman and Reamey found the dividend reduced poverty rates for 15,000-25,000 Alaskans (out of a population of about 730,000) from 11 percent to 9 percent (Note 24) (Note 25).
Goldsmith attributes the success of the Fund to several additional factors in addition to the dividend (Note 26): - The Fund was set up as a savings account to maximize long-run earnings that could be available for any purpose, rather than an economic development or infrastructure account. Investment was driven by economic rather than political factors (As Groh points out, pursuant to the run-up in oil prices in 1979, the state expanded economic development programs, which circumvented the need for the Fund to play that role) (Note 27). - The Permanent Fund Corporation was set up as a separate institution whose sole purpose was to manage the Fund. It is highly respected.
-The Fund has invested very little in Alaska.

The Fund at Low Oil Prices
Alaska North Slope oil production peaked in 1988 (Note 28) at about 2 million barrels per day (Note 29). Since, production has been slowly declining. Now it is about at one-quarter of peak (Note 30).
At the same time oil prices were slowly increasing, as to offset the state revenue decline from the production decline, and oil revenues continued to provide a large share of the budget, nearly 90 percent (Note 31).
Oil prices had a precipitous rise starting in 2008, and began an even more precipitous decline starting in At the same time the state economy is in recession, due in part to the impact of low oil prices on the state's petroleum sector, a significant part of the economy, and due in part to reduced state spending.
The state's bond rating has been downgraded, attributable to the recession, reduced state revenues, and the absence of a sustainable budget plan (Note 36).

Opportunity Costs
While much has been written about the success of the dividend program, less attention has been paid to the trade-offs inherent with the plan. Within Alaska, which would attract the most concentration, as Goldsmith observed, "since most Alaskans view the dividend as a distribution of their wealth, they see no reason to study it as a phenomenon, and actually look on any attempt to study the dividend as a potential threat to its existence" (Note 37).
Outside Alaska most of the emphasis has been on the dividend as a model of basic income guarantees (Note 38).
With that background, the focus will be to examine in retrospect the issues that have been presented by the dividend, particularly what alternatives to the dividend might have meant. Some of these become manifest in the context of an economy that has been significantly weakened by a sudden large unexpected drop in oil prices, a relatively recent occurrence. The following will be examined in that context: -Foregone returns on dividend amounts -Political complexities presented by the dividend -Income disparity -Private vs. public spending Some of these issues were briefly cited by Goldsmith (Note 39) and Knapp (Note 40). Additional concerns they mentioned, not addressed here, include: -The dividend is taxed by the federal government.

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The perception fostered by the dividend reduces federal aid to the state.

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The dividend creates a culture of consumption and dependence on government.
-The dividend subsidizes wages for Alaska employers, who can reduce what they need to pay to attract workers from outside by the amount of the dividend. other revenues. There currently would be no budget problem, no reduction in bond rating, and some easing of the recession (albeit the dividend has elevated the baseline economy). Alternatively, the amount would have been available for counter-cyclical spending in times of low oil prices. In that regard the dividend has directly weakened the Fund.

Foregone Returns
Of course, Alaskans have been enjoying that money over the years. And as discussed above, zealous defense of the dividend protected the Fund from imprudent investing, or risky or politically motivated attempts at internal economic development, or runaway spending. And the dividend circulated in the Alaska economy.
But can it be said that sacrificing $80 billion preserved the Fund? And was it necessary, or the only way, to safeguard the corpus? How were intergenerational distributions affected?
Of the scores of sovereign wealth funds worldwide, Alaska is the only one that pays a dividend (Note   42). Yet without a dividend many of these other funds do not appear to be plagued by those problems.
They generally contain a professionally managed, well-diversified portfolio (Note 43).
As a counterexample to the dividend argument, Alaska can be specifically compared to Norway's Government Pension Fund Global (GPFG). The GPFG was established in 1998 for a very similar purpose to the Permanent Fund: to save petrodollars by maximizing investment returns.
The source of funds is the net cash flow from petroleum activities. Gross revenues include taxes and royalties, operating income and dividends from Norway's direct financial interest in the company Statoil (almost 70 percent), and the investment returns. Expenses include the direct investments and operating costs in Statoil's commercial petroleum activities (Note 44). Their fund is now worth nearly a trillion dollars, about twice as much per capita as Alaska (Note 45) (Norway was able to save 100 percent of its oil and gas money because it retained its VAT and personal income tax when the oil dollars started to flow).
GPFG's goal is to maximize return with moderate risk. It establishes benchmark indices, which it usually exceeds. Per its investment rules the fund may not invest in Norwegian securities or infrastructure or economic development (Note 46).
Between 1998-2016 the Norwegian fund has earned an average annual total return of 5.7 percent (Note 47). The Alaska Permanent Fund in the same period earned 6.8 percent. GPFG's lower return may be due, in part, to more conservative investment limits than Alaska (Note 48), an extensive list of investments and companies forbidden due to ethical concerns (Note 49), and currency fluctuations.
Norway is allowed to use up to 4 percent of the GPFG principal in its annual budget. In 2016 for the first time, owing to slumping oil prices and revenues, Norway appropriated about 1 percent of the GPFG fund's market value for its budget (Note 50), and 3 percent in 2017 (Note 51).
Both jurisdictions had high revenues during high oil prices. And though Norway had a broad-based tax, in both jurisdictions revenues were not sufficient to cover the budget during low oil prices. regard the dividend did not provide protection from using savings.
In summary, Norway, as an example, has managed to avoid all the pitfalls the dividend addressed without a dividend.
Moreover, since 2000 many of the oil-based sovereign wealth funds larger than Alaska (Abu Dhabi, Saudi Arabia, Qatar, Kazakhstan, Kuwait) have either increased the assets under management or earned returns at rates similar to Alaska (Note 52).
These economies, too, had surplus revenues at high oil prices, and increased spending accordingly (like Alaska). While it could be argued that those expenditures served the function of the dividend by keeping pressure off the fund, at low prices these jurisdictions are cutting budgets, but still making deposits into their funds while using some fund earnings (like Alaska). Accordingly, their funds have continued to stay even or grow even at low oil prices (Note 53).
Total sovereign wealth fund assets under management worldwide have increased from $1 trillion to $7 trillion between 2000 and 2015 (Note 54).
But that is not to say all sovereign wealth funds have succeeded. Many have not had significant growth.
The Alberta Heritage Savings Trust Fund, for example, has not increased in value in many years. This is attributable to many factors. The fund in Alberta had no rigorous deposit regime while government spending was increased, and money from the fund was directed toward local economic development in Alberta, capital infrastructure, and loans (Note 55) (Note 56).
Similarly, in Venezuela, money was taken from the principal for public spending (Note 57). In Texas, earnings from their fund are explicitly earmarked for education (Note 58). In Iraq money from the principal was diverted for food, electricity and oil infrastructure, and equipment for Iraqi security forces, civil service salaries and ministry budget operations (Note 59).
In these jurisdictions there was either no rigorous deposit process, the principal was available for spending, or earnings were used continually for internal purposes (infrastructure, economic development, general government spending). The former two actions could not occur under Alaska's structure with or without a dividend; the latter one could.
There are two other observations regarding the foregone income: First, Alaska may have avoided all the drawbacks the dividend was meant to circumvent, and accrued a larger current balance in the Fund, by paying out somewhat less than 50 percent of the earnings in dividends.
Second, should future dividends be reduced, or broad-based tax liabilities introduced, due to the consequences of past dividend amounts and foregone earnings, this may represent a front-end loading of the inter-generational distribution of the resource wealth. To the extent the state's future budget problems cause more Fund earnings to be used for the state budget and less for dividends, or result in the institution of a statewide property or personal income tax because the Fund balance is too low to cover the budget gap, past Alaskans may have received a greater benefit from the Fund than future ones.
Of course to the extent the dividend protected the Fund this will not be the case.

Politics
Financing a dividend at a time of budget deficits is problematic. While no clear consensus seems to be emerging about what the size of Alaska state government should be, there does appear to be conceptual agreement about how to pay for the Permanent Fund Dividend, and these are connected.
Up until now the money to pay the dividend has been isolated from the state budget. Only dividends were paid out of Permanent Fund earnings. And the budget to run government came from revenues, plus, recently, subsequent to the collapse in oil prices, draws from the CBR. Dividends and General Fund spending came from different pots, and were not in competition with one another.
With the CBR nearly depleted, since it is highly unlikely that budget cuts or new tax revenues will fill the entire gap, it is inevitable that part of government will be funded by Permanent Fund earnings. Earnings will be brought in as a revenue item, just like other General Fund unrestricted items, and be available for appropriation. The earnings will be allocated between running government and the dividend. And the dividend will be appropriated out of the total available revenues. At that point, the dividend becomes inextricably linked to the budget.
This will be a game changer. The total amount available for state spending and dividends will be fixed under legislative proposals to limit the annual draw to a set percentage of the Fund's total market value. It will be a zero-sum game. Funding the dividend will now require either de-funding something else or raising additional revenue.
The FY 2018 budget has $760 million for the dividend (Note 60). At the same time a proposed income tax, which passed the House but not the Senate, would have brought in about $700 million (Note 61).
Some taxes would come from out-of-state residents who work in Alaska, and there would be some income re-distribution. But many Alaskans saw that either as nothing more than paying taxes from themselves to pay dividends to themselves, or as some Alaskans paying taxes in order to give dividends to others.
However, some Alaskans have no problem with combining the dividend with an income tax insofar as they view the dividend not as a part of public spending, but rather as the annual distribution of their ownership share of the publicly owned resource.
In addition, the budget and dividend mechanism in using Permanent Fund earnings to fund both government and dividends presents risks at low oil prices; it increases the effect of oil price volatility.
Some ongoing state revenues would still come from oil taxes and royalties, which depend on oil prices.
Dividends would consist of a portion of the Permanent Fund earnings, which is independent of oil prices.
Under that mechanism, at low oil prices state revenues drop precipitously while dividends are unchanged.
At low prices the dividend takes up an increasing share of the limited revenues. tax). So paying the dividend means either bigger budget cuts (less public spending), higher taxes to pay for the dividend, or a higher earnings draw from the Fund, which threatens its sustainability.
Each of these options has constituencies that both favor and oppose each option. Many Alaskans now feel the main purpose of the Fund is not a savings account, but to generate dividends (Note 62). And like most entitlements, it is difficult to take back. The 2016 dividend veto mentioned above was not popular. That veto led to litigation challenging the Governor's authority to veto half the dividend appropriation, an effort to recall the Governor, and a decline in the Governor's approval rating.
The existence of the dividend in the debate has created divisiveness in the attempt to get to a long-run sustainable budget plan. As a result the CBR Fund has been drawn down, whose diminishment threatens the Permanent Fund (Note 63).

Income Equality
The State of Alaska owns about 24 percent of the acreage statewide, and much of the land containing North Slope oil leases. Its constitution calls for managing public resources for "the maximum benefit of its people". Governor Hammond often quoted that provision in promoting the dividend.
Article 1 of the Alaska constitution begins with a Declaration of Rights. Section 1 of the article contains Inherent Rights, and says, "… all persons have corresponding obligations to the people and to the State".
Median family income in Alaska was $83,000 in 2014, the fifth highest state in the country; half the families make more than that amount (Note 64). So frankly, does everyone need the dividend? If not, should everybody get it? Or could the part that goes to high-income people be put to better use? Are there more efficient ways to help lower-income Alaskans than paying the same fixed amount to everyone?
The Economic Policy Institute and the Center on Budget and Policy Priorities found that in Alaska the wealthiest 5 percent of households have incomes nearly 11 times higher than the poorest 20 percent, and that between the late 1990's and mid-2000's average income among the bottom 20 percent dropped 9.2 percent (Note 65). The poverty rate in Alaska is 9 percent and rising (Note 66).
There is no intrinsic reason why every citizen deserves the dividend. Much of the dividend is the result of the efforts of the body politic of previous generations.
Much has been written regarding the moral dimensions of income inequality. For example, Scalon has noted that income inequality: -… can give wealthier people an unacceptable degree of control over the lives of others.
-… can undermine the fairness of political institutions.
-… undermines the fairness of the economic system itself (Note 67).
In addition, the generally accepted laws of diminishing marginal utility of income and wealth suggest that as income increases, individuals gain a correspondingly smaller increase in satisfaction and happiness; re-distributing income from the rich to the poor raises the well-being of the poor by more than it reduces it of the rich. The quality of life of lower income people can be made correspondingly better without undue burdens on the higher income. Thus the policy of paying the same amount to everyone, with dividends being paid to higher income Alaskans, could be diverted to address the problems of income inequality and poverty. In addition to cash, this could take the form of housing, energy, food, health, and education, where the latter set can be delivered to multiple households more efficient.
Given the lower propensity to save by lower-income people, this could also result in an enhanced economic impact relative to the current program.

Private vs. Public Spending
In establishing the dividend Hammond wanted "to pit collective greed against selective greed," the former being personal interests, and the latter being public, where not all Alaskans benefited from state spending, and some waste is inevitable (Note 68).
The Permanent Fund, and the dividend, are originally products of surplus windfall revenues, surpluses relative to an existing baseline. Without the excess there could have been no savings account and derivative revenues. A choice between individuals receiving money now or public spending (either one limited to only a portion of Fund earnings) is a choice very few other jurisdictions could offer.
There are well-documented observations in behavioral psychology and economics regarding the partiality of instant vs. delayed gratification. The immediate reward can be visualized better, it comes sooner, and is more reliable to occur (Note 69).
In addition, there is the financial duress many households find themselves in. In a way, the "collective greed" never had a chance.
The "correct" size of government is always a subjective moving target. In his comments for announcing the size of the dividend in 2002, the commissioner of the Department of Revenue, Wilson Condon said: People for centuries have chosen government as the means to achieve the goals of an organized community, the delivery system for many of the needs of society such as schools, roads, justice and health systems … Everyone benefits from services delivered by government … Similarly, Cummine pointed out that Sovereign Wealth Funds (SWFs): … are first and foremost savings vehicles for the citizen body as a collective. Individuals have a right to benefit from this wealth but vis-à -vis their membership of the community, not in their capacity as private individuals. Even if private rights to this wealth are found to exist, such rights would be trumped by jointly held rights to this common wealth. This is reflected explicitly in the establishing documents of many SWFs, which conceive of SWFs as national savings funds set up to ring-fence capital to help meet long-term community liabilities (Note 70) (Cummine was actually arguing against the "anti-dividend posture" that dividends are consumption that should be invested, they dilute returns relative to being invested en masse, they belong to the citizens as a collective, and may impair the jurisdiction's ability to affect macroeconomic adjustments).
It is not a question of public spending undermining private enterprise; again, the capital for the dividend was earned by the government. The alternative perspective is that the dividend not a part of public spending, but rather the annual distribution of the ownership share of the publicly owned resource.
Public spending could nurture its own constituencies to protect the fund, and grow the economy, as well.
Moreover, the use of earnings to obviate an income tax could also have considerable support.
In their aforementioned study Knapp, Berman, and Guettabi found, relative to other fiscal options, that cutting the dividend would have a greater short-run impact on income (Their charge was only to look at the short-term). But they also said: Choices Alaskans make about closing the budget deficit would affect Alaska's economy and society in many important ways beyond the short-term economic impacts we estimated for this study. We should base our fiscal choices not only on their short-term effects but also on what they might mean for Alaska's economy and society over time (Note 71).
Over the long-run systematic cuts to services (health, education, safety, workforce training, transportation infrastructure and maintenance, fisheries management, etc.) could have impacts on the quality of life. In that situation, having caused reduced services, could the dividend itself have made Alaskans better or worse off?

Conclusion
The Alaska Permanent Fund Dividend is a unique program. It has shaped the distribution of petrodollars directly to citizens to a remarkable degree, and has protected the Fund from frivolous practices. The political temptation to spend on unsound economic development or infrastructure can be intense. In Alaska, beyond spending earnings, the value of the Fund can also be eaten away by not inflation-proofing, or borrowing from the Fund to pay off debts that may never be repaid.
The dividend has been an effective protector of the Fund because the citizens had a direct financial stake in its management. The absence of it would have required thorough safeguards: rigorous deposits,