AN ECONOMIC BOOM IN THE LAST FRONTIER
Alaska’s first decade of statehood was a bumpy one. Speckled with natural disasters including the Good Friday Earthquake (1964) and the Fairbanks Flood (1967), the Last Frontier was battling the elements and had limited economic prospects. Although the state’s first substantial commercial oil field was discovered in 1957 on the Kenai Peninsula, oil had yet to make a significant financial impact on the state. Main economic activities of the 1960s were related to fishing, timber, and mineral extraction, as well as a large federal military presence.
One critical change statehood brought was how Alaska’s resources and land would be managed, a topic worth its own discussion, but nevertheless a segue into how the permanent fund came to be. The U.S. Congress, under the Statehood Act (U.S. Public Law 85-803), permitted the State of Alaska to claim over 40 million hectares (approximately one quarter of the state’s land) of vacant, unappropriated federal land within its borders. One of the state government’s selections was a piece of land bordering the Arctic Ocean on the northwest coast of Alaska. The claim opened up the possibility for exploring resources in this area, and it didn’t take long for companies to begin test drilling for oil.
The 1968 discovery of oil in Prudhoe Bay and subsequent lease sale of subsurface rights to 179 tracts of land on the North Slope in 1969 would forever change Alaska. To put things in an economic context, the state’s entire state budget in 1969 was less than $200 million. The bonus lease sale that same year generated over $900 million in revenue, practically overnight. A booming population (approximately 226,000 in 1960 compared to 282,000 in 1969) had left the state with growing needs, and now it suddenly had the funds to do something about it.
In an interview with Alaska Public Media, Eric Woolworth, Alaska’s Commissioner of Revenue under Governor Bill Egan, recalls the relief the influx of cash brought the state. As he describes, “the state of Alaska in the late 60s was close to being a basket case, fiscally … limping from one session to another with huge unmet needs.” Ideas for how to allocate these new revenues included a bonus for all Alaskan citizens, improving public facilities, expanding health and welfare efforts and even transferring the state capital. Governor Egan and the state’s sixth legislature decided to place the lease funds into the state’s General Fund and use a portion of the funds to fill gaps in areas including education, infrastructure and public services. These fiscal decisions sparked debate, with some Alaskans feeling the cash windfall had been frivolously ‘wasted’. Resource management would dominate Alaska’s planning and policy discussions over the next decade.
Milestones of the 1970s included the Alaska Native Claims Settlement Act (1971), the Trans-Alaskan Pipeline Authorization Act (1973), and the construction of the Trans-Alaska Pipeline (1975-1977). With oil production and the subsequent revenues imminent, it was decision time for the state. One major contender being discussed was a dedicated permanent fund for generating income into perpetuity. Supporters of this approach believed such a fund would help create a sustainable way to generate future income for the state, if and when oil revenues ran out. Those in favor of a permanent fund also supported the idea of limiting the amount of oil revenues sent to the legislature’s budget, thus preventing excessive or unnecessary spending.
A ballot proposition was placed before voters in the 1976 General Election. By a margin of 75,588 to 38,518, a Constitutional Amendment establishing the Permanent Fund (Alaska Constitution Article IX, Section 15. Alaska Permanent Fund) was approved, but the state’s fiscal debate was far from finished.
The Permanent Fund received its first oil revenue deposit of $734,000 on February 28, 1977, and the focus then shifted to how to best manage the Fund. Elected officials would debate the topic for the next few years—one side in favor of short term investments being managed like a development bank for the state, the other side in favor of a more long term view, as an investment fund.
With steady flowing oil funds, discussions around the Fund’s investment strategy also brought debate about the state’s existing income tax. In a presentation to the Fairbanks Chamber of Commerce in the fall of 1979, Governor Jay Hammond explained:
Income taxes now provide about the only source of recurring income to pay for ongoing state government. If we eliminate that major source, we must further invade our one time oil-wealth. This wealth should either go into our savings account and earn annual interest which we can spend in good conscience or capital construction projects which incur no new operational costs.
Governor Hammond would eventually shift his position on the issue, and in 1980 the legislature repealed the state’s individual income tax. That same year, Governor Hammond signed the Permanent Fund Act creating the Alaska Permanent Fund Corporation (APFC) to manage the Permanent Fund as a long term investment, placing a list of permissible investments into state law. The legislature originally approved the Permanent Fund Dividend (PFD) program to payout dividends to residents based on length of residency. Residents of at least 18 years of age were eligible.
The Permanent Fund and dividend program of today are somewhat modified versions of what was created in 1980. The payment based on years of residency was deemed unconstitutional, the legislature made significant changes to how the Fund could be invested—eliminating the investment list from state law and charging a governor appointed Board of Trustees with managing the Fund’s investments, and the dividend payout is now calculated using the net income averaged from the fund over the previous five fiscal years.
The state’s first dividend checks were distributed on June 14, 1982 in the amount of $1,000. Worth noting, these first payments were not actually made from Permanent Fund income, but rather from surplus oil revenues.
As of May 31, 2019, the Fund’s total value was roughly $64.3 billion with $45.3 billion in principal (unspendable) funds and $19 billion in the earnings reserve account (available for appropriation). What remains unchanged in the Fund’s four decades of existence is the continued debate over what is the best way for the state to manage these resource revenues per the Alaska Constitution, Article VIII – Natural Resources, Section 2 – General Authority, while contributing to “the maximum benefit of Alaska’s people.”
Alaska Constitution Article IX, Section 15
Section 15. Alaska Permanent Fund
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.