This commentary argues that Alaska should change the formula for calculating its yearly Permanent Fund Dividend (Alaska’s basic income) to create more stable dividend payments.
Widerquist “Commentary: Let’s change the way Alaska Permanent Fund pays dividends,” the Alaska Dispatch, December 5, 2012
https://www.alaskadispatch.com/article/lets-change-way-alaska-permanent-fund-pays-dividends
Alaska distributed its yearly Permanent Fund Dividend (PFD) on October 4, 2012. The amount was disappointing, only $878—down from last year’s dividend of $1,174 and the smallest dividend since 2005. The 2012 dividend was only the second dividend in the last 20 years to be below $900, and it is well below the all-time highest dividend of $2,069 in 2008 ($3269 including a one-time supplement the state added to the 2008 dividend).
The PFD is a sort of a yearly, variable basic income, given to all U.S. citizens (men, women, and children) who fill out a form showing that they meet the state’s residency requirement for eligibility. This year nearly 650,000 Alaskans received the dividend. It is financed by the Alaska Permanent Fund (APF), which is a sovereign wealth fund owned by the state and financed in turn by the accumulated savings from the state’s oil exports. The dividend varies considerably from year-to-year because the amount is calculated from a complex formula averaging the last five years of returns to the fund. The dividend is down this year because of the poor performance of international stock and bond markets over the last five years.
Even this year’s small dividend will come to $4,390 for a family of five, and the dividend makes a big difference in the lives on many Alaskans. The dividend is one reason Alaska is the most economically equal of all 50 states. According to Russ Slaten, “the oldest applicant was 107 years-old, and the youngest was born minutes before the qualification deadline on December 31 of last year.”
According to Jeff Richardson of the Fairbanks Daily News-Miner, Alaskan retailers have seen a smaller-than-usual bump in sales around dividend time this year because of both the smaller changes and in the higher cost of fuel oil. The smaller effect on retail sales might also be partly attributable to the increase in people donating all or part of their PFDs to charities through the state’s Pick-Click-Give program that allows people to direct some or all of their PFD to the charity of their choice in a few steps on the internet. This year, 23,000 Alaskans gave more than $2.2 million through the program, four times as much as they gave in the first year of the program (2009).
The PFD has largely escaped the demonization given to many programs that promote equality, probably because it provides tangible benefits all Alaskans, rich and poor alike. According to Jeanne Devon, “Even those who gripe about it in theory don’t want to actually give up their own Alaskan ‘entitlement.’ It is our oil, after all.”
The yearly fluctuations in the fund do not signal a long-term threat to the PFD. The fund has had a healthy grown trend since its inception, and it continues today. The bigger worry for the future of the Alaska Dividend is gradual decline in the state’s oil revenues. The amount of oil flowing through the Trans-Alaska Pipeline System is getting dangerously close to the minimum level needed to keep the pipeline system open. Most of the state’s operating budget comes from oil exports, and the state budget is not well prepared for the loss of oil revenue. Gradual decline (or a sudden drop) in oil exports would put enormous pressure on the state budget and might inspire the legislature to divert returns currently used to financed the PFD toward regular government spending.
For more recent stories on Alaska’s PFD, see the following stories:
“Alaskans to get $878 in yearly oil wealth payout”
By Rachel D’Oro Associated Press, September 18, 2012
https://bigstory.ap.org/article/amount-annual-alaska-dividend-be-announced
“Smaller Alaska dividend check likely to disappoint … for good reason”
Carey Restino, Bristol Bay Times, Sep 20, 2012
https://www.alaskadispatch.com/article/smaller-alaska-dividend-check-likely-disappoint-good-reason
“Dividend set: Alaskans shouldn’t forget fund’s purpose”
Fairbanks Daily News-Miner Editorial Sep 18, 2012
https://newsminer.com/view/full_story/20186798/article-Dividend-set–Alaskans-shouldn%E2%80%99t-forget-fund%E2%80%99s-purpose?instance=home_opinion_editorial
“2012 Permanent Fund Dividend is $878”
SIT News Ketchikan, Alaska, September 18, 2012
https://www.sitnews.us/0912News/091812/091812_pfd.html
“Permanent Fund Dividend Lowest Since 2005”
Russ Slaten, Your Alaska Link, Sep 19, 2012
https://www.youralaskalink.com/news/Permanent-Fund-Dividend-Lowest-Since-2005-170382336.html
“With Alaska’s higher costs, dividends won’t go far”
Mark Thiessen, Associated Press, Sep 18, 2012
https://www.businessweek.com/ap/2012-09-18/with-alaskas-higher-costs-dividends-wont-go-far
“PFDs still good for business, but not like the glory days”
Jeff Richardson, Fairbanks Daily News-Miner, Sep 19, 2012
https://newsminer.com/bookmark/20198521-PFDs-still-good-for-business-but-not-like-the-glory-days
“Happy Socialist Money Grab Day, Alaska!”
Jeanne Devon, the Mudflats, September 19, 2012
https://www.themudflats.net/?p=33271
“By the numbers: Alaska Permanent Fund Dividend”
Eric Christopher Adams, The Alaska Dispatch, Sep 18, 2012
https://www.alaskadispatch.com/article/numbers-alaska-permanent-fund-dividend
“Alaskans donate $2.2 million from PFDs using Pick.Click.Give.”
Alaska Dispatch, Oct 06, 2012
https://www.alaskadispatch.com/article/alaskans-donate-22-million-pfds-using-pickclickgive
“Count the ways Alaskans spend their $878 Permanent Fund check”
Alaska Dispatch, Oct 05, 2012
https://www.alaskadispatch.com/article/count-ways-alaskans-spend-their-878-permanent-fund-check
“It’s time to cut state spending: The numbers show future has arrived”
Bradford Keithley, Fairbanks Daily News-Miner, Oct 07, 2012
https://newsminer.com/view/full_story/20385563/article-It-s-time-to-cut-state-spending–The-numbers-show-future-has-arrived?instance=home_opinion_community_perspectives
PFD program generates record amount for Alaska nonprofits
Anchorage Daily News, October 5, 2012
https://www.adn.com/2012/10/05/2652015/pfd-program-generates-record-amount.html
Alaska’s Permanent Fund Dividend (PFD) is volatile and uncertain reflecting the Alaskan economy, which—typical of resource-exporting regions—is subject to volatile commodity prices, fear that resource exports will soon run out, and hope that a new export boom could be about to begin. The dividend is likely to decline this year as more difficult news about the state’s finances comes out, but new drilling could bring the first increase in oil exports in years.
The PFD is the only existing basic income in the developed world. Each year it pays an equal amount in cash to all citizens who meet the residency requirement, but the amount varies each year. The PFD is funded by the returns to the Alaska Permanent Fund (APF), a pool of investments created out of savings from the state’s oil revenue. The APF accumulates investments each year as new savings are deposited into it, but its value fluctuates with the world economy. The Alaska Permanent Fund Corporation (APFC), the state-owned corporation that manages the fund, uses a complex formula to make the yearly dividend less volatile than the yearly returns to the fund, but the dividend still is rather volatile.
After reaching a high of $2,069 in 2008 ($3269 if the one-time energy rebate is added), returns over the past three years have been $1,305 in 2009, $1,281 in 2010, and $1,174 in 2011. According to a recent press release by the APFC, the dividend level is likely to decline a little more this year. APFC will designate $605 million for distribution as dividends this fall—nearly $200 million less than the $801 million it designated for dividend payments in 2011. Therefore the dividend might slip under $1000 for the first time since 2005. The exact amount of the dividend will be announced in a few weeks and dividends will be distributed in October.
The main reason for the decline is the poor performance of world stocks. Although the APF has recently moved some of its funds into real estate investments, which have been doing well, they have not done well enough to make up for poor stock performance. The APF finished its fiscal year on June 30th with a yearly return of 0.02%.
Some recent news has been troubling for the future of the dividend. As discussed in this column recently, Alaskan oil exports have been declining for 20 years, but oil revenue has so far been buoyed by rising oil prices. However, according to the Fairbanks News-Miner, the recent decline in oil prices has threatened the state’s budget. “To cover the state budget for the coming fiscal year, which begins July 1, oil prices must average at least $104 per barrel.” But oil prices have recently been as low as $100, a price that would put the state budget into deficit if it were to continue.
Reduced oil revenue does not immediately threaten dividends, but it will reduce new deposits into APF, which will have a negative effect on dividends over time. If the state finds itself in permanent deficit, it is constitutionally prohibited from spending the APF principal, but it has the authority to reduce or cancel the PFD and use APF returns for other purposes. Whether the state would have the political will to do so is uncertain. It would probably depend on whether popular opinion was more strongly against elimination of PFD or the reintroduction of state sales or income taxes.
Typical of a resource-exporting region, Alaskans live with the constant fear of lost resource revenue and with the constant hope that new sources of resource revenue will be found. Not long ago there was a great deal of talk about a new natural gas pipeline that might replace oil revenue when North Slope oil runs low. The recent decline in the price of natural gas has made such a pipeline less attractive in the near future.
The latest new hope in Alaska is for offshore oil drilling. According to Alex DeMarban of the Alaska Dispatch, Shell Oil is about to start exploratory drilling off the Alaska coast. Federal law makes offshore oil the property of the federal government rather than the various state governments. However, several states along the Gulf of Mexico have recently made an agreement with the federal government to share more than one-third of the royalties for oil drilled off their coasts. This agreement might be precedent setting. If Alaska can get a similar deal, offshore oil will prove lucrative for the state and for the PFD, but not as lucrative as on-shore oil has been.
For more on these issues see the following links:
Alex DeMarban “Will offshore oil development in Alaska’s Arctic make the state rich? Don’t count on it.” The Alaska Dispatch, July1, 2012:
https://www.alaskadispatch.com/article/will-offshore-oil-development-alaskas-arctic-make-state-rich-dont-count-it
The APFC’s press release on its performance for the 2012 fiscal year (Permanent Fund flat for Fiscal Year 2012) is online at:
https://www.apfc.org/home/Content/pressroom/pressStory2009.cfm?story=Permanent%20Fund%20flat%20for%20Fiscal%20Year%202012&s=1
“Volatile stock market hinders return for Permanent Fund”
KTOO News Department, August 2, 2012. Online at:
https://www.ktoonews.org/2012/08/02/volatile-stock-market-hinders-return-for-permanent-fund/
“Alaska Permanent Fund’s 2012 investments flat, PFD payout smaller”
Alaska Dispatch, Aug 2, 2012
https://www.alaskadispatch.com/article/alaska-permanent-funds-2012-investments-flat-pfd-payout-smaller
Becky Bohrer, “Alaska Permanent Fund dividend likely to shrink this fall”
The Associated Press, Aug 02, 2012
https://newsminer.com/view/full_story/19671261/article-Transfer-into-Alaska-Permanent-Fund-dividend-account-smaller-than-2011?instance=home_news_window_left_bullets
Title: “Government intervention in the American oil industry?”
Subject: Bill O’Reilly and Lou Dobbs, two conservative commentators on America’s ultra-conservative Fox News Network, talk favorably about an Alaska-style dividend financed by fees for oil drilling.
Date: February 24, 2012
Available from: Fox News Network
Available at: https://www.foxnews.com/on-air/oreilly/index.html#/v/1472237953001/government
Alaska’s basic income is cursed with interesting times. The Permanent Fund Dividend (PFD) is a small, variable basic income given yearly to every Alaskan who meets the state’s residency requirement. The size of the dividend is determined by several different factors, all of which are facing increased uncertainty and possibly moving in different directions.
The PFD is financed not by current oil revenue, but by past oil revenues that have been saved and invested in the Alaska Permanent Fund (APF). The size of the dividend depends on the returns to the fund’s investments and on the size of the fund, and the size of the fund in turn depends on the international market price of oil, the amount of Alaskan oil sold on the international market, and the tax rate on oil companies selling Alaska’s oil. Those four factors (among others) affect the size of the dividend, and all of them seem to be moving in different directions and facing increasing uncertainty right now.
Oil prices and returns to the fund’s investments have been high recently, helping bring the APF’s principal to record high levels. According to Amanda Coyne of the Alaska Dispatch, the fund ended March with $41.5 billion-the highest month-end figure to date. The state is expected to deposit nearly $1 billion into the APF this year. But while oil prices are high, oil exports from Alaska are declining; the governor of Alaska is pushing for lower taxes on oil exports, making it easier and more lucrative for countries around the world to import and export oil to and from Alaska from overseas using shipping services similar to Plexus Freight (www.plexusfreight.com). However, the rate of return on the APF’s investments is facing increased uncertainty in the next few years.
To begin, consider the APF’s rate of return. According to Pat Forgey, of the Juneau Empire, executives of the Alaska Permanent Fund Corporation (APFC) expect lower earnings for the rest of this year, and perhaps for several years, thanks to the outlook for stocks, bonds, and real estate. Alaskans have come to expect a very healthy return of 8 percent or more, but Forgey quoted Greg Allen, of the advisory firm Callan Associates, “Getting a 5 percent (real) return is going to require people to take more risk than they’re used to.” The APFC has a strong responsibility to avoid unnecessary risks with the people’s APF, and so they are likely to stick with a more conservative investment strategy. Lower returns will translate into lower dividends over the coming years even if oil revenues remain constant.
And oil revenues are not likely to remain constant. Alaska’s oil exports (measured in barrels of oil) have been gradually declining for 20 years, but rising oil prices have kept the state’s oil revenues up. The increase in oil prices in the first months of 2012 have been an enormous help to the state’s fiscal position. Oil revenues have also been increased by higher tax rates on oil companies, enacted in 2008. But the gradual decrease in the number of barrels exported each year will sooner or later outstrip the effect of higher revenues per barrel of oil, and the effects of the decline might be felt sooner rather than later.
According to the Fairbanks Daily News-Miner state projections indicate that declining revenues could put the budget into deficit within the next three years. For most states a budget surplus with a possible deficit three years off would be a great fiscal position. But Alaska is used to budget surpluses, and because oil is by far its main source of revenue, any decline in oil output is worrying.
Alaska governor Sean Parnell has responded to the prospect of declining oil exports by asking the legislature to decrease oil taxes. The idea is that lower taxes will encourage greater oil exports. The difficulty with this strategy is that to increase oil revenue lower taxes would not only have to increase oil exports but increase them so much that the greater number of barrels exported makes up for the smaller revenue on each barrel. It’s a questionable strategy that has certain benefits only for oil companies. Other oil exporters with high oil taxes find oil companies willing to drill and sell it. There are other things the state could do to encourage greater oil exports, such as introducing use-it-or-lose-it leases. Current law allows oil companies to lease the right to drill for oil in a certain area and then choose not to do so. Many leases today are simply sitting unused.
In sum, at the moment we have: oil prices up; returns on investments up (for now); oil taxes probably going down; and oil exports down. All that could change, in the short and medium term. The only certainty is that oil exports will eventually decline over the long term, because there is only so much oil in Alaska. It seems that the downsides are looking larger than the upsides at the moment, but I make no prediction of whether the APF and PFD will be up or down in the next few years.
-Karl Widerquist Tel Aviv, May 2012
Recent articles on the APF & PFD include:
Forgey, Pat (Feb. 24, 2012) Juneau Empire, “Permanent fund warned of lower earnings”
https://juneauempire.com/state/2012-02-24/permanent-fund-warned-lower-earnings
Pat Forgey (February 23, 2012) Juneau Empire, “Permanent Fund to continue securities lending: Alaska protected from risks, advisers tell fund trustees”
https://juneauempire.com/state/2012-02-23/permanent-fund-continue-securities-lending
Pat Forgey (February 23, 2012) Juneau Empire, “CIO suggests new permanent fund options: Investment chief Jay Willoughby says state should capitalize on fund’s strengths”
https://juneauempire.com/state/2012-02-23/cio-suggests-new-permanent-fund-options
Maureen Farrell (February 29, 2012) CNN Money Markets, “Alaska’s oil windfall”
https://money.cnn.com/2012/02/29/markets/alaska_oil/
Amanda Coyne (Apr 20, 2012) “Alaska Permanent Fund makes a comeback as markets rebound,” Alaska Dispatch.
https://www.alaskadispatch.com/article/alaska-permanent-fund-makes-comeback-markets-rebound
Kevin Olsen (April 23, 2012) “Alaska Permanent Fund nets 1.9% return over 9 months”
Pensions & Investments (PI online):
https://www.pionline.com/article/20120423/DAILYREG/120429976/alaska-permanent-fund-nets-19-return-over-9-months
Lisa Demer (February 27, 2012) “Alaska Legislature: Senate panel tackles multiple amendments to oil tax bill”
Anchorage Daily News: https://www.thenewstribune.com/2012/02/24/2040560/senate-panel-tackles-oil-tax-bill.html
Fairbanks Daily News-Miner Editorial Board (March 4, 2012) “Deficits loom: Alaska’s cash will erode quickly in coming years,” Fairbanks Daily News-Miner
https://newsminer.com/view/full_story/17726357/article-Deficits-loom–Alaska%E2%80%99s-cash-will-erode-quickly-in-coming-years?instance=home_opinion_editorial
