In 1968, a huge oil deposit was discovered on state land in remote northern Alaska. Many considered these new oil riches a blessing for our state; others, including Jay Hammond, weren’t so sure. If our oil income was spent as fast as it came in, we could suffer financial disaster trying to maintain the extensive government-financed programs, services and infrastructure created by oil money, when it ran out. Hammond’s solution was to create a state investment/savings account and start depositing 50% of our oil income into it. When he became Alaska’s governor in 1974 that’s what he set out to do.
Hammond’s first attempt to create a “permanent” investment account didn’t go well. Since Alaska’s Legislature is empowered by the constitution with making laws, Hammond sent them his request for a law creating such an account. They responded with a statute, which Hammond knew could be changed by any subsequent Legislature to allow them access to all the money we’d saved. He vetoed it. Hammond understood that many politicians, once in office, become extremely interested in getting reelected and will promote and implement programs and services that benefit the special interest group(s) that elected them even if those expenditures are detrimental to the state as a whole. To prevent raids on our savings by the Legislature, he needed a law imbedded in the constitution so that no money could be spent without a vote of the people. The constitutional amendment the Legislature presented to Hammond was far less than the 50% savings he requested. Accepting that some savings were better than nothing he didn’t veto it. In 1976, the people of Alaska, voting 75,588 in favor and 38,518 against, amended our constitution to establish the Alaska Permanent Fund. Deposits into it began in 1978. The average annual rate of return since inception is 9.12%, and the fund’s current value is $83 billion.
How much income from oil has actually been deposited into the fund? In 2012, our highest oil income year, the Permanent Fund Corporation reported $915 million deposited into the fund as resource income. The same year, according to the Alaska Oil and Gas Association, $8.857 billion from oil revenue was deposited into the general fund. That’s 10% into savings and 90% into the general fund for the Legislature to spend. Not exactly what Hammond had hoped for.
Other countries use Sovereign Wealth Funds, similar to our Permanent Fund, to invest their natural resource income for the future. Norway’s Government Pension Fund Global (GPFG), also known as the Oil Fund, is the world’s largest with $1.4 trillion in assets. It was created in 1990 as a repository for income from Norway’s petroleum sector, primarily North Sea oil and gas. Their fund and ours differ in one substantial way: Norway put the bulk of their income into their fund and has only used the earnings from its investments; we put the bulk of our resource income into the hands of our Legislature and saved only a small portion of it. Saving 50% of our oil income, as Hammond suggested, would have resulted in a $415 billion balance today, generating earnings of $37.8 billion each year. This income could easily finance our state budget and provide a substantial dividend to all residents. Looking back, most would agree we’d have been better off saving more and spending less. Hammond certainly would.
Year after year we are plagued by budget shortfalls, extended legislative sessions and numerous special ones, endless legislative bickering over finances and budget deficits fixed by depleting our cash savings. Losing cash savings is especially hurtful, since the loss is both the savings and their earning power. Over $17 billion of our cash savings has been used by the Legislature to finance budget deficits. That amount invested at 9.12% would yield $1.55 billion of income every year forever! That’s more than the combined income from a state income tax ($700 million) and a statewide sales tax ($500 million) contemplated in the Legislature’s 2021 fiscal year state budget discussion.
Slowly, voters are rooting out the big spenders, special interest promoters and others in our Legislature who have been too busy spending money to think about our future. This process needs to continue.
Jay Hammond was right about saving for the future and provided the leadership to make that happen. He wrote extensively about solving the rest of our financial problems. We should read about it. “Tales of Alaska’s Bush Rat Governor,” Hammond’s autobiography, would be a good place to start.