Alaska Permanent Fund
The Permanent Fund was created in 1976 to save and invest oil income so that when oil production rates declined in the future, we would have investment income to take its place.
The Permanent Fund has continued to grow, and this year will contribute about $3.1 Billion to the budget. Oil income was forecast at $2.1 billion (at $71/bbl from December 2021 Legislative Finance) for the Fiscal Year 2023 budget but will likely be significantly more this year if oil prices continue to remain high.
Alaska Revenues & Expenditures
The simplest way to understand Alaska’s budget is to look at the Unrestricted General Fund (GF). The General Fund represents Alaska’s basic revenues and expenditures. The General Fund budget has decreased over the last 10 years and is now stabilized at the $4.5 billion level. This pays for our essential state services – schools, health, transportation, social services, public safety, etc. Your Dividend is also paid through the General Fund.
As displayed in the graphs above, oil revenue has not been enough to support state services for years. Each year, the state dipped further into the Constitutional Budget Reserve Fund to pay the bills, and starting in Fiscal Year 2019 the Legislature and governor agreed it was time to use some of the Permanent Fund earnings to help pay for public services in addition to the annual dividend. The state law adopted that fiscal year limits the annual withdrawal of Permanent Fund earnings to no more than 5% of the market value of the fund over the past five years. The intent of the 5% percent-of-market-value limit was to ensure that the Permanent Fund balance will grow over time, by not overdrawing the fund. It will leave enough of the earnings in the fund to protect against inflation and swings in investment earnings.
In addition to the ERA, the CBR is the other additional savings account for the state’s use.
The CBR (Constitutional Budget Reserve) Fund is intended to act as a short-term savings account funded by oil revenue and investment earnings. If the savings are spent, the state is supposed to repay the account in future years when oil revenue is higher. For the past 7 years, we have only borrowed against this account, and as of the end of FY21 the account is nearly depleted. We cannot rely on this account as a rainy-day fund, if we never responsibly replenish it. Fiscal Years 22 and 23 are shaping up to afford us the opportunity to use some of the revenue from high oil prices to replenish this savings account. The stability of the CBR is directly related to the stability of Alaska’s economy. The high oil prices we are enjoying at this moment are not likely to last indefinitely. Let us use this surplus responsibly to help reduce our risk and uncertainty for future years.
The price of oil is extremely volatile, and history shows we are not likely to remain at high oil prices indefinitely. Additionally, the production of North Slope Oil has declined significantly over the years, and it is unlikely the volumes will increase significantly again. At our peak, the North Slope was producing over 2 million barrels per day. For the last several years our daily average is a quarter of that volume, at about 500,000 barrels per day.
The Alaska Permanent Fund Dividend Program
Here is a chart that shows the amount of the Dividend over time. The average is $1,163 per year with a low of $331 in 1984 and a high of $2,072 in 2015.
Alaska’s Fiscal Future
With current revenues and expenses, we can afford to maintain essential state services at approximately the current level with sustainable Dividends and no new state taxes.
The big issue before the Alaska Legislature is how large a Dividend can be paid going forward and how to pay for it. Each $1,000 in dividend costs about $635 million per year.
The 50:50 Plan would split the annual 5% draw from the Permanent Fund to the state between Dividends and state services. That proposal would result in a Dividend of approximately $2,350 this year.
Dividends at this level would cost as much as $600-700 million per year more than we can afford without major new taxes or significant budget cuts moving forward as the price of oil normalizes. (See chart on oil price volatility.)
Another proposed plan is a 75-25 split between essential state budgetary needs and dividends. While Alaskans for Common Sense is not advocating for a specific plan, this type of approach does offer far greater sustainability when demonstrated in fiscal modeling.
Alaskans have a choice.
Pay unsustainable dividends now.
OR
We can avoid unnecessary new taxes, receive a sustainable Dividend for years to come and maintain essential state services.