Trustees' papers volume V:
THE CREATION OF THE PERMANENT FUND: A SHORT HISTORY

Joan Kasson
Joan Kasson researched and wrote this paper for the Alaska Permanent Fund Corporation in November 1983, as part of an early effort to record the history of the Fund. Publication in the Trustee Papers Volume No. 5 marks the first time this paper has been widely available to the public.

Introduction: An Overview

In 1976, the voters of Alaska passed a Constitutional amendment establishing the Alaska Permanent Fund. The amendment required the dedication of 25 percent of mineral bonuses, royalties and related income to a special fund to be put into income-producing investments. On June 30, 1983, the assets of the Fund stood at about $4.3 billion, a hefty sum by any standard.

The Fund is operated as a public trust, much like trust funds established for pension funds. This means Fund managers must balance the idea of income producing against ordinary prudence about risk. In its simplest terms, the Permanent Fund is a savings account geared to make money for Alaskans.

How the Fund came to exist, and how it came to be operated in this manner, is the subject of this history. The Fund exists as a result of evolution of thought regarding state ownership of wealth, and how that money should be managed to best benefit all Alaskans, present and future.

This evolution occurred in three stages: first, the decision on what was wanted; next, the decision on how it was to be accomplished; and finally, the beginning of a process to decide what it is to do.

Many people were part of this evolutionary process. The executive and legislative branches of state government played major roles. The public, through voting and participating in the legislative hearing process, contributed their views. What are called special interests also played a large part. The business community, banks, fishing and agriculture advocates all registered their views on the Permanent Fund.

The evolution of the Permanent Fund took several years. During this time, many things happened in Alaska to affect it. Large oil and gas deposits were discovered on state-owned lands. The state chose to raise taxes on the petroleum industry to increase state revenues. These revenues increased even more as the Organization of Petroleum Exporting Countries' (OPEC) price hikes took effect. Finally, state expenditures increased along with revenues.

The Alaska Permanent Fund is a trust. Early proposals and discussions considered the use of the Fund as a vehicle to diversify the Alaska economy. However, the trust concept for the principal of the Fund prevailed at every turn. The later issues debated during the evolution of the Fund were, instead, questions regarding management and use of the Permanent Fund earnings.

Background: Resources Belong to Alaskans

In 1955, Alaska was still a territory of the United States. Late that year, fifty-five people met in Fairbanks to write a constitution in preparation for statehood. The resulting document was viewed by many as a model constitution. Two themes present in the Constitution bear directly on the Permanent Fund.

The constitutional convention delegates saw the importance of resource development. Alaska has long been dependent on its natural resources. All the economic booms that Alaska had experienced, except the World War II military boom, had been caused by resource development. Furs, gold, then fish, were harvested and in the eyes of the delegates, the benefits from these harvests primarily went outside Alaska.

The constitutional convention delegates were not opposed to resource development, but they wanted Alaskans to get the maximum benefit. Thus, Article VIII of the Alaska Constitution, stressed just that:

Article VIII, Section 2, General Authority. The legislature shall provide for the utilization, development, and conservation of all natural resources belonging to the State, including land and waters, for the maximum benefit of its people.

The second theme was opposition to the dedication of revenues. Dedication of revenues means that certain revenues are assigned to special funds for special purposes, bypassing the appropriations process. At the time of the convention, many states had such dedications. The delegates believed that dedicated revenues constrained the government from pursuing the maximum welfare for its citizens, so they forbade dedication except in certain, limited cases.

The delegates realized the importance of Alaska's resources. They wanted Alaskans to realize the maximum benefit from them. They did not, however, foresee that the state would later become financially dependent on one source of revenue.

$900 Million Oil Lease Sale

On September 10, 1969, the state received $900,041,605.34 in bonuses from the Prudhoe Bay oil lease sale. Earlier discoveries, in particular the Swanson River Oil Field on the Kenai Peninsula, had increased state revenues, and therefore expenditures, but nothing on the order of Prudhoe Bay had ever happened before. The $900 million, as it came to be commonly called, was nearly as much as all previous state budgets combined. The fiscal year (FY) 1970 budget had totaled only $172.8 million.

The question before Alaskans was what to do with all that money. Should it be saved, or should it be spent to meet Alaska's many needs, such as rural schools, safe water, transportation and communication links? The Legislature appropriated money to look into the question. The Brookings Institute held four seminars in late 1969 to decide what should be done. Discussion covered issues as diverse as Alaskans themselves.

There are plenty of details, but the basic point is, we're going to invest in Alaska its people, through education, health and well-being opportunities, and in the physical through esthetics and their preservation and natural resources, using the non-renewable in the best interests of the state, both economically and environmentally.¹

Spending, then, was to be the course to take.

The Idea: Saving Mineral Wealth

Although the Brookings seminars may have called for spending, the idea of investing some of the state's wealth was being mentioned here and there. Before the 10th Annual Convention of the Alaska State Chamber of Commerce in October 1969, Robert Krantz, of the investment firm Kidder, Peabody & Company, called for the establishment of a perpetual and permanent capital fund for the continuing development of Alaska.2 Krantz envisioned a fund where the principal would remain intact but the income would be available for appropriation by the Legislature. His reasoning:

In the investment banking world, we are constantly exposed on an almost day-to-day basis to situations which demonstrate the insatiability of the demand for funds once they become available and the ease with which capital can be dissipated. This is found at all levels unfortunately in our own homes as well as within business and philanthropic organizations. It is at the government level, however, that we find this intense pressure for current expenditure in its most extreme degree.³

Krantz's speech did not receive much notice nor was his idea new. Other states had similar funds. However, it is the first written record of the idea of a permanent fund for Alaska.

At the same time, Gov. Keith Miller was outlining his idea for a resources permanent fund. He introduced legislation to create the fund in 1970. It passed the Senate, but died in the House. It was, however, a taste of things to come. It was the first formal legislation on the subject, and it brought out issues that were to be major points of contention later.

Miller's resources permanent fund was not a dedicated fund. Instead, the Legislature was to appropriate money to it. In addition to this dedication question, the legislation showed that management would be a major issue. Who would control all that money? Should it be the legislature or the executive, Republicans or Democrats?

Not until 1975 was the idea looked at again. In the meantime, state budgets increased annually, and the state began to bond itself into debt based upon expectations of future income from the oil fields. In 1972, $124.5 million worth of general obligation bonds were approved, and in 1974, $189.5 million more.

Legislature Feels Pressure to Invest, not Spend

By 1975, the idea of a permanent fund had gained a following in the Alaska Legislature. The primary reason was negative reaction to the spending of the $900 million received from the Prudhoe Bay lease sale. People asked, What happened to the $900 million? Ð implying it had been wasted.

Committee Substitute for House Bill 324 amended Senate, (CSHB 324 am S),4 An Act establishing the Alaska mineral lease bonus permanent fund; and providing for an effective date, passed the Legislature during the 1975 session. Its purpose:

The Legislature finds and declares that it is essential to preserve a portion of the revenue derived from mineral lease bonus sales, a nonrenewable resource, for future generations of Alaskans, and further, that this purpose best can be served by preserving this income in a permanent fund to be used for investment capital by Alaska residents.

CSHB 324 am S was the first bill passed by the Legislature that specifically created a permanent fund for the benefit of future generations.

It is important to note the uses to which the money could be put. This bill dedicated 50 percent of mineral lease bonuses (money received for the sale of leases) to the fund. This principal was to be invested as other state surplus funds and in approved loan programs. The income resulting from this investment either could be reinvested in the fund, or appropriated for the administration of the fund or for other operating and capital expenses of state government as provided by law.

This first successful attempt was promptly vetoed by Gov. Jay Hammond. Hammond said that allocating 50 percent of mineral lease bonuses to the permanent fund was an unconstitutional dedication of revenues. The state Constitution specifically prohibited such dedications. Therefore, Hammond called for a Constitutional amendment, rather than a statute. He was, however, fully in favor of a permanent fund.

Gov. Hammond Offers Plan

In 1976, Hammond introduced Sponsor Substitute for House Joint Resolution 39 (SSHJR 39) to the Alaska Legislature. The important section:

Sec. 2. Article IX, Constitution of the State of Alaska, is amended by adding a new section to read: Section 15. ALASKA PERMANENT FUND. Ten percent of all mineral lease rentals, royalties, royalty sale proceeds, revenue sharing payments, bonuses, and mineral production taxes received by the State shall be placed in a permanent fund, the principal of which shall be used only for income investments. The legislature may appropriate additional amounts to the permanent fund which shall become part of the principal of the fund. All income from the permanent fund shall be deposited in the General Fund.

A committee substitute for SSHJR 9 passed the Legislature overwhelmingly and was successfully put before the voters of Alaska at the November 1976 general election. The important section now read:

Sect. 2. Article IX, Constitution of the State of Alaska, is amended by addition a new section to read: 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.

The state had its Permanent Fund. Now, the question was how to run it.

An Analogy: What to Do With a Windfall

Let us suppose for a moment that you come from a large family and someone leaves you a large sum of money unexpectedly; in short, a windfall. Your first inclination might be to buy that house you needed and get the operation for one of the kids you haven't been able to afford. Then, perhaps you buy a van to help out Aunt Millie's catering business. Now that home for wayward children down the street could sure use some money.

At some point you may realize that this money will not last forever. So, you decide to save some for later. Do you put it into a straight savings account and earn 5 1/4 percent? Not if you can earn 11 percent through one of those money market accounts. But wait, if you invest it in the stock market you might even make more money. Then again, you might lose some, too. Maybe you could make loans to all those relatives for what they want and need. Will they pay you back?

The connection may seem a bit thin, but it illustrates the kinds of choices that were available in 1977 on how to structure the Alaska Permanent Fund. In a 1976 working paper, Robert Richards of Alaska Pacific Bank outlined a series of investment options. He identified the options as falling into three areas: social orientation, economic orientation, and fiscal management orientation. Some examples:

Social orientation income redistribution from high-income to low- income earners, subsidies to low-income families, geographic redistribu- tion, i.e., from urban to rural environments, subsidies to any Alaskan to improve the quality of life.

Economic orientation subsidizing small businesses, or traditional industries such as fishing and timber, or providing subsidies to create a more broad-based economy.

Fiscal management orientation to save and invest the Fund conservatively to hold for when revenues fell, or use the Fund to reduce state debt and/or taxes.

In a paper prepared for distribution prior to the 1976 election, the Department of Revenue outlined its view of the objectives of the Permanent Fund. These included economic diversification for the state, controlling expenditures by government, saving the money for the future, revenue sharing with local governments, or perhaps community development through capital construction, increased social services, direct aid to community businesses.

It was up to the Legislature to decide which one or combination of the above the Permanent Fund should be managed to achieve.

First Efforts: Seeking a Direction for the Fund

Anticipating the passage by the voters of HJR 39, Gov. Hammond expanded the size of the State Investment Advisory Committee (SIAC), and directed it to look into organizational structures and investment options for the Permanent Fund. The committee was composed of representatives from the business community, consumer groups, the executive branch, the Legislature and members of the general public.

It became clear through the SIAC hearing process that the Permanent Fund was being viewed as all things to all people. At a hearing held in November 1976, testimony called for investment in fish hatcheries, loans for utilities, housing loans and creation of a trust to save for the future.&sup6;

The SIAC, through the governor, introduced two bills to the 1977 legislative session. The first, HB 210, passed quickly. It was an interim measure outlining management of the Permanent Fund while the Legislature debated the long-term structure. HB 210 required the Commissioner of Revenue to invest the Permanent Fund in conservative investments. It was a holding pattern.

The second SIAC bill contained its plan for the long-term management structure. Although it did not pass, the bill showed the direction the Permanent Fund was headed at that time. The bill, HB 298, called for a 50-percent contribution rate, up from the 25 percent required by the Constitution. The money would be invested by percentages in different types of investments; 40 percent in investment-grade securities; 30 percent in Alaska private industry where other capital from private entities was not available; and 30 percent in community development through municipalities, public corporations and construction. The management would be by a policy board appointed by the governor, and an investment committee, separate from the policy board, would make the specific investments. All income would go to the General Fund. Investments would be limited by application of the Prudent Investor Rule. No investment would be allowed where other private capital was available, and the Fund would not be allowed to manage any entity in which it had invested.

In his letter of introduction, Gov. Hammond stressed that HB 298 was not necessarily the final product, but only a vehicle for discussion.

The House of Representatives, meanwhile, had appointed a special committee to look into Permanent Fund management. Chaired by Rep. Clark Gruening, the committee received all bills introduced on the Permanent Fund. They also introduced one of their own, very similar to the SIAC bill, but with a higher contribution rate.

Also of interest in the 1977 session was the introduction of Hammond's HB 525. This bill, which went nowhere, was the first to call for a cash distribution of Permanent Fund income to individual Alaskans. Called Alaska, Inc., the plan called for payments to registered voters of one share for every five years of residency. This would be paid for by 50 percent of the Fund's annual income.

Although none of the Permanent Fund bills introduced in 1977 passed, the discussion was well under way. That discussion was focusing on a combination of development and saving.

Public Hearings Guide Fund Design

During the interim between the 1977 and 1978 legislative sessions, the House Special Committee on the Permanent Fund took its hearings on the road around the state. The results of all those hearings were outlined in the committee's final report, "A Proposal for the Alaska Permanent Fund."

The final report gathered up all the testimony presented to the committee and divided it up by what the public, the consultants, and the committee proposed. It gives a good idea of where the Permanent Fund was headed in late 1977.

In summary, the public response to the hearings was worked into a general list of points for the committee to follow:

The money in excess of current needs should be put into the Fund.
This money should not be used for current expenditures.
The investments should not be in areas where existing private financing was available.
The income of the Permanent Fund should be used for the benefit of current and future Alaskans.
The structure of the Permanent Fund should allow public accountability.
However, political decision-making should take place where necessary.
Appointed officials of the Permanent Fund should not make those types of decisions.
The consultants' positions were also collated into general points. Their positions became much more important later when serious legislative maneuvering took place. Essentially, the consultants agreed:
Subsidizing, through cheap loans or bonds, industries or commercial enterprises was not a good idea for the Permanent Fund.
If the project proposed was a viable one, then private financing entities would fund them.
If private banks refused, then perhaps the project was not a good one.
In that case, why should the state take the risk?

The most aggressive (and in conventional terms, imprudent) lending policy cannot, however, create an industry where resources, markets, skilled labor and other requisites are missing, and the Fund's managers should never become so soft as to finance enterprises whose promoters are not taking a substantial risk themselves, or which do not have convincing prospects of long-term viability.

The consultants, however, did feel that medium and small industries might benefit from Permanent Fund assistance where institutional barriers may exist. In this case, the barriers were defined as lack of knowledge, and distance. Lending in small towns or the Bush is exceptionally expensive; however, the cost of investigating and servicing small commercial, real estate and installment loans and lease purchase contracts and the like, and the costs of collection, foreclosure, repossession and resale can easily exceed the potential earnings from loan fees and interest. These excess cost burdens, together with unfamiliarity with local conditions, understandably make the statewide (Anchorage and Fairbanks) banks and other financial institutions reluctant to provide capital even for larger locally-owned development, such as resorts, hotels, apartment houses, fish processing plants, etc., and where they do make loans they are willing to finance a smaller portion of total investment.

Fund Goals Become Clear

Based upon its hearings, the committee determined that the first two goals of the Permanent Fund were to be permanence and income production. These are in conflict in that investments that may earn a very high return are likely to be more risky than ones with a lower expected return. The goals must be balanced against each other. The additional goal was that part of the Permanent Fund be used for the short-term benefit of Alaskans. In effect, these required a trust concept for the principal of the Fund.

It also realized, however, that the Permanent Fund is only one of several financing vehicles available to the state and that it was unnecessary, as well as unwise, to try to design a Permanent Fund to do all things.⁹

The compromise the committee worked out was introduced in the 1978 session as HB 596. The legislation created two entities: The Alaska Permanent Fund Corporation and the Alaska Enterprise Investment Corporation. The former, receiving the bulk of the revenues, was to be severely restricted on the type of investments it could make. The ultimate goal of the Permanent Fund Corporation was to maintain safety of principal. The second entity, the Enterprise Corporation, was the answer to providing short-term benefit to Alaskans. It was to provide funds to "financially sound small- and medium-scale productive private enterprises and community development projects."

Two points must be made here. First, people began to realize that the Permanent Fund really wasn't that large of a part of state revenue. In FY 1978, contributions to the Alaska Permanent Fund totaled $50.4 million, while total unrestricted revenue to the state was $787.4 million. There was other money available to fund the miscellaneous projects people envisioned.

Second, in 1978, other entities began to be created to handle these assorted wants. The first real effort to do just this was a result of the House Special Committee's efforts. Many of the people testifying before the SIAC and the House Committee wanted to further renewable resource industries and break Alaska's dependency upon one nonrenewable source of revenue oil. As a result, the House committee introduced legislation, which later passed, to create the Alaska Renewable Resources Corporation. The purpose of this corporation was to give grants and other financial assistance to "projects and programs that identify and demonstrate new products, markets and technologies in renewable resources."

During the interim, the Senate also had a Special Committee on the Permanent Fund working. In addition, the executive branch was still involved through the Division of Policy Development and Planning. The result of all this studying of the question was the introduction of several bills in the second session of the Tenth Alaska Legislature in 1978.

1978-1980: Subsidized Loans vs. Free Trade

In a memo to two consultants dated September 2, 1977, a staff assistant to the House Finance Committee outlined the prevailing state of affairs:

Where to invest the Permanent Fund seems to be the question of whether a developing economy (isolated, with leakage of an estimated 64 cents on the dollar, but mostly literate and skilled), based largely on a depleting resource (transfer payments from the oil and gas industry), and having few apparent options for some time should have a policy of government intervention. In short, a policy of loans at the going market or subsidized loans, or even subsidized infrastructure loans (which may be possible in some cases) versus a policy of free trade.¹⁰

The question of how the Permanent Fund should be invested had from the beginning centered on the development bank versus the trust. There were different approaches with each bill, but all of them took some form of one tack or the other. From 1978 to 1980, the development issue remained but instead, focused on the Permanent Fund earnings.

The major Permanent Fund management bills introduced in 1978 were to be the basis for three years of discussion. The main bills in 1978 were HB 596 and SB 429. In 1979 and 1980, SB 1 traveled through the legislative process, first encompassing the Senate's ideas and then the House's. It finally became a compromise bill in free conference¹¹ ; committee and was adopted by the Legislature.

Prudent Investor Rule to Guide Investments

All of the versions reflected the recognition on the part of legislators that the principal of the Permanent Fund should remain inviolate. It should be invested with an eye toward safety of principal first. The Prudent Investor Rule, well established in common law, was to guide the investments. The greatest danger of substantial erosion of the Permanent Fund principal is not (as suggested in a February 23, 1979 Permanent Fund policy memorandum of the Division of Policy Development and Planning) from a practice of making investments at less than market rates but rather from making investments entailing more than a reasonable risk. Generally, in the investment world the higher the risk, the higher the expected return.¹²

Agreement on the safety of principal was only the tip of the iceberg, however. The main differences between the House and Senate bills were the management structure and the use of the income.

Dividends or Loans? House, Senate Differ

The first difference was that the Senate wanted the state Department of Revenue to manage the Permanent Fund and its investments. In a report of the Senate Special Committee on the Permanent Fund issued in 1978, the main reasons cited for this stand were that the expertise was there and that there would be no conflict of interest since all the money in all the funds administered by Revenue belonged to the people of the state.

The House, however, saw a need for management independent from state government. The point: to insulate the Fund from politics, but keep it accountable to the public. Such a task was to be accomplished by the creation of a public corporation separated from established government agencies. The corporation would be under legislative oversight to assure that it would not become too independent.

The second difference, and the most hotly debated, was over the use of Permanent Fund income. Ideas for its use abounded, but three major ideas surfaced in the 1978 to 1980 debate.

The House Permanent Fund bill did nothing with the income stream, leaving it for later Legislatures. The income was to continue to flow into the state's General Fund, available for whatever uses the Legislature chose.

The governor supported wholeheartedly a proposal to give the money to Alaskans in the form of dividends. Some of his reasons were outlined in a February 14, 1980 memo to Hugh Malone:

Benefits from oil wealth which belong to all Alaskans can be distributed in many ways: low-interest loans, tax relief, expanded government services. While these all may have merit, not all Alaskans are beneficiaries. This is why I have proposed a Permanent Fund dividend program which, compared to drastic income tax reduction or repeal, would:

Provide benefits to all Alaskans from the earnings of their resource wealth ...

Confine benefits to Alaskans ...
Equitably impact both rich and poor.
Retain the taxpayers' one remaining tie with, and consequent concern for, government growth: How much it costs them.
Far less likely reduce federal revenue sharing to the state.

By contrast, maximize favorable impact upon the state's economy by keeping a far larger portion of the money to fund the programs here in Alaska.

The Senate had its own proposal for Permanent Fund income. The legislation was introduced by the Senate Special Committee, chaired by George Hohman of Bethel. It provided a vehicle to thoroughly revamp the state loan programs. Many programs would have been abolished and then restored in a centralized Alaska Loan Programs Fund. The purpose, in part to:

"... create moneys for small businesses at low interest affordable rates which could be used not only to help out existing small businesses, but to generate new businesses particularly in the area of renewable resources."

The same memo also noted: The Alaska economy is currently in a state of crisis, particularly in the area of small business.¹³

The idea of loans for Alaskans went back to the original permanent-fund-as-a-development-bank idea of 1975. In a 1978 memo, an aide to the House Finance Committee chairman outlined what the Enterprise Fund, mentioned earlier as part of HB 596, and a variant of the development bank idea, was to accomplish:

The Enterprise Fund is to close the capital gap in Alaska, private and public. This gap is measured by economists as the amount of capital that would normally be provided by private markets but is not because of institutional barriers in the financial community as a whole. Such barriers include lack of information, lack of experience with particular kinds of investment, and racial and other bias. Local regulatory practice can be a barrier, but the effects are probably not great due to the relatively free flow of capital within and even between countries.

A capital gap is not a sheer absence of funds. Money can usually be obtained at some price. Rather, the usual reason that funds are not forthcoming is that other areas, offering better returns and lesser risks, can pay more for capital and enjoy more investor confidence.

The full scale of this gap in Alaska is not documented. However, the evidence is that the shortfall is in the millions, not billions, of dollars and is focused in rural Alaska, mainly in small and medium ventures. Elsewhere, there is no proof that large, attractive loans are being missed or rejected by the private capital markets (banks and their lines of credit, bond and money markets, and insurance companies).¹4;

The House moved away from this stance in later Permanent Fund bills, but the Senate continued to feel that the Permanent Fund was the vehicle to cure the rural capital gap.

Criticism of Senate's Loan Plan

Opposition to the Senate bill is shown by the following excerpts:

The Governor: In any program increasing the dispersal of our oil wealth all Alaskans, not simply taxpayers, should be beneficiaries. We already have numerous programs selectively dispersing portions of our oil wealth in the form of expanded subsidized government programs and low interest loans. These go only to select Alaskans, not to all. The size of these selective hidden dividends can be substantial.

For example, take the case of someone who gets a $100,000 state loan of oil wealth at 9 1/2 percent interest. Yet, all other Alaskans who own just as much of that wealth as he could get about 15 1/2 percent return if their money were loaned at market rate. Therefore, the loan recipient is receiving a dividend, or subsidy, of $6,000 in the first year alone. That subsidy or dividend would amount to an incredible $94,000 on a 30-year loan.

That dividend or subsidy is being paid from oil wealth owned by all Alaskans. We don't confine payment of such loan dividends to taxpayers only or demand that before we provide Alaskans with low-interest loans, we first eliminate the income tax. Why should a system which provides far more equitable benefits to all Alaskans, such as the Permanent Fund dividend concept, be subordinate to that consideration? It seems high time that any new means of dispersing oil wealth should provide that all Alaskans, even the non-taxpaying, housewife, student, unemployed or retired couple get a share.¹⁵

The House: What are the House objections to the Hohman bill? The primary objection is that it is concerned much more with the state's loan programs than the Permanent Fund, and that a free conference committee on the Permanent Fund is not the place to so drastically restructure the loan programs. SB 1 is extremely complex and, if implemented, would have far-reaching consequences for the state's economy and credit rating. Specific problems with the concept include: 1) the earnings of the Permanent Fund are put at risk; 2) consolidation of the loan programs does not solve the existing problem of access to them; 3) the programs would receive automatic funding without legislative review; 4) there is no method of prioritization and the different loan programs could not be judged separately on their merits; and 5) municipalities would be encouraged to issue unrestricted debt.¹⁶

As can be seen, the problems with the loan fund approach basically were of three types: specific problems with the technical aspects of SB 1; general problems with the idea of subsidies to generate development; and questions whether the Permanent Fund was an appropriate place to fund such a program. While legislative votes on General Fund appropriations were held in the public eye, as envisioned by SB 1, decisions directing the use of the Permanent Fund income could have been made without public scrutiny.

It took three years, massive amounts of paperwork, numerous versions of various bills, and for the first time extensive use of professional financial and investment experts and economists. But the Legislature ultimately adopted the House version without the Enterprise Fund that had been proposed in 1978. The final version required independent management through the Alaska Permanent Fund Corporation, secure investment of the principal in government and other high-grade securities, and left the income-use question unanswered.

Appropriations to the Fund and Dividends

At the same time the fight over management was going on, another important piece of legislation was introduced. This one proposed appropriating $900 million to the Alaska Permanent Fund, a symbolic amount recalling the $900 million received from the 1969 Prudhoe Bay lease sale. It passed, as did a later appropriation for $1.8 billion. The justification:

The oil revenues currently being received by the state are in excess of what should be immediately spent, and depositing a portion of them in the Permanent Fund would be a wise and responsible move.¹⁷

There was another bill firmly supported by Hammond winding its path to passage in 1980. Earlier paragraphs have noted his emphasis on dividends for all Alaskans. The dividend distribution plan finally gained enough support to pass. In an article written for The Alaska Journal in 1983, two participants in the dividend battle outlined the major reasons for passage:

... As explained by Elmer Rasmuson, the Alaska Permanent Fund Corporation's first chairman, The Permanent Fund began, chiefly, with a negative goal, to place part of the one-time oil wealth beyond the reach of day-to-day government spending.

Some Alaskans, including then-Gov. Jay Hammond, came to favor direct distribution of a portion of the oil revenues as a check on government growth. Without such a check, asserted Hammond, government spending and lending would create a dependence which would bring a wrenching dislocation when the oil money ran out.

Direct distribution, on the other hand, would give each citizen a personal stake in oil revenue and thus give Alaskans an incentive to oppose pork barrel spending and budgetary hyper-growth in general. Further, argued Hammond, if the distribution was paid in the form of annual dividends from the Permanent Fund's earnings, Alaskans would be more likely to fight raids on their savings account.¹⁸

Erickson and Groh further credited the economic concerns of equity and efficiency for the passage of the dividend program. The dividends would provide for equal distribution of the oil wealth. Loans, for example, did not, as only some could receive the benefits, and then at the expense of others.

Efficiency involved the normative judgment that the people themselves should be able to choose how to spend the money, rather than have government do it.

Zobel Challenge Modifies Dividend Plan The arguments in favor of the dividend distribution program prevailed. The legislation established a program giving every Alaska resident $50 for every year of residency since statehood in 1959. This graduated Permanent Fund dividend concept was to prevent migration to Alaska solely to collect the dividend check.

This law was promptly challenged on constitutional equal protection grounds by two Anchorage attorneys, Ron and Patricia Zobel. The case ended up before the United States Supreme Court. The dividend payments were held in limbo pending the Court's decision. The Court agreed with the challenge to the program and declared the program invalid.

Looking ahead to that possibility, in 1982 the Legislature passed another dividend plan to go into effect should the Court rule against the 1980 version. It called for equal payments to all six-month residents of the state. The first payment was to be $1,000, and all future annual payments were to be based on earnings of the Permanent Fund. That income was to be averaged on a five-year basis, and fifty percent of the average was to be divided among all eligible Alaskans.

When the Court struck down the 1980 plan, the 1982 version went into effect. On June 14, 1982, ... the big computer in the State Office Building down the street from the capitol started up, and the first oversized blue-and-gold $1,000 checks rolled off the high-speed printer and into the mailbox.¹9; What is not so clear is the extent to which government investment can create self-sustaining non-government economic development. Nevertheless, the notion that government efforts can and should bring long-term prosperity still exerts a powerful grip on many Alaskans, particularly in the case of energy development.

Dividend distribution is of course also a way to inject money into the economy but it flies in the face of these traditional Alaska notions of development as well as the practices of other governments. All governments distribute benefits in a host of forms, but never before in the industrial world has a government mailed checks to all its residents simply because they lived there. Indeed, the only historical parallel to the Permanent Fund dividend distribution appears to be a recent program of the remote Malaysian state of Sabah, which, like Alaska, used windfall revenues collected from natural resource development to fund its per capita payments.²⁰

Post-1980: Fund Grows, Management Evolves

After passage of the 1980 management legislation, the Permanent Fund continued to accrue mineral revenues as before, but now under the management of the Alaska Permanent Fund Corporation. Oversight was and is provided by the Legislative Budget and Audit Committee, but the Legislature as a whole has generally stayed away from the Fund. The exception was passage in 1982 of some non-controversial amendments to the 1980 Act. The legislation broadened the investments the Corporation was allowed to make, and more importantly, called for a certain percentage of the income to return to the Fund's principal to prevent inflation from eating it away over time.

The Corporation itself has separated from the Department of Revenue, inhabiting offices in another building, hiring staff to manage and invest the Fund independently from other state funds, and managing its own operational budget. In its 1983 annual report the Corporation reported net earnings of $471,125,000. The total Fund balance on June 30, 1983, was reported to be $4,375,036,000.

With over four billion dollars in the Permanent Fund, it was inevitable that the next question should arise: What exactly was this money for? By virtue of the thirty bills introduced during the 1983 legislative session having something to do with the Permanent Fund, it was clear that several members of the Legislature had some ideas as well.

Why is there a Permanent Fund? It was created for myriad reasons, not least of which was to keep it out of the immediate government spending stream. How to manage it was another question settled after lengthy debate.

What the Fund is and how it is being managed give some clues about what the Fund is for. But pressure continues to use the Fund in short-term ways now, or to save it to use in short-term ways in the future. It is up to the same people who decided to create the Fund and how to manage it, to decide its ultimate fate.

Footnotes

Alaska, Legislative Council and the Brookings Institution, Statement of the Gamma Group: Seminar One, A Conference on the Future of Alaska (no place of publication, no date).
Robert A. Krantz, Jr., Investment Management for Alaska's Second Decade, (October 4, 1969), p. 2. Ibid., p. 3.
Throughout this text, the words House Bill are abbreviated as HB, and the words Senate Bill as SB.
Alaska, Department of Revenue, Permanent Fund, Alaska Revenue Journal, vol. 1, no. 2 (October 1976): pp. 6-7.
Alaska, State Investment Advisory Committee, Hearing Minutes of November 5 and 6, 1976, (Anchorage, Alaska), pp. 2-9.
Arlon Tussing, Economic Considerations in Establishment of Alaska's Permanent Fund, (Anchorage, Alaska: Institute for Social and Economic Research, July 7, 1977), p. 21.
Ibid., p. 17.
Alaska, House Special Committee on the Alaska Permanent Fund, A Proposal ..., p. 7.
James B. Rhode, Aide to House Finance Chairman, to Barbara Bergman and Donald Gordon, Professors, Legislative Affairs Library files, September 2, 1977, p. 2.
Free conference is a type of committee composed of members from both the House and Senate. Its purpose is to resolve differences in House- and Senate-passed versions of a particular bill.
Alaska, House Special Permanent Fund Committee, Testimony of Clark Gruening, (March 30, 1979), pp. 10.
Questions and Answers Concerning Alaska's Permanent Fund, 1979 or 1980, p. 6.
James B. Rhode, Aide, to Steve Cowper, Chairman of the House Finance Committee, Legislative Affairs Library files, March 8, 1978, p. 1.
Jay Hammond, Governor, to Hugh Malone, Representative, Legislative Affairs Library files, February 14, 1980, p. 3.
Hugh Malone, The Alaska Permanent Fund and Management of the Alaska's Wealth, House Special Committee on the Permanent fund, Legislative Affairs Library files, March 5, 1980, p. 4.
Hugh Malone to Homer News, et. al., Press Release, Legislative Affairs Library files, January 31, 1980, p. 3.
Clifford John Groh and Gregg Erickson, The Permanent Fund Dividend Program: A Noble Experiment, The Alaska Journal, vol. 13, no. 13 (Summer 1983), p. 142.
Ibid., p. 145.
Ibid., pp. 141-142.

Trustees' papers volume V: THE CREATION OF THE PERMANENT FUND: A SHORT HISTORY