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On October 1, each eligible resident of Alaska will receive a payment of $2,072. Shania Sommer, a 12-year-old, announced the amount of the Alaska Permanent Fund dividend on Monday in Anchorage on behalf of Bill Walker, the state’s governor. (See full presentation at end of article.)
The announcement comes at a time when sovereign wealth funds based on oil revenue are under pressure from both low prices and turbulence in the financial markets.
Alaska’s fund, which now totals about $52 billion in revenue from oil production, was established in 1976. Juneau pays a dividend each year based on the return on the fund’s investments. The principle is not allowed to be used for state operations. The formula for calculating the payout is based on a five-year average of the fund’s investment returns, this year 4.9%.
Alaska’s budget, about 90% dependent on oil revenue, has been under pressure as decreasing general revenues have meant cuts to services, but the yearly payout directly to state residents continues. When asked on Monday if the big cheques will continue in future years, Gov Walker’s answer was: “That’s not up to us …. We can’t predict that.” He went on to say that the dividend formula may be reviewed in the next legislative session.
Barry Rabe, a public-policy professor at University of Michigan, reckons that continuing the dividend payments in the short term is possible, given the fund’s “remarkable durability and resiliency”.
However, he also points out that the oil business is fundamentally different now than it was five years ago. Alaskan oil, for example, is much less in demand, not only because of the lower price but also because it competes with many more jurisdictions, especially shale-oil producing states that have much lower extraction fees. He points out that Alaskan oil is also more difficult to transport to market compared with oil from other locations.
North Dakota, a state whose economy is booming thanks to shale-oil extraction, looked long and hard at the Alaska model but rejected it in favour of setting up a fund modeled after the Norway’s sovereign wealth fund, in which some of the returns on investments, instead of being distributing to residents, are used on operations.
Politically, Mr Rabe notes, it would be tough for Alaska to stop paying a dividend because after 40 years residents have come to expect their annual payment. North Dakota, with a long history of boom-and-bust cycles in other commodities, as well as a considerable population of people of Norwegian descent, wanted to avoid a complete dependence on oil revenues.
The Government Pension Fund of Norway, as its wealth fund is officially called, stands at 5,534 billion kroner ($877 billion). Although oil revenue makes up about 11% of its yearly budget, falling revenues this year has meant that Oslo had to increase the percentage of the fund it used for operations from 3% to 3.5%.
Two factors, however, make Norway a different political environment to operate in. One is that social programmes are run by the administration in Oslo, which also also runs the oil fund. Juneau, meanwhile, is not responsible for paying for social programmes, and thus, says Mr Rabe, would have a harder time justifying keeping the funds in state coffers. Norway, he adds, has pushed the oil fund as an inter-generational wealth-transfer system, and that Norwegians trust their governments to manage the fund well.
That Mr Walker chose to have young Ms Sommer unveil the amount of this year’s cheque shows that he, too, is thinking about the next generation. Whether he will be able to secure payments for it is a question that is worth far more than $2,072.