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Interesting times ahead for Alaska Permanent Fund

Karl Widerquist
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Editor's note: The following commentary first appeared at Dr. Widerquist's Alaska Dividend Blog and is published here with permission.

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The Permanent Fund Dividend (PFD) is cursed with interesting times. The relationship between Alaska’s oil exports and the size of the dividend is complicated. Four important factors that affect its size are facing increased uncertainty and possibly moving in different directions.

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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. Other factors, such as any changes the legislature might make in the APF and PFD’s rules and the size the state’s population, also affect the size of the APF and PFD, but we only need to look at these four to see how uncertain the future is right now.

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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 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; and the rate of return on the APF’s investments is facing increased uncertainty in the next few years.

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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.

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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.

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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.

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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, and the state needs to do much more to prepare for the eventual decline in exports, but I make no prediction of whether the APF and PFD will be up or down in the next few years.

Karl Widerquist is an Associate Professor at the School of Foreign Service-Qatar, Georgetown University who has studied Alaska's Permanent Fund and Dividend for the last 12 years. He and Michael W. Howard have edited two books on the subject, both of which will be published by Palgrave-Macmillan in 2012: Alaska’s Permanent Fund Dividend: Examining its Suitability as a Model (March) and Exporting the Alaska Model: Adapting the Permanent Fund Dividend for Reform Around the World (August). He holds a doctorate in Political Theory from Oxford University and a doctorate in economics from the City University of New York.

The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch. Alaska Dispatch welcomes a broad range of viewpoints. To submit a piece for consideration, e-mail commentary(at)alaskadispatch.com.