Alaska’s Sovereign Wealth Fund Is Tapped to Boost State Coffers

A drop in oil prices has produced a revenue shortfall for the state government, which has turned to the kitty providing Alaskans with annual dividends.

Reported by Staff Report

Art by Melinda Beck


Alaska’s state government is running in red ink because the price of oil is down, and forecasts aren’t for a boost anytime soon. So, it has turned to its sovereign wealth fund, which gives residents a stipend worth $1,606 per person yearly, to help cover the fiscal gap.

The oil-supported fund, called the Alaska Permanent Fund Corporation, is worth $64 billion. And this year, for the first time, the government is tapping it for its own purposes, drawing a little more than 4%.  

Perhaps because the amount siphoned from the fund is relatively small, and there are no other large sources of revenue available, turning to the fund hasn’t provoked a political squawk.

The $2.7 billion from the fund’s earning reserve account was allocated for basic government services such as education and workforce development to cover the fiscal gap from lower oil royalties. In fiscal year 2020, the state plans to draw slightly more, $2.9 billion.. For both years, the distribution was based on a percent-of-market-value approach.

For decades, oil revenues supported a majority of the state’s general-fund budget. “The dilemma the state will face in the future is finding new revenue sources to replace at least a portion of oil revenue in the general fund and maintain services for the long term,” according to alaskabudget.com.

The state constitution mandates that the principal fund receives 25% in oil, gas, and mineral royalties that state oil contracts generate. There’s a statutory provision for leases after 1979 that provides for an additional 25% of royalties, which also go to the principal of the fund. In 2014, oil prices began to decline. That year, Alaska’s reliance on petroleum revenues dropped to 72%.

After Alberta, Canada, Alaska has the largest sovereign wealth fund in North America. The fund’s investments gained 1.24% during the first quarter of fiscal year 2020, which began July 1.

As of September 30, total assets under management were valued at $64.1 billion. The value of the principal is $47.9 billion, including $41.6 billion in constitutionally protected deposits and $6.3 billion in unrealized gains. The value of the Earnings Reserve Account is $16.2 billion, including $6.4 billion of accumulated realized earnings and $7.7 billion of committed realized earnings plus $2.1 billion in unrealized gains.

The legislature is prohibited from accessing the fund’s principal. In June, amid fears that future legislatures would spend down the fund, the legislature signed into law a budget bill that moved $4 billion of the earnings reserve account to the principal of the fund at the end of fiscal year 2020.

The new legislative parameters for the fund have not changed its investment strategy. The fund is not heavily invested in oil and gas stocks, and holds a majority of its holdings in public and private equities. When oil and gas prices dropped, contributions to the fund dropped, too.

“The reserves are invested in the same investment vehicles. So if there’s a big decline in the market and the fund is down, there will be financial volatility in the principal and the earnings reserve,” said Marcus Frampton, chief investment officer for the fund. “The mandate is to grow the fund within the bounds of our risk limits. It doesn’t direct us to factor into our investment strategies changing liquidity needs of the state or oil prices.”

The state is treating the fund as an endowment. There’s a return objective of CPI plus 5%. In June 2018, Alaska passed a law that limited the amount the state can take from the permanent fund. The measure put in place a percent-of-market value on funds allocated to fill the budget deficit. Subject to annual appropriation of the legislature, through 2021, the legislature can’t divert more than 5.25% of the fund. After that, the figure drops to 5%.

Alaska does not have an income or sales tax. The government has been funded almost entirely with oil revenues since the late 1970s. The fund was established in 1976, and received its first deposit of dedicated oil revenues of $734,000 a year later.

The drop in oil prices has triggered discussions to implement an income tax. In 2017, the Alaska House passed a bill to implement a personal income tax for high earners that was blocked in the state Senate. During the 2018 gubernatorial campaign, Gov. Mike Dunleavy campaigned on cutting spending while his Democratic opponent, Mark Begich, urged the state to consider an income or sales tax.

Alaskans are notoriously anti-tax. “Alaskans don’t want to tax themselves and they don’t want to raise oil taxes. That would be self-destructive,” said Brad Keithley, managing director at Alaskans for Sustainable Budgets. “We’re trying to figure out other revenue streams to support the government.”

Alaska is not the only fund that the fall in oil prices has affected. Norway has drawn money from its sovereign wealth fund periodically when oil prices have fallen, most recently in August. The first time the government dipped into the fund was in 2016. Because the country has a robust tax base, it has not experienced a fiscal crisis like Alaska.

In Texas, about 5% of state revenues are derived from oil and gas severance taxes. The state has considered a rainy day fund now that oil and gas prices have stabilized.

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Alaska, Alaska Permanent Fund Corporation, Marcus Frampton, oil,