Permanent Fund seal

Editor’s Note: This is the second in a three-part series on the history of the Permanent Fund and its Dividend.

In the early 1980s, when the Permanent Fund Dividend was created, the idea of giving away money seemed outlandish to many Alaskans. It was a quirky idea – government giving away money. There was, and is, nothing in any western democracy like Alaska's Permanent Fund dividend.

In a survey of 19 oil-producing areas worldwide in the 1980s, economist Malcolm Gillis, later president of Rice University, found the closest parallel in the oil-rich state of Sabah, in Malaysia, where the sultan sent out $50 checks to the citizens.

When the late Zhou Enlai, premier of the Peoples’ Republic of China, dined with then-Gov. Jay Hammond during a visit by Hammond to the People's Republic of China, Zhou learned of the dividend program and exclaimed, "You Alaskans are more socialistic than we are!"

For many Alaskans, the dividend seems an embarrassment at a time when oil revenues are shrinking and basic public services, like schools, are coming under pressure.

But many fiercely defend the dividend as necessary to keep the state's citizens interested in the $60 billion-plus Permanent Fund, and protecting it from raids by special interests.

Jay Hammond strongly believed that. Elmer Rasmuson, a conservative Alaskan banker and the first chairman of the Fund's Board of Trustees, agreed with Hammond that the dividend has created a strong public constituency for the Permanent Fund and, most important, for continued investments in the principal to offset inflation.

Most Alaskans, however, simply regard the dividend as now a political reality and a curious fixture of the state's fiscal system.

Where did the idea come from?

From Jay Hammond, really. Hammond is widely credited with getting the dividend through the Legislature in 1980 and 1982, but he had earlier thought of a "citizen dividend" in the Bristol Bay Borough in the 1960s, as a way of redistributing fish tax revenues paid by nonresident fishermen. The proposal failed because local voters so adamantly opposed any tax, even one 97 percent paid by nonresidents. Bristol Bay eventually adopted a fish tax, but without the dividend.

The notion was probably first floated to a statewide audience in 1969 by University of Alaska economist Arlon Tussing at the Brooking Institution's Conference on the Future of Alaska. Tussing suggested, to an incredulous audience, Alaskans might consider a one-shot distribution of the $900 million windfall in oil bonuses the state received in a 1969 North Slope lease sale.

Economist Milton Friedman broached the idea in a meeting with state legislators in 1977. Asked what method of spending oil revenues would best benefit individual Alaskans, Friedman urged legislators to "write individual checks."

But more than anyone’s, the dividend idea was Hammond's.

"The concept of a distribution in the form of an annual dividend to all Alaskans was essentially one man's idea – Governor Hammond," Elmer Rasmuson recalled.

Hammond had long been interested in the notion of more equitable sharing of public resource wealth. He had watched fisheries payrolls in his home region of Bristol Bay go mainly to nonresident fishermen, with little left behind for local people. He worried the same thing would happen with oil.

There were models for a state "dividend" in the early 1970s, following the North Slope oil lease sales. The Longevity Bonus Program was an early version of the dividend, sending a monthly stipend to Alaska senior citizens. There was also a generous loan program for college and vocational students with nearly half forgiven if the borrower remained in Alaska after graduation, a gift that was a kind of education dividend.

An important principle was that these payments were not linked to need, or income. Everyone was eligible regardless of income or status. It was a short step, conceptually, from these early targeted-entitlements like the Longevity Bonus to broadly-based Permanent Fund dividends. Hammond, however, championed an early version of the dividend in which payments were linked to years of residency, so that "pioneer" old timers would get larger dividends than newly-arrived "cheechakos."

That was not only morally right, Hammond thought, but it would discourage in-migration of newcomers mostly interested in getting the dividend. This was the version that passed the Legislature in 1980, only to be contested in court by Ron and Penny Zobel, two Anchorage residents.

Because of the legal uncertainties raised by the Zobel litigation, the Legislature passed a "backstop" dividend bill in 1982 (the Zobel case was still in court) to make equal dividend payments to everyone. The U.S. Supreme Court eventually ruled the original 1980 law unconstitutional so the alternative 1982 plan went into effect. It is the program we have today.

The idea of direct distribution of public wealth was given additional intellectual currency in 1980 when Mike Gravel, then one of the Alaska's U.S. Senators, offered an idea as an alterative to the direct payment of a division. Gravel’s idea was the Alaska General Stock Ownership Corporation (AGSOC), a state corporation which would invest in development projects (oil being a leading candidate) with shares of stock distributed to individual Alaskans.

AGSOC was based on Louis Kelso's concept of community ownership of assets. Kelso pioneered the employee-owned corporation, of which there are many in the U.S. At the time Hammond was tinkering with a variation of Gravel’s idea in his "Alaska, Inc." proposal, which also involved citizens owning shares of stock. At the time these ideas appealed to Alaskans' more libertarian instincts.

Accidents of history played a role.

Gravel's AGSOC had support and might easily have emerged in the Legislature as an alternate to the idea of directly-paid dividends. But politics intervened: House Democratic leaders worked to defeat AGSOC to deprive Gravel, who was running for reelection, of credit for its authorship. At the time, State Rep. Clark Gruening, D-Juneau, wanted to challenge Gravel in the 1982 U.S. Senate election. Meanwhile, Hammond eventually backed away from his Alaska, Inc. idea and returned to the idea of dividends paid to citizens from the Permanent Fund itself.

To understand how the dividend came to be, one must recall what 1980 and 1981 were like in Juneau. Those were heady days when unexpected increases in oil prices brought billions of dollars of surplus oil revenues into the state treasury. Developers and contractors, with schemes to spend the money, crowded the halls of the state capitol.

In 1979, the Legislature had about $1 billion available for spending; in 1980, that increased to $3 billion. In 1981, state revenue forecasters were predicting that $6 billion would be available. The numbers seemed incomprehensible to many Alaskans at the time. The Legislature, in a frenzy, actually appropriated that much, although a dip in oil prices resulted in less money being available. An embarrassing deficit was avoided when Governor Hammond delayed a large appropriation to the Permanent Fund.

Things were so wild at the time, the Legislature actually voted money to build a harbor and airport on an uninhabited island (there was a real estate speculation involved). Legislators didn't even meet to deliberate capital projects. They simply punched appropriations into the Legislature's central computer, which printed out what was to become the state capital budget.

It was as if Alaskans thought up all the traditional schemes they could think of to spend money public services like soft loans, construction projects, and saving some in a “Rainy Day Fund,” repealing the state income tax, and then decided just to give some of it away. At the time the conventional wisdom from respected economists was that oil prices would keep going up. Alaska's bonanza would never end, it seemed. In that environment, the idea of giving money away — giving Alaskans a direct payment from the state’s resource endowment — seemed not so crazy, at least then.

In actuality, the public, and the Legislature, were initially very cool to the dividend idea. Soon after the Permanent Fund was established in 1976, Alaska pollster Mike Rowan found more respondents were opposed to, than supportive of the idea of direct payments. Another researcher, David Dittman, found similar results during surveys in Anchorage in 1977.

A legislative panel that held hearings on the Permanent Fund in 1977 and 1978 reported the weight of public comments favored tax relief; loans for economic diversification; and reinvestment of any surplus funds into the Permanent Fund itself.

Elmer Rasmuson recalled that first-year seminars he chaired, as the Fund's first chairman, "showed almost no support for the dividend concept, but rather for public service benefits" from the Permanent Fund.

Influential Alaskans also opposed the idea of a dividend: Bob Richards, a well-known economist at the time, worried it would divert resources into consumption and away from needed investment in public infrastructure. Others had misgivings about the nation's reaction to big Alaska "giveaway" programs. Many, including Hammond, worried that the giveaways would attract immigration (there is some evidence that it has.)

Cliff Groh, Jr., who helped lobby the dividend through the legislature as a legislative staffer, acknowledged later that the dividend was a "top-down" idea, conceived by Hammond and rammed through the Legislature by the governor and a handful of legislators in the State House. Hammond saw the dividend as a device to safeguard the Permanent Fund, but also as a way to slow the feeding frenzy at the state treasury trough and to redistribute at least some of the benefits of the state's oil windfall to all citizens instead of only special interests and the politically-influential.

Some legislators agreed with Hammond on this latter point. Terry Gardiner, a lawmaker from Ketchikan and eventually one of the dividend's backers (and House Speaker) was appalled to find upper-income Alaskans receiving state-backed home mortgage loans with interest rate subsidies larger than poor families were receiving in state assistance. The dividend's chief advocate in the Legislature, Rep. Hugh Malone of Kenai, was interested in the redistribution effect, and also agreed with Hammond that it would help safeguard the Permanent Fund.

Despite all the state money being available, it wasn't an easy sell. Cliff Groh recalled there were just a handful of legislators supporting the idea in the beginning. Hammond recalls a delegation of House Democrats, led by Rep. Mike Miller, of Juneau, asked him to drop the plan. Conservative Republicans in the House Minority opposed it, mainly on grounds of philosophy. Two Anchorage Republicans, Rep. Ramona Barnes and Rep. Joe Hayes, felt the state should invest in public infrastructure instead of dividends. Barnes demonstrated her dismay by tearing up a symbolic Permanent Fund dividend check during a House floor speech.

The plan produced odd political alignments. Rep. Sally Smith, a liberal Democrat, who strongly supported Great Society social programs, was a skeptic. Gardiner, then Speaker of the House, and Anchorage's Rep. Sam Cotten (now state Fish and Game Commissioner) were lukewarm. Reps. Dick Randolph and Ken Fanning, Alaska’s first Libertarian Party legislators, were enthusiastic supporters, and some House Republicans supported the idea. Libertarian elements in the plan appealed to conservatives like David Cuddy, an Anchorage banker who was in the State House at the time, as well as Rep. Mike Beirne, another former legislator. Cuddy is credited with giving the dividend its name (it was earlier called a "Heritage Payment") as the bill emerged from the House Finance committee. Rick Halford, now a senator but then in the House, was originally skeptical but became a key supporter.

Many in the more conservative Senate had ideological problems with the idea of giving away money, but the Senate leadership, led by the late Don Bennett and former senators Jalmar Kerttula and Ed Dankworth, mainly wanted to give Hammond what he wanted so the governor wouldn't veto the senate's big capital budget appropriations, mainly for construction. The final legislative votes were close. The dividend bill actually failed 10-8 in its first consideration on the senate floor, then finally passed 12-8.

Hammond was, at various times, ambivalent about the backstop equal-dividend-for-all because he wanted the residency-based approach. At times in 1981 and 1982 he favored alternatives, like a distribution of Permanent Fund income to municipalities, or setting up annuities for individual Alaskans, or using it to pay for health insurance. What always brought him back to the dividend was his feeling that public resources belong to the people, that government only manages the resource, and individuals, not government, should decide how to use their own money.

In the end, Hammond had to play hardball to get the Legislature to finally pass the backstop dividend bill in 1982. He vetoed a House and Senate capital appropriations bill and threatened a special session (unpopular in an election year) unless he got his dividend. He finally got what he wanted. Later that year the printing presses rolled, printing out $1,000 checks for all Alaskans – the first PFD.

What if the PFD had never been created? How large would the Permanent Fund be today? Alaska economist Roger Marks has calculated that if $21 billion paid out in dividends between 1982 and 2016 been kept in the Fund, and earning the same return the Fund has enjoyed over the years, the Fund would be $80 billion larger than it is today, or $135 billion. Assuming an average annual return of 5 percent, which is less than the Fund has actually earned, annual income would be $6.75 billion, or 57 percent more than the state’s current unrestricted General Fund budget. Marks’ paper, “The Opportunity Costs of the Alaska Permanent Fund Dividend,” was published this year in the Journal of Economics and Public Finance.

Mike and Tim Bradner are long-time Alaskan journalists and publishers of the Alaska Legislative Digest and Alaska Economic Report. Mike Bradner served in the Legislature and was Speaker of the House when the Permanent Fund was created in 1976.

 

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