The US state that gives residents $1,000 each year

Each year, Alaska sends each resident a cheque in the mail. Cody Liska explains why. Video by Michael Downey.

From the fur trade to fisheries to gold mining to oil, Alaska’s economy has always been entwined with its natural resources. But reliance on oil has left the state vulnerable to global price fluctuations, creating the need for a safety net.

When the Prudhoe Bay Oil Field was discovered, the state used some of the revenue to create a public savings fund. Since 1982, residents have received an annual payout from what’s known as the Alaska Permanent Fund Dividend (PFD). Payouts have ranged from $331 to $2,072, with an average of about $1,000.

But what kind of impact has the PFD had? Has it changed the Alaskan economy and if so, how?

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The US bought Alaska from Russia in 1867 for $7.2m. It was a fur trading hub until 1896, when gold was discovered along the Klondike River. In the early 1960s, its small economy was based around fisheries, oil and military spending. The annual state budget then was about $100m.

But the major change occurred in 1968, when a massive oil field – with an estimated 13 billion recoverable barrels – was discovered on the North Slope in Prudhoe Bay, an oil field on the state’s northern coast, more than 1,000km north of Anchorage, the largest city.

“An oil field like Prudhoe Bay is very rare and its rarity can be suggested by the names for it in the oil industry. They call it an elephant or a super-giant,” says Cliff Groh, former Alaska Revenue Department official and longtime advocate for the Permanent Fund.

The scale of the windfall was clear very quickly, when land leases to oil companies around the field brought the state $900m in 1969.

It was clear that the discovery of the Prudhoe Bay Oil Field and the construction of the Trans-Alaska Pipeline would transform Alaska’s economy. But when the $900m was spent on infrastructure and services, some residents struggled to see immediate concrete benefits. Jay Hammond, elected governor in 1974, was also keenly aware that oil was a finite income stream.

So his administration set up the Alaska Permanent Fund in 1976 to save money for future generations of Alaskans. It was agreed that a quarter of the state’s oil royalties would go into the public savings fund, which today is valued at over $65bn.  

“I wanted to install a sense of ownership in all Alaskans that would incline them to support healthy resource development and resist unhealthy versions,” wrote Hammond in ‘The Governor’s solution: How Alaska’s oil dividend could work in Iraq and other oil-rich countries’.

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Six years later, the Permanent Fund Dividend was created to distribute a portion of the Permanent Fund to residents who had lived in Alaska for at least one year.

Proponents of the move argued it would motivate the public to protect the fund against raids by special interests, deliver benefits more equitably and provide a safety net for low-income Alaskans.

One argument for it, says Groh, was that “it would create a greater economic bang for the buck than the alternative ways of spending the same amount of money”.

Hammond, meanwhile, said giving citizens a share of the resource wealth to be spent “as they, not the government, felt was for their maximum benefit” was the best way to manage Alaska’s oil wealth for its residents.   

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In 1982 each eligible Alaskan resident received a cheque for $1,000 (worth about $2,670 today). After that, the dividend was calculated each year using a formula that averages the Permanent Fund’s taxable income over the previous five years.

It found that recipients spent about 45% of it on basic necessities like food, heating, clothing and rent; 20% was saved; 20% went on federal taxes; 5% went on reducing debt and about 10% went on leisure purchases like airline tickets.

“The [PFD has] provided one of the most important sources of growth in disposable (after-tax) personal income in Alaska since the current economic boom began in 1980,” the report found.

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“I know a lot of seniors who didn’t plan well for their future or, if they did, they now have health issues, and I’m seeing a tremendous need by individuals who benefit from having the PFD,” says Becky Parker, executive director of the Anchorage Senior Activity Center.

“For some of them, it’s the difference between not eating for the year or at different times during the year, if they have money in their pocket to go to the grocery store or buy gas for their car or to even pay their rent.”

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The PFD is paid in early October, providing an injection of cash into the local economy that can last well into November. “In our case it meant about a good month, six weeks, shot in the arm,” says Mike Gordon, former owner of the historic Chilkoot Charlie’s bar in Anchorage.

But calculating its overall impact is difficult. In 2018 around 90% of Alaska’s 740,000 residents received the PFD, releasing over $1bn. ISER professor of economics Matthew Berman says the amount that reaches the Alaskan economy is somewhat less, because about a fifth goes on federal income taxes and some use PFD for savings or debt.

The primary quantifiable impact is providing poorer households with a percentage of their yearly income. “If you’re a family of four that’s in the poverty line and you’re making less than $30,000 and now you’ve got $6,000 [from the PFD], well that’s 20-25% of your income. That is a huge deal,” says Marcus Hartley, president and principal economist at Northern Economics.

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One argument against the PFD is that the spending leaks out of the Alaskan economy.

“If you pay that same amount of money as wages and salary to somebody, say government employees, that effect would be much greater to the economy as a whole,” Hartley says. Such a move would create jobs for people who would then spend locally.

Others suggest that because most Alaskans support the PFD, politicians fear losing votes by changing the system.

Alaskan author and historian Charles Wohlforth says the state ­­– which has no income tax –doesn’t spend on parts of society that produce economic and social mobility, most importantly education.

“The dividend has made it politically impossible to impose broad-based taxes. That being the case, economic growth in Alaska divides available oil funds into ever smaller slices, reducing per capita funding for students. Meanwhile, bigger and bigger dividends will lure more people here,” says Wohlforth.

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Alaskans now rely on their annual payout. But in 2016, then-Governor Bill Walker reduced it by about half, as low oil prices led to a multibillion-dollar state budget deficit.

“The deficit is funded out of the Permanent Fund earnings reserve account. The dividend comes out of that same pot. So there is a direct trade-off between the size of the dividend and the provision of public services,” says Alaska-based petroleum economist Roger Marks.

Some Alaskans backed Walker, but many didn’t. In 2018, both main gubernatorial candidates promised to protect the PFD. Winner Mike Dunleavy pledged not to cut it again and to disperse funds retained since 2016, advocating deeper spending cuts and more oil development instead.   

Low oil prices have already caused three years of recession in Alaska. Oil prices are rising but Alaskan production has fallen significantly since its 1988 peak (though a recent report suggests large quantities of recoverable oil and gas remain in the North Slope Basin).

And debate around the PFD – and how it best serves Alaskans – looks set to continue.

(Image credit: Michael Downey)