Fine Grind -- just the facts
On Thursday, Jan. 28 representative from the Walker administration will begin to present the governor’s sovereign wealth fund plan to the Senate State Affairs Committee. In preparation for that the committee heard from a sovereign wealth fund expert Tuesday to bone up on what a SWF is and how they work.
Malan Rietveld presented an overview of the form and function of SWFs to committee members. Rietveld is a fellow at Harvard University’s Center for International Development in the Kennedy School of Government. He is currently finishing his PhD in economics – with a thesis focused on SWFs, and he has consulted with several jurisdictions, including Saudi Arabia, to help them develop or improve their funds.
As the legislators dig into the details of the governor’s proposal beginning Thursday, it’s useful to look at a few key takeaways from Rietveld’s presentation.
In a general sense, Rietveld said SWFs are cropping up all over the globe. For Alaska’s purposes the point of transitioning the Permanent is to stabilize the state’s budgeting process by reducing volatility in revenues, and to create rules that help the state budget in a more sustainable and stable way. In short the idea is to transition from a budget process almost completely tied to the volatile crude market to a process dependent upon the more stable earnings of Alaska’s fiscal assets.
An important reason to do this, according to Rietveld, is that Alaska's dependence upon oil has led to boom and bust budgeting to match the boom and bust nature of the state's primary source of revenue. In terms of state and national governments, Alaska is one of the most oil dependent in the world, as Rietveld's chart below demonstrates.
The above chart plots reliance based upon two key factors. How much of a government’s total revenue comes from oil, and how high does the price of oil have to be to balance the books. In the bubble on the left side of the chart are Norway, Alberta and Wyoming. For Norway oil accounts for about 30 percent of government revenue. A big reason for that is that Norway also has high civilian and corporate taxes. As a result, Norway can balance the books at $40 oil.
On the right side of the graph are countries and provinces where oil accounts for between 80 and 90 percent of revenues. However, because Alaska does not make use of its fiscal resources it surpasses even Saudi Arabia in terms of how valuable oil must be to balance the state’s budget. Remaining under the status quo would mean oil will have to reach somewhere between $104 and $113/bbl before Alaska is back in the black.
However, according to Rietveld, by applying Governor Bill Walker’s Sovereign Wealth Fund model Alaska’s budget would be balanced at something more like $40/bbl oil. For perspective, Alaska oil is worth about $26/bbl today. With that in mind Rietveld said the state is going to have to go to something like Walker’s plan or find other sources of revenue before the savings run out (in four years or less).
The good news, Rietveld said, is that while Alaska’s Permanent Fund is not as large as some others in the world, like Saudi Arabia’s and Norway’s, Alaska’s fund also represents a much larger proportional relationship to the state’s budget. In other words, the Permanent Fund is plenty big enough to keep the lights on in Alaska while also growing its own corpus.
At this point Sen. Bill Stoltze (R-Eagle River) asked if the governor’s plan accounted for inflation proofing the fund’s principal. Currently the fund is protected against inflation by using some of its earnings to offset the problem. Rietveld explained that the governor’s plan would do the same thing by simply maintaining a government draw below earnings. The governor’s proposed draw would be about 4.5 percent with earnings estimated at between 6.5 and 7.5 percent, effectively inflation proofing the fund, and potentially growing the fund in big earning years.
Of course, a concern for some legislators is that Walker’s Sovereign Wealth Fund plan includes a restructuring of how Permanent Fund Dividends are paid, reducing the amount significantly from last year’s record number, and exposing dividends to the same volatility the governor is trying to escape in the budgeting process.
Sen. Bill Wielechowski (D-Anchorage) asked Rietveld if any of the world’s SWFs spin off dividends to their citizens. Rietveld said the short answer is “no.” He added that in Alaska the government knows some kind of dividend will likely have to remain in the picture, and that it shouldn’t be a hindrance to employing the plan. Stoltze said he believes a judgment call has been made by the administration as evidenced by its decision to make future dividends more dependent upon the volatile oil market while sheltering government spending under the more stable fund model.
Wielechowski, who has remained stalwart in his defense of the dividend program, pressed Rietveld on the point asking him that since dividends are a high priority of Alaskans, shouldn’t they also be tied to the stock market. He said the proposed plan prioritizes spending over dividends.
Rietveld’s response was that in the big picture it balances out because dramatic cuts to government spending also have severe negative impacts on Alaskans. In a volatile budgeting world the economy is subject to the ups and downs of government spending, so people’s property values can also fluctuate wildly and investment is curtailed in an unpredictable environment. Wielechowski, perhaps not understanding Rietveld’s point or perhaps simply expressing his own prioritization of dividends over spending said, “So, you’re OK with flipping it and tying the dividend to the fund and spending to the stock market?”
Rietveld responded that he’d prefer not to tie government spending directly to the stock market, but that the size of the Permanent Fund stabilizes the model and provides for more consistent budgeting. He also pointed out that the SWF model actually protects dividends what, with no government action, will go away altogether in the near future.