With the completion of the pipeline, Prudhoe Bay’s oil tap was cranked wide-open. Alaska was suddenly rich. Not just sort of rich but filthy rich. The big lease sale of September 1969 had made the state swagger, but that $900 million in revenues was a drop in the barrel compared to the hundreds of millions of dollars that now flowed annually into state coffers from a combination of oil and gas leases, royalties, and taxes. The words budget surplus took on a whole new meaning. By one estimate, it was projected to be $2,500 annually for the next thirty years for every man, woman, and child in Alaska. “This is an absolutely unique situation,” mused University of Alaska economics professor Arlon Tussing, “in that the state has money it doesn’t know how to spend.”63
In the tradition of the mining frontier, some Alaskans wanted to spend this newfound wealth on a spree—whether it be a new billion-dollar capital, a winter trip to Hawaii, or just about anything in between. Others, including Governor Jay Hammond, took a longer view. Back in his days as the part-time manager of the Bristol Bay Borough, Hammond had once proposed forming an investment corporation to be funded from a fishing-use tax, the vast majority of which was paid by nonresidents. Hammond went on to suggest that after paying the costs of local government, local residents—as shareholders in the corporation—would receive an annual payment akin to a stock dividend for each year they had resided in the borough. Most folks in Bristol Bay looked at him as if he were crazy, and promptly and overwhelmingly voted down the measure.
A decade later, Jay Hammond was governor, and it was the state of Alaska that was awash in excess revenues. Hammond thought that his original idea of a dividend-paying corporation was still a good one. To promote it among Alaska voters, he created a traveling town meeting called the Alaska Public Forum. This became a raucous roundtable for discussing controversial state issues, but Hammond’s dividend idea didn’t receive much support. Undeterred, the governor introduced a bill in the Alaska legislature to amend the state constitution and create Alaska, Inc. Under Hammond’s proposal, Alaska, Inc. would receive 50 percent of all mineral payments and tax dollars for a trust fund, the principal of which could be invaded only by statewide vote. Half of the fund’s annual earnings would be distributed as cash dividends to all Alaskans in the form of one share of dividend-paying “stock” for each year of residency since statehood.64
While various committees of the state legislature sparred with Hammond’s proposal, there was no shortage of other ideas. Most Alaskans had come to agree that the enormous economic bounty being harvested from oil royalties should be used for something less Brazilian than building a new capital, but there the consensus stopped. Senator Bill Ray, a Democrat of Juneau, termed Hammond’s dividend proposal “well intentioned, but misguided” and gave it “not much chance of passage.”65 Loans to small businesses and marginal enterprises, outside investment in blue chip stocks, a host of community development projects, and an Alaskan version of the World Bank to finance megaprojects such as the still-simmering Susitna–Devils Canyon Hydroelectric Project, were among the ideas discussed.
One thing was clear. Alaska’s initial $900 million lease windfall had been spent rather quickly to catch up on long-neglected infrastructure and public works, education, and social programs. Meanwhile, in less than a decade the state budget had tripled from just under $300 million, and its growth showed no signs of slowing. It seemed that government was expanding to consume whatever revenues were available.
Rather than have that happen, Governor Hammond opined, “I would far rather take that oil money—money from nonrenewable resources—sail it back out to the people in the form of a dividend, and then, through the normal taxing process, provide for the funds for normal state services.” 66 In other words, base the state budget on necessary expenditures and not black gold revenues.
When the legislature first presented Governor Hammond with a fund bill, it was for a statutory investment fund, not an invasion-proof trust created by constitutional amendment. Instead of depositing 50 percent of all mineral revenues into the fund, it called for crediting 25 percent of only the leasing and royalty revenues, not severance taxes as well. Alaska, Inc. wasn’t mentioned, and these shortcomings made Hammond skeptical despite the proposed name: the Alaska Permanent Fund. In Hammond’s mind, this was not a case where half a loaf was better than no loaf. Legislation could be changed depending on what bunch might congregate in Juneau every two years. Hammond wanted something permanent in more than just name or at least something so firmly embedded in the state constitution that it would take a vote of the people to change it. Hammond vetoed the measure.
The legislature got the message and redrafted the legislation. On November 2, 1976, Alaska voters approved an amendment to the state constitution creating a truly permanent fund. It was to be the repository for at least 25 percent, but conceivably 100 percent, of all mineral revenues received by the state: lease bonuses and rentals, royalties, oil and gas sale proceeds, and federal mineral revenue-sharing payments. The Permanent Fund was to invest these revenues in an attempt to provide long-term security from the sale of the state’s nonrenewable resources. Just how this was to be done and for what purposes the fund’s income could be used were left to the governor and legislature to decide. There was no mention of a dividend to individual Alaskans, but the fund itself was a good start.
In his next State of the State address in January 1977, Hammond renewed his proposal for the dividend-paying Alaska, Inc. and urged the legislature to put at least 50 percent of revenues, rather than the 25 percent required by the amendment, into the Permanent Fund. A reluctant gubernatorial candidate in 1974, Hammond ran for reelection in 1978 in large measure because he wanted to see the benefits of the Permanent Fund accrue to Alaska’s residents and not remain a large slush fund subject to legislative whims.
In that 1978 election cycle, Hammond managed an unusual political hat trick. He beat the same candidate, former governor Walter J. Hickel, three times: in the Republican primary, in a court-ordered runoff for the Republican nomination, and in the general election when Hickel refused to give up and ran as a write-in candidate. Hickel likened fellow-Republican Hammond’s dividend idea to something akin to socialism and preferred to view the surplus as a huge pot from which to fund development projects. By then, Hickel had become something of an unlikely antiestablishment hero for having been fired as secretary of the interior by Richard Nixon, but even pro-development Alaskans still remembered the Hickel Highway.
Two years later, the Alaska Permanent Fund Dividend became law. Essentially, it provided each Alaskan with one “share” of dividend-paying stock for each year of residency in Alaska since statehood. Aside from resembling Hammond’s first dividend idea at Bristol Bay, this approach seemed a fair way to compensate old-timers for the leaner years they had put in before the oil boom. The first dividend was set at fifty dollars per “share,” or year of residency. But before the state treasury could crank out the checks, two young attorneys freshly arrived in the state and admitted to the Alaska bar filed suit alleging that dividend payments based on length of residency were unconstitutional. A lower Alaska court agreed, but the Alaska Supreme Court reversed the ruling and upheld the law. The law’s critics appealed to the U.S. Supreme Court. Meanwhile, earnings continued to accumulate in the fund.
On June 14, 1982, in an 8-to-1 decision, the U.S. Supreme Court struck down the payments based on residency. The court held that such a system violated the Equal Protection Clause of the Fourteenth Amendment because there was no valid state interest to be rationally served by distinguishing between long-term residents and newcomers. Such a distinction, the court said, could lead to other similar classifications. (Associate Justice William Rehnquist was the sole dissenter.)
Anticipating the high court’s decision, Hammond and the legislature had recrafted the dividend program to provide that one-half of the annual income of the Permanent Fund be distributed equally to all Alaska residents, including children, who had lived in the state for six months. A portion of the remaining income was to be added to principal to act as a hedge against inflation, and the annual payments were to be based on five-year income averaging that would avoid large yearly fluctuations. A few weeks after the Supreme Court decision, more than 400,000 $1,000 checks were distributed to Alaska residents, roughly the amount of three years of dividends that had accumulated during the litigation.67
Meanwhile, with Alaska’s state coffers overflowing, the legislature had taken the extraordinary step of abolishing state personal income taxes. There were many, including Governor Hammond, who thought this action was feeling just a little too flush. Suspend these taxes or reduce them for a few years perhaps, but abolish them? Woe to the governor and legislature that would ever have to reimpose them should oil revenues drop.
Some thought that they never would, and by the end of the 1970s, Alaska’s state government was beholden to oil and gas revenues in a way that dwarfed the dependency of other states. In 1978, for example, oil and gas revenues accounted for 29.2, 19.6, and 15 percent of the state budgets of Louisiana, Texas, and Oklahoma, respectively. In Alaska that year, the figure was 58 percent, and it topped out at a whopping 90 percent in 1980 and remained in the 80 percent range for much of the following decade. At the peak of oil revenues in 1981, more than $10,000 per resident flowed into the state treasury.
But the truth of the matter was that even with the spigot cranked wide-open, there were a number of variables affecting Alaska’s oil revenues. The state was the beneficiary of the fivefold price increase for Middle Eastern crude in 1973–74 and the resulting threefold increase in domestic crude. At thirty dollars a barrel, things looked mighty sweet, but such market swings could work both ways. Alaska historian Claus-M. Naske summed up the downside quite simply: “At $22 a barrel, the state of Alaska shudders, and at $15 per barrel it would face a fiscal revolution.”68
Meanwhile, of course, pipeline pay had forced up other prices. Alaska was an expensive place both to do business and to live. As always, distance from manufacturing centers and a heavy dependence on imports added to the burden. But with annual fund distributions of $404 paid to more than 500,000 residents in 1985, such worries were for the future.
Back in November 1976, shortly after the passage of the Permanent Fund amendment, the Anchorage Daily Times reported that “the impact of the new oil money, with its potential to influence life in Alaska for better or worse, has hardly begun to sink into the public consciousness.”69 Perhaps. But once this got into the collective consciousness, it was going to be awfully hard to shake. As the fortunes of oil have ebbed and flowed in the quarter century since then, one thing is certain. Every Alaskan who cashes an annual Permanent Fund check should thank the determined foresight of Jay Hammond and a few of his cohorts for putting something away for a rainy day.
