How U.S. Sovereign Wealth Funds Benefits their Citizens and Help Alleviate Poverty
There are more than 83 sovereign wealth funds (SWF) in the world. Unknown to many Americans is that in the United States there are 21 SWFs at the associate state level. A positive side effect of these sovereign wealth funds is that they assist in helping those in poverty escape the poverty trap. This is done in various ways, from direct cash disbursements, to assistance in K1 to K12 education as well as free college or trade school education at public colleges and universities and reducing state taxes allowing for greater disposable income for those at the poverty level.
While the best-known SWF is the Alaska Permanent Fund, the oldest SWF is in Texas. The Texas Permanent School Fund (PSF) which is administered by the Texas General Land Office (TLO), was authorized by the Texas Legislature in 1854. The seed money for the PSF was $2 million taken from the money paid to Texas by the federal government in return for Texas’ claimed territory in what are now parts of New Mexico, Oklahoma, and Colorado. The PSF was further augmented in 1953 when Congress passed the Submerged Land Act that relinquished to coastal states all rights of navigable waters within state boundaries. If the state, by law, had set a larger boundary prior to or at the time of admission to the Union, or if the boundary had been approved by Congress, then the larger boundary applied. The profits from the investment profits, sale, and rentals of these lands are then transferred to the PSF.
In August of 2019, the PSF had a balance of $46.5 billion. Of these funds, $1.2 billion was distributed to Texas public schools for the school year of 2018. The disbursement of these funds reduced the tax burden for low-income families that would normally be used for the education of their children.
The state of Texas also has a Permanent University Fund (PUF) which was established in 1876. The current value of the PUF as of September 2019 was $22.8 billion. The PUF distributes funding from its investment income of two-thirds to the University of Texas System, and one-third of its investment income to the Texas A&M Universities. The disbursement from the PUF to the state universities go towards buildings and the upkeep of the universities.
The Alaska Permanent Fund (APF), which is funded by severance taxes on the extraction of oil, follows a different approach to reducing the poverty rate for its state. The APF currently has a value of $67 billion. The APF on an annual basis distributes the Alaska Permanent Fund Dividend which is proposed by the governor of the state and then authorized by the Alaskan Legislature. For the year ending in 2019, each Alaskan citizen regardless of age received $1,606. With an average household population of 3.28, this represents additional income for each family of $5,267.68 for the tax year ending in 2019. With a per capita income of $30,651, the permanent dividend raises that income to $35,981 per year. With the poverty level for a family of three at $20,420 in Alaska, those families whose income is at or below $20,420 (80,012 families) an additional $5,267.68 raises a substantial portion of the working poor out of the poverty level. With the permanent fund dividend of $8,030 for a family of five, the fund raises this family’s income to $36,810. The addition of the dividend to a family’s income increases the chances for the children of these types of households to escape the poverty trap. This link shows how an average citizen in Alaska uses their PFD.
The New Mexico State Investment Council (SIC) manages the SWF for New Mexico. The New Mexico SWF is valued at $23 billion and is funded by a severance tax from oil and gas extraction. By constitutional amendment, seventy-five percent of distributions from this SWF goes to education. New Mexico uses this wealth to provide free tuition for all New Mexico state residents regardless of income at all New Mexico state and public universities. By providing access to a college education to all of its citizens, New Mexico is providing opportunities for those citizens who would not have been able to obtain a higher education, providing a ladder to higher-paying jobs, and a higher standard of living. In addition to free higher education, the SIC disburses up to $1 billion annually for state government operations.
The Alabama Trust Fund (ATF) like most sovereign wealth funds is based on severance taxes from the extraction of natural gas and oil. The current value of the ATF is $3.2 billion. The ATF disbursements are made to cities and counties throughout the state, providing assistance to their annual budgets, and reducing the need for higher taxes which leaves more money in the bank accounts of its citizens. Thirty-three percent of its distribution goes to cities and counties, Forever Wild Land Trust, Alabama Senior Services and the Alabama General Fund. The distribution to senior citizens helps to alleviate income issues with Alabama’s senior citizens. By providing a safety net to its senior citizens, and other citizens of Alabama, the ATF provides for a higher standard of living, and indirectly reduces the poverty rate in Alabama.
North Dakota’s sovereign wealth fund is known as the “Legacy Fund.” It currently has a value of $6.5 billion. The Legacy Fund is relatively new and was founded in 2010. It is funded as well by a severance tax on oil and natural gas. By a constitutional amendment to the state’s constitution, known as Measure One, no disbursement was allowed until 2017. From there the Legacy Fund distributes its investment earnings to the state’s general fund. As a result of the vibrant earnings of the Fund, the state legislature is considering abolishing state taxes and funding state government operations directly from the earnings of the Legacy Fund. By abolishing state taxes, more money will be left in the bank accounts of the citizens of North Dakota.
While disbursements from the sovereign wealth funds differ from state to state, the intent of these sovereign wealth funds are to establish a higher standard of living for each state’s citizens. From direct disbursement of funds, the Alaska Permanent Fund Dividend, to the funding of school systems in Texas and New Mexico, and the abolishment of state taxes in North Dakota, state sovereign wealth funds assist in the reduction of poverty. These funds also provide avenues of social mobility for their citizens through improved and higher education, as well as reducing the tax burden for lower-income families.