Alabama Eyes Change to Constitution to Tap SWF

Ashby Monk

The Alabama Senate (led by the state’s Democrats) yesterday passed a constitutional amendment that will allow the government to tap the state’s SWF for an “Alabama stimulus program.” The idea is to take $1 billion from the Alabama Trust Fund for road and bridge building over the next ten years–$100 million will be drawn from the fund each year and invested in construction works so as to create local jobs.

Because the bill calls for drawing down on the SWF’s principal (and requires a constitutional amendment), it has not been well received by everybody.

“People are treating the Alabama Trust fund like free money,” according to Sen. Scott Beason, R-Gardendale.

Indeed, the states’ Republicans see this bill as a breach of the SWF’s original intention and rationale.

The Alabama Trust Fund was launched in 1985 as an “an irrevocable, permanent trust fund”. The plan was to sequester a portion of revenues from offshore drilling rights and royalties in an intergenerational savings fund. Indeed, the trust receives 99% of all oil and gas payments paid to the State (the remaining one-percent goes to the Department of Conservation-Lands Division). In turn, the government only gets a portion of the interest from the Fund’s investments (which is used to fund prisons, health programs, elderly care, among other things).

In short, the Alabama Trust Fund was never meant to be a stabilization fund. As such, using it to pay for a stimulus package to create jobs–while politically expedient–is quite a departure from the fund’s original purpose.

In times of crisis, politicians around the world must be tempted to put SWF assets to work in their communities; even if the fund has a mandate that explicitly prohibits that type of behavior. So, how do you set up an intergenerational savings fund with appropriate checks and balances to ensure the assets aren’t misused?

  • In Canada, the CPPIB’s mandate is harder to change than the Canadian constitution. The idea being that, while past governments can’t tie the hands of future governments completely, they can make it very difficult to change the fund’s mandate (so as to access to these assets).
  • When Ireland tapped its National Pension Reserve Fund to bolster the country’s banks, new legislation was required that changed the fund’s mandate.

And so, Alabama is currently following a similar path through the state’s checks and balances. Indeed, this bill requires both the approval of the House and voters (since it’s an amendment to the constitution). If all agree that this is in the best interest of the state, then who’s to say they are wrong?

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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