Investing in the Nation’s Future: Why Congress Should Emulate Energy States’ Sovereign Wealth Funds

This report contains corrections.

“I have spoken of the rich years when the rainfall was plentiful. But there were dry years too, and they put a terror on the valley … And it never failed that during the dry years the people forgot about the rich years, and during the wet years they lost all memory of the dry years. It was always that way.” – John Steinbeck, East of Eden, 1952.¹

In 2023, Lea County, New Mexico, received $180 million in property and sales tax revenue from oil and natural gas production, an 800 percent increase from the previous year and nearly double the county government’s annual budget.² The windfall revenue resulted from rising oil production and high prices³ due to factors outside the control of county officials.

These revenues will not last forever. Lea County and peer governments in fossil fuel-producing regions face common risks of becoming overly dependent on revenue from nonrenewable resource extraction.⁴ Spending these dollars on annual budgets and reducing other taxes at the same time creates structural dependence on future oil, natural gas, and coal income.⁵

This report highlights cases where state governments have decoupled annual budgets from annual fossil fuel revenue by saving and investing income in sovereign wealth funds, also called permanent funds or endowments. Sovereign wealth funds are designed to replace nonrenewable natural resources, which are depleted over time, with a permanent financial asset that protects and grows the state’s wealth. In addition, sovereign wealth funds generate income used to pay for public services that benefit current and future generations.⁶ The examples of state funds highlighted in this report offer a blueprint for a proposed federal sovereign wealth fund.

The U.S. government is the only major fossil fuel-producing nation without a sovereign wealth fund—depleting the nation’s nonrenewable wealth for short-term spending. A problematic feature of this spending is revenue-sharing payments sent directly to state and local governments. These largely rural places where federal leasing occurs—in New Mexico, Wyoming, Montana, and Alaska, for example—can struggle to manage volatility of large federal disbursements.⁷ A federal sovereign wealth fund could replace these annual payments with stable and permanent distributions and help mitigate the risks that leasing and market uncertainty shift onto energy-producing communities.

The Center for American Progress previously proposed a sovereign wealth fund to replace revenue-sharing payments. (see text box) This report addresses the investment strategy such a fund could pursue—one aligned with state and regional economic diversification and energy transition strategies. States again inspire this idea. This report highlights examples of states investing public capital from their permanent funds into companies and sectors that are diversifying and growing fossil fuel-dependent state economies. The federal government is also using public financing to support small businesses and rural economic development. The federal government could leverage these existing programs and capacity to implement a new public capital investment strategy that follows the lead of state sovereign wealth funds. This report begins with an overview of state and international sovereign wealth funds. It then describes how Congress could direct the development of an investment strategy using existing entities.

Permanent funds are a commonly used and proven strategy to insulate governments from the volatility and decline of revenue earned from fossil fuel extraction. Permanent funds stabilize revenue and guarantee intergenerational benefit from the one-time depletion of nonrenewable resources.

State governments, including New Mexico, Texas, Alaska, Utah, and Montana, currently manage several hundred billion dollars in funds financed with nonrenewable natural resource revenue.¹⁰ The state of New Mexico offers an excellent example of managing funds to stabilize government revenue. The state manages two permanent funds, the Land Grant Permanent Fund and the Severance Tax Permanent Fund. The funds’ combined assets of $39 billion were financed with oil and gas royalties and severance taxes, respectively.¹¹ Distributions from New Mexico’s permanent fund investments will surpass oil and gas as the state’s leading source of revenue by 2039,¹² enabling an energy transition without a fiscal impact to the state budget, including statewide public school funding. This accomplishment is essential in a state with relatively high poverty rates, poorly funded government services (including education and health care), and substantial dependence on oil and gas revenue.¹³

Permanent funds are also common practice around the globe. Norway’s sovereign wealth fund, established in 1990 and worth $1.7 trillion in July 2024, was set up to mitigate fiscal risks in the event of declining oil prices or depletion of oil fields in the North Sea.¹⁴ By saving instead of spending oil revenue, Norway has substantial resources to pay for social services long after oil production ends.

The United States remains the only major resource-rich country lacking a sovereign wealth fund.¹⁵ New Mexico and countries including Norway recognize they are blessed with oil and natural gas but are using these resources to look forward and build resilient and diversified economies that can thrive independently from oil. The United States should make similar investments to ensure the places producing the nation’s energy wealth are compensated fairly and prepared for economic transitions. The following section offers best practices from states to inform the establishment of a new federal sovereign wealth fund.

Permanent funds, endowments, and sovereign wealth funds share the same principles and basic functions: They save and invest one-time revenue from extractive industries to create permanent wealth and to generate income to pay for government services and benefits of current and future generations.¹⁷ The purpose of state and international sovereign wealth funds—what the income is spent on—varies. The basic function of saving and investing nonrenewable revenue is common. Establishing a new federal sovereign wealth fund would allow the implementation of best practices demonstrated by state and international wealth funds. These best practices are discussed below.

Permanent principal balance

The money saved in a permanent fund is called the principal. This principal is the “permanent” part of a permanent fund.¹⁸ The principal is not spent but is invested in a portfolio of stocks, bonds, real estate, and other financial assets to earn income.

Inflation proofing

The principal of the fund must be inflation proofed so as not to leak funds over time. Inflation proofing requires fund managers to retain some of the investment earnings in the fund to ensure the principal continues to grow and keep pace with long-term inflation. Alaska’s Permanent Fund is inflation proofed by appropriating funds equal to the inflation rate from its Earnings Reserve Account.¹⁹

Defined beneficiaries

Permanent funds all have a fiduciary responsibility to be managed on behalf of defined beneficiaries. That means the fund must be managed in the best interest of a specific group of people. New Mexico’s Land Grant Permanent Fund helps pay for public schools,²⁰ Alaska’s Permanent Fund makes annual payments to every state resident, and Norway’s sovereign wealth fund pays for public pensions and stabilizes government budgets for social services.²¹ The purpose of the proposed federal sovereign wealth fund is to make stable and permanent payments to the state and local governments that currently receive direct revenue-sharing payments from the federal government.²²

One way to ensure a new fund is managed on beneficiaries’ behalf is to establish a board with robust representation from state and local governments that will receive payments from the fund. A previous proposal from Oregon’s and Idaho’s U.S. senators proposed establishing a permanent fund that would have replaced revenue-sharing payments from public land leasing with stabilized payments from the fund.²³ To prevent a future Congress from spending down the principal of the fund instead of saving it, the proposal would have created a rural development corporation to manage the fund with the corporation’s board of directors, including membership from beneficiary state and local governments.²⁴

Stable payments from the fund

Disbursements from the fund must be stabilized to mitigate against the annual volatility of financial markets. This can be accomplished in several ways, including by investing in fixed-rate return bonds and making distributions equal to a fixed percentage of the ending fund balance, averaged over several years. This approach smooths more volatile returns from equity investments and stock portfolios. For example, the state of New Mexico’s Land Grant Permanent Fund disburses 4 percent of the ending fund balance averaged over five years.²⁵

Managing investment risk

The principal in a sovereign wealth fund is invested to earn income, and the income is the money available for spending. The investment strategy is defined by fund managers, such as a state investment council for state permanent funds, a university board of governors, or a legislative body that sets the rules governing a sovereign wealth fund. The investment strategy guides the expected rate of return and the risk that fund managers are allowed to take. Some funds are managed for low risk, investing exclusively in governmental bonds and receiving relatively low rates of return. Some funds are invested in a diversified portfolio of stocks, venture capital, and equity, seeking higher returns but also taking on greater risks of loss.²⁶ For a new federal fund, principal investments should not be made by the Treasury Department or other federal agencies but by intermediary institutions with the necessary capacity, expertise, and autonomy from political influence.

The proposed purpose of a new U.S. sovereign wealth fund is to replace annual revenue- sharing payments with permanent and stable distributions from the fund.

As mentioned earlier, much state funding for key programs such as public schools, public health, and infrastructure in energy-producing states depends on ongoing oil and gas extraction. In states where fossil fuel extraction occurs on federal lands, state and local governments receive more money when more oil, natural gas, and coal are extracted, and less money when production slows. This encourages more mining and drilling because of the risks to state and local budgets. This report argues that the federal government has an obligation to help mitigate the risks of boom-and-bust economies and declining oil and gas production for energy-producing communities. The federal government can meet this commitment by creating a sovereign wealth fund specifically to stabilize payments to state and local governments and make them permanent.

Because the principal balance of a sovereign wealth fund is typically built over time by investing income from natural resource extraction over years and decades, canceling revenue-sharing payments and investing them instead would deprive state and local governments currently dependent on these payments of needed revenue. This problem of timing can be easily solved by capitalizing a new fund with a one-time payment.²⁷ Capitalizing a new fund with an up-front payment would guarantee immediate, predictable, and permanent replacement of annual revenue-sharing payments. Using future fossil fuel revenue to repay a one-time principal payment would make a new fund immediately work for state and local governments and wouldn’t cost taxpayers any money.

The size of a one-time principal payment should be informed by the size of desired disbursements to beneficiary state and local governments. The cost to taxpayers can be estimated using projections of future royalty income from fossil fuel and natural resource extraction. Resources for the Future recently projected future federal fossil fuel royalty income through 2050 under different energy market and policy scenarios. The study estimates future revenue will vary from $180 billion under a policy scenario that holds global temperature rise to 1.5 degrees Celsius to $322 billion under a business-as-usual scenario.²⁸ The share of total royalty collections disbursed to state and local governments averaged 23 percent over the past five years, suggesting that if these ratios hold going forward, future royalty income available for distribution to state and local governments through 2050 is estimated to be from $49 billion to $88 billion.²⁹

Federal mineral revenue-sharing payments averaged approximately $2 billion annually from 2011 to 2020.³⁰ To replace this amount, a fund with a principal balance of $49 billion—the low end of revenue projections—would need to achieve an average return on investments of 4.1 percent. If the fund’s principal were $88 billion—the high end of revenue projections—a new fund would only have to earn 2.3 percent on its investments. Additionally, inflation-proofing adds 2 percent to the required average returns (the Federal Reserve’s long-term inflation target),³¹ meaning that if the investment strategy achieves 4 percent to 6 percent average returns on investment, the fund would be inflation-proofed and deliver predictable and permanent payments to state and local governments.

The pertinent question then is: How would a federal sovereign wealth fund, aiming to decouple state and local budgets from annual fossil fuel extraction revenue, invest $49 billion to $88 billion to generate 4 percent to 6 percent average returns?

Currently, most public investment portfolios target a diversified assortment of stocks and bonds designed to earn income, manage risk, and mitigate against corruption and overheating a national or state economy. This approach often leads to investments that are not aligned with the purposes of a sovereign wealth fund—namely, leveraging public resources for intergenerational benefit and managing the risks associated with volatile nonrenewable resource markets. In a high-profile example, Arizona’s state employee pension fund invested in a project that extracted scarce Arizona groundwater used to irrigate alfalfa which was exported to Saudi Arabia. The project’s foreign investors could pursue the venture because of lax or nonexistent rules around groundwater pumping in Arizona and the financing they received from the state’s public employee pension fund. The wells of residents near the project were going dry due to the rapid groundwater pumping. According to estimates, the groundwater used for the project would have supplied 1 million Arizonans for a year.³² Local and state politicians have since attempted to push back on the project. However, it was the lack of public financing tools that created the problem in the first place.³³

A new federal fund has the potential to transform rural economies if the investment strategy is crafted to do so.

Again, U.S. state funds show the way. Several states are directing portions of their principal investments to build more resilient and diversified economies and to leverage opportunities in the energy transition. New Mexico and North Dakota are implementing investment strategies that align with and advance state economic diversification and energy transition goals. The New Mexico State Investment Council (SIC) completed a renewable energy strategic investment plan in 2020 that allows the SIC to invest a portion of the Land Grant Permanent Fund’s principal into renewable energy projects sited in the state.³⁴ More recently, New Mexico earmarked 11 percent of the principal of the Severance Tax Permanent Fund for investment in private equity funds that support climate technology.³⁵ The SIC does not make investments directly. For example, the SIC allocated $50 million to DCVC, a California venture capital firm focused on climate technology firms.³⁶ Those funds are part of a portfolio: The SIC has given $540 million to 14 venture capital firms to increase investment in climate technology companies looking to expand or locate in New Mexico.³⁷

The state of North Dakota created the North Dakota Growth Fund, a program sending return-seeking capital to North Dakota-based entrepreneurial and innovation centers. By the middle of 2024, 14 North Dakota companies had received financing directly from the Growth Fund, and 30 or more had participated in entrepreneurial leadership and networking programs that the Growth Fund supports.³⁸ And the Growth Fund has crowded in an additional $1.56 of private investment for every $1 of state funds committed.

The federal government should draw on existing programs and principles when designing a new investment strategy—including certifying and capitalizing community development financial institutions (CDFIs) and several agency loan programs at the U.S. Department of the Interior (DOI) and the U.S. Department of Agriculture (USDA). The private sector is innovating a variety of different funds and institutions to advance rural and energy development goals.

An ecosystem of established place-based and mission-driven institutions is emerging across rural America to provide and facilitate loans, equity investments, and other forms of financing, filling in the gaps left by traditional financial institutions. The most effective of these institutions not only facilitate access to various sources of capital, but they also provide technical assistance, capacity, and grant support to their clients—the proverbial “capital stack”—helping rural communities achieve locally defined goals and access and use historic federal resources.³⁹ These institutions work to establish and protect local ownership and invest in local businesses and entrepreneurs. The institutions are as diverse as the rural communities they serve. Still, they follow similar principles: They 1) provide flexible and patient capital to retain wealth in the local economy; and 2) provide for more diverse and resilient economic opportunities.

A new federal fund could invest public capital through these existing intermediaries with strong, well-established roots in these places. The substantial scale of a federal sovereign wealth fund—with a principal of $49 billion to $88 billion—could increase the scale and reach of the emerging ecosystem of local financial institutions by directing public capital to them for investment. However, more analysis would be required to determine if sufficient demand or infrastructure exists—from intermediary investors or the entities who borrow from them—to mobilize billions of dollars in new public capital. A federal investment strategy should be aware of this potential limitation and plan to diversify its assets across multiple channels. A variety of these intermediary organizations may include the ones discussed below.

Community development financial institutions

CDFIs provide flexible and long-term (or patient) capital to rural organizations, businesses, and individuals. CDFIs provide traditional bank services, such as home financing and small-business loans, at affordable rates in economically disadvantaged communities.⁴⁰ They can also invest in health centers, schools, and community centers⁴¹—all vital services and institutions that build community well-being and opportunity. In addition to financial services, many CDFIs provide technical assistance and grant support to clients, helping address the lack of capacity that many rural governments and organizations face.

Many types of financial institutions can be considered CDFIs if they primarily serve economically disadvantaged communities.⁴² The most traditional CDFI is a loan fund, typically providing loans at rates between 4 percent and 7 percent on terms that match the borrower’s needs and abilities.⁴³ CDFIs can also be credit unions and banks.⁴⁴ All entities seeking to operate as a CDFI are vetted and approved by the U.S. Department of the Treasury’s CDFI Fund, the federal office that oversees the CDFI industry.⁴⁵ Once CDFIs are approved, the CDFI Fund provides financial and organizational support to them, helping them cover operating costs and excel in their work.⁴⁶ Essentially, CDFIs are a way the federal government supports community banking in places where free markets don’t sustain banks. There are currently more than 1,400 CDFIs nationwide, and their presence and impact have been growing in the wake of the COVID-19 pandemic.⁴⁷

The Treasury Department’s oversight and regulation of CDFIs allows them to invest federal dollars in communities directly. Various governmental programs trust CDFIs to distribute their funds as well. For example, Fahe (see text box) helps mobilize USDA dollars across rural towns in Appalachia.⁵⁰ The Emergency Capital Investment Program (ECIP) deployed $8.5 billion to America’s hard-to-reach places through minority depository institutions (MDIs), which include CDFIs, in response to the COVID-19 pandemic.⁵¹ Even more recently, the Greenhouse Gas Reduction Fund (GGRF), created through the Inflation Reduction Act of 2022, has committed roughly $14 billion to CDFIs to accelerate clean energy investments nationwide.⁵²

Nonprofit impact and mission-driven investment funds

A growing number of nongovernmental organizations (NGOs) are making investments in rural and energy communities that could also serve as intermediary investors. Some of these organizations are part of an expanding field of impact investors who invest funds to realize societal improvements that generate returns.⁵⁴

The Conservation Fund is one of many NGOs across the country that works to conserve land, combat climate change, and build vibrant communities⁵⁵ by purchasing privately owned forest and farmland and then selling it to the U.S. Forest Service or other conservation land managers.⁵⁶ Organizations such as The Conservation Fund may be willing to access financing from a federal fund to secure and expedite land deals, supporting public and private land conservation.

Calvert Impact is a nonprofit investment firm and national leader in impact investing. Calvert Impact provides profit-generating investment options that support communities through financial products such as the Community Investment Note,⁵⁷ which currently provides up to 4.5 percent returns for a five-year note while supporting the United Nations’ Sustainable Development Goals. Calvert Impact teamed up with the Community Preservation Corporation and Self-Help to form Climate United (CU),⁵⁸ which was awarded $6.97 billion from the GGRF. Climate United committed at least 60 percent of the funds to low-income and disadvantaged communities, 20 percent to rural communities, and 10 percent to Tribal communities. The funds will help deploy energy efficiency upgrades to housing, community infrastructure, small farms, and local businesses.⁵⁹ The three nonprofit organizations comprising CU had already collectively managed nearly $30 billion across partners in different sectors, demonstrating their capacity and the market for investments in sustainable economies.*⁶⁰

Federal revolving loan funds

Federal agencies already manage large investment portfolios and could serve as intermediaries to invest some of the proposed sovereign wealth fund’s capital. Notably, USDA Rural Development (RD) managed a total loan portfolio of $220 billion in fiscal year 2023.⁶¹ USDA RD makes loans to homeowners, businesses, community facilities, and water and electric utilities in rural areas.⁶² The Inflation Reduction Act expanded the U.S. Department of Energy (DOE) Loan Programs Office’s (LPO) authority to more than $400 billion in lending capacity.⁶³ These two agencies are responsible for deploying capital across the country for projects that otherwise may not have had access to capital due to the projects’ perceived risk, location, or size.

Several federal agencies manage mission-aligned revolving loan funds available to developers and rural and Tribal communities who often lack access to capital. However, they do not operate as sovereign wealth funds managed to maximize income for a defined beneficiary. Rather, their loans are structured to provide capital to entities that cannot access financing through private markets and are provided at preferential rates. For example, the USDA Rural Economic Development Loan & Grant Programs provide loans at 0 percent.⁶⁴ A sovereign wealth fund would likely need a higher interest rate for that portion of the capital stack than the agencies typically demand to provide a sufficient return for the fund’s beneficiaries. A market assessment would be required to determine if demand exists for higher-interest loans from existing programs.

Aside from revolving loan funds, federal agencies offer other programs that help facilitate capital to rural communities. For example, the USDA operates the Farm Credit Administration, which oversees an agriculture-focused banking system that provides agricultural real estate mortgage loans, rural housing loans, and rural cooperative loans.⁶⁵ The Farm Credit Administration also certifies other local impact investors, such as RuralWorks,⁶⁶ which could allow a federal fund to invest capital in private and NGO intermediaries that have federal certification.

Careful diversification

A new sovereign wealth fund will need a diversified investment strategy while earning income for revenue-sharing state and local governments. That investment strategy can be aligned with local and regional economic development and diversification strategies. The fund should mobilize capital through CDFIs, private and nonprofit impact investors, federal revolving loan funds, and other options to ensure the public’s investments are insulated from political influence; provide a sufficient return to beneficiaries; and leverage economic diversification strategies in rural, resource-dependent, and revenue-sharing communities.

Developing and implementing an investment strategy will require time to evolve. Investing too much too quickly into state and local markets risks overheating local economies and crowding out private and philanthropic dollars. Initially, the principal balance of a new sovereign wealth fund can be invested in well-established national and global index funds to achieve required returns. For example, renewable energy exchange-traded funds (ETFs) are readily available.⁶⁷ Over time, more of the portfolio can be directed to intermediaries for local and regional investment as they build capacity and scale opportunities.

The primary purpose of the proposed federal sovereign wealth fund is to make permanent and stable payments to state and local revenue-sharing governments. This objective requires the establishment of a new fund with a transparent and sound governance structure. Previous CAP work proposed the creation of a National Transition Corporation (NTC) to manage a proposed federal Legacy Fund.⁶⁸ The NTC could facilitate a nationwide transition strategy by delivering and coordinating capacity and technical assistance to eligible communities, aligning federal agency programs and resources, and streamlining processes. For example, the NTC could employ regional navigators, resembling the USDA’s Rural Partners Network community liaisons and the Economic Development Administration’s economic recovery fellows. The NTC could also provide a vehicle to coordinate federal programs through memorandums of understanding and joint funds, design investments to be eligible for the new markets tax credit and Direct Pay provisions, and provide for streamlined applications and eligibility for transitioning communities. This would help communities make the most of the historic investments in rural and transitioning communities from the Inflation Reduction Act, the Infrastructure Investment and Jobs Act, the CHIPS and Science Act, and other federal economic development programs.

Having the NTC manage a new federal sovereign wealth fund would provide security from future reappropriation by Congress. It would also allow for direct participation and leadership from beneficiary state and local governments and better alignment with other energy transition and economic diversification programs.

A federal sovereign wealth fund’s capital must work flexibly alongside funds from philanthropy, community funds, grants, and more. For example, as Katy Stigers, vice president of research at Fahe, explains, “When Fahe deploys federal funding, those funds are leveraged on balance sheets with additional private and philanthropic capital to maximize our work and do more in hard-to-serve places such as persistent poverty counties and rural areas in Appalachia.”⁶⁹ Often, federal loan programs must be utilized for specific types of projects. Rural lenders need financial capital to fill gaps in their existing capital stacks. A National Transition Corporation would be well placed to meet communities where they are and provide financing—through intermediaries—that better meets their needs when compared with existing federal loan programs. Pairing flexibility, capacity, and technical assistance, and packaging capital with tax credits, grants, and other financial resources, would allow communities to launch and sustain long-term strategic investments that leverage locally designed diversification and transition goals.

One of the primary vulnerabilities of state and local governments facing a transition from fossil fuels is an acute loss of revenue that pays for annual operating budgets. In some cases, fossil fuel revenue can make up one-quarter to one-third of total local and state governmental revenues. The federal government’s policy of collecting and disbursing revenue earned by leasing federal lands for resource extraction exacerbates the fiscal risks these governments face. CAP has proposed that the United States instead should establish a permanent fund that would save and invest revenue from nonrenewable resources and provide stable and permanent payments to those state and local governments receiving direct annual revenue-sharing payments.

Creating a federal permanent fund would also provide an opportunity to generate returns through an investment portfolio designed to benefit revenue-sharing state and local governments as they work to diversify their economies and transition budgets from fossil fuels. An emerging network of intermediaries, including community development financial institutions, private and not-for-profit impact investment funds, and existing mission-driven federal loan programs, could be used to invest the principal of a new federal permanent fund. A new National Transition Corporation could establish transparent and sound governance and coordinate revenue replacement payments and investments with the existing ecosystem of rural development programs. A federal permanent fund’s investment strategy could catalyze resilient, sustainable rural economies nationwide before the end of fossil fuel extraction leaves them broke.