The Governors Forum recently came out with a statement declaring the sovereign wealth fund unconstitutional signalling their intent to apparently politically kill the fund. Alarm bells seem to be ringing for any hope of a return to fiscal discipline but should anybody really be worried?
The governors seem to be against the idea of being forced to save. Unfortunately this seems to be driven not by any ideas on fiscal discipline but on their inability to pay the new minimum wage but there is really no cause for alarm. The federal government can still run its own fund from its share of oil revenues as long as it lets the states know that in the event of another oil price shock the states are on their own. My guess is some states will choose to run their own funds and it will probably take a state government shut down to convince other states to think about fiscal discipline.
I ran into Eric Parrado, one of the brains behind Chile’s successful sovereign wealth fund and also one of the consultants hired to work on Nigeria’s fund framework and I asked him how Chile dealt with regional governments and the inevitable politics that goes with such a fund. Turns out they don’t have lesser governments underneath their federal government so we are basically in uncharted waters. I guess we will have to learn the hard way