POMV plan has potential

Spending limit, guidelines in law would protect future of fund

Posted: Wednesday, April 07, 2004

For the past six years, the trustees of the Alaska Permanent Fund have advocated for changes to the fund's management system to modernize the fund and inflation proof its principal into the future. With these goals in mind, the trustees have requested consideration of a percent of market value system similar to that used by most large trusts and endowments across the nation.

The trustees propose basing the annual payout on the total value of the fund and limiting the possible draw to no more than 5 percent. Permanent fund administrators expect the $28 billion fund to grow at a rate of about 8 percent annually, while the inflation rate is expected to be about 3 percent a year. With surplus earnings retained in the fund, future inflation proofing will be automatic, without relying on legislative transfers. This will make the permanent fund truly permanent and multi-generational.

Under the current wording of the Alaska Constitution, the Legislature has access to approximately $4.5 billion in earnings of the permanent fund. Except for dividends, the Legislature has left the earnings virtually untouched since 1982. However, with the fiscal gap widening and the Consti-tutional Budget Reserve dwindling, pressure is mounting.

As part of ongoing discussions regarding the state's fiscal future, I proposed language to the Senate finance committee on March 19 for possible changes to the percent of market value idea that would help prevent overspending from the permanent fund and protect its value.

I believe before voters approve any changes to the Constitution, they must understand and have confidence in the plan put before them. As a result, I drafted my proposal to address concerns I have heard over the past three years during discussion of the trustees' concept.

My proposal would amend the Alaska Constitution to maintain the protected principal of the fund. All income of the fund would be deposited into a constitutionally protected earnings reserve account. The Legislature would be allowed to withdraw up to 5 percent of the total value of the fund each year, but only from the money in the earnings account. Withdrawals could go only toward dividends and public education. In order to move forward, this plan would have to be approved by two-thirds of the Legislature and go to a vote of the people.

To further assure voters that their dividend will be protected, I have proposed that legislators place into law how the earnings would be split between education and dividends before voters decide on the constitutional amendment.

I made this proposal to assure that the principal value of the fund cannot be spent in a prolonged down market, that tapping earnings will not lead to draining the fund, and that using earnings does not threaten the dividend program.

Regrettably, the details of how my plan would protect the dividend and principal of the fund were overshadowed by comments I made about a possible one-time bonus check. At the same Senate finance meeting, I also discussed an idea to send out a second dividend check in December, if voters approved the plan, that would represent the difference between how much checks would be under the current system and how much they would be under my proposed change. The idea was just that an idea and not part of the bill that I asked the finance committee to consider. The proposal stands alone and I find it unfortunate that, just like "Grinch" stole Christmas, the holiday bonus stole the headlines.

Ultimately, the most important goal is preserving the permanent fund for future generations of Alaskans. This plan provides constitutional protection without hamstringing the ability of those Alaskans to respond to circumstances we have no way to predict.

Gene Therriault, R-North Pole, is the president of the Alaska Senate.

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