Permanent fund amendment favored

Posted: Friday, June 01, 2001

An Alaska Permanent Fund Corp. spokesperson campaigned in Kenai last week for a constitutional amendment to allow the Legislature to spend up to 5 percent of the fund each year.

Elmer Rasmuson, first chair of the permanent fund board of trustees, lobbied for laws to inflation-proof the fund's principal, Jim Kelly, the corporation's director of communications, told the Kenai Chamber of Commerce.

State law now requires the corporation to transfer enough of the fund's earnings to cover inflation to the principal each year.

That has kept the fund whole, Kelly said.

Now, the permanent fund trustees are lobbying for an amendment to the Alaska Constitution.

"We're talking about putting inflation-proofing into the Constitution. That gives a higher level of protection to the fund," he said.

If the Legislature approves, the amendment will go on the Nov. 5, 2002, ballot. It would:

n Require all permanent fund earnings to be deposited to the fund, and

n Limit annual spending from the fund to 5 percent of its average market value for the previous five years.

According to the corporation's analysis, the principal still would be constitutionally protected and unavailable for spending. Appropriations would come from the permanent fund earnings account.

Larry Persily, deputy commissioner of the Alaska Department of Revenue, said the amendment would inflation-proof the earnings account as well as the principal. Current statutes inflation-proof only the principal.

The permanent fund now totals about $26.7 billion, including $20.3 billion in principal, which the Legislature cannot spend, and $6.4 billion in the permanent fund earnings account, which it can. To date, the Legislature has spent the earnings only to pay dividends to Alaska residents and to inflation-proof the fund.

Over the last 17 years, the fund has earned an average of 11.37 percent per year, Kelly said. For the future, the trustees expect it to earn an average of 8.25 percent per year. They expect inflation to average 3.25 percent. That leaves 5 percent that could be spent each year without reducing the real value of the fund.

If the Legislature spent 5 percent each year, Kelly said, the fund would just sustain its value. The only real growth would come from deposits of new oil and gas revenues. According to the corporation, the amendment would protect the fund, maximize distributions from it and minimize fluctuations in annual payouts.

Last year, the permanent fund dividend program cost roughly $1.1 billion -- about 4 percent of the fund's value. If the Legislature spent 4 percent for dividends, Kelly said, that would leave 1 percent -- $175 million to $300 million per year -- that could be used to fund government.

Alaska voters soundly defeated a September 1999 ballot measure that asked whether, after paying permanent fund dividends and inflation-proofing the fund, the state should use part of the permanent fund's earnings to help balance the state budget. Many voters feared that spending permanent fund earnings to fund government would cut into the dividend program.

Kelly said he and the trustees are talking about the proposed amendment now so the public will have plenty of time to learn about it before the 2002 election.

"We do not want to have a repeat of what happened in September of 1999, where this kind of very complicated proposal came up and was put before the people and people didn't really understand it," he said. "And maybe it wasn't as well thought out as it should have been, and it was soundly, roundly and properly defeated."

Kenai Mayor John Williams said barring cuts to government services, the state will have to find a way to close a $1 billion annual budget gap.

"The academic point that I'm trying to make here is that citizens are going to have to make a decision as to whether to trade off keeping the permanent fund and growing it so that they get an annual check versus taxing themselves for government," he said.

Kelly said there is no way around the choice. The fund's earnings are not enough to pay dividends, fund government and fund real growth of the principal.

"You can do two of those things handily, or you can do a portion of all three of those things," he said. "... People are going to have to come to terms with that."

Ed Martin Sr., a prime organizer of the "Vote No" campaign to defeat the September 1999 ballot measure, said the permanent fund corporation should invest more in Alaska and less Outside.

"We have a big pile of money here. In proportion to the number of people who live here, it's out of whack. We're not getting the value out of that wealth," he said.

Kelly said the corporation makes investment capital available to Alaska banks, but the banks have not been able to lend it all.

"They would tell you that folks that have a good idea or a vision can find the money they need," he said.

There is no shortage of capital in Alaska, he said.

He compared the Alaska Permanent Fund to one Alberta started in 1976 using its oil revenues. In the 1980s, he said, Alberta's fund was larger than Alaska's. But Alberta used its fund to make cheap loans for people to buy houses and subsidized loans to businesses. When the economy went into recession, the fund lost its money.

Martin said the Alaska Permanent Fund is losing money now in the stock market.

"If we are going to lose some of this money, lose it within the state," he said.

At least then, he said, the money would circulate through Alaska's economy.

He said politicians seem not to have gotten the message in 1999.

"We've given the politicians time to get this in line, yet the politicians are telling us, 'Give us more money.' We have the vote, and the people spoke quite loudly -- 'do not touch it,'" he said.

David Lee of Nikiski also criticized the proposed amendment.

"I don't want the people to get robbed by the politicians," he said. "We're going to have to start another 'Vote No' campaign. Once they get their hands on it, it's going to be gone.

"If they get 5 percent, what's to stop them from saying, 'We want 10 percent or 15 percent.' We need to get it where the politicians can't touch it."

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