Enough to go around?

Fund earnings could pay for dividends, government, says corporation official

Posted: Thursday, July 20, 2000

Whether earnings of the Alaska Permanent Fund should be used to subsidize state government will certainly be a topic of debate in this year's legislative races.

That is something for the public and its elected representatives to decide, Jim Kelly, director of communications for the Alaska Permanent Fund Corp., told the Soldotna Chamber of Commerce this week.

However, the fund's earnings could subsidize government to the tune of $280 million per year without threatening the principal and without reducing future dividend payments, he said.

As of Monday, the permanent fund, a public savings account built on state oil revenues, totaled $28.2 billion. That includes $20 billion in principal, which the Alaska Constitution forbids the Legis-lature from spending, and $8.2 billion in earnings, which the Legislature can spend. Of that, $4.1 billion sits in the state's permanent fund earnings reserve account. The rest is unrealized, for example, in stocks that have gained value but not been sold to take the profit.

The fund's fiscal 2000 earnings were $2.1 billion. The Legislature deposited $428 million of that to the principal to protect it from inflation and deposited $250 million to grow the fund. It also appropriated $1.2 billion to pay this year's dividends -- $1,950 to every Alaska resident. The state still must withdraw the $1.2 billion from the earnings reserve account. That leaves roughly $222 million in fiscal 2000 earnings still unused.

So far, the Legislature has used the earnings to pay dividends and preserve the principal against inflation and plowed any remaining income back into the principal.

"What you want to do in the fu-ture is the big question," Kelly said.

For the last three years, the fund's earnings have exceeded the state's oil revenues, which totaled $1.6 billion in fiscal 2000.

"Oil revenues will continue to decline, and fund revenues will continue to increase," he said. "I would expect that over the long term, you're going to make a lot more money from the permanent fund than has ever been made from oil. That raises the question, of course, of how are you going to pay for the things you used to pay for with oil?"

Kelly said the permanent fund can be viewed as a public asset or a personal one.

"When someone announced the dividend is going to be $1,950 or so, was your first thought, 'Gee, we ought to be using that money for something else' or was your first thought, 'Should I save that money, or what am I going to buy with it?'" he asked. "I don't think it's a sin to have taken that second choice."

The dividend program does much to smooth the ups and downs in Alaska's economy, he said. However, the earnings are enough to subsidize government, too.

The Alaska Permanent Fund Corp. has invested about 54 percent of the fund in the stock market, which has had the highest long-term rate of return. As a hedge in case stocks fail to perform, though, it has invested about 36 percent in bonds and about 10 percent in real estate.

Largely because of the booming stock market, the fund has earned about 12 percent per year for the last 16 years. But that is unlikely to continue, Kelly said. Given the mix of investments, the corporation predicts the fund's long-term earnings will average about 8.25 percent per year -- about 5 percent more than the predicted rate of inflation.

Kelly said he met recently with former Gov. Jay Hammond, who seemed to feel it will be necessary to use some of the fund's earnings to subsidize government. He said Hammond favored inflation-proofing the fund but did not want to reduce dividend payments.

"It turns out that if you're making 8.25 percent and you need 3.25 percent for inflation-proofing, you've got 5," Kelly said. "It turns out you need 4 to keep the dividend where it is. There is 1 percent left, what I said was $280 million. There's $280 million that you could pay to the government."

Legislators have debated whether the requirement to pay dividends should be written into the Alaska Constitution, Kelly said. Alaska Permanent Fund Corp. attorneys say doing that would greatly increase the risk that the federal government will decide to tax permanent fund earnings.

"It should give you pause as to whether that's something that you would want to pursue," he said.

The Legislature has paid dividends for 19 years, he said, and the program is not at risk. Still, the fund cannot do everything.

"We can certainly inflation-proof it, we can certainly pay a dividend, and we can certainly use some money for government," Kelly said. "But you can't do all of those things all the way. You can't pay for all of government and give people dividends and protect it. There have to be choices made."

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