July 18, 2001 The Anchorage Daily News on inflation-proofing the Permanent Fund:

Posted: Tuesday, July 24, 2001

Next January, the Alaska Legislature will have another chance to pass a constitutional amendment that more securely inflation-proofs the Alaska Permanent Fund. It's a good idea that has yet to gather much momentum in the Legislature or among Alaskans.

The inflation-proofing proposal, offered by the Permanent Fund trustees, will go nowhere unless public enthusiasm overcomes legislative inertia. To stir up public support, the trustees are hitting the stump this summer. Monday, Trustee Eric Wohlforth pitched the amendment to a modest crowd at Monday's Anchorage Chamber of Commerce luncheon.

Right now, state law requires the Legislature to reinvest enough of the fund's yearly earnings to offset inflation each year. Each year -- so far -- the Legislature has fulfilled that obligation. But any future legislature is free to repudiate the inflation-proofing law.

As the state's fiscal squeeze gets tighter and tighter in the coming years, the temptation to shortchange the fund will increase. Only by putting an inflation-proofing mandate into the state constitution can Alaskans ensure ironclad protection against future legislative mischief.

The proposed amendment uses a slightly different formula to ensure inflation-proofing. No more than 5 percent a year of the fund's average value, measured over five years, could be used to pay dividends or any other state expense. Over the long term, the formula assumes the fund will beat inflation by five percent or better. In the past 75 years, an investment mix similar to the Permanent Fund has beaten inflation by 5.6 percent, calculated on a 5-year rolling average.

Of course, inflation rates and fund earnings can vary widely from year to year. Averaging the fund's value over five years helps dampen the fluctuations.

Applied to the current balance of $25.8 billion, the 5 percent rule would provide $1.3 billion of income. Dividends take about $1.1 billion, leaving $200 million for other uses -- even after securing the fund against inflation.

Using the ''5 percent rule'' would bring the fund's management in line with most other major endowments. It would also end the current distinction between ''principal,'' which is constitutionally protected, and ''earnings,'' which the Legislature is free to spend. That distinction confuses the public and complicates decisions about when the fund sells investments, especially those with big capital gains.

Another potential benefit is that the trustees' proposal would keep the legislature from ever spending the $4 billion now accumulated in the fund's unobligated earnings reserve. (The earnings reserve is the money left after each year's payment of dividends, inflation-proofing and any miscellaneous expenses.) Instead of being able to play with a one-time-only chunk of up to $4 billion, the Legislature would have to content itself with using about $200 or $300 million a year for other spending.

Some people might worry that taking such a huge chunk of money off the table would restrict the state's future fiscal choices. Maybe so. But if this is a make-or-break objection, legislators can exclude the earnings reserve from the corpus that becomes subject to the 5 percent rule. Lawmakers are free (legally, if not politically) to hold onto part or all of the reserve if they wish. The fate of the earnings reserve needn't determine the fate of the 5 percent rule.

Whichever way it is applied, the 5 percent rule would make the Permanent Fund more permanent. Legislators should advance the necessary constitutional amendment to Alaska voters.



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