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Permanent fund should be managed as true endowment to protect it

Posted: Tuesday, October 01, 2002

The stock market gyrations that briefly threatened this year's permanent fund dividend were a vivid demonstration of the need to change the fund's marching orders.

For a time, fund managers were unsure that money would be available to pay the dividend, which is $1,540.76 this year and is due in October. The checks are now safe due to a market uptick.

The good news is that fixing the permanent fund's long-term problem would open the way to using a portion of fund earnings for their original purpose. And it could be done with minimal pain from diving dividends.

Right now, fund earnings are placed into an account called the earnings reserve. Earnings -- and those dividend checks -- are based only on gains from investments sold or cashed in. Investments that grow but aren't cashed in don't get considered.

That puts pressure on the fund's managers to sell assets to keep the earnings reserve full when it might make more sense to hold the assets and cash them in later. The permanent fund trustees are making the point -- and it's a good one -- that the fund should be managed as a true endowment like the big educational funds at Harvard University and elsewhere.

Alaska's fund is managed to earn 8 percent a year overall. The trustees propose to change the rules, calculate annual earnings as 8 percent of the total value and reinvest 3 percent in the fund to provide growth and a hedge against inflation.

That would leave 5 percent to pay dividends and a share of the cost of state government, the latter being the reason the fund was set up in the first place. The change could be made painless and go a long way toward filling the gap if it were phased in three years from now and the 5 percent split evenly between dividends and state spending.

Dividends are calculated on a five-year average of the value of the earnings reserve. And because of the investment market shrinkage in recent years, the size of the checks is declining. Under the existing system, the dividends will be about $1,010 in 2005.

If Alaska switched to an endowment system and the 5 percent was split between dividends and state expenses, about $625 million would be available for each purpose. That would put a big dent in the expected fiscal gap, perhaps pushing back the need for any new taxes for years. And the dividend checks would be approximately $1,030 each, about $20 more than with the present formula.

The time is fast approaching when new ways of doing things will be necessary. Keeping the dividend money flowing and using some fund earnings for their original purpose would make a lot of sense.

-- The Voice of the (Anchorage) Times

Sept. 23



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