Speakers protest changes to fund

Posted: Friday, October 31, 2003

Most of the eight Kenai Peninsula residents who testified at a Senate Judiciary Committee hearing on a proposal to change the way payouts are made from the Alaska Permanent Fund objected to one aspect or another of the plan.

Senate Joint Resolution, or SJR 18, a proposal recommended by the fund's board of trustees, would amend the Alaska Constitution to limit annual spending to up to 5 percent of the fund's total market value.

By establishing the annual spending limit based on a percent of market value (POMV), the formula used to set payouts from the fund would switch from one based solely on earnings to one based on the true market value of the fund.

Among the criticisms of those who testified were that the POMV proposal fails to guarantee a fixed percentage for permanent fund dividends, it opens the door to legislative spending from the permanent fund, and it lulls Alaskans into complacency by stabilizing the fund. About 40 people attended the public hearing in Kenai City Hall on Tuesday.

In an opening presentation before hearing from the public, Robert Bartholomew, chief operating officer of the Alaska Permanent Fund Corp., said the rules governing payouts from the fund need to change to reflect the change in the current makeup of the fund's assets.

"In the first three years, all the investments were in government bonds," Bartholomew said.

"The fund has evolved since then and the assets are now in stocks, bonds and real estate. Now only 35 percent is in bonds," he said.

Currently under the Alaska Constitution, the permanent fund consists of two parts reserved assets or principal, and unreserved assets or earnings.

The reserved portion is invested permanently and cannot be spent without a constitutional amendment. As an example of the situation, Bartholomew said that if a building the permanent fund owns in Washington, D.C., increases in value, that increase is not reflected in the fund's earnings account, unless the building is sold.

Instead, the value of the real property shows up in the fund's principal, which cannot be touched for state services or for paying permanent fund dividends.

Under the POMV proposal, the true market value of the building would be used to determine the amount that could be paid out of the fund each year.

The proposal also limits the payout to up to 5 percent of the fund's five-year average market value.

Rhetorically asking why the spending limit would be 5 percent, Bartholomew explained that the permanent fund's board of trustees has set a policy goal of earning 8 percent and leaving 3 percent of those earnings in the fund to protect it against inflation.

Up to 5 percent would then be available for spending by the state legislature.

"Right now the legislature has the right to do as they wish," said Preston Williams of Kenai, the first person to testify during the public hearing.

"That 5 percent is set, but no percent is set for how much is set aside for a dividend," Williams said.

Later, Bartholomew explained that the board of trustees only recommends a limit to spending in total, not how much should be set aside for state services and how much for a dividend payout. Those determinations are made by the legislature.

Williams also objected to capping the state's spending to 5 percent.

"There might be a catastrophe in Alaska and the Constitution has set the spending limit at 5 percent. You're stuck," Williams said.

Sen. Ralph Seekins, R-Fairbanks, chair of the Senate Judiciary Committee and moderator of the hearing, said under the current rules that allow no spending from the principal portion of the permanent fund, even less would be available in the event of a catastrophe.

Bartholomew said 84 percent of endowment funds of universities and other institutions, funds that he compared with the permanent fund, have used percent of market value as the basis for spending.

"POMV may work well for organizations and universities that rely on donations," said James Price of Nikiski.

"I think the legislature would immediately appropriate funds from the permanent fund and their withdrawals would never cease.

"POMV is wonderful if we could get protection from legislative spending," Price said.

He proposed putting both POMV and a protection against legislative spending up to a vote of the people.

"I think we all want to protect the permanent fund in one way or another," said Rep. Mike Chenault, R-Nikiski, who, along with Rep. Kelly Wolf, R-Kenai, was invited to sit on the judiciary committee's panel Tuesday.

Chenault said he has not decided how he will vote on SJR 18, but said, "I believe POMV smoothes out the bumps."

Pointing to realized earnings in the portion of the permanent fund that can be appropriated for state services and the permanent fund dividend payments, Bartholomew said, "On June 30, 2000, the earnings reserve account had $3 billion. On June 30, 2003, it had $100,000."

By not allowing appropriations to be based on the actual market value of fund assets, earnings could be such that in good years the state could spend large amounts and authorize large dividends, but in lean years, no dividends would be paid.

"The trustees want to look at stabilizing that amount," Barth-olomew sai .

"You put your monies down and you take chances," said Vicki Pate of Nikiski.

"It is a good thing Alaskans have permanent fund values that go up and down and are not level because that creates a disconnect," Pate said.

She said that if the amount of dividend checks always remained about the same, Alaskans would not worry and would lose interest in matters affecting the fund.

"If the concern is on stock-market volatility, then the permanent fund should return to fixed-rate bonds or whatever," said Malcolm McBride of Kenai.

"The permanent fund has not been broken for 20 years. Don't fix it," McBride said.

When C.A. Short of Nikiski said the change sounded pretty good to him, but he would like more time to study it, Sen. Scott Ogan, R-Palmer, vice chair of the Senate Judiciary Committee, concurred.

"I'm probably the most distrustful of allowing legislative spending," Ogan said. "The jury's still out on this one."

Seekins said he thinks the POMV proposal would remove political volatility from permanent fund spending decisions because the fund's assets would not need to be sold to move their value from the principal portion of the fund into the earnings portion.

"Right now, those six trustees (of the Alaska Permanent Fund Corp.) can play God and decide when to sell.

"I want to take the political volatility out of when you make that decision," Seekins said.

Bartholomew said the trustees have a philosophy of long-term growth.

"We don't always want to have to sell in order to pay dividends," he said.

After the public testimony, Chenault said he took people's comments seriously and thanke the audience for attending.

Sen. Seekins added his thanks and said, "My personal intent is that the primary focus of the permanent fund is to return the most to the citizens and then allow the legislature to spend for state services.

"The legislature has a fiscal responsibility and they have been responsible over the years," Seekins said.

Legislators are expected to take up SJR 18 when they go back into session in January. If approved, the proposal would be placed on the ballot in the 2004 general election.

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