Consistent numbers make POMV approach possible option

Posted: Sunday, November 23, 2003

Under current law, the principal of the Alaska Permanent Fund cannot be tapped to provide funds for state programs.

The fund is invested in a variety of financial vehicles, including government and corporate bonds, U.S. stocks, non-U.S. stocks and real estate.

State lawmakers can use the annual earnings from those investments, which over time, average about 8 percent per year.

However, historically, the Legislature only has used a portion about half of the earnings to pay annual dividends to Alaska residents, pouring the rest back into the protected principal.

According to Robert Bartholo-mew, chief operating officer of the Alaska Permanent Fund Corp., roughly $7 billion of the total fund came directly from earnings in excess of what was necessary to protect the principal from inflation. In other words, earnings lawmakers chose to put back into the principal.

The percent-of-market-value approach would make up to 5 percent of the total value of the fund its principal and earnings available each year to the Legislature. From that, approximately $1.3 billion, lawmakers could ensure the costs of state programs were covered without tapping the Consti-tutional Budget Reserve and pay out sizable annual dividends.

Bartholomew said there was a window of opportunity that makes the POMV an attractive alternative to current law. The 5 percent could pay out dividends slightly higher than were paid this year and provide enough money to wipe out the expected deficit, yet still leave enough earnings to ensure growth of the principal itself.

Here is a brief look at aspects of the POMV approach to handling the permanent fund:

The permanent fund is projected to make an average of 8 percent a year.

Five percent would be available annually for dividends and state programs (the decision on how that split would be made would be up to lawmakers, or could be set in law).

The remaining 3 percent of earnings would go into the principal as inflation proofing. That could be even more in years when investments do particularly well.

Historically, fund returns have nearly matched long-term projected returns of 8 percent. Over the past 10 years, actual returns have averaged 7.8 percent. However, in the late 1990s, the fund was returning better than 10 percent.

According to promoters, the POMV would protect the permanent fund for future generations and the option of continuing dividends.

The POMV constitutional amendment is embodied in the language of two legislative measures Senate Joint Resolution 18 and House Joint Resolution 26.

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