Alaska editorial: Permanent fund transfer a risk not worth taking

Posted: Monday, January 08, 2007

The following editorial first appeared in the Anchorage Daily News:

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The Alaska Permanent Fund is the single most popular program in state history. Alaskans guard the fund so fervently that most politicians are eager to join in the chorus. "Protect the Permanent Fund" is the state's unofficial political theme song.

But it's possible to love the fund too much. It's possible to put such a strong lock on too much of the fund that it jeopardizes the state's financial future and, yes, even the dividend itself.

So while we support much of Gov. Sarah Palin's first proposed budget and her commitment to stashing away as much money as possible during the heavy revenue flow of high oil prices, we worry about her proposal to transfer permanent fund earnings to the principal column on the ledger. Palin wants lawmakers next session to approve moving as much as $1.3 billion from the permanent fund earnings reserve to the principal.

The folks in the governor's office says it's about saving for the future. They say moving dollars from the earnings reserve to the principal means the money can be invested for a longer term, earning higher returns.

No, not true.

The entire $36-billion-plus permanent fund is invested without distinction as to whether a dollar is in the $32-billion-plus principal or the $4-billion-plus earnings reserve. Those designations are merely lines on a financial statement; there are no separate checking accounts and no different investment strategies for earning different returns.

Moving $1.3 billion from one column to another will not change the fund's total balance and will not earn a penny more in investment profits.

What it will do is move $1.3 billion from the column that could be spent in an emergency or to pay dividends into the column that can only be spent with a constitutional amendment, which requires a two-thirds supermajority of the state House and Senate and a vote of the public that can only occur once every two years.

But what if oil prices drop into the $40-a-barrel range? And what if they stay there for a few years? And what if the state's budget reserve fund runs low? And what if the Permanent Fund's stock investments lose money and the earnings reserve shrinks, as it did in 2001, 2002 and 2003, when it fell by almost $3 billion? And what if Alaskans needed a few hundred million dollars from the Permanent Fund to cover school costs one year? Locking up too much of the earnings reserve could become a problem if the next constitutional amendment election is a year or two away.

And what if the permanent fund next year loses money? The earnings reserve could be drawn down too low and there might not be enough money left to fully pay the October 2008 dividend. Or maybe the bad news wouldn't hit until the 2009 dividend. That's a real risk - not probable, but possible.

That's why it's so important not to risk transferring $1.3 billion from the earnings reserve to the principal. Sure, the money is extra, extra safe in the principal, but it's also pretty safe in the earnings reserve, which legislators have never spent for anything but dividends and to run the Permanent Fund.

When she released her budget plan Dec. 15, Gov. Palin said it was a work in progress, subject to change. We hope she reconsiders the permanent fund transfer and changes her mind.

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