A fund plan instead of taxes

Posted: Monday, March 03, 2003

During the fall election campaign, Frank Murkowski said there is no fiscal crisis in Alaska, just a crisis in management. He was right. There is a better way.

The earnings of the $22.5 billion Alaska Permanent Fund go to dividends and inflation-proofing of the fund. The problem is that earnings have been going down for three years because a little over one-third of the fund is invested in U.S. and foreign stocks and stock markets are near a 10-year low.

The dividend is based on the average earnings over the past five years. With three bad stock years behind it, the five-year average is down and liable to go lower. That means lower dividends. Fund managers warned this week that it could even mean zero dividends.

Rep. Bill Williams, R-Saxman, co-chairman of the House Finance Committee, said he favors an alternate plan proposed by the trustees of the fund. It was considered by the Legislature's Fiscal Caucus last year. Under it, the fund is administered like other foundations nationwide, which apparently are still able to fund their projects, such as environmental activism. It's the way the University of Alaska successfully administers its foundation that pays for the Alaska scholars program.

Instead of basing payouts on the earnings of a foundation (or the Permanent Fund principal), the payouts (dividends) are based on the total value of the fund. Five percent of the total value of the fund or foundation is taken out each year. All foundations and the fund earn in excess of 8 percent annually because they also are invested in bonds and real estate. The fund has earned an average of 10.2 percent annually since 1984. Taking 5 percent out allows 3 to 5 percent, or more, of the earnings to stay in the principal of the fund. That offsets inflation and grows the fund, which grows the money available for the next year's dividends.

If 5 percent were taken out of the fund this year, and divided equally between dividends and the Constitutional Budget Reserve, the $500-600 million fiscal gap would be closed and dividends of about $1,000 would be payable. Gov. Murkowski hints that he favors dividing the 5 percent between education and dividends. Rep. Williams, who has investigated this approach more than most, favors dividing the 5 percent so that 40 percent goes to education, 20 percent to capital projects and 40 percent to dividends.

The Williams idea is the most practical for solving the state's fiscal problem, for continuing dividends, for growing the economy with infrastructure and for avoiding more taxes. Education still would have to depend upon a general fund appropriation for part of its money, meaning there would be the needed legislative oversight on spending. But education would benefit from the capital program through financing new schools. That 20 percent of the 5 percent this year could provide $225 million for capital projects. That could be leveraged into billions for projects (although practically it would be much less) by using it to retire bonds. The bonds would fund schools, railroad expansion, power interties, roads, harbors, airports, ferries - infrastructure to boost the economy, as the governor proposes.

Taking the annual expense of a capital budget and a portion of the education budget out of the general fund, and reducing state expense, as the governor is doing by merging departments and programs, covers the fiscal gap.

Because the payout is based on the total value of the fund, there is inducement to build the principal of the fund. The plan protects the dividend and the principal of the fund. There will always be a dividend and it will grow as the fund grows from the addition of oil royalties from new production, which the governor also is promoting.

That plan must go before the voters for approval but is simpler and easier to sell than the complicated plan that was killed a few years ago. It will be especially easier to sell if dividends drop to zero and Alaskans are faced with a state income tax.

The governor, the legislators and the trustees of the Alaska Permanent Fund should get the plan worked into a constitutional amendment to put before the voters in the 2004 election.

In the meantime, Alaskans can pray that the stock market turns around by June 30 if they want a dividend this year under the current plan.

• Williams is retired publisher of the Ketchikan Daily News.

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