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Legislature should think of the future generations

Posted: Sunday, April 10, 2005

Ketchikan Daily News By Lew Williams

Congress is considering improvements to Social Security for future generations. The Alaska Legislature should do the same - put state finances in order to benefit future generations.

State Senate President Ben Stevens, R-Anchorage, is taking a bold step in that direction by proposing use of $337 million in Alaska Permanent Fund earnings for school maintenance and other construction projects. For years, legislators have shied away from doing anything with the permanent fund except to pay 50 percent of its earnings to individual Alaskans. The rest has gone into inflation-proofing the fund.

Alaska politicians have been afraid to do anything that will be perceived as a "raid" on the fund that will reduce dividends.

President Stevens just hasn't gone far enough to stabilize Alaska's finances, assuring continued dividends, inflation-proofing, and use of fund assets to build the state without invoking an individual income tax, or boosting taxes on industries to the point they are non-competitive in world markets.

President Stevens and the other legislators should follow the advice of the Alaska Permanent Fund trustees and change the fund to a foundation form of management. Under that, 5 percent of the total market value of the fund is available every year for dividends and state expenses.

Under the current system 50 percent of the earnings of the fund, averaged over five years, have been used for dividends. The problem is that earnings vary widely with the stock market. In 20 years, dividends gradually climbed from a little more than $300 a year to $1963.86 in 2000. Then the stock market slumped, along with fund earnings, so that the 2004 dividend was only $915.84, the lowest amount in 12 years.

That doesn't have to be. If the state constitution is changed to allow up 5 percent of the market value (POMV) of the entire fund to be used for dividends and state spending, dividends will be higher than they were in 2004 using only one-half of that 5 percent. And the amount for dividends will go up gradually each year - instead of swinging with the markets - because the fund's market value increases from new oil revenues and automatic inflation-proofing.

The fund has grown by more than 10 percent per year over the past 20 years. If 5 percent a year goes to dividends and state spending, the balance - more than 5 percent - stays in the funds as inflation-proofing.

The resolution offering that amendment to the constitution should be passed in this legislative session so lawmakers can explain it to voters before the 2006 election.

The lawmakers also should pass a law that if the amendment passes, lawmakers will dedicate 50 percent of the 5 percent of market value to dividends. The rest can be divided 40 percent to operating budget and 10 percent to capital. Or, it can be 30 percent to state and 20 percent to local governments.

The amendment should not specify the amount of the dividend. That should be up to each legislative session - the future generations.

And that brings us to capital spending as proposed by President Stevens. Lacking the POMV or any other plan, he has a good idea. But the best idea for paying for capital projects is to finance them with 20-year bond issues, an even more practical idea under POMV when amounts of money are steady and known each year for making bond payments.

All successful big businesses borrow (bond) to expand and beat the competition. States bond to build infrastructure that encourages economic development - more future jobs and income. Wal-Mart's fabulous growth in the 1990s was financed by long-term (bonded) debt.

Bonds are morally the best way to finance long-term expansion, such as infrastructure improvements, instead of using cash on hand - this generation's money. The state should use some of its increased oil revenue to finance bonds.

Think of future generations. Shouldn't they pay something each year for the roads, schools, ferries, airports and other infrastructure they will be using in the next 20 years?

• Lew Williams Jr. is the former publisher of the Ketchikan Daily News.



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