Fund payout limits a good idea

Posted: Monday, April 23, 2001

The following editorial appeared in the Anchorage Daily News on April 17:

By and large, Alaska's leaders have been good stewards of the Alaska Permanent Fund.

By any measure, the Permanent Fund is a success. The fund is now worth $28 billion.

Alaska's residents last year received individual checks of $1,963 as their share of the state's wealth. The fund's principal has the protection of the Alaska Constitution.

And we still have the blessing of choice - we haven't decided yet what, other than dividends, we want the Permanent Fund to do for us.

But most Alaskans agree they want to fund to last.

That unity bodes well for the board of trustees' efforts to limit the payouts of the Permanent Fund to 5 percent of a five-year average of its year-end market value.

The payout limit would require a constitutional amendment, meaning two-thirds of each house of the Alaska Legislature would have to agree to put it on the 2002 general election ballot. Then a majority of voters would have to approve.

This is a good idea.

Jim Kelly, communications director of the Permanent Fund, gives three reasons.

The limit keeps Alaska's treasure safe. Fund managers now count on its earnings running at about 8.25 percent. With a five percent maximum payout, inflation-proofing becomes automatic at a rate of at least 3.25 percent. So the fund will continue to grow in real value.

Maximize income. Five percent is in line with what most endowments pay out, but, particularly with the five-year average, is conservative enough to keep the fund growing. Over time, a larger five-year average will make that 5 percent larger.

Minimize fluctuations from year to year. Use of the five-year average builds some perspective into the return formula, and gives the state a better idea of just how much money the fund will provide from year to year.

The 5 percent rule won't affect the dividend check, which already is calculated using a five-year average that tempers fluctuations. Five percent is more than enough to cover the dividend payout using the current formula; historically, dividends have cost the state a little less than 4 percent of the fund's value.

Trustee Clark Gruening said the 5 percent-limit is the "best way to ensure the Permanent Fund is permanent."

The 5 percent rule has another advantage. Without affecting the current dividend formula, and while strengthening the fund against inflation with the force of the state constitution, the limit would leave a projected $175 million-$300 million in earnings available for state spending. This amount could be used to help cover the state's spending shortfalls. That residual amount is projected, not guaranteed - the proposed constitutional amendment puts inflation-proofing and dividends first - but the soundest proposals for ways to square state spending and revenue have included some use of Permanent Fund earnings along with other revenue and economies.

Whether the Legislature would decide to use leftover earnings that way, the proposed constitutional amendment would be as close as Alaskans can come to having the fund's protection written in stone. That would guarantee a growing fund to serve Alaskans yet to be born, as well as those of us alive now.

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