Change the permanent fund to a foundation

Posted: Sunday, May 04, 2003

Now that Saddam is gone, President George W. Bush and Prime Minister Tony Blair have decreed that Iraqi oil belongs to the Iraqi people. National pundits cite Alaska's Permanent Fund and its dividends for Alaskans as one way for Iraq to go. George Melloan of the Wall Street Journal isn't keen about Alaska's example. He says giving Iraqi citizens a dividend from their oil might make them lazy and unproductive. (Alaskans resent that inference.)

Melloan is uninformed. He cites Alaska's big pot of money as a continuing tempting target for politicians. He quotes Alaska House Speaker Pete Kott's view that creating the Permanent Fund was a mistake and it needs to be changed from a "sacred cow" to a "cash cow" for the state.

Melloan admits that prying dividend money out of the hands of Alaskans won't be easy. We add that it is impossible. That is why the Iraqis should consider it. The people keep under control their politicians and the cost of government to protect their dividends, more so than when paying an income tax.

Alaskans can improve their system by changing the Permanent Fund to a foundation. That secures it from irresponsible political spending, assures dividends forever and provides funds to help run the state forever. It reduces the amount of other taxes needed and puts money (dividends) into the economy instead of taking it out (taxes).

Dividends currently are paid from the average earnings of the fund over the past five years. A foundation allocates money based on the average market value of the total fund over the past five years. Up to 5 percent of that value is taken each year to spend on projects, scholarships, etc. In the case of the Alaska Permanent Fund Foundation, it can go half to dividends and half to government expenses. Had that formula been in effect this year, it would have given Alaskans $600 million or about $1,000 each in dividends. It would have covered the state's fiscal gap with another $600 million. Under the current system, fund earnings have been negative for two years. That means dividends based on earnings instead of total market value of the fund could result in little or no dividend this year.

Thousands of similar funds worldwide are handled as foundations quite successfully. The University of Alaska's Consolidated Fund ($128 million) invests money contributed to the university and uses 5 percent of the total value of the fund for scholarships (for the top 10 percent of Alaska high school graduates) and other programs. The program admits to negative earnings in the past year of 7.1 percent but over the longer terms has yielded average annual earnings of 5.9 percent.

The National Association of College and University Business Officers has 654 members, including UA, and tallies earnings of their foundations. Over a 10-year period funds the same size as the UA's have yielded average annual earnings of 9.9 percent. Bigger funds, those with over $1 billion in assets (Harvard claims $17 billion and Yale $10 billion) have average annual earnings of 12.8 percent over 10 years. That means 5 percent went to projects and more than 5 percent went back into the funds for inflation-proofing.

In its first 20 years, Alaska Permanent Fund earnings average 11 percent annually. They aren't in that area this year but will rebound. That's an investment fact to which 367-year-old Harvard and 302-year-old Yale can attest. Alaska Permanent Fund trustees and their financial advisors predict the Fund's earnings, less than $1 billion this year after peaking at a record $1.8 billion in '96, will approach $3 billion by 2013 and $5 billion by 2026. That means the principal of the fund will grow even if oil revenue falls.

Alaskans must have their finances in order for the day that larger sums are bolstering the Permanent Fund, paying dividends to future Alaskans and helping pay for their education, social programs and infrastructure. Converting the Permanent Fund to a foundation is a must.

As Alaskans watch Iraq move to a stable new government that some experts predict will take five years, we should avoid criticism. The 14,000 people in the Ketchikan area have been unable to create a stable, unified government in 40 years.

Williams is retired publisher of the Ketchikan Daily News.

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