The Alaska Permanent Fund Board of Trustees is urging the Legislature to propose to Alaska voters an amendment to Alaska's constitution that will provide greater protection for the Alaska Permanent Fund. For Alaskans to have the opportunity to vote on the trustees' proposal in the November 2004 general election, each house of the Legislature would have to approve the proposal by a two-thirds vote.
The Trustees' proposal (HJR26 in the House and SJR 18 in the Senate) would set a limit on what could be paid out annually from the fund and guarantee inflation proofing of the fund by establishing a percent-of-market-value spending limit.
For 23 of the fund's 27 years of existence, the APFC has been governed by a six-member board of trustees. Protecting the fund against inflation has been the highest public policy goal of the trustees since the original board was appointed in 1980. The first board testified to the Legislature that the greatest threat to the permanence of the fund is inflation. In response, the Legislature adopted statutory inflation proofing in 1982.
In more recent years, the board has examined the use by various large endowments and public funds of a formula approach to determine the method and size of payouts from these funds. This approach is generally referred to as "percentage of market value" payouts or "POMV" for short. The trustees' proposal calls for a spending limit of 5 percent of the market value averaged over five previous years.
The purpose of placing this formula in the state constitution is to protect the long-term real value of the fund and to provide consistent and predictable distributions for the long term. Unlike the present statutory provision for inflation proofing, HJR26 and SJR18 would make inflation proofing automatic, not discretionary. This is significant because since 1982, Alaska's fiscal picture has changed dramatically.
If the permanent fund is going to continue to serve each generation of Alaskans, it has to be able to make distributions so that current generations receive some benefit while not "over-harvesting" the fund so that there is little or nothing left for future generations. The Alaska Permanent Fund can be reasonably expected to produce more future state revenue than any single source - more than oil or natural gas, more than fishing or other natural resource.
In managing Alaska's fishery stocks, the only sensible choice is to avoid taking too much of any fish stock so that, over the long term, the harvest is maximized. While over-harvesting can reap short-term rewards, the inevitable result is, at best, fewer fish and, at worst, permanent impairment or destruction of a fisheries stock. The same is true for managing distributions from a large investment fund like the Alaska Permanent Fund.
As the balance in the Constitutional Budget Reserve (CBR) dwindles and consensus on solutions to the fiscal gap remains elusive, there is a danger that the permanent fund will, by default, fall victim to over-harvesting. While the existing constitutional provisions establishing the permanent fund say that the "principal" of the fund can only be used for "income-producing investments," this language would not prevent overspending of the income or realized earnings of the fund.
Overspending can occur in two ways. First, statutory or discretionary inflation proofing may be discontinued to make more income available for spending. The Legislature has always appropriated money for inflation proofing but the fiscal situation may soon be such that placing hundreds of millions of dollars in the fund for inflation proofing will be very difficult politically.
Second, as the balance of the CBR approaches zero, pressure will mount to manage the permanent fund for the short term and to realize gains to raise cash. What has happened to the CBR would be likely to happen to the permanent fund. Just as more of the assets of the CBR are required to be invested in short-term and less-profitable investments, the permanent fund may also be forced to consider a shorter investment horizon for a significant portion of its assets.
Properly invested and protected, the Alaska Permanent Fund will continue to successfully convert the non-renewable petroleum wealth of our state into a permanent and substantial stream of revenue for generations after the last barrel of oil has been pumped. The trustees' proposed constitutional change is more compatible with the fund's diversified, long-term investment strategy of achieving a 5 percent real rate of return over time. The present constitutional language, designed over a quarter century ago for a fund that was invested 100 percent in bonds, does not require inflation proofing or prevent overspending of fund income.
Legislative passage and voter approval of the board's proposed amendment will protect the ability of the fund to be managed for the long term and to continue to import money into the Alaska economy.
The trustees believe that this proposal for complete and protected inflation proofing makes ultimate good sense for Alaska's permanent fund and for Alaska's future. This session, the trustees' proposal deserves approval by the Legislature to give the public the chance to vote on the proposal in November of 2004.
Clark Gruening has been a member of the Board of Trustees of the Alaska Permanent Fund since 1995 and served as chairman of the board from 1999 through 2001. He is a partner in the Juneau law firm of Gruening & Spitzfaden, APC.