Calling the formula used to determine Alaska Permanent Fund Dividends arcane, Revenue Commissioner and fund Trustee Wilson Condon on Tuesday called for inflation-proofing the fund and using earnings to help pay for state services.
The speech at the Juneau Rotary Club luncheon marked the kickoff of the Alaska Permanent Fund Corp.'s annual meetings and the completion of Condon's eight-year term as revenue commissioner.
The amount of this year's dividend checks will be announced tonight at the corporation's annual dinner. State officials estimate this year's checks will total about $1,550 each.
Condon on Tuesday emphasized the volatility of oil revenue, stressing revenue from investments in the permanent fund can be just as unstable.
"It is inevitable that we will need permanent fund income, along with oil and gas income, to pay for Alaska's public needs over the next decade," Condon said. "The volatility of both sources poses a huge challenge to the future managers of the state finances."
Condon said annual dividend checks could be preserved if use of the permanent fund were combined with other revenue-generating measures such as an income or sales tax. Although inflation-proofing and using the fund for state services makes more sense in terms of economic management, Condon said, "decades of demagoguery" would make it difficult to win public support for the plan.
When general fund revenue, which is used to pay for state services, fell in the 1990s by nearly 30 percent, largely due to declining oil revenues, the Legislature turned to the Constitutional Budget Reserve Fund.
The CBR was created in 1990 based on billions in oil and gas tax and royalty settlements paid to the state by oil companies. That money has been used each year to fill the state's budget gap.
The state already has used $4.8 billion of the $7.1 billion in the CBR, and there are no more big settlements to replenish the fund, Condon said. Based on revenue forecasts, Condon said the fund will hit empty by late 2004.
"And even if oil reaches $30 a barrel and stays there day in and day out, the Constitutional Budget Reserve Fund would hit zero in December 2006," Condon said.
Between 1986 and 1999 the price of oil averaged about $16.50 per barrel, Condon said. As of Tuesday, North Slope crude was at $29.76 a barrel.
The permanent fund's total market value, as of June 30, was $23.5 billion, down from $26 billion-plus in 2000. The principal of the fund in June 2002 was $21.9 billion while the Earnings Reserve Account was $1.6 billion.
Condon noted the principal, which is inflation-proofed in statute but not in the state constitution, does not vary with the ups and downs of the market. The earnings, which are used to pay dividends and are not inflation-proofed, reflect changes in the stock market.
"The fund's principal increases with oil royalty deposits and inflation-proofing, while the Earnings Reserve rises and falls solely on market performance," Condon said.
Condon, along with the trustees of the fund, recommend a constitutional amendment that would inflation-proof the entire permanent fund and limit the amount that can be withdrawn from the account to 5 percent a year.
Although inflation-proofing is required by law after dividends are paid, the Legislature could change that law and use the earnings. Passing a constitutional amendment would require a two-thirds majority of the Legislature and then a majority vote by the people.
"The fund's trustees support a constitutional amendment to limit the amount that could be withdrawn in any one year to 5 percent of the fund's total market value," Condon said. "In addition to placing a limit on the amount of income that could be spent, this amendment would provide two other major benefits; it would enshrine inflation-proofing in the constitution ... and it would inflation-proof the entire fund - only the principal is inflation-proofed under the existing statute."
Condon added that the percent-of-the-market value is a common technique used by most university endowments and foundations.
Instituting the 5 percent payout limit would allow the fund to grow while protecting it against inflation, Condon said.
Timothy Inklebarger can be reached at email@example.com.