Governor backs fund-protection plan

Posted: Tuesday, September 30, 2003

A plan to protect the Alaska Permanent Fund from stock market volatility has won Gov. Frank Murkowski's approval, but he won't say how much, if any, of the fund's earnings should be used on state government.

Murkowski has endorsed a plan by the Permanent Fund Corp. - the organization that manages the $25 billion fund - to cap the amount of investment earnings that can be used at 5 percent of the total market value of the fund.

Currently, the earnings of the fund's investments are put into an earnings reserve account. Dividends are determined by averaging the performance of the fund's investments for the previous five years.

About half of the amount of the five-year average is used to pay dividends and the other half is used to inflation-proof the principal of the fund.

The earnings reserve account is not inflation-proofed, which puts the dividend at risk.

Under the new plan, known as the Percent of Market Value method, the earnings reserve account would be eliminated and the earnings would be inflation-proofed with the principal of the fund, according to Bob Bartholomew, chief operating officer for the Alaska Permanent Fund Corp.

"Instead of a principle and an earnings reserve account, there would be a single consolidated account," he said.

The amount used for dividends would be capped at 5 percent.

Bartholomew said the approach would stabilize the account and protect dividends during years when the market is down.

"It's a spending limit so you don't overspend in the good years," he said. "But it's also a buffer that gives you distribution in the bad years."

Some state lawmakers, however, want to use some of the 5 percent to pay down the state's budget gap.

This year, despite Murkowski cutting more than $130 million from the budget, the Legislature drew about $400 million from the state savings account, the Constitutional Budget Reserve, to cover the deficit.

The House Ways and Means committee held the first of several hearings last week in Anchorage, to discuss using part of the capped 5 percent to help close the state budget gap.

Murkowski would not comment on whether permanent-fund money should be used to cover the state deficit. He said making use of the earnings of the permanent fund should remain in the realm of the Legislature.

"I will, perhaps, comment on it if (the Percent of Market Value method) passes and if there's support there," Murkowski said in a press conference last week. "But I don't see any point in taking a lot of time or energy on what-ifs, because the bottom line is whether or not we are going to support it."

Adoption of the Percent of Market Value method requires amending the state constitution. This needs approval by two-thirds of the lawmakers in the state House and Senate.

Then the question goes to a vote of the people. If approved by lawmakers next year, the question would go on the ballot in the 2004 general election.

Anchorage Republican Rep. Mike Hawker, the House Ways and Means Committee co-chairman, said the Legislature has a constitutional mandate to balance the budget, a charge that takes precedence over paying dividends.

"We have two to five years of money left in the Constitutional Budget Reserve depending on the price of oil," Hawker said, noting that once the budget reserve is empty, the state might have to dip into the earnings reserve to balance the budget.

"You can't give (money) away and then not pay your creditors," he said.

Hawker noted that the Legislature already has the authority to dip into the earning reserve but acknowledged the political consequences of doing so without a vote of the people.

Hawker said he is planning to submit a bill next year in the Legislature that would split the 5 percent cap. Half would go toward paying dividends and the other would be used to balance the budget. The bill would be effective upon passage of the constitutional amendment.

"These are my ideas," Hawker said. "I am completely open to other ideas in the Legislature. We need to incorporate the ideas of others in the Legislature, but it has to result in a balanced budget."

Hawker said the Ways and Means committee will hold hearings in Southeast and the rest of the state over the next few months to discuss the POMV plan and other aspects of fiscal policy.

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