Permanent fund payout change will bring stability

Posted: Tuesday, October 14, 2003

There have been a number of recent articles and opinion columns regarding the Permanent Fund Board of Trustees' percent of market value (POMV) payout proposal, often referred to as the "5 percent solution." I would like to reinforce the board's perspective on this issue and clarify some misconceptions that have been placed in front of the public.

POMV would change the way money is paid out of the Permanent Fund, limiting the amount to no more than 5 percent of the average value of the entire fund for the previous five years. How this differs from current practice is that now, the payout structure bases payouts on the realized earnings of the fund. The board feels that POMV will provide a spending limit in the good years when earnings run high, while allowing a payout in the bad years when earnings fall off. This approach meets the direction under Alaska's statutes to manage the fund "to benefit all generations of Alaska."

The trustees' proposed payout method would not make additional money available for government spending or for any specific purpose. The Legislature has already been granted authority by the Constitution to use the earnings in any manner that it chooses. While Alaska statutes specify a formula for calculating dividends and inflation proofing, the Legislature has the ability to spend any or all of the earnings reserve without a vote of the people. POMV would make the amount that is available each year more stable and predictable, but would not grant new powers to the Legislature.

While there are Legislators that support POMV, the proposal did not originate in the Legislature. The board of trustees first endorsed the plan six years ago. Since then we have seen changes in the composition of the board, and subsequent trustees have embraced the proposal put forward by their predecessors.

I know that the question on most people's minds is "How will this affect my dividend?" The most truthful answer is that we don't know for sure. Projections estimate that even if only half of the 5 percent is devoted to dividends under a POMV system, the amount available for dividends would initially increase. Over time the amount would either run slightly higher or slightly lower than status quo projections depending on how much of the 5 percent goes to dividends.

However, this comparison is based on the assumption that if we don't adopt POMV, all the excess earnings from the Permanent Fund will be deposited back into the principal as they have been. With the balance of the Constitutional Budget Reserve account rapidly declining, is it reasonable to assume that earnings from the Permanent Fund won't be used for government services? Once we start showing the effect of using those excess earnings instead of keeping them in the fund, the picture changes and POMV clearly becomes the better plan for the future.

The board of trustees cannot predict what future Legislatures will do, and we can't say for sure if excess fund earnings will be returned to the fund or spent by our lawmakers. It is our responsibility to consider every possible outcome and present a plan that best manages thefFund for the benefit of present and future Alaskans under any scenario.

POMV will do just that. It will protect the fund from overspending in the good years, while still allowing the option for a payout in the bad years. The governor has said he supports the POMV proposal as it is recommended by the board of trustees. I urge our Legislature to approve the amendment this upcoming session and the people of Alaska vote to support it next November.

• Carl Brady Jr. is chairman of the Alaska Permanent Fund Corporation Board of Trustees.



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