A big issue this year is whether to use some of the Alaska Permanent Fund's earnings to help fund government. What has received less attention is another important structural issue, with long-lasting consequences, not just for the dividend but for the Permanent Fund itself: Two prominent legislative proposals would change the source of the dividend payment, so that the dividend no longer comes from fund earnings but instead comes from oil royalties. Doing so would remove a crucial connection between Alaskans and the Permanent Fund.
The performance of the fund has been good since its inception but should not be taken for granted. The Alaska Constitution established the Permanent Fund, dedicating a portion of state royalties to the fund, and prohibits spending the principal, but the specific rules concerning management and oversight, the quality of the investments, and use of the earnings, are not set in the Constitution but instead in statute, and statutes can be changed (just as statutes describing the dividend payout are proposed for change in the current session).
The big thing the Permanent Fund has had going for it is its strong public constituency. Through the dividend program, Alaskans have a fairly immediate and direct personal connection to the performance of the fund. When the fund does well, each Alaskan's dividend goes up, and if the fund does not do so well, the size of the dividend suffers. With this connection, Alaskans have supported extra contributions to the fund beyond what the constitution requires, inflation-proofing, and prudent investment principles. Over four decades the fund has grown to over $50 billion.
This direct connection is a great protection for the fund. Any proposal which would be harmful to the success of the fund -- for example any proposal to invest in a financially weak development project, or to lend money at below-market interest rates -- would have a hard time even getting out of the starting blocks when generally all it would take to counter the proposal is to point out what the effect would be on the size of each Alaskan's dividend check.
In contrast, compare the fund's widespread support to the circumstances surrounding the Constitutional Budget Reserve. The CBR is generally perceived as great to have but, in the end, just another big pot of government money. The link between the CBR and the public isn't there, and it should come as no surprise that neither is the volume of the outcry over its projected rapid depletion.
If the dividend is uncoupled from the fund, the public loses its connection to the fund as well. If the Permanent Fund ever becomes regarded as just a big pile of money with the sole purpose of funding government, even with a constitutional prohibition on spending the principal, the fund's long-term outlook will be more precarious.
State government does have a serious fiscal problem. However, even if there is a desire to use some of the fund's earnings on government, switching to oil royalties as the dividend source is unnecessary. The total of fund earnings, resource royalties, and taxes in any single year adds up to the same amount, regardless of whether the fund earnings are the source for the dividend or if something else such as royalties are used. Whatever the spending plan is for next year, the total money out there to fund that plan isn't changed just by changing the sources.
A crucial difference, though, between using fund earnings and using oil royalties for the dividend is not just the picture in any single year but how the dividend changes from year to year. If the size of the dividend depends on the success of the fund, the performance of the fund matters to each Alaskan. If the fund performs well and grows, the dividend will grow. The up-close and personal link between Alaska's citizenry and fund performance would be maintained. If the size of the dividend is simply fixed as a dollar amount, or if its size depends on what happens with oil royalties, that link is gone.
The question over use of the fund's earnings should be framed as follows: First, establish the maximum sustainable earnings draw from the fund. Second, recognize the importance of continuing a dividend which is paid from fund earnings, and third, decide on a split on between dividends and other uses. The policy choice comes down to how to divide the earnings, if at all.
It would be clearest if the maximum draw were stated as a Percent Of Market Value, as many have advocated. If the agreed maximum sustainable draw is 5 percent, then any split that adds up to 5 percent is sustainable. With a $50 billion Permanent Fund and a 5 percent POMV draw, a plan which directed 1.5 percent to dividends and 3.5 percent to state government would yield a dividend of about $1,000. A plan which directed 3 percent to dividends and 2 percent to state government would yield a dividend of about $2,000, similar to what it was this past year. In any case, the portion of earnings going to dividends needs to be meaningful to maintain the connection between Alaskans and the Permanent Fund, and ensure the continued growth and success of the fund.
Steve Rieger is a former Alaska state legislator and former member of the board of trustees of the Alaska Permanent Fund Corp.
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