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A $5,000 dividend would put the ‘Alaska experiment’ in deep danger

  • Author: Charles Wohlforth
    | Opinion
  • Updated: March 1, 2018
  • Published March 1, 2018

The Permanent Fund could be state government's savior, but unless the Legislature restructures the dividend, it could also be a bomb.

Because of the outdated way the fund is organized, the Legislature currently is free to spend a fourth of it at any time. People have been talking about a $5,000 dividend. The state could send out $26,250 to each Alaskan without changing any laws.

To put that amount of money in context, such a payout would triple the financial assets of a household of typical size (using Census Bureau figures for Americans' net wealth, not including home equity.)

The idea of draining the fund's Earnings Reserve Account may seem crazy — and it would be a catastrophe for future Alaskans — but such things have happened. There is an example right here in Alaska.

The Alaska Native Claims Settlement Act transferred the traditional land of tribes to corporations owned by village shareholders. After the Exxon Valdez Oil Spill, some villages sold their land to the government for conservation and put the money in trust for future generations.

In at least one case, villagers voted to liquidate their trust for a one-time payout. The corporation for the Kodiak Island village of Akhiok had paid $1,000 monthly dividends from its trust, but ended that in 2002 with $200,000 for each typical shareholder.

Alaska's dysfunctional political system could do the same with our fund's Earnings Reserve Account, which currently contains $16.8 billion. We already have politicians campaigning on giving away more money.

From 1982 to 2015, Alaska paid out dividends from the Earnings Reserve according to a simple formula based Permanent Fund income. But as oil revenues declined, apparently permanently, the state abandoned the formula in 2016 and 2017 and paid arbitrary lesser amounts, $1,000 and $1,150.

I would have done the same. Facing fiscal and economic calamity, it made no sense to continue giving away half of fund earnings. The Earnings Reserve Account was the state's only hope for financial stability.

But by discarding the old system without creating a new one, the Legislature has made the fund vulnerable. Nothing protects the Earnings Reserve other than the wisdom and forbearance of whoever is in office.

That's not reassuring.

Few people have studied the state's fiscal crisis more closely than Cliff Groh, who leads the civic group Alaska Common Ground. Talk of a $5,000 dividend worried him.

Groh likened the state's political situation to the stalled trench warfare of World War I. Without a dramatic outside event, the sides are too evenly balanced for movement.

"People have not thought clearly in Alaska about the actual range of problems the state faces, and the actual priorities they would have," Groh said. "If anything, it's getting worse."

With an election coming, advantage goes to those who stayed on the sidelines of the fight and now can demagogue on impossible solutions that would impose no pain and deliver free goodies.

Is the Alaska experiment facing failure?

The framers of the Alaska Constitution built a government designed to put maximum power in the hands of the people of the present. One of the Constitution's most important provisions was the prohibition on dedicated funds. In Alaska, everything is on the table every year.

The Permanent Fund became an exception to that rule. Concerned that a rush of oil money would be wasted, voters amended the Constitution in 1976 to divert part of the flow to an account that could never be spent.

The amendment was brief and simple. It still allowed the Legislature to invest the fund as it liked and left the earnings available for spending.

The Legislature created the dividend in 1982. It was never part of the Constitution, so sending out money, and how much, is up to each year's representatives, senators and governor.

One of the fund's creators saw the hazards in this structure long ago.

Hugh Malone of Kenai helped shape the fund as chairman of the House Finance Committee in 1976 and was on hand for the creation of the dividend, too.

Groh called him one of the smartest and deepest people he ever met. Although a high school dropout, Malone became a political giant as Alaska grew into an oil state.

He may have foreseen this perilous political moment.

Not long before Malone died in a freak accident in 2001, he told an interviewer the fund had grown too large. At the time, it contained $26 billion. Now it is $66 billion.

"I think now that the creation of the Permanent Fund — at least allowing it to grow apparently to unlimited size — may have been a mistake," Malone said. "I don't know what to do with the fund as it continues to grow and this black beast gets bigger and bigger and is hiding in the closet."

Malone feared that Alaskans couldn't handle so much money. He said he would prefer to do away with the Permanent Fund rather than have it continue to dominate Alaska politics and potentially hurt Alaskans' lives through misuse.

The risk that concerned him at the time was political control of fund investments. The fund's prudent investment policy is only a tradition, like the dividend formula. The Legislature could invest the fund in almost anything.

Now that the Earnings Reserve amounts to a fourth of the fund, the risk has grown. Each Legislature is free to spend that money, or give it away.

The solution — and it is urgent now — is to adopt a new constitutional amendment to limit annual spending of the Permanent Fund to 5 percent or less of its total value. At the same time, we should enshrine the fund's prudent investor rule in the Constitution.

I would also guarantee a reasonably sized dividend constitutionally. That would help get voter support and would be good policy.

But, most important, protect the fund.

Malone's black beast in the closet is threatening Alaska now. It is the beast of greed. If it escapes, it could destroy our future.

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