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Editorials

Break the deadlock, tap the fund

  • Author: Anchorage Daily News editorial board
    | Opinion
  • Updated: January 20
  • Published January 20

Alaska residents line up to apply for the Permanent Fund dividend on the last day, March 31, 2015, at the PFD division’s Anchorage office in the Linny Pacillo Parking Garage at Seventh Avenue and F Street. (Bill Roth / ADN archive 2015)

Conventional wisdom says the Alaska Legislature will talk about a long-range budget solution this session, but will do little or nothing of substance because it's an election year.

But there's one major part of a budget solution that both sides of the aisle in both the House and Senate have endorsed in principle, although not in detail.

That solution is to adopt a percentage of market value (POMV) draw on the Permanent Fund each year to help pay for government services and continue to pay out a dividend to qualified Alaskans. There's general agreement that one way or another, we'll have to use Permanent Fund earnings to balance the state budget without further hits to the economy.

The POMV method has long been a standard model for major endowments, such as those that support universities and nonprofit institutions, and for more than 15 years has been favored by the Permanent Fund's trustees.

Basically, here's how the percentage of market value would work:

The Legislature would draw a percentage of the average total value of the fund over the last five years to pay for government services and dividends. That percentage — recently proposed as 5.25 percent — would have to cover inflation-proofing, to prevent erosion of the fund's value by inflation, what the late Alaska banker Elmer Rasmuson warned against as "a thief in the night." Historically, 5 percent has been a common draw. That protects and builds endowments because over time they average better than 5 percent earnings, so inflation-proofing is built in.

Let's say a rolling five-year average of the total value of the fund is $50 billion. A 5 percent draw would yield $2.5 billion. If you did a 2-to-1 split between government and individual dividends, you'd have $1.67 billion for government, and resolve most of the current chronic deficit, and $830 million for dividends. Given roughly 640,000 of us eligible for the dividend, we'd each receive almost $1,300.

Such a POMV payout would still leave us with a deficit, but hundreds of millions is more manageable than billions. We'd fight over how to cover that, just as we've been doing for decades. Income tax? Sales tax? More spending cuts? The governor's payroll tax? Oil taxes? We might get some clarity on that after the November elections.

For now, let's settle on a POMV system. Debate percentages of the split and the draw, but leave taxes, spending cuts and dividend caps or constitutional protections out of the bill. No clutter. Keep the bill clean and the road to compromise clear.

If such a draw on the fund's total value were to touch the principal, that would require a constitutional amendment, meanings two-thirds passage in both the House and Senate and then a vote by the people.

But lawmakers can do this without a constitutional amendment as long as they don't touch the principal of the fund. Given the strength of the earnings reserve now ($15.3 billion), the Legislature could make a 5 percent draw for the next fiscal year and likely some years beyond without going near the principal – and could write the law to make 5 percent or another figure the maximum, allowing a lesser draw in some years to protect and build the fund. Lawmakers have the authority now to appropriate earnings reserve funds as they see fit. So they could provide the benefits of a POMV and a partial budget solution without resorting to a constitutional amendment.

There's a warning, however, in recent projections of the fund's returns, a warning that Angela Rodell, the Permanent Fund's executive director, has made before. The booming bull market of recent years won't last forever. So talk of 5 percent may need to be scaled back. Lawmakers need to be careful, for with only the earnings reserve to work with, a few years of losses could hurt.

Taking that into account, lawmakers should still craft a POMV bill.

Alaskans already have lost about half their dividends over the last two years, first by Gov. Bill Walker's veto and then by legislative appropriation. That money went to the Permanent Fund's earnings reserve. So we've made the sacrifice, but haven't yet seen the payoff of progress toward a sustainable budget plan. A POMV plan with a sensible split between government services – education, public safety, fish and game management — and individual dividends provides a large measure of that payoff.

Some will cry "raid" on any use of Permanent Fund money – principal or earnings. But most Alaskans can tell the difference between a raid and a draw. A POMV plan done right simply recognizes reality — we need some of the wealth the fund has earned to pay for services we all use. If this means easing some of that dividend death grip, so be it. We'll still have a fair share in hand. And we'll still have the debate about how to cover the rest of the gap before us.

There are three goals here in calling for a POMV plan: Build a sustainable budget, protect and increase the value of the Permanent Fund and provide a dividend – the people's direct, individual share of Alaska's wealth. We're blessed because we have the means to achieve all three.

BOTTOM LINE: Pass a straightforward bill this session to draw on Permanent Fund earnings to cover much of the budget gap. That would be progress.

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