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Representative Alan Austerman Session:
State Capitol, Room 434
Juneau, AK 99801-1182
Phone: (907) 465-2487
Fax: (907) 465-4956
Send E-Mail

Interim:
112 Mill Bay Road
Kodiak, AK 99615
Phone: (907) 486-8872
Fax: (907) 486-5264 (at LIO)

Alaska Permanent Fund History Recapped

May 5, 1999
By Representative Alan Austerman at (907) 465-2487.

As the Legislature works on the budget and talks about the future and a long range plan, the Permanent Fund (PF), Permanent Fund Dividend Program (PFD) and the Earnings Reserve will continue to come into the discussion. I thought it might be a good time to share the history of the PF in writing so that everyone will have a better understanding of the program.

The Alaska Permanent Fund (PF) was created in 1976 by an amendment to the Alaska Constitution. It was established to ensure that Alaskans would get long-term benefits from the temporary bonanza that oil development would bring to the state. The first deposit was in February 1977 in the amount of $734,000.

The Alaska Constitution, Article IX, Finance and Taxation, Section 15, Alaska Permanent Fund states;

"At least twenty-five percent of all mineral lease rentals, royalties, royalty sale proceeds, federal mineral revenue sharing payments and bonuses received by the State shall be placed in a permanent fund, the principal of which shall be used only for the income-producing investments specifically designated by law as eligible for permanent fund investments. All income from the permanent fund shall be deposited in the general fund unless otherwise provided by law."

In researching the PF I found the following;

Transmittal from Governor Jay Hammond to Speaker of the House, Mike Bradner, January 15, 1976.

"I am transmitting ... an amendment to the Constitution of the State of Alaska establishing a permanent fund for mineral leasing revenues. --- The principal of the fund would be used only for investment in income producing investments which the legislature would establish and change to meet current investment needs of the State. The fund could not be used to fund the general operating expenditures or capital improvements of the State. ... The income of the fund would be deposited into the general fund without any permanent fund restrictions."

House Journal, March 24, 1976, Joint Chairman's report on CS SSHJR 39, which is the legislation that went to the voters creating the PF, I note the last paragraph of the report.

"The purpose of the language in the last sentence of the resolution is to give future legislatures the maximum flexibility in using the Fund's earnings - ranging from adding to the fund principal to paying out a dividend to resident Alaskans."
In very simple terms this meant that the income off of the PF could be spent by the Legislature in any manner that they wanted to.

The following statement was printed in the 1976 Election Pamphlet.

"Today as the result of anticipated oil and gas revenues, Alaska stands on the brink of unprecedented prosperity. No one, but no one, argues that these non-renewable resources will last but for a few decades. Similarly, no one should fail to recognize that in those years ahead the cost of state government will continue to spiral upwards. Now is the time to ask ourselves the question: When the oil and gas is depleted, where will the funds to feed our giant government come from? The answer: the Permanent Fund."

In 1980 the legislature created the Alaska Permanent Fund Corp. (APFC). The same year the legislature, by state statutes, increased the fund's share of certain mineral revenues from 25 to 50 percent which placed more into the PF. (All of the original leases are still paying 25%, as per the constitution.) In 1982 the legislature approved the PFD program and paid out a check for $1,000 to every qualified resident of Alaska. The legislature also instituted inflation-proofing of the PF. All of this was done by state law (statute).

Pie Chart of the Sources of Permanent Fund Principle As of January 1,1999 the PF had a total value of $25.3 billion and that total is broken down in the following manner. The principal, or corpus, of the PF was $18.6 billion. Of this amount, $6.4 billion was placed into the PF corpus by constitutionally dedicated oil royalties. The reason that the PF is as large as it is, is that during this same time the legislature placed all extra interest earnings back into the PF corpus along with extra one time sums of money the state was receiving. This amounted to $6.6 billion, which is more than was placed into the PF constitutionally. $5.5 of the $18.6 billion is the money placed into the PF for inflation-proofing. The remainder of the PF is made up of $2.8 billion in realized income or interest earnings and $3.9 billion in unrealized income. Unrealized income is the difference between the market value and the cost value of the assets currently held by the PF which become realized income only when the asset is sold. An interesting side note is that as of April 19, 1999 the PF total value was $26.343 billion, but I do not have a current breakdown of the fund. In other words the PF grew by over $1 billion during the first four and half months of this year.

Simply put, the principal or corpus of the PF is protected constitutionally and cannot be spent without a vote of the people. The income from the PF which pays for the PFD, inflation proofing, and the excess interest earnings is subject to statutory changes by the legislature. Remember, the constitution says the income was to go into the general fund unless otherwise provided by law. Under current state statutes the PFD is paid out first and then inflation-proofing is done second. Only the principal of the PF is inflation-proofed.

How is the amount of the dividend determined each year? Basically the total number of eligible applicants is divided into the average income for the last five years, giving us the individual amount for each dividend. There is some real concern among legislators and APFC Board members about the practice of paying PFD's out on a five-year average. If there is a major drop in the stock market, the PF would not earn enough interest to pay out a five year average and still inflation-proof the PF.

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