Alaska: How much saving is too much?

Alaskans from time to time receive national notoriety for the extravagant administration of their vast financial windfall from North Slope oil. Less well known is that more than a quarter of Alaska's oil wealth is being squirreled away in a conservatively managed Permanent Fund -- an investment trust of which only earnings can be spent.

The $7.7 billion fund's investments bring in about $2 million each day in interest and dividends. And its earnings are expected to grow from $870 million this year to $2 billion a year by early next century. The annual income from the fund should surpass oil revenues in the 1990s.

Half of the fund's annual earnings (averaged over five years) may be appropriated by the Legislature for state expenditures. But under state law, the remainder is paid out as ``dividends'' to every eligible Alaska resident who requests a check.

Later this year approximately 500,000 men, women, and children in the state will receive about $530 each. Most of the quarter of a billion dollars put into Alaskans' pockets will be spent, and the spending will provide more jobs and economic growth than anything else the government might use the money for, according to a University of Alaska study.

Former Gov. Jay Hammond devised the dividend payments so citizens could share directly in Alaska's oil bonanza. Mr. Hammond correctly predicted that the dividends would in effect create a half-million member army on guard against legislative schemes to ``raid'' the Permanent Fund's principal, as any plans to use the fund or its earnings for government purposes could diminish dividends.

Indeed, the public has supported the fund so enthusiastically that through 1985 state officials deposited an additional $2.7 billion beyond the 25 percent of state oil royalties that have automatically flowed into the fund since it was created by statewide vote in 1977.

The fund is managed by David A. Rose, executive director of the Alaska Permanent Fund Corporation, and his 12-member staff. Under a risk-averse investment strategy, the fund has realized a nominal rate of return averaging 13 percent a year.

But Mr. Rose expects that, as oil income dwindles, increased pressure will be brought on the fund's trustees to seek higher returns with shorter-term and riskier investments.

Not surprisingly, many legislators long to use the full amount of fund proceeds available to them for state programs. ``When the Permanent Fund was created, the earnings were ultimately to be used to operate state government,'' says Ben Grussendorf, a Democrat from Sitka and the speaker of the state's House of Representatives.

``Over half of the residents have been in the state less than five years. We need to educate them so they understand why the fund was established,'' Mr. Grussendorf adds.

But the lawmakers are under strong public pressure not to use the state's oil bounty ``irresponsibly.'' Also, Dave Rose has persuaded the Legislature to plow enough of the money back into the fund to prevent inflation from eroding its purchasing power.

Rose acknowledges, however, that as oil revenues continue to decline, it will become tougher to argue for dividend payments and inflation-proofing as higher priorities for earnings than government programs.

``But if I were a betting man, I'd say, we'll reinstate the income tax before repealing the dividend program,'' Rose said in an interview.

If legislators are to continue to resist the temptation to tap into the fund's earnings, they will have to remain convinced that raids will raise the ire of their constituents, Rose says.

In May, the Legislature deposited another $1 billion in accumulated earnings into the fund's principal, where it can't be spent.

``They got tired of taking the heat,'' Rose said of the political pressure on the legislators not to ``squander'' the state's oil revenues. ``They wanted to remove the terrible temptation.''

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