Point of View: Follow Hammond’s advice by adjusting oil taxes to redeem state’s share

Larry Smith

Larry Smith

There are at least eight state savings and investment funds operating today, quasi-independent of legislative appropriations. The Department of Revenue manages the Alaska Retirement Management Fund (ARM) which controls an estimated $30 billion. The Treasury Division manages an estimated $22 billion of non-pension assets. Various quasi-independent state entities (Alaska Industrial and Export Authority, Alaska Housing Finance Corporation and the Alaska Railroad Fund) hold about $3.5 billion more. This includes the Mental Health Trust which is required to let the Alasks Permanent Fund Corporation invest its money — a good thing since the Alaska Permanent Fund has grown while the pension fund has been underwater partly from mistakes in Department of Revenue investment strategy. The total of our financial assets may exceed $125 billion at present.

The recently established Percent of Market Value (POMV) formula lacks the controls advocated by Gov. Jay Hammond which are similar to those of the $1 trillion Norway Sovereign Wealth Fund.

As Gov. Jay Hammond said, “Only when the the market value of the Permanent Fund has increased over the previous year … may a portion of such increase be distributed.”

Norway has a maximum 4% POMV and has no draw when the previous year shows no increase. Our POMV could have such sideboards added. The POMV could follow the lead of funds with max dollar percentage; in fact the Mental Health Trust has that limit, a full 22% less than the 5.25% max we are using. Using without the Hammond suggested limits, the Permanent Fund Trustee Paper #9 recently published calls our Permanent Fund “underwater” because the take is too high when added to inflation.

Spending should not include credits for oil production from legacy fields. Incentives, bonuses and AIDEA support for Cook Inlet and other fields should be reconsidered. An income tax is reasonable. After all, from 1948 we paid the tax and achieving statehood was based, in large part, on that willingness to pay our way, however partially. Statehood was sponsored by Territorial Gov. Ernesst Gruening, who, in 1941, also proposed a permanent fund so that in future there would be no industry that carried away our wealth, leaving a trail of ghost towns. He was talking about copper, of course.

To bridge the gap between the time when the state’s share of production revenue increases and the present session, I believe that the reduced services of AIDEA and AHFC should become functions of a Department of Commerce and Economic Development, and the related billions be transferred to the Permanent Fund. A bigger, well-managed fund is a safer place for our money. Careful consideration should be given to the conclusions of the financial assets report to the governor. Legislative Finance Director Pat Pitney was a ranking participant in this group which forwarded the idea of advantages of centralizing our multiple funds.

Reducing dividends to individuals may, regretfully, be needed in the short term, while we seek the Alaska agreed-on share of oil revenues. Hammond said the deal was one-third for industry, one-third for the nation and one-third for the state of gross oil revenues. Every year since the industry has lobbied hard and gained a greater share.

In “Diapering the Devil” (chapter 14, A Broken Bargain, pages 51-53), Hammond wrote, “First oil taxes must be adjusted to redeem the state’s share.”

I see the industry power as too great to retrieve our full third, retroactively, going back to when they got Economic Limit Factor passed, amended in their favor and lately added Senate Bill 21 to their shareholder’s advantage. The most Alaskans can hope for is removing credits and undoing the tax-breaks provided by the success of intensive lobbying.

I hope we can begin a mutually respectful relation with industry, based on our insistence on our sovereignty and willingness to do honest business. We welcomed the industry with open arms and allowed them to take away enormous profit. Their time has come to treat us the same way.

Larry Smith is a long-time area builder who thinks we should all do our best but not take ourselves too damn seriously.

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