Shaky math and long-term risk underlie $3,000 dividend dream

By Larry Persily

Let’s assume a $3,000 dividend for every eligible Alaskan this fall, rather than something between $1,000 and $1,600 that would not require ruining a lot of public services and taking extra money out of the Permanent Fund.

But where exactly does the money come from this year, next year and the years thereafter?

The options are limited for coming up with all that cash — somewhere between $1 billion and $1.3 billion — to fatten up the dividend to reach the politically popular $3,000.

There are a couple of savings accounts that have helped pay for schools, roads, troopers, prisons and everything else for years — actually, almost three decades. The Constitutional Budget Reserve Fund has been around almost 30 years and the Statutory Budget Reserve Fund more than a decade.

But the statutory reserve fund is down to its last $172 million or so. It has no revenue stream to replenish the account. The Legislature parked some one-time money there when oil prices were high and the state was temporarily rich again.

The constitutional reserve is down to about $2.1 billion, a painfully far cry from almost $13 billion just five years ago. But don’t drool over what’s left — it’s the cash that allows public services to continue at the start of each fiscal year before oil dollars come into the treasury. It’s the shock absorber that protects against low oil prices or a production stop.

Drain the fund and we risk having to borrow money if oil prices or oil flow come up short. If that happened, the state could issue what are called “revenue anticipation notes,” essentially payday loans that we promise to pay back with the next oil tax checks. Not good fiscal management.

That leaves the Permanent Fund’s accumulated earnings if you really want a $3,000 PFD. That’s the account that has paid dividends the past 36 years. It’s also the account that this past year for the first time helped pay for schools, roads, troopers and everything else the public wants. Fiscal life was easier 30 years ago, but North Slope oil production is down 75 percent while population is up 35 percent.

That earnings account is the only part of the fund that can be spent. The rest of the money, the principal, has a constitutional chain-link, barbed-wire-topped fence around it.

According to the Permanent Fund’s latest financial statements, the earnings reserve had about $19 billion as of May 31. However, $3 billion is reserved for this year’s maximum draw under the law for spending on dividends and the rest of the state budget. And almost $1 billion needs to go into the principal to protect the fund from last year’s loss to inflation.

That leaves about $15 billion.

The Legislature and governor this month moved $4 billion out of the account, over to the principal for safekeeping. That transfer is now law.

We’re at $11 billion.

Plenty to take an extra $1 billion or more to pay the $3,000 dividend, right?

But what about taking more money next year and the year after? Can the fund earn enough to keep up with large overdraws? A Republican House member, speaking in support of the $3,000 dividend, said: “The funds are there.”

True, but only if you draw down more than 7 percent of the fund’s market value each year, far in excess of the 5.25 percent maximum set in law last year as what the fund could afford long term without losing value.

What if the market crash of 2008-2009 returns, when the fund lost $6 billion? Could happen again — the world economy is a bit shaky.

Take $11 billion, lose several billion in the market, withdraw the legal maximum of $3 billion next year, cover inflation, take an extra billion or more for the big dividend — and suddenly, the fund could hit empty. Made even worse by the fact that the less money left in the fund, the less it earns.

Taking out extra money to pay a fat dividend would be like retirees taking too much from savings each year, only to discover they outlived their nest egg.

Larry Persily is a longtime Alaska journalist, with breaks for federal, state and municipal jobs in oil and gas and taxes, including deputy commissioner at the Alaska Department of Revenue 1999-2003. He will teach journalism starting this fall at the University of Alaska Anchorage.

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