Weak money markets have chipped away at the Alaska Permanent Fund and if the trend continues, annual dividends paid to Alaskans could dip to $850 in several years, fund officials said Tuesday.
The fund, now about $25 billion, lost $600 million in 2001 to a weak market. And although the economy is a little better off now than it was two months ago, any upturn probably will be modest, permanent fund consultant Michael O'Leary told the House Finance Committee.
"The primary reason for saying that is the consumer has spent a lot of money during the recession," said O'Leary of Callan Associates.
Rep. Eldon Mulder, co-chairman of the Finance Committee, called the outlook sobering.
"There aren't going to be huge infusions of cash into our state treasury," said Mulder, an Anchorage Republican.
The Alaska Permanent Fund Corp. projects a gradual decline in the amount of dividends over the next four years. Finance Director Chris Phillips estimated the payouts could range from $1,610 to $1,670 in 2002, down from last year's near-record $1,850 check, and from $850 to $1,550 in 2005.
"That's purely a reflection of less statutory net income given the current market situation," Phillips told the committee.
Prospects improve in 2006 with the checks ranging from $920 to $1,740 and from $970 to $2,050 in 2007. However, Mulder, the committee cochairman, said the entire dividend program is in peril unless the state figures out a way to close an expected annual $1 billion budget gap.
The Legislature currently funds budget deficits through a $2.5 billion savings account, but the account is expected to be exhausted by 2004.
If the state does not have a plan in place to help fund the shortfall with new revenues by the time the savings account is gone, lawmakers will have no choice but to tap permanent fund earnings, Mulder said. And given the bear market, the earnings may not be enough to pay for state services and the annual dividend, he said.
"Alaskans' dividends in a very real sense are at risk in the near horizon," Mulder said. "Not because of the Legislature, simply because of what's happening in the markets."
Committee member Rep. Eric Croft, an Anchorage Democrat, put it this way:
"It's just another indication that the free ride is over."
The state could reach that point in four to eight years, said Bob Storer, executive director of the corporation.
"Not only would the dividend potentially cease to exist but you'd discontinue being able to draw down the fund itself because you would have reached the principal" of the permanent fund, Storer told the panel.
The $21.2 billion principal is off limits to lawmakers unless Alaskans vote to let them spend it. But any income made by investing the principal may be spent by lawmakers, who currently tap earnings to fund the dividend and to adjust the principal for inflation.
Any extra income goes into the earnings reserve, which dropped from $6 billion in 2000 to $3.6 billion in 2001, partly because the state had to tap the reserve to fund the 2001 dividend. Projections by the corporation show a 25 percent chance the reserve could drop to $900 million by 2004.
Some lawmakers are now questioning whether the weak money market will undermine the fund as a substantial income source in the near future. The worst scenario is the earnings reserve erodes to zero and the fund does not make any money in a given year. Then the Legislature could not draw on the permanent fund at all, Mulder said.
Kathy Dye can be reached at firstname.lastname@example.org
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