ANCHORAGE - Be careful spending that permanent fund dividend this month. There may not be one next October.
Investments in the Alaska Permanent Fund have dropped so sharply that if they don't recover in the next nine months, the 2003 dividend will be exactly zero.
That's because the Alaska Constitution says the principal of the fund can't be touched. And the value of the fund's investments right now actually has fallen below that principal amount.
So if today were June 30, 2003, there would be no dividend.
"There's not much we can do about it. We have a market that affects everybody," Eric Wohlforth, chairman of the board for the Alaska Permanent Fund Corp., told the Associated Press. "It sure would create an economic shock if it happened."
The 2003 dividend already is projected to dip to about $1,200, down from the $1,540.76 that's being paid out to Alaskans starting with direct deposits Wednesday.
But that amount could be reduced even further - or eliminated entirely - if the state's investments don't recover.
For purposes of the permanent fund law, principal is a stool with three legs - appropriations to the fund, dedicated oil revenues and inflation proofing.
Over the years, those have added up to a big number: $21.9 billion as of last June 30, when the fiscal year ended. By next June 30, when the 2003 dividend pot will be calculated, the protected principal will surpass $22.1 billion, according to Robert Bartholomew, chief operating officer for the corporation that manages the huge oil-wealth nest egg.
As of Friday, the fund's investments were valued at $21.7 billion.
Giving the numbers a little more precision, on Friday the fund was $477 million short of the principal amount it'll need next June - before even that first dollar of 2003 dividends can be paid. That's give or take a few million depending on how much oil revenue comes in.
Some of that could be made up from regular income. About $75 million rolls into the fund each month from bond interest, dividends and real estate income, Bartholomew said.
So somewhere north of $600 million will come in that way before the fiscal year ends.
But in recent months, that $75 million has been a trickle compared to the outgoing tide of losses in the stock portfolio. Stocks have tanked across the board.
"The last quarter has been a unique phenomenon, when almost every one of our equity investments has performed poorly," said Wohlforth, the Anchorage attorney who's chairman of the fund's trustees.
At least, he notes, the fund has less than 50 percent of its money invested in stocks. "We're better situated than most investment funds to withstand a bear market."
But what a bear it's been.
Take September, if you dare. At the end of August, the fund's earnings reserve contained about $845 million, Bartholomew said. While final figures for September aren't available yet, all that has essentially disappeared into the monetary mist.
The fund lost 4.4 percent in September, Bartholomew said. Still, that was far better than the Standard & Poor's 500 index, which dropped 11 percent.
A good month or two could rescue next year's dividend, Bartholomew notes.
"With a fund this big, the swings both ways can be big. If the markets were up 10 percent, that would about do it. And that can happen in a month.
"It could also go down another 10 percent."
Aside from the issue of dipping into principal, the dividend payout is limited another way.
State statutes say only half of the now-empty earnings reserve can be tapped for dividends when June 30 rolls around.
So a full payout of roughly $740 million would require the fund to add more than $1.4 billion over the next nine months.
What if the fund ends up, say, $600 million in the black? Then Alaskans would split $300 million in dividends, or about $500 apiece. That would leave $300 million, which would be roughly what's needed for inflation-proofing.
Then the cycle starts over again at zero.
That earnings reserve, incidentally, is the account that some politicians have suggested should be used to fill the state's budget gap.
Just over two years ago, in June 2000, the earnings reserve was flush at roughly $6.6 billion.
About $2 billion of that was used for dividends, and $1.2 billion went to inflation-proofing, Bartholomew explained. Even on June 30 of this year, it still held $1.7 billion.
But now it's empty.
What happens to the state's economy if there's no dividend next year to be spent for snowmachines and wide-screen TVs and Christmas presents?
"If we lose the dividend for one year, it will be hard on families that have come to depend on it, especially in rural areas," said economist Scott Goldsmith of the University of Alaska Anchorage. "It'll be hard on businesses. But if people think it's only one year, people could ride it out."
Still, he said, the doubling of the dividend between 1995 and 2000 "was one of the two driving forces helping our economy. That and federal spending. It'll be harder for the federal piece to carry the whole ball."
Economist Gregg Erickson of Juneau said the dividend accounts for roughly 5 percent of the state's $17 billion economy.
"If there was a loss of the complete dividend, it would be a lean Christmas for our retailers, and for many families and households who depend on it. But people's spending habits probably would not change immediately."
Still, Erickson said, it would be an economic blow.
"I'm confident that in many communities of the state, and in lower income families, every one of those dollars goes back into the local economy."
The trustees of the permanent fund corporation have lobbied the Legislature for several years to change the way the investment account is handled.
They want to turn it into a fairly simple endowment where 5 percent of the total fund would be available each year for dividends and other purposes.
"If you had a spending limit of no more than 5 percent of the fund, principal and earning reserve, you would guarantee a dividend every year," said Jim Sampson of Fairbanks, a member of the permanent fund board. "The only reason the Legislature wouldn't do it was they wanted to be able to go into the earnings of the permanent fund. Now look at what's happened to that."
The plan supported by the trustees calls for a constitutional amendment to make all the necessary changes. That requires a two-thirds vote of the Legislature and vote of the people at a general election. That means no changes before next June 30, or the one after that. The soonest any constitutional amendment could be approved would be November of 2004.