September 29: Anchorage Daily News and how the Alaska Permanent Fund works:

Posted: Monday, October 02, 2000

One thousand nine hundred sixty-three dollars and eighty-six cents.

Even for Alaskans with no affinity for numbers, this one is memorable, for it's everyone's 2000 share of the Alaska Permanent Fund.

Most of us likely are more concerned about the check than where it comes from.

But debate about how best to use our public wealth will go on, and the more we know about how it's produced, the more we'll have to offer in that debate.

There are two parts to the Permanent Fund, principal and income.

Principal is the part that makes the fund permanent. It consists of dedicated oil revenue, inflation-proofing deposits and special appropriations. The Alaska Constitution protects the principal by requiring a vote of the people to spend it.

Otherwise, it must be invested to generate income for the benefit of all Alaskans.

Right now the principal totals $20 billion.

Income is what the principal earns through investments in stocks, bonds and real estate. Income pays dividends, provides inflation proofing and pays expenses.

Income includes both actual gains and unrealized gains -- for example, stocks that have increased in value but haven't been sold yet. Realized income goes to the earnings reserve account.

Anything left after dividends and inflation proofing remains in the earnings reserve.

Right now, income totals $7.2 billion.

Of that, $4 billion is in unrealized gains and $3.2 billion is in the earnings reserve.

Permanent Fund managers invest earnings reserve money just as they do the fund's principal, so the money is always working for us.

The Legislature is free to appropriate Permanent Fund income as it sees fit.

Currently, the Legislature approves a budget that includes the dividend, inflation proofing and covering the expenses of the managing the fund. Any Legislature could change that, for the Constitution says simply that income from the Permanent Fund goes to the general fund unless otherwise provided by law.

Often the Legislature has reinvested some of the money left in the earnings reserve into the principal of the fund to generate more income for current Alaskans and build the fund for future generations.

From its first deposit in 1977 through June 30, 2000, the Permanent Fund had earned $23.5 billion, used for both spending and savings.

--Spending: $10.1 billion, or 43 percent. Most of that has gone to pay dividends to every qualified Alaskan for the past 19 years. Only about $272 million has gone into the general fund.

--Savings: $13.4 billion, or 57 percent. That money has been reinvested either in the principal of the fund or in the earnings reserve account.

Alaska Permanent Fund Corp. managers' job is to prudently invest for the greatest return. Reasonable risk is acceptable, hence the current 53 percent investment of the fund in stocks. The only yardstick is the bottom line, but long-term returns count for much more than short-term gains. Managers make no investments for social or political purposes.

The dividend program is designed to give every Alaskan with at least a year's residency a direct share in the fund's income, so that each Alaskan has a tangible, easily understood stake in the fund.

Fund managers calculate the dividend this way:

Add each of the past five years' net income. Take 21 percent of that sum and divide it in half. Subtract any obligations and expenses for running the dividend program. Take the remainder and divide it by the number of eligible Alaskans.

In 2000, about 585,000 Alaskans will split roughly $1.15 billion, for an individual dividend of $1,963.86.

Inflation proofing also uses a simple formula:

Take the principal of the fund as of June 30. Multiply that amount by the increase in the U.S. consumer price index. The result is what's required to protect the principal from loss by inflation.

In 2000, the principal as of June 30 was about $19.3 billion. The consumer price increase was 2.19 percent. So mangers deposited $423 million in income into the principal of the fund.

Number crunching doesn't have the straight appeal of that dividend check, but from numbers Alaskans can draw several satisfying conclusions.

The Permanent Fund has been well managed and stands in excellent shape today.

Fund managers can't take all the credit, as fund spokesman Jim Kelly points out.

''It's been good management. It's been great markets,'' he said. But fund managers and some political leaders have seen to it that the fund has paid off for current Alaskans and grown into a $20 billion trust for Alaskans yet to be born.

Some Alaskans will recall the bumper sticker that prayed for another oil strike and promised not to squander it this time. Well, it's clear that we haven't spent it all.

We've saved plenty and even made it multiply.

We just haven't decided yet whether dividend payments are its only purpose.

Until we do, we're wise to keep saving.



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