AD Header Dropdowns

AD Main Menu

Let's change the way Alaska Permanent Fund pays dividends

Karl Widerquist
Alaska Dispatch image

This year Alaskans received a dividend of $878, not bad compared to all the other states, but this dividend is the smallest since 2005, and it is only the second time in more than 20 years that the dividend has been below $900 per person. Alaska’s Permanent Fund Dividend (PFD) needlessly fluctuates widely. This year’s dividend is 25 percent smaller than last year’s dividend of $1,174, and it is 57 percent smaller than the 2008 record-high dividend of $2,069 (not counting the one-time supplement of $1,200 that was added to that year’s dividend).

The declining dividend does not mean that the PFD is in trouble. Actually the Alaska Permanent Fund (APF), which financed the PFD, is at near-record high levels. It closed the 2011-2012 fiscal year at $40.3 billion. The dividend was low this year because the state uses a complex formula averaging the returns over a five-year period to determine yearly returns. The five-year average was chosen to smooth out fluctuations in market returns to create a more stable dividend, but -- as Alaskans can easily see -- a five-year average is not enough to do that job. Markets tend to have stable long-term trends, but they can have occasionally large yearly fluctuations (either up or down) that can dwarf a five-year average. The mid-2000s market boom, and the 2008-2009 market bust were just such fluctuations. Now, several years later with the boom returns falling out of the calculations but the decline still in, the 2008 market bust affects the dividend the more than it did at the time.

There’s a better, more stable way to calculate the dividend. It’s called percentage of market value (POMV). Most financial managers agree that an individual can afford to withdraw up to 4 percent of a well-invested diversified portfolio and still expect it to grow in real terms over time.

If Alaska used this rule to calculate the PFD, this year’s dividend would have been $2,380. It would have been a record-high dividend, because the APF closed the fiscal year at a record-high level. Suppose then there was a major sell-off in the markets and the fund declined by 25 percent to $30 billion. The dividend would decline by 25 percent as well, to $1,846. Suppose instead it rose by 25 percent to $50 billion. The dividend would rise by 25 percent as well, to $3,076. Because 25 percent is an unusually large fluctuation, we can expect this to be an unusually large change in the dividend. Most often it would change by less than 10 percent from year to year, and in most years it would increase.

Perhaps Alaskans should be more conservative. The goal of the fund is not just to pay out as much as possible. It is also to save for the future. The more the APFC pays out in dividends now, the slower the APF and the PFD will grow over the long term. So, perhaps a POMV rule of 3 percent would be better -- a little more cautious -- than the 4 percent rule. If so, payouts this year would have been $1860. Payouts after a 25 percent decline to $30 billion would be $1,395. Payouts after a rise to $50 billion would be $2325, and Alaska could expect to larger reinvestments by the APFC to help the APF get to $50 billion much more quickly.

POMV just makes sense. It stabilizes dividends, making it easier for Alaskans to plan, and it can be part of a conservative payout strategy that will keep the fund growing over time.

Karl Widerquist is an Associate Professor at the School of Foreign Service-Qatar, Georgetown University, who has studied Alaska's Permanent Fund and Dividend for the last 12 years. He and Michael W. Howard have edited two books on the subject, both published by Palgrave-Macmillan in 2012: Alaska’s Permanent Fund Dividend: Examining its Suitability as a Model and Exporting the Alaska Model: Adapting the Permanent Fund Dividend for Reform Around the World. He holds a doctorate in Political Theory from Oxford University and a doctorate in economics from the City University of New York.

The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch. Alaska Dispatch welcomes a broad range of viewpoints. To submit a piece for consideration, e-mail commentary(at)alaskadispatch.com.