There is roughly a 25 percent chance Alaskans would not receive a Permanent Fund dividend check sometime during the next five years if a plan by Gov. Tony Knowles to use Permanent Fund earnings to help balance the state budget is implemented, according to a consultant for the Alaska Permanent Fund Corp.
The problem is not that the Permanent Fund will be low on funds, but a quirk in how dividends are paid, said Gregory C. Allen, executive vice president for Callan Associates Inc., based in San Francisco.
Allen said a similar risk exists for any budget plan that uses most of the fund's accumulated earnings.
Alaskans might be spooked by the risk, but they need to remember the state is trying to address a dire financial situation before it worsens, Allen said.
``While this $4 billion transfer as currently proposed may cause problems with the dividend, those problems could be less than the problems that could result if you didn't do it,'' he said during a phone interview Friday from his office.
Administration officials and legislators have previously said using Permanent Fund earnings will be necessary to help correct a record $1.2 billion budget shortfall caused by declining oil revenue. But they emphasized Friday they are looking at ways to avoid Allen's scenario.
``No one is passing a plan into law that is going to run a one in four risk of eliminating the dividend,'' said Larry Persily, special assistant for the state Department of Revenue. ``You've got 60 legislators and the governor who are trying to find the best plan to reduce risk and yet provide the same services people are demanding just as loudly as they are demanding their dividend.''
An obscure concept lies behind the problem: The value of a stock now versus its worth when sold.
New federal government accounting regulations require Permanent Fund income be determined by the current value of holdings, whereas fund managers for years calculated income from stocks and similar investments after their sale. The new rule means the fund's income can vary much more each year as stock prices rise and fall.
There are currently $6 billion of earnings available through the Permanent Fund Earnings Reserve - either in cash or assets that can be sold - with Knowles proposing to use $4 billion for budget purposes. If that occurs and if the market has a bad year or two, the earnings account could technically be in debt - even if there is cash in the fund - because of the lower stock and other asset values.
The earnings account is used to pay dividends and protect the Permanent Fund itself against inflation, but could not do so if in debt. While plenty of money would remain in the principal of the $25 billion Permanent Fund, the state Constitution prohibits spending those funds without voter approval.
Bob King, a spokesman for Knowles, said he did not hear the potential dividend problem discussed during early meetings on the governor's proposal that was unveiled in January. King said revenue officials understand well how dividends are calculated, but did not research every worst-case scenario before the plan was introduced.
Allen originally delivered his analysis to the Permanent Fund board earlier this month. He also warned them the increased volatility will make it unlikely the fund can fully inflation-proof itself if Knowles' transfer occurs.
The House and Senate Republican-led legislative majorities are considering a variety of plans - historic and current - that rely in part on Permanent Fund earnings as they draft their budget proposals. Knowles has also said he is open to looking at such approaches.
One proposal is an endowment system where a certain amount of the Permanent Fund's market value - such as 4 percent - could be spent for dividends and other expenses instead of relying on the earnings themselves. If the fund grows 8 percent a year, which analysts expect for the near future, its total value will continue to increase.
``It will guarantee a payout over a long period of time and ensure that the fund is protected well into the future,'' said Sen. Sean Parnell, an Anchorage Republican who co-chairs the Senate Finance Committee.
Parnell said he learned of the potential risk to the dividend only a few days ago, roughly two months after Knowles introduced his proposal. There will be considerably less time for scrutiny of proposals by the majority during the regular session, since proposed plans are expected in April and may be revised right up until the regular session ends in May.
It is hoped that unanticipated consequences will be avoided because lawmakers are going through an extensive review of factors that future state income might rely on, such as the stock market, inflation and oil prices, Parnell said.
Using relatively small amounts of Permanent Fund earnings will still have a downside.
A proposal by a Republican senator to use $900 million of earnings for education would reduce somewhat the amount of money available for future dividends, for example. Also, spending earnings directly on government each year could reduce the long-term value of the state's savings more than Knowles' approach, which places earnings in an interest-generating account and spends the interest.
Ensuring the state's savings accounts continue to grow and keep up with inflation is critical to any budget plan, since income from those accounts will play a bigger and bigger role in the state's financial future, said Jim Kelly, a spokesman for the Alaska Permanent Fund Corp.
``It's a good idea to have those savings accounts growing, not shrinking,'' he said. ``I think that's going to be an element of the winning proposal.''
