OPINION: Permanent Fund Hits New High and its Dividend Hits New Low

The Alaska Permanent Fund (APF) has reached an all-time in a year in which Alaska’s Permanent Fund Dividend (PFD) will probably reach its lowest level since 1987. The PDF is Alaska’s small, variable, yearly basic income. It’s financed by the returns of the APF. You’d think, then, that the fund and the dividend financed by it would move up and down together. And they do—on average, over the long-run, with a time-lag. But they don’t necessarily move together in any particular year, and this year the difference is extreme. The fund has risen to an all-time high of $45.5 billion, while the dividend is likely to reach a 25-year low of barely more than $700.

One reason the fund and dividend don’t always move together is that new oil revenues deposited into the fund increase its size every year without directly affecting the dividend. Another is that the size of the dividend depends on how many Alaskans apply for it that year. But the main reason the fund and dividend often move in opposite directions has to do with the formula translating the returns of the fund into dividends.

The legislators who created the dividend choose a rather simplistic way to try to protect the fund from inflation and to smooth out returns to make the dividend less volatile than the fund’s returns. The fund is invested in stocks, bonds, real estate and other assets around the world. A fund like that can rise by 20% one year and decline by 20% the next—and it did nearly that in 2007-2009. Nobody wants to have a negative dividend, and so the state decided to smooth out the dividend by basing it on a 5-year average of returns to the fund. This strategy does make the dividend more stable than it would be if it was calculated solely on the returns in any one particular year, but it also makes the dividend a lagging indicator of the fund’s performance over the previous 5 years.

This year’s dividend calculation is the first one in five years that doesn’t include the big returns of 2008 and last one that will include the negative returns of 2009—experienced as the world stock market bottomed out following the 2008 financial melt-down. As long as this year’s returns are better than they were in 2009, next year’s dividend will be substantially higher than this year’s. Some (very) preliminary estimates indicate that the dividend could nearly double to about $1400 next year.

The state could make the dividend much less volatile by dropping the current formula based on 5-year-average returns and adopting a new formula based on percentage of market value (POMV). Under a POMV strategy, if the fund increases by 10 percent (say from $45 billion to $49.5 billion), the dividend increases by 10% (say from $1500 to $1650, and when the fund decreases by 10% (say from $45 billion to $40.5 billion), the dividend decreases by 10% (say from $1500 to $1350). Most investment managers agree that a well-managed fund can pay out at least 4% of market value each year and still expect the fund to grow on average in real terms over time. Such a formula would be much simpler and more stable than the current system in which the dividend can double while the fund increases by only 10%.
-Karl Widerquist, Lowfield, Morehead City, North Carolina, May 23, 2013

For more on the recent ups and downs of the fund and dividend, see the following three articles:
Jerzy Shedlock, “Alaskans’ Permanent Fund dividend may shrink to less than $800 this year,” The Alaska Dispatch, March 30, 2013
Jerzy Shedlock, “Booming stock market helps Permanent Fund hit $45.5 billion,” Alaska Dispatch, March 31, 2013
Anchorage Daily News, “Alaska Permanent Fund hits all-time high,” Anchorage Daily News, February 20, 2013

Karl Widerquist

About Karl Widerquist

Karl Widerquist has written 874 articles.

Karl Widerquist is an Associate Professor at SFS-Qatar, Georgetown University. He specializes in political philosophy. His research is mostly in the area of distributive justice—the ethics of who has what. He holds two doctorates—one in Political Theory form Oxford University (2006) and one in Economics from the City University of New York (1996). Before coming to Georgetown he was lecturer in Political Theory at the University of Reading (UK) and a Murphy Fellow at Tulane University in New Orleans (LA). He has written or edited six books. He is the author of "Independence, propertylessness, and Basic Income: A Theory of Freedom as the Power to Say No" (Palgrave Macmillan 2013). He is coauthor of "Economics for Social Workers" (Columbia University Press 2002). He is coeditor of "Basic Income: An Anthology of Contemporary Research" (Wiley-Blackwell 2013), "Alaska’s Permanent Fund Dividend: Examining its Suitability as a Model" (Palgrave Macmillan 2012), "Exporting the Alaska Model: Adapting the Permanent Fund Dividend for Reform around the World" (Palgrave Macmillan 2012), and "the Ethics and Economics of the Basic Income Guarantee" (Ashgate 2005). He is currently under contract to author or coauthor two more books: "Prehistoric Myths in Modern Political Philosophy" (Edinburgh University Press 2014) and Justice as the Pursuit of Accord (Palgrave Macmillan 2015). He was a founding editor of the journal Basic Income Studies. He edited the USBIG NewsFlash for 15 years and the BIEN NewsFlash for five years. He is one of the founding editors of Basic Income News on the basicincome.org website. He has published more than a twenty scholarly articles and book chapters. His articles have appeared in journals such as Political Studies; the Eastern Economic Journal; Politics and Society; and Politics, Philosophy, and Economics.

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