The Alaska Citizen's Guide to the Budget


1.1.3 The Permanent Fund

The Permanent Fund dividend is paid out of the earnings of the fund. In addition a portion of fund earnings is deposited into the principal of the fund each year to protect it against a decline in value due to inflation. At the time that the operating and capital budgets for FY2002 were decided upon (in the spring of 2001), the legislature also made an estimate of how much would be appropriated from the earnings of the Permanent Fund for these purposes for FY 2002. This estimate was $1.799 billion. The actual amounts were not determined until after the end of the fiscal year (June 30, 2002) when the earnings of the fund were finally determined and the inflation rate for the year was calculated. Because of the volatility in the annual fund earnings and uncertainty over the inflation rate, the exact amount spent for these two purposes can end up being several hundred million dollars more or less than estimated before the fiscal year begins.

The Permanent Fund Dividend

During the budget-making process for the FY 2002 budget, lawmakers estimated the size of the account from which the Permanent Fund dividend would be paid to be $1.106 billion. This represented the average of the earnings of the fund over the previous 5 years, divided by 2. (Actually half of 21% of the fund earnings over the last 5 years.) The size of the individual dividend is the total account divided equally among all eligible Alaskans.

Inflation Proofing

$.693 billion was set aside from the earnings of the Permanent Fund to inflation proof the Permanent Fund for FY2002. This is the deposit made at the end of the fiscal year to keep the purchasing power of the fund from eroding due to inflation during the year. Since the actual rate of inflation is not known until the fiscal year ends, the amount set aside is just an estimate, and because of the size of the fund, a mistake in forecasting the rate of inflation by 1% would cause the actual amount appropriated to differ from the initial estimate by about $200 million. This deposit becomes part of the principal of the fund, which is prohibited from being spent by the Alaska Constitution and which is invested to generate income for future years.

 

Keep in mind that in most years, after paying the dividend and inflation proofing, there is some left over earnings of the fund. These left over earnings remain in the Earnings Reserve Account of the Permanent Fund until appropriated by the legislature. In years past, legislative appropriations have added several billion dollars to the principal of the Permanent Fund from the Earnings Reserve Account.

 

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Page updated November 13, 2002

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