1.2.4 Part of Permanent Fund Earnings $ 1.799 billion in 2002
There is about $21 billion in the principal of the Permanent Fund (this is Constitutionally protected and cannot be spent). In addition, as earnings are generated, they are deposited in the Earnings Reserve. Depending on the time of the year, the Earnings Reserve can have anywhere from $1 to $3 billion in it. (The Fund also has some unrealized gains—the difference between the current value and the purchase price of the stocks in its portfolio.)
The Fund and Earnings Reserve generate earnings of about $2 billion in an average year when they hit the target rate of return of 5% (net of inflation). Because the Fund is invested in a portfolio of stocks, bonds, and real estate, actual earnings vary considerably from year to year, depending on market conditions.
Earnings are calculated in 2 different ways. Statutory net income is actual realized income of the Fund from interest, dividends, and the sale of assets. This definition is used in the calculation of the annual Permanent Fund dividend. GASB (Government Accounting Standards Board) income, or net income, is the realized income of the Fund plus changes in the value of Fund assets (changes in unrealized gains). Obviously GASB income can be negative in a year that statutory income is positive if the Fund suffers unrealized losses in a market downturn.
Fund earnings can be used for any purpose. Historically, they have been used to pay the Dividend, inflation proof the principal of the Fund, and add to the principal. Some accrued earnings are held in reserve in the event that current year earnings are not sufficient to pay the Dividend and to inflation proof. This can happen because the formula for the Dividend depends on the earnings of the Fund over the last 5 years. Generally, about 85% of Fund earnings goes to pay the Dividend and to inflation proof—leaving 15% for other purposes.
This table shows the relationship between estimated Permanent Fund earnings and expenditures from earnings used in developing the FY 2002 budget (Spring 2001).
Because of changing market conditions, estimated earnings and spending had both fallen by the spring of 2002. The estimated size of the Dividend account had declined as had the estimated amount necessary for inflation proofing.
Fund earnings have grown rapidly in the last few years both because the Fund has grown and because the rate of return on the Fund portfolio has been high. Fund earnings are now the largest source of income for the state, surpassing oil revenues. They will continue to grow, as long as the Fund itself grows. The most likely sources of growth in the future are from dedicated oil revenues and from the deposit of a part of earnings into the Fund for inflation proofing. (Inflation proofing increases the size of the Fund, but not its purchasing power.)