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Why are PFDs down when oil prices and
the Fund's value are at all time highs?


September 21, 2005

The announcement Tuesday evening that the 2005 dividend would be $845.76, the lowest amount since 1988, has left some Alaskans wondering, "Why did dividends go down this year, not up?"

24 years of dividends
2005 $845.76
2004 $919.84
2003 $1107.56
2002 $1540.76
2001 $1850.28
2000 $1963.86
1999 $1769.84
1998 $1540.88
1997 $1296.54
1996 $1130.68
1995 $990.30
1994 $983.90
1993 $949.46
1992 $915.84
1991 $931.34
1990 $952.63
1989 $873.16
1988 $826.93
1987 $708.19
1986 $556.26
1985 $404.00
1984 $331.29
1983 $386.15
1982 $1000.00


Statutory net
income in millions
by fiscal year

FY 2000 $2,222
FY 2001 $1,199
FY 2002 $257
FY 2003 $355
FY 2004 $1,502
FY 2005 $1,700 (estimate)


In short, the 2005 dividends are smaller than last year because:

  • Realized earnings are lower in 2005 than in 2000.
  • Low earnings of 2002 and 2003 continue to dampen the five-year average.
  • Oil revenues are not part of the dividend calculation.
  • Unrealized gains in the Fund's portfolios are not part of the dividend calculation.
  • The Permanent Fund Dividend Division reports that more qualified applicants are expected in 2005 than in 2004, so more people are dividing a smaller pie.

According to the Alaska Permanent Fund Corporation (APFC), the Alaska Legislature uses a specific formula for determining the amount of the dividend each year - called the dividend formula. Dividends are calculated using a five-year average of the Fund's realized income, the cash income received from real estate rents, bond interest, stock dividends and net profits taken on investments that are sold.

Last year's dividend was calculated using fiscal years 2000 - 2004. This year's dividend formula will average the realized income from fiscal years 2001 - 2005. Because the income from 2005 is lower than the income from 2000, the average used to calculate the dividend will go down compared to last year.

For the fiscal years 2002 and 2003 the Fund's realized income was very low due to stock market losses during that period. These poor years also have a dampening effect on the average.

This is how the Legislature designed the dividend formula to work when it started the program 23 years ago. Averaging the dividend over five years helps smooth out the peaks and valleys and make it more stable from year to year.

While this year's check is lower than if it were simply based on current income, the tradeoff is that the checks Alaskans received in 2002 and 2003 were significantly higher than they would have been without the averaging provision say APFC. For example, a dividend paid only from the realized earnings for 2002 would have been less than $200 instead of $1,540.76.

Some may be also wondering how the price of oil impacts the dividend. The impact of oil prices on the PFD is indirect according to information provided by the Alaska Permanent Fund Corporation. Incoming oil revenues are deposited into the Fund's principal. The state constitution says that Fund principal must be invested and may not be spent. This means that incoming oil revenues cannot be part of the annual dividend calculation.

Of course the more money the Fund has invested, the more realized earnings it can generate. The more realized earnings it generates, the more that goes toward dividends. However, oil revenues for the last fiscal year will total a little more than $450 million, an amount that isn't going to significantly impact the earning potential of a $30 billion fund.

And what does the Alaska Permanent Fund Corporation have to say about realized earnings v unrealized gains? The constitution only allows the Legislature to spend realized earnings says the APFC. When Fund investments increase in value (as the stock holdings have this year), that increase is an unrealized gain. Unrealized gains are considered to be Fund principal and as such, cannot be spent unless the investment is sold and the gain is realized. While the Fund has grown significantly this year, much of that growth has been in the form of unrealized gains in its stock holdings, and so these earnings will not be included in this year's dividend formula.


Source of News:

Alaska Permanent Fund Corporation


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