Checks and Balances in Alaska

Despite soaring prices, state residents' 2005 oil-revenue dividends are down. The reason has a lot more to do with Wall Street than Arctic wells

By Sonja Ryst

With oil prices at record highs, some Alaska residents might have been surprised when the state announced this month that the annual dividend to each state resident from a fund derived from North Slope oil revenues was only $845.76 for 2005, the lowest since 1988.

But, as state officials were quick to point out, oil revenues have less to do with the size of the annual dividend than the returns the Alaska Permanent Fund receives in the markets. And these days, the state is still making up from a couple years of weak performance.


  "The dividend was lower this year because we use a calculation that is a five-year average of our realized income" in the fund, said Laura Achee, director of communications at the Alaska Permanent Fund Corp. She added that state law doesn't permit the spending of oil deposits.

Instead of taxing the personal incomes of those in its tiny population, the state puts oil-related revenues into the fund, which invests the money for the public benefit. Each of the more than 600,000 eligible Alaska residents receives a dividend from the fund each year.

Didi Taylor, for example, is expecting a total of $3,383.04 for her four-person family. The 34-year-old administrative assistant will use it to pay for her two children's sports. The Anchorage resident figures that just driving her son to hockey games will likely cost her hundreds of dollars, with gas prices so high. Then she'll have to spend the usual amounts on hockey equipment and other necessities.


  As oil prices and revenues skyrocketed during the year ended June 30, 2005, the Alaska Permanent Fund took in more than $475 million of royalties from the energy industry, vs. $435 million in the fiscal year 2004. A year after its establishment in 1976, the Fund started out with a lowly deposit of $734,000 in oil revenues.

After investing those oil revenues for decades, the fund has ballooned into $31.3 billion of assets such as stocks, bonds, and real estate, so these days the money it earns each year can dwarf its oil receipts. The fund realized about $1.7 billion in gains on its investments in fiscal year 2005, but only pulled in $257 million during the tough markets of 2002.

If the government had based its 2002 dividend payments to residents only on earnings that year, the Taylors would each have received less than $200. Instead, they got a dividend -- $1,540.76 -- based on the five-year average of the fund's performance. "If the dividend hadn't been there that year, I would probably have accumulated debt," Taylor says.


  Now Taylor is, in essence, paying for that extra in 2002 by receiving less from the fund's hefty earnings on investments this year. Normally Taylor's dividend is enough to cover her son's hockey expenses, but this year she has had to dip into the household budget to meet them.

In 2004, each person in her family received $919.84 apiece. "I won't say it's not a nice bonus, but just the cost of living up here is expensive," Taylor says. "It's not fulfilling all the needs we have. Basically, we use the dividend to pay down our credit-card debt and start over again."

The fund is administered by the Alaska Permanent Fund Corporation, a state-owned company. Its asset allocation is currently 55% stocks, 32% bonds, 10% real estate, 2% private equity and 1% absolute return, according to the fund's Web site.


  The dividend goes to anyone who has lived in Alaska for more than a year, apart from a few exceptions such as students or people in the military. About 455,000 Alaskans asked to receive their dividends by direct deposit this year on Oct. 12. Another 148,080 residents will have theirs mailed starting Oct. 26, according to Tom Boutin, deputy commissioner of the state Treasury Dept.

The good news is that Alaskans have finally caught up, after the hefty gains in 2005. "We don't predict a bull market," says Mike Burns, chief executive of the Alaska Permanent Fund, who nevertheless expects dividends to improve next year, says Mike Burns. Which means that even if the price of oil stays up, Alaskans such as Taylor will have enough to fill their tanks with equally pricey gasoline -— and perhaps a few extra pairs of hockey skates.

Ryst is a reporter for BusinessWeek Online in New York

Edited by Phil Mintz

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