Department of Law supports dividend payment

State lawyers said dividend can be paid despite market decline, legal questions

Posted: Friday, February 20, 2009

Alaska's Permanent Fund dividend checks might amount to about $1,500 this year, despite the recent, unprecedented decline in the Permanent Fund.

But that's only if a dividend is paid at all.

It's been years since the question of not paying a dividend has even been raised because the complicated formula by which dividends are calculated by averaging returns from multiple years.

It's taken last year's dramatic stock market losses, which saw the S&P 500 lose 37 percent of its value, to trigger an obscure legal argument about the ability to pay dividends.

Gov. Sarah Palin called the question "so hypothetical," but asked the Department of Law to study the question nonetheless.

Assistant Attorney General Mike Barnhill reported to the board the preliminary results of an extensive analysis of that question.

"By law, there will be Permanent Fund Dividends this year," Barnhill told the Alaska Permanent Fund Corp.'s Board of Trustees on Thursday.

The question arose because of concerns that the fund had dropped so low this year there wouldn't be enough earnings to pay the dividend, and it would have to dip into principal to do so.

Once over $40 billion, it was at $27.7 billion Thursday.

The Permanent Fund staff currently estimates that the dividend will calculate to be about $1 billion, while the fund has $2.3 billion in the earnings reserve to pay dividends.

Under the Alaska Constitution, the fund's "principal" can't be spent, only the fund's earnings can be. Those earnings are where the popular dividend payments come from.

Last year's record dividend of $3,269 was boosted by $1,200 added by the legislature from oil profits.

Under one analysis of what constitutes principal, however, there's not enough in the fund to pay the dividend without dipping into principal.

The Alaska Department of Law has been reviewing an earlier decision on how dividends are to be calculated and paid.

Gov. Sarah Palin called the questions about the legality of paying a dividend hypothetical, but acknowledged that there were differing opinions.

One of those opinions comes from Juneau economist and journalist Gregg Erickson, who has said there is a credible interpretation of the state Constitution that says the state can't dip into the Permanent Fund's principal to pay a dividend, and that paying a dividend this year might require doing just that.

Erickson was invited before the House Finance Committee to explain that reasoning.

There's no debate about the fact the Alaska Constitution says the principal of the fund, the amount of money deposited into the Permanent Fund, can't be spent. Only the earnings can be spent.

Where the debate arises is on the definition of "principal."

"That's the root of the confusion, what does the word 'principal' mean?" asked Pat Galvin, the state's commissioner of revenue.

A percentage of the state's oil royalties every year gets deposited into the Permanent Fund. That and other deposits to the fund constitute its principal.

In addition, the Legislature had taken some of the fund's earnings and added them to the principal in a process called "inflation proofing."

The question now is if the principal is less than the nominal amount deposited, is it unconstitutional to dip into that amount to pay a dividend?

The issue first arose in 2003 after a similar stock market decline.

Barnhill's opinion follows on a similar opinion issued by then-Attorney General Gregg Renkes.

Permanent Fund Executive Director Mike Burns said that while not everyone agreed with that view, it was made moot when the stock market rose and a dividend was paid without dipping into the principal.

Steve Frank, chairman of the Board of Trustees, said he supported Renkes' opinion.

"While some people don't like the opinion, I think it makes a tremendous amount of sense," he said.

The board asked Palin to have the Attorney General's office review the matter again, however.

Barnhill said his decision was based on a thorough review of legislative intent in 1976, when the Permanent Fund was created. That's had him over at the Alaska State Archives to listen to 12 reels of poor-quality recordings of legislative debate.

"I'm trying to put myself back in 1976," he said.

So far he's learned enough to conclude that Renkes got it right, and there's no legal barrier to spending the money in the Permanent Fund on a dividend.

Based on the likely numbers of applicants and possible investment returns between now and the end of the year, next year's dividend appears likely to be between $1,400 and $1,600.

Burns said he was not predicting any dividend amount, or even if one would be paid.

"I don't know if in today's markets we can assure people of anything," he told the Senate Finance Committee recently.

And even though two legal reviews and the Permanent Fund's auditors agree, someone else might file a lawsuit to stop dividend payments, he said.

"It's an opinion," he said. "Anybody can challenge that in court."

• Contact reporter Pat Forgey at 586-4816 or

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