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Permanent Fund rebound may clear way for dividend

Fund at $30.4 billion, still far below its highs prior to last year's market dive

Posted: Thursday, May 21, 2009

Rebounding stock markets have brought billions back to the Alaska Permanent Fund, which is likely to boost dividends in future years. It also might ensure residents receive a dividend this year.

Executive Director Mike Burns told the Alaska Permanent Fund Corporation's board of trustees Wednesday in Anchorage that unrealized losses had diminished from $4.9 billion earlier this year to $1.9 billion more recently.

The total size of the fund as of Wednesday was up to $30.4 billion, though that's still far below its highs of more than $40 billion prior to last year's market dive.

The statutes controlling the Permanent Fund allow dividends to be paid only from profits - the fund's principal cannot be touched. And because of market fluctuations, those profits are averaged over five years to calculate the yearly dividend.

The Permanent Fund comes from "realized" earnings, according to statute. If a stock or other investment goes up in value, that profit is not "realized" until it is sold.

This year's dividend has not yet been determined, and cannot be until after the end of the fiscal year on June 30. Next fall, that dividend based on the previous five years' earnings will be paid out.

The unprecedented dive in the Permanent Fund's value over the last 12 months raised concerns about whether the dividend could be paid out without tapping into the fund's principal.

Key to the decision is how "principal" is defined. Principal could be considered the ammount originally deposited, or that amount plus some of its earnings which have been converted to principal. Converting earnings to principal is done every year in a process called "inflation-proofing" that's aimed to protect the fund from losing purchasing power.

If the markets had not rebounded, paying out the dividend might have been legally questionable. Legal opinions from the Department of Law under former Gov. Frank Murkowski, and reaffirmed under Gov. Sarah Palin, determined dividends could be paid.

During legislative hearings this year that view was questioned by Juneau economist Gregg Erickson, however.

He warned that even with the rebound there might not be enough realized earnings available to pay the dividend and inflation-proof the fund.

Had the market stayed low, some legislators warned that there could be a legal challenge to the dividend.

The issue first arose in 2003 after a similar market downturn, but it rebounded before June 30 and the dividend was paid.

• Contact reporter Pat Forgey at 523-2250 or patrick.forgey@juneauempire.com.



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