Permanent fund cleared for dividends

Paying dividends this year may be imprudent, economist says

Posted: Monday, July 06, 2009

The Alaska Department of Law has determined that a permanent fund dividend can be paid this year, despite concerns about its legality that led to legislative hearings earlier this year.

"Nothing in law prohibits payment of permanent fund dividends this year," according to an official opinion the Alaska Attorney General's Office issued June 16.

This year's dividend will likely be less than half last year's record $3,269 dividend, based on Empire estimates of likely earnings and dividend applications. Last year's dividend checks were supplemented by an additional $1,200 in oil profits by the Legislature.

The permanent fund suffered massive losses in last year's market decline, losing more than $10 billion in value after topping $40 billion before the crash. It rebounded somewhat in the last few months, and its current value is about $30.9 billion.

The fund's annual dividends are paid on an average of profits over five years. Despite the huge one-year loss, officials with the Alaska Permanent Fund Corporation project a dividend payment this year.

The decline prompted concern that paying the dividend may drop the fund below what's called its "principal," the amount originally deposited in the fund from oil receipts adjusted for inflation.

The statutes establishing the permanent fund, approved by voters in 1976, don't allow principal to be spent, only earnings. Each year's earnings are placed into a subaccount called the "earnings reserve" from which dividends are paid.

The legal review, conducted by Senior Assistant Attorney General Mike Barnhill, concluded that those and other laws governing the fund don't bar a dividend payout this year.

"A valid appropriation for 2009 permanent fund dividends has been enacted into law, funds are currently available for this appropriation in the earnings reserve account, and therefore these dividends can be paid," Barnhill concluded.

One of those raising the concern about whether the dividends were allowed this year is Juneau economist Gregg Erickson, who had a role in creating the fund in the 1970s.

He said he is not qualified to dispute Barnhill's legal reasoning, but questioned whether paying a dividend from the depleted fund was prudent.

"When we put that money in it was supposed to be permanent," Erickson said. Paying a dividend when the fund is below the "principal" amount threatens to erode the value of the fund, he said.

If the fund's value is less than the inflation-adjusted principal, it is referred to as being "underwater."

The Legislature discussed this issue when the fund's value was billions lower than it is today. The rebound has diminished the discussion's relevance.

The issue previously came up with a market decline in 2003, and then-Attorney General Gregg Renkes reached a similar conclusion. This year's analysis included an extensive look at the history of the creation of the fund.

Barnhill's review concluded that the corporation was misinterpreting one part of how earnings reserve calculations should be made. Corporation officials said they would change their calculation method to comply with Barnhill's analysis.

"We appreciate that the Department of Law has provided us with continued clarification regarding the accounting of the fund's principal and earnings reserve, and we are implementing this guidance in APFC's accounting procedures," said Mike Burns, the corporation's executive director.

Permanent fund staff said the changed calculations should not affect dividend payments.

Erickson said he doubted that paying a dividend while the fund was underwater would withstand a court challenge, but would not challenge it himself.

• Contact reporter Pat Forgey at 523-2250 or

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