Our view: Zero dividend?

Alaska's constitution says the principal of the fund -- the amount deposited -- can never be spent. Only the earnings can be used for dividends or other expenses.

This dispute over the dividend arises because the way Alaska does the accounting on the fund is unusual.

Alaska's approach works well for relatively small sums, like the money in a savings account at your bank. You put money in and you earn interest. You might tell yourself, as Alaska does, that you can spend the interest, but you promise never to touch the money you originally deposited.

In a setup like that, it's pretty easy to do the accounting.

It's easy because when you deposit money in that savings account, the value never drops. You might not earn much interest, but your money is safe.

That's fine for household savings, but when you have billions to invest, it's a different ballgame.

Investors seek much bigger returns by investing in stocks, bonds, real estate and other things. To make more money, you have to take more risk. That means the value of those stocks, bonds and real estate can go down as well as up.

Today, the market value of the Permanent Fund has dropped below the amount of the money originally deposited in it. That's why some assert that the fund today has no money to pay dividends.

But the official state interpretation of the fund's situation is different. The fund still includes a couple billion of earnings that have not been spent on past years' dividends or other expenses. According to an attorney general's opinion, dividends can be paid from those earnings.

As this dispute shows, Alaska's system for calculating "earnings" is too simplistic and too confusing for such a huge, sophisticated investment fund.

Most endowments use a version of what might be called the 5 percent rule. Each year, what fund managers are allowed is usually averaged over several years, to smooth out yearly fluctuations. Managers might use a slightly higher or lower percentage as the yearly benchmark for drawing money, depending on how conservative they are.

With this approach, managers don't have to worry whether the fund's gains or losses are officially turned into "earnings" by selling assets. The increase (or decrease) in market value may just be a paper gain or a paper loss, or it might be a real loss; it doesn't matter. You don't have any more arguments about which money in the fund is "earnings" and which is "principal."

It's a much better way of managing huge investment funds for long-term benefit.

If Alaska shifted to this system, lawmakers could peg each year's dividend to the new definition of "earnings." Instead of taking half of 21 percent of the five-year average "earnings," the pool of dividend money could be a set percentage of the fund's market value averaged over several years. That would eliminate any dispute about whether paying dividends would invade the principal of the fund. In volatile times like these, the dividend payout would not bounce up and down so much from year to year.

Switching the fund to a version of the 5 percent rule, also known as "percent of market value," requires a constitutional amendment, which would have to be ratified by voters. The idea has been around for at least a decade and it's not going to happen this year. But it would be the best way for Alaskans to make sure there's money for dividends without calling the long-term health of the fund into question.

BOTTOM LINE: Prospect of a zero dividend should get Alaskans thinking about using the 5 percent rule for managing the Permanent Fund.