Anchorage Daily News

Will the sinking U.S. economy scuttle Alaskans' Permanent Fund dividend checks too?

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Mike Burns

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The dollar signs sure look grim.

The fund has lost $9 billion over the past four months.

Right now, the fund's market value is more than $1 billion under the total amount deposited in the Permanent Fund over the past 32 years.

This year is one of only two in the fund's history -- the same thing also happened in 2003 -- that the fund's value has dipped below the sum of its deposits.

This scenario raised difficult questions for state policy-makers and it probably will again, former legislators say.

That's because the money deposited in the fund every year -- the principal -- is protected by the Alaska Constitution.

The principal is the "permanent" part of the state oil-wealth savings account. Only its investment profits -- not this deposited principal -- are used to pay dividend checks.

Which brings us back to the original question.

Can dividend checks be paid to Alaskans when the fund's investments are losing gobs of money?

Yes, fund officials and state attorneys say.

Next year's dividend check likely will be smaller, but this year's market meltdown won't stop it from getting paid, said Mike Burns, the Permanent Fund Corp.'s top executive.

This set of questions and answers explains why that's the case:

Q. How can the state pay a dividend when the Permanent Fund is losing money? Would that carve into the fund's principal, violating the constitution?

A. The short answer: The state's legal justification is a 2003 opinion offered to the fund's trustees by then state Attorney General Gregg Renkes.

Here's the long answer: In 2003, the fund's trustees were worried about heavy stock market losses that had eroded the fund's value. The trustees didn't know if they could pay a dividend without shrinking the principal. So they asked Renkes to advise them to what extent the principal needed to be protected.

After reviewing the constitution and state law, Renkes issued an opinion that says the trustees should no longer consider the principal as something that could only grow in value and never decline. The principal -- the value of deposits made over time -- may fall if invested in stocks, bonds and real estate that tumble in value.

The Permanent Fund dividend is separate, Renkes reasoned, paid by law from the cash profits the fund receives. As long as the fund's bonds are earning interest, its stocks are getting dividends and its real estate tenants are paying rents, the PFD may be paid even if the principal is falling.

The opinion was swiftly adopted by the trustees at the time, who changed their accounting practices as Renkes suggested. The current Permanent Fund board and Department of Law still depend on the Renkes opinion.

At the end of October, the account holding these cash profits totaled more than $4 billion. If nothing else changes, the amount of money in the earnings reserve is more than enough to pay a dividend next fall, state officials said.

Q. But didn't this change in accounting policy violate the constitutional provision that above all the principal must be protected?

A. In the opinion, Renkes said, "we anticipate some will claim that our reading of the constitution and statutes serves to permit a silent invasion of principal."

He didn't think that would be a valid claim, however. He said that while the constitution has always been viewed as providing protection to the principal, the "nature and extent" of that protection was unclear.

Others are not so sure.

Making the principal eat the losses rather than the dividend account "ignores the concept that this was to be a 'permanent' fund," said Andrew Halcro, a former state legislator and Palin administration critic.

Halcro stopped short of saying that he disagreed with the Renkes opinion, but he worries about the political motives that were behind it -- protecting dividend payouts.

"If you can redefine principal to get what you want, where do you stop?" Halcro asked.

"It's a very slippery slope," he said.

Permanent Fund officials noted, however, that the Renkes opinion didn't create a brand-new definition of principal. In fact, it re-established an accounting rule that the fund had used until 1997.

Q. Isn't the Renkes opinion just that -- an opinion?

A. Yes, someone could file a lawsuit challenging the opinion and even seek to block the distribution of dividend checks next year.

But for now, the 28-page document has the force of the Department of Law behind it and the support of the Permanent Fund Corp..

"I actually think it holds water pretty well. I think there is some good legal scholarship in there," said Burns, the fund's executive director.

But so far, no one has sued the state over the opinion, asked the Department of Law to reconsider it, or even written a complaint about it, said Mike Barnhill, an assistant attorney general.

The department would take a second look if someone asked it to, Barnhill said.

Former state Sen. Rick Halford has been champion of blocking legislators and governors from spending down the Permanent Fund. He said he wouldn't be surprised if the Renkes opinion became a hot topic in the coming months.

In 2003, most people paid little attention to the opinion, mainly because the fund recovered its losses before the end of the year, he said.

Q. Why should I care about the fund's accounting policies as long as I get my dividend check?

A. The Renkes opinion demonstrates the tension between the protecting the principal -- a concept ingrained in the constitution -- and the popular demand for dividend payouts.

Dividends are not required by the constitution; the Legislature started them in 1982.

Q. What's the likelihood that the markets will improve by June 30, the end of the state fiscal year, allowing the principal to recover the billions it has lost in recent months?

A. Fund officials refused to speculate if or how soon the fund will recover from its losses.

Most financial experts are not sure what is going to happen in the global market, Burns said.

While acknowledging that the financial meltdown this year has been unprecedented and shocking, Burns said, "I don't think we're playing against the clock right now."

Find Elizabeth Bluemink online at adn.com/contact/ebluemink or call 257-4317.