The principle behind "the dividend" - Must Read Alaska
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Monday, September 23, 2019
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The principle behind “the dividend”

DEBATE RAGES AS TO THE ORIGINAL INTENT BEHIND ANNUAL CHECK

Alaskans have debated it for years, but even more so since the Permanent Fund dividend was politicized by Gov. Bill Walker in 2016, when he unceremoniously cut it in half, and put the unspent half into the Earnings Reserve Account for future government purposes.

  • What was the purpose of the dividend itself?
  • Why did Alaskans create a dividend, rather than just pour all of the oil money into the principal of the Permanent Fund?

It’s a debate that has all sides quoting the late Gov. Jay Hammond, who proposed that 50 percent of all mineral leases, bonuses, royalties, and severance taxes be deposited into an investment account. Then, each year one-half of the account’s earnings would be dispersed among Alaska residents, each of whom would receive one share of dividend-earning stock. The other half of the earnings could be used for essential government services.

Hammond’s rationale? He wrote about that in “Diapering the Devil: How Alaska Helped Staunch Befouling by Mismanaged Oil Wealth: A Lesson for Other Oil Rich Nations”:

“My rationale for creating such an investment account and making shareholders of Alaskans was many fold:

1. I wanted to encourage contributions into the investment account and to protect against its invasion by politicians by creating a militant ring of dividend recipients who would resist any such usage if it affected their dividends.

2. I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity. It was apparent that unless we did so, politicians would spend every windfall to satisfy insatiable short-term needs and demands, only to find themselves in a world-of-hurt when oil wealth declined. Such had been the experience of virtually every oil-rich state and nation. Not only Pérez Alfonso’s Venezuela had been defiled by the devil s excrement.

3. To put it crudely, I wanted to pit collective greed against selective greed. In the past, those who knew how to play the game were able to secure subsidies for their pet projects, many times at the collective expense of all other Alaskans. One example of this was a program granting loans not based on need at an interest rate far less than what that money could have earned in an investment account such as proposed in Alaska, Inc. In one year alone, more money had been lost to the state through subsidized loans not based on need than was paid out that year in dividends, and those loans went to but 6 percent of the people.

4. I wanted to remove a number of Alaskans from welfare. (The legislature subsequently frustrated this effort by exempting dividends from consideration as income when determining one’s eligibility for welfare.)

5. By issuing shares of dividend-earning stock annually and allowing Alaskans to accumulate them over time, I hoped to eliminate the magnetic attraction for others from elsewhere who might otherwise be inclined to flock to Alaska in order to receive dividends. Few would do so for the mere $50 dividend per share we initially set arbitrarily, but many might if everyone received a few thousand.

6. I wanted to install a sense of ownership in all Alaskans that would incline them to support healthy resource development and resist unhealthy versions.”

[Read “Diapering the Devil at this link]

At the Permanent Fund’s inception, the dividend was not part of the equation, however. The fund itself was to grow and eventually be used to help fund State government in times of budget shortfalls. But the details of how it would be used were not clearly detailed in the original constitutional amendment passed by voters in 1976.

In 1980, the Alaska Legislature enacted the dividend program by statute and Hammond signed it into law. The Legislature laid out the lawmakers’ purpose of the fund itself:

  1. The fund should provide a means of conserving a portion of the state’s revenue from mineral resources to benefit all generations of Alaskans;
  2. The fund’s goal should be to maintain safety of principal while maximizing total return;
  3. The fund should be used as a savings device managed to allow the maximum use of disposable income from the fund for purposes designated by law.
“This statute at least created a semblance of Alaska, Inc., but fell far short of what I had hoped for. The 50 percent contribution of oil lease bonuses, royalties, and severance taxes that I had proposed was cut to 25 percent, and severance taxes, which constitute roughly half of our oil wealth income, were eliminated and instead funneled into the general fund. Moreover, no stock-sharing dividend program was included in the legislature’s statute,” Hammond wrote.

The plan, at the time, was to give every adult Alaskan $50 for every year of residency since statehood. That was litigated as a violation of the 14th Amendment to the U.S. Constitution by Ron and Penny Zobel, who had moved to Alaska in 1978. It went  to the U.S. Supreme Court and was ruled unconstitutional. Every Alaskan would get the same amount, regardless of how many years they had called Alaska home. A one-year residency was set.

The first check, cut in 1982, was for $1,000, and was not from investments but from surplus oil revenues.

A poll run by Must Read Alaska on Facebook last week asked participants what they believed was the greater driving factor in the creation of the Permanent Fund dividend: Was it meant to be Alaskans’ share of the oil wealth (owner state concept), or was it to give Alaskans a stake in the Permanent Fund so they’d never let their legislators drain the principal?

Those responding favored the first answer:

A Facebook poll is unscientific, but this one shows a strongly held belief that the dividend does not actually belong to the government, which then distributes it through an appropriation as it sees fit, but that it is the average citizen’s share of the sale of Alaska’s oil. For these respondents, the government is merely the holding company of that money, which is then distributed based on a set calculation.

The other 22 percent feel the dividend is in place to ensure that Alaskans are always holding their lawmakers accountable, and will vote them out of office if they dip into the money that belongs to the people.

In September of 1999, Alaska lawmakers put an advisory question on the ballot asking Alaskans if the state should spend some of the earnings of the Permanent Fund for government. The overwhelming vote was 84 percent against that concept, even though the “vote yes” side had spent heavily to sway public opinion.

The way the question was worded on that advisory 1999 ballot gives a clue to how Alaskans perceived the dividend 20 years ago:

Permanent Fund Dividends: Guarantee a dividend to eligible Alaskan residents at a minimum of $1,700 in 1999 and $1,700 in 2000. Thereafter, the dividend will be approximately $1,340 and will continue to grow with the value of the permanent fund. After accounting for inflation-proofing, the dividend will be based on 50 percent of the annual earnings payment.

“Funding for Essential Public Services: After payment of permanent fund dividends and inflation-proofing the fund, prioritize the annual investment earnings payment for essential public services.”

[Read the entire ballot language here]

Two decades later, the earnings are, in fact, finally being used to patch the budget gap. Alaskans still seem to resent the idea that the government should take their dividends away.

After a lengthy debate, SB 26 (dubbed by Gov. Walker “The Permanent Fund Protection Act”) passed in 2018. It was a plan to draw from Permanent Fund earnings — not principal — to pay for state government. It was the first time in Permanent Fund history that state government would draw on the fund’s earnings for budgetary shortfalls.

The plan was to take 5.25 percent of the Permanent Fund’s value each year. For the 2019 budget cycle ending July 1 of this year, that amount is $2.7 billion. It was known as a “structured draw.” Fifty percent of that structured draw was to go to the Permanent Fund Dividend fund.

But SB 26 did not clearly specify how dividends would be calculated. Language in SB 26 describes a “transfer” under AS 37.13.145(b) from the earnings reserve account to the dividend fund. Former Attorney General Jahna Lindemuth said it requires an annual appropriation in order to accomplish the transfer of permanent fund income.

During the debate over SB 26, critics warned that the “structured draw” would allow lawmakers to spend more on general government, and divert cash from the dividend program.

Indeed, last year’s dividend was set at $1,600, half of what it would have been under the previous formula the state used, based on return on investments.

This year, Gov. Michael Dunleavy is in office, elected in large part by people who want a full dividend. Even his primary opponent Mark Begich promised a full dividend during his campaign. Only former Gov. Bill Walker, who was a vestigial remnant on the November General Election ballot, wanted to stay with the half-a-dividend program; he won 2 percent of the vote.

The full dividend under the traditional calculation would be $3,000 for this year, in a check or deposit issued in October.

Today, lawmakers are debating HB 1005 in special session, which would again revisit how the dividend is calculated. It would take the 50 percent of the 5.25 percent that goes into the dividend program, and cut that in half. Alaskans would get 25 percent of oil revenue instead of 50 percent; government would take 75 percent for services.

[Read: HB 1005 gets pounded by public testimony]

With HB 1005, Alaskans would get a $3,000 dividend, but in subsequent years, they’d get half of whatever the original 50 percent formula would have given them, and the rest would go toward government.

This scenario is playing out just as critics of SB 26 said it would.

HB 1005, offered by Reps. Tammie Wilson and Neal Foster, is back on the calendar for House Finance for 8 am Tuesday, after taking a beating in public testimony last week. The meeting will be televised at 360North.org.

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Suzanne Downing had careers in business and journalism before serving as the Director of Faith and Community-based Initiatives for Florida Gov. Jeb Bush and returning to Alaska to serve as speechwriter for Gov. Sean Parnell. Born on the Oregon coast, she moved to Alaska in 1969.

Latest comments

  • I moved to Alaska in 2017 because I was promised ~$3,000 a year in government hand outs and redistribution of oil wealth if I did.

    I want my benjamins

    • You aren’t eligible for the 3k if you arrived in 2017

  • I moved to Alaska in 1990 and depend on the dividend to feed my family because I have never obtained gainful employment.

    I want my benjamins

  • If you want to know the principle behind the dividend, why not ask Dick Randolph? He came up with it and pushed it through. As far as I know, he’s alive and well and living in Fairbanks.
    As I remember the reasoning was “so Alaskans will pay attention to what the legislature is doing with their money.” Hasn’t worked out quite that way, but hey, people are lazy. I didn’t read this whole story, so may be re-chewing somebody else’s cabbage.

    • Typical libertarian; didn’t read the whole thing. Dick was here and held public office at the time but he was by no means the architect of either the Fund or the Dividend. Sorry, Paul, but the Fund and the Dividend were products of Hammond, a bunch of almost Marxist Democrats, and some by today’s standards, liberal Republicans.

      • Not sure that’s a factual statement, Art. Dick told various people that it was he who first proposed the idea of a
        permanent fund and that a citizen’s dividend be distributed as a way to directly spread the oil wealth. He went on to say that Jay Hammond stole the idea from him. This supposedly took place while Randolph was a legislator and Hammond was governor. Hammond ended up taking full credit. As an aside, Randolph would be happy today to take the ENTIRE fund and divide it up for FULL distribution to each qualified resident. Now, let’s ask Dick Randolph himself and see whether his prior statements agree with the truth of the matter. I’ll bet you a steak dinner that Dunleavy believes the Randolph version.

        • He may have talked about it; lots of people had lots of ideas in those days. That said, Dick was pretty much just a pestilence in politics in those days and he sure didn’t have much to do with enacting the legislation. And, if Dunleavy believes the Randolph version, that is a poor reflection on Dunleavy.

          • Chance, you are bang on. Having spent a little time with Hammond and Tillion, they (Hammond posthumously, and Tillion now) would laugh out loud.

          • I realize Randolph has had no luck in politics in the past 40 years, but why is Dunleavy putting so much faith in him now by making him the governor’s policy advisor on constitutional issues?

  • I was born in Alaska and have a state job with the executive branch and don’t want to pay an income tax and don’t want to send a 1/3 of my PFD to the feds in the form of federal income tax.

    I want my government job and my benjamins to stay mine and in Alaska.

    • Good luck with that. Some of us don’t want 1/2 our PFD to pay for your job.

      • What if my State job was a state trooper position?

        cut it?

        • It is complicated: We want to fund some government services fully (?) like the state troopers, cut some, eliminate some (?) like the ferries and high paid executive branch positiond, and get a “full” PFD. The math doesn’t balance out without raiding out savings. Which is not sustainable.

        • If your job was a state trooper, it should be cut immediately because you are too big a clown to hold such an important position. My guess is that your true job is one of our slimy legislators, masquerading as one of us “commoners” to insinuate that the State can more sensibly spend our (stolen) PFD money, than we lowly folk could ever hope to do.

          • ^

    • Wassa matta? You run out of that hijack ransom? Thought you went to Mexico… Made a great movie anyway. IF you qualify, you should be getting a PFD.

  • $3,000 PFD= $450 million of Alaska’s money shipped to D.C. libs in the form of federal income taxes.

    -go 🙂

    while I get the popcorn

  • The legislature can play this tune over and over again. Regardless of whatever key, rhythm, or style, they are still singing the same song. Members of our state legislature have sold out their constituents. Pure, simple and indisputable!

  • The State Constitution(Art IX, Sec 15) is written so that Statutes dictate the distribution of the PF Earnings. Previously to Wielechowski vs the APFC, those funds designated for the Dividend were not considered accessible to Legislative appropriation. Since that has changed with the recent Supreme Court decision (based more on claims of a financial crisis than anything else) the Legislature has not been shy to access funds previously designated for Dividends.

    In order to change that, those funds “designated” by Statute need to be “dedicated” and so remove them from Legislative appropriation. That can be done either by a Constitutional Amendment or by overturning the AK Supreme Court decision in Federal Court. Since the Legislature controls the Amendment process, are they likely to give up power that they have over the Dividends ? The Amendment process will not produce anything that Alaskans will approve of, unless the Dividends are dedicated. If the US Supreme Court overturns Wielechowski vs. the APFC, then we will get our back Dividends, and the Statutes will hold on current and future Dividends, until they are changed.

  • If the dividend was a central component of the establishment of the Permanent Fund and all else which is holy, it would be part of the Constitution. It is not. (I voted in the 1976 election, when the Fund was created.) What one Legislature enacts into law can be changed by a subsequent Legislature. Discussion which fails to acknowledge these facts is largely unproductive and a waste of time. Even the faux-deity, Jay Hammond, with the magnificent beard and colorful language could not will or command Constitutional status for the dividend.

    • The provision for the Dividend was included in the “unless otherwise provided by law” clause. To that extent it was provided for by the Constitution, and was included in the discussions surrounding the intent of that clause. That the Dividend, inflation proofing, and the Earnings Reserve Account were created by Statute points to the wisdom of that approach. The failure now resides in stripping the protection from the Statutes, and allowing legislation appropriation of any amount or a veto of any amount by the Governor. For heaven’s sake all they need to do is follow the law or change it !

      • That is a creative argument but false. No dividend was discussed at the time the voters amended the Constitution to establish the Permanent Fund. Don’t get me wrong: If folks want to amend the Constitution to include the dividend, more power to ‘em. I probably will not vote for it, but it is certainly possible. What is bizarre is the extent to which some try to ascribe to the dividend a status that it does not possess.

        • The “unless otherwise provided by law” clause is of crucial importance, and it was used to do the things I mentioned earlier. If the thinking evolved over time to include a Dividend, it was able to be implemented because of that clause. When and by whom the Dividend was conceived is not going to be easy to discern. That the ERA could serve as a repository of “dedicated” funds was once held in the opinion expressed in Hickel vs. Cowper, 1994. I agree with you that the Dividend is established by Statute, and I assert that the right to it is derived from our common ownership of the State’s Resources. The current situation with an annual appropriation is less than the intent of the Statute. We do not need an amendment putting the Dividend in the State Constitution. We need an Amendment that dedicates the funding in Statute pertaining to the income of the PF.

  • I recently read “Diapering the Devil” and the above article is correct. Hammond was not known as an explosive personality, but according to this book — his final thoughts on the subject — he would have erupted like a volcano at the idea of taking dividend money to pay for state government. I highly recommend this little volume (less than 70 pages) to anyone interested in learning the thought process behind the PFD and its historical context from the man who has to be considered the authority on the matter.

  • I suggest that the explanation of the distribution of our PFD. Be printed as it was written by the Hammond administration and mailed to each registered voter in Alaska.And a registered certified copy to each Legislator..

  • Nonstop BS! Just stop and do it by the book.

  • I suggest every registered voter be sent the raw numbers. $3,000 PFD= ~$450 million sent to Washington D.C. in the form of federal income taxes.

  • My name is DB Cooper, I live in my Mom’s basement. And between delivering pizzas I troll Conservative websites using the talking points I learn from NPR. Though I’m not very good at trolling, I give it the old community college try. Feel the Bern!

    • Really it took that long before personal attacks began without even addressing the issue at hand: The transfer of ~$450 million of our State’s wealth to Washington D.C.?

      Impressive. Got to go, pies to deliver, benjamins can’t wait

      • Both of you are under surveillance.

  • Susan, wish you would run this as an op-ed in the Delta Discovery in Bethel.

    The YK Delta needs to read this. Don’t count on public radio sharing any of this. KYUK hates everything about our Governor.

    Delta Discovery sends a stack of papers to each village, free, every week.

  • The purpose of the Permanent Fund when it was voted on by the legislature and then by the people in 1976 was to pay for government services far in the future when the oil revenues ran low. There was nothing written at the time, about giving out free money checks to individual citizens. That idea probably would have seemed absurd to the 1976 self-reliant Alaskans.

    But then in 1980, as the oil money rolled in and they had surplus cash piling up, the legislature decided to spread some of that surplus amongst the people rather just putting all of the surplus money into a time capsule for the people far in the future.

    So, the purpose and principle of the dividend checks is: “extra cash in the pocket is good, and feels good, and is good for buying good stuff and paying bills, and so hey, why not?”

    The original 1980 dividend cash payments plan, was supposed to pay more for people who had lived longer in Alaska, and had roots here, rather than hordes of people from outside who crossed our borders just to grab free government handouts. But the court struck down the longevity component, and when the first PFD payment came out in 1982, everyone, including one-year new arrivals, stuffed the same amount of cash into their pockets.

    I stuffed the cash into my pocket in 1982. I had been an Alaska resident since 1974. It was fun getting free cash that I did not work for. I’ve taken thousands of dollars of dividend checks all the way up to 2014. But then when the price of crude oil crashed in 2014, and created a $4 billion deficit in the state budget, I said there is something terribly wrong about me taking this money. It’s one thing when there is surplus money floating around, but not when then state is screaming in agony as the life blood of our CBR savings account is being drained down.

    I have continued to received the paper PFD checks in the mail (every October), but I never cash them. I endorse them, and send them back to the state with a note asking that they be deposited into the state’s general fund so as to help reduce the budget deficit.

    All the assets of the state belong to the people of Alaska, collectively. That collective ownership begins automatically when we become a resident of Alaska. We don’t have to pay a cent to gain a share of collective ownership of all state property, including state office buildings, state land, filing cabinets, trooper cars, spare tires for the trooper cars, equipment for road maintenance, and drums of motor oil for the road graders (“it’s our oil!” – in those drums). Our collective ownership share is extinguished when we become a resident of another state.

    Every now and then trooper cars get too old for the troopers, and they become surplus. The people have a chance to get one for a cheap price at the disposal auction. But until they become surplus, it would be wrong of me to just take a trooper car when no one is looking. If I get caught, I might say: as an Alaskan citizen, I have collective ownership of all the trooper cars, and I only took one. But that defense won’t stand up. By taking the trooper car, I am costing all my fellow citizens who must cough up extra money to replace the car I took.

  • Randy the Rambler: Randy, everyone appreciates your good intentions and your insightful offerings. But, please. Can you do it without taking up so much band-width?

    • I submitted my post with spaces between paragraphs, but this “comments” section automatically removes those spaces making ramblers look especially blob-like. Now, I’m going to do a test. I’m going to try to make a 3-space indentation at the start of the very next paragraph.
      “Indent”. There I did it. Now I’m going to submit this post and see if those 3 spaces that I inserted on the left side of the word, that has the quote marks around it, are still there.

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