 Clarifying Permanent Fund Accounting Procedures June 20, 2003
After a thorough review of Alaska statutory and case law, the attorney general determined that existing law requires only realized income from investments should be used for
The Permanent Fund Board of Trustees requested the opinion from the attorney general in order to resolve an apparent inconsistency between that law and revised accounting principles, the attorney general said. "We hope this opinion will resolve the ambiguity created by differences between our law and standard accounting practices regarding the treatment of unrealized gains and losses," Renkes said. "This is important because it could affect the amount of money available for Permanent Fund dividends and will affect the calculations the funds necessary for inflation-proofing." Alaska law requires the corporation to transfer funds from the Fund's earnings reserve account at the end of each fiscal year to distribute dividend checks and inflation-proof the principal. While the Alaska Legislature this year made the necessary appropriations authorizing each transfer, declining stock and financial markets had raised concerns that the earnings reserve account would not be big enough to cover those appropriations. These concerns were exacerbated by an apparent conflict between state law and changes in the Generally Accepted Accounting Principles (GAAP) regarding calculation of the balance of the earnings reserve account, the attorney general said. State law holds that only realized earnings (i.e., the gains and losses from the sale of investments, bond interest, stock dividends, and rental property income) were recorded as income in the earnings reserve account. However, 1998 changes to the GAAP required the Permanent Fund Corporation to record the Fund's readily marketable investments at current fair value in its financial statements. In other words, all unrealized earnings (i.e., the difference between market value and the original cost of assets held in the fund) were required to be included in determining Fund income for accounting purposes. "This inconsistency resulted in large differences between net income as calculated under Alaska law, and net income as calculated using the new generally accepted accounting principles," Renkes said. "The Permanent Fund Trustees looked to us to resolve that inconsistency in their March 14 request for an opinion." "Although financial markets have significantly rebounded over the past several months, it was imperative that these issues be addressed today," said Renkes. "By clarifying these standards, we ensure that the earnings reported by the Permanent Fund are an accurate representation of its value. It is important that the public and the trustees understand the correct application of the law and that the corporation's financial statements properly inform the public." As of June 30, 2002 the Permanent
Fund recorded net assets totaling $23.5 billion. Of that total,
$21.8 billion was principal. Since 1982, $7.5 billion of permanent
fund income has been added to principal for inflation-proofing,
through June 30, 2002. In addition to the constitutionally and
statutorily mandated dedicated revenues, the legislature has
made June 30 is the last day of
the fiscal year and is the date on which the total amount available
for dividends will be determined. The Permanent Fund Corporation
will announce the amount of the dividend during its annual meeting
on September 24 in Anchorage.
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