Is it legal for Gov. Walker to shrink Permanent Fund dividends?

In a blink, Gov. Bill Walker vetoed half of this budget year's money for Permanent Fund dividends that benefit almost every Alaskan.

And almost as quickly the question arose: Is it even legal for a governor to do that?

Clashing views are emerging and the two sides are digging in. Court cases and attorney general opinions that touch on the subject date back to 1980. But there's never been a court ruling on whether the governor's veto powers extend to the Permanent Fund dividend program.

That may change.

"I'm skeptical that the governor can just unilaterally do it," said state Sen. Bill Wielechowski, a Democrat from Anchorage and an attorney. He is investigating the legislative history of statutes governing Permanent Fund dividends and is considering bringing a court challenge himself.

Walker's team says there's no doubt. The Alaska Constitution specifically gives the governor power to veto individual appropriations, and that's what he did, said Cori Mills, an assistant attorney general.

"The most important thing is that it is not the statutes that really address this," Mills said. "It is the constitution."

['Day of reckoning': Gov. Walker vetoes hundreds of millions in spending, caps Permanent Fund dividend at $1,000]

Walker said he cut the Permanent Fund dividends after the Legislature failed to approve his plan to restructure the fund as an endowment. He wants to use fund income for state spending at a time of low oil prices, low oil production and a multibillion-dollar budget gap. He said his veto gives political cover to legislators reluctant to alter dividends, which are popular, essential to many and, before now, untouchable.

"They have someone to blame," Walker said last week. "They can blame me."

Yet the veto conflicts with a state law that says the Alaska Permanent Fund Corp. "shall transfer" at the end of every budget year half of its available income into the state's dividend account. Dividend amounts are calculated based on how much is in that account and the dividends themselves are distributed from it.

"Just because there is a statute that says this is the amount, that doesn't trump the constitutional power of appropriation," Mills said. "So, regardless of what this statute says, the Legislature and then the governor by line-item veto have the power to determine what those appropriations are."

To veto the Permanent Fund dividend money, Walker struck through a section of the state operating budget bill that refers to the dividend-transfer statute. He crossed out the amount that represents the amount specified in law – $1.36 billion – and wrote in a new amount, $695.7 million, initialing each change with "BW."

That lower amount is what is available for dividends from the Alaska Permanent Fund, the state's oil wealth savings account. Walker says it will mean a payout of $1,000 per eligible Alaskan rather than the expected $2,000 that would have been available under the law.

"It is not being done by the calculation that is currently in the statute," Mills said.

Generally, constitutional provisions supersede statutes, says a former assistant attorney general, Juneau attorney Jim Baldwin, who represented the state in a veto-challenge case during the Knowles administration. But this veto "is one that is difficult to make a call on."

Automatic – or not?

Lawmakers themselves sometimes let the constitution rather than law guide them. They did that this year in stretching the regular legislative session to 120 days. The law caps it at 90 days but the constitution allows the longer period.

On vetoes, the constitution says: "The governor may veto bills passed by the legislature. He may, by veto, strike or reduce items in appropriation bills."

Only nine other states allow governors to reduce appropriations – funding specified in a budget – as well as zero them out, according to "Alaska's Constitution: A Citizen's Guide." It's considered a progressive measure that gives governors more power for fiscal management, according to the guide by retired legislative employee Gordon Harrison, who most recently updated it in 2012.

The constitution generally prohibits the Legislature from creating dedicated funds that continue year after year, to ensure that lawmakers have flexibility for current circumstances.

The Permanent Fund is an exception. It was added to the constitution in 1976 to protect the state's oil wealth. The dividend program is not mentioned but laws on how the fund income should be handled are referenced.

After the Legislature created the Permanent Fund dividend program in 1980, it didn't specifically appropriate the money for dividends at first.  An attorney general opinion in 1980 concluded it didn't have to.

When Jay Hammond was governor, the transfer to the dividend-paying account indeed happened automatically.

That is key, say those questioning Walker's veto.

"In the Hammond administration, the appropriation for dividends was unnecessary because everyone understood that it was dedicated," said former state Senate President Rick Halford, who was a state representative when the dividend was born. "At the time it wasn't even considered as part of state spending. It was simply the pass-through of the people's share of the resource value."

The section of the constitution that establishes the Permanent Fund says "all income from the permanent fund shall be deposited in the general fund unless otherwise provided by law."

Those last five words tie the dividend statutes to the constitution, Halford, a Republican, said.  "It is otherwise provided by law."

Because of that reference, in his view, the Legislature would have to change how the dividend is funded in order for the governor to veto the money.

"The repeal of the Permanent Fund dividend takes concurrence of the legislative branch because it is a constitutionally provided-for dedication," the former Senate leader said from his home in Dillingham.

Unconventional approach

In 1983, with then-Gov. Bill Sheffield in office, his attorney general looked at that clause more narrowly and recommended the Legislature appropriate the money for dividends.

That's been the approach ever since. It provided Walker a mechanism to shrink the dividends that he likely wouldn't have had otherwise.

The Walker administration contends the "unless otherwise provided by law" clause allows Permanent Fund income to automatically go into a savings account called the earnings reserve account. But the next step, from the earnings reserve into the dividend fund from which payments are made, requires an appropriation, Mills said.

While the Alaska Supreme Court said in a 1994 decision that the transfer into the dividend fund also was automatic, "this is incorrect," Acting Attorney General Richard Svobodny wrote in a 2009 opinion that discussed how the money was appropriated.

Baldwin, the former assistant attorney general, was on the losing side of a 1999 Alaska Supreme Court case in which the Legislative Council sued then-Gov. Tony Knowles over his striking intent language from a budget bill.

The court said that he could only zero out or reduce the funding, not the descriptive wording spelling out what lawmakers had in mind.

In his recent veto, Walker crossed out the reference to the dividend-transfer law.

"He's done kind of an unconventional thing here," Baldwin said. "He's stricken some language and reduced some numbers. You have to wonder whether he's really done anything beyond what he is authorized to do."

Still, Walker's intent was to reduce an appropriation, and Alaska governors have veto powers that strong, Baldwin said. Walker most likely is within his rights, he said.

Lawmakers are set to convene in their second special session of the year on July 11.

They could try to override the veto but senators already voted 14-5 to back Walker's plan to restructure the dividend program, noted Wielechowski, the Democratic senator and one of five no votes.

The questions may need to be resolved in court, Wielechowski said.

Who would bring a case?

"It could be any number of people," he said. "It could be me."

Walker has said that if he didn't reduce this year's dividends and if the program isn't restructured, the payments will vanish in four years.