Opinion ID: 1395626
Heading Depth: 2
Heading Rank: 2

Heading: The Permanent Fund Earnings Distribution System

Text: The recent tremendous wealth bestowed upon Alaska by the development of oil and mineral resources has created governmental problems unique to this state. Both the original establishment of the permanent fund and the later statute establishing a system for distributing the earnings from the fund represent novel mechanisms to deal with this wealth. The creation of the fund was a response to two specific concerns. First, the people of the state recognized that Alaska's oil and mineral wealth is based on nonrenewable resources which will become depleted at some point in the future, potentially leaving Alaska with the choice of either terminating certain governmental programs or continuing them through increases in taxation. The permanent fund channels some of the current wave of moneys into just what its name implies-a permanent fund, the earnings from which will help to defray the costs of government at that future time when the nonrenewable resources run out. The second concern was the temptation to use the current flood of funds for costly, wasteful, and unnecessary government projects. Typically, some limit is placed on this tendency by the fact that funding for such programs must come from the taxpayers. With this damper removed, the people of Alaska recognized the need to substitute some other form of restraint. Thus, the constitutional provision establishing the fund places the principal of the fund beyond the legislature's appropriation power, which can be exercised only over earnings derived from the fund. The legislature's subsequent decision to use its appropriation power over the earnings to distribute some of the earnings directly to Alaska residents was also unique. Undoubtedly, the legislature was aware that such action would be popular with its constituency. However, there is merit in the state's contention that there was an additional motive for choosing to distribute some of the earnings. The earnings alone have been substantial enough to engender concern over the unwarranted and painless growth of government. By distributing some of the fund's income directly to residents, the state could insure that future legislatures will face a spending limit. To exceed this limit, the legislature would have to take back some of the fund's income distributed to Alaskans. This would, in effect, simulate a legislative choice to enact a tax. The mechanism established to effect this distribution of earnings is as follows: one-half of the fund's earnings are to be distributed in dividends of at least fifty dollars. [18] To be eligible, a person must be eighteen years of age and a resident of Alaska. AS 43.23.010(b). There is no durational residency requirement; a bona fide resident of Alaska is immediately eligible for a pro rata portion of his or her first dividend. AS 43.23.010(f). However, the number of dividends received by an eligible person is determined by length of residency, with one dividend allowed for each full year of residency since statehood (1959). AS 43.23.010(a). It is this connection between the length of residency and the number of dividends received which is at issue here. [19] On April 28, 1980, Ronald and Patricia Zobel, residents of Alaska since 1978, filed suit challenging this statute on the ground that it violates the equal protection clauses of both the United States and Alaska Constitutions. On June 27, 1980, the superior court issued its decision declaring the statute invalid under the equal protection clause of the Alaska Constitution. The state has appealed that decision to this court. Application of the Erickson test leads us to conclude that the statute is constitutional.
As federal equal protection law still uses the two-tier analysis, the initial inquiry must be to determine which of the two standards is to be applied. Although the question is not a clear one, we conclude that the rational basis standard is applicable. [20] We recognize that the United States Supreme Court applied a strict scrutiny analysis in the cases of Shapiro v. Thompson, 394 U.S. 618, 89 S.Ct. 1322, 22 L.Ed.2d 600 (1969), Dunn v. Blumstein, 405 U.S. 330, 92 S.Ct. 995, 31 L.Ed.2d 274 (1972), and Memorial Hospital v. Maricopa County, 415 U.S. 450, 94 S.Ct. 1076, 39 L.Ed.2d 306 (1974), and that there is language, particularly in Dunn, which indicates that any durational residency requirement automatically triggers the strict scrutiny analysis. But Shapiro and Maricopa County explicitly left open the possibility that there might be durational residency requirements which do not trigger strict scrutiny because they would not penalize the exercise of the right of interstate migration; and the strict scrutiny analysis was not applied in the most recent United States Supreme Court pronouncement on the subject, Sosna v. Iowa, 419 U.S. 393, 95 S.Ct. 553, 42 L.Ed.2d 532 (1975). We think that language in Shapiro and Maricopa County and the ruling in Sosna indicate that a durational residency requirement does not automatically trigger strict scrutiny. To determine whether or not the stricter test is applicable, we must look at the factors which have been advanced in the Supreme court cases as explaining the different results. Our analysis of the cases reveals four possible distinguishing factors, any one of which may invoke the strict scrutiny test. First, Sosna distinguished the earlier cases on the basis that they had involved state justifications based only on administrative, budgetary, or recordkeeping needs. [21] To the extent that this distinction does apply here, the justifications put forward by the state go beyond budgetary, recordkeeping, and administrative concerns, and thus, under this distinction, the case at bar falls into the Sosna non-strict scrutiny camp. The second distinction is the one suggested in Maricopa County -the basic necessities distinction. If the benefit of which new residents are deprived by the state is a basic necessity of life- e.g., the welfare payments in Shapiro, or the medical care in Maricopa County -then the strict scrutiny test is appropriate; otherwise, it is not. [22] Under this distinction, this case clearly falls into the non-strict scrutiny category, as a permanent fund earnings dividend is not a basic necessity. The third distinction is suggested by two passages in Sosna and by some language in Vlandis v. Kline, 412 U.S. 441, 93 S.Ct. 2230, 37 L.Ed.2d 63 (1973). [23] This distinction indicates that there is a dispositive difference between a state absolutely denying a benefit and a state merely delaying provision of the benefit. Thus, a durational residency requirement of one year prior to eligibility to file a divorce action is permissible, since the right to file is merely delayed, not denied. This is a difficult distinction to apply in most cases, as any durational residency requirement can, it seems to us, be equally well characterized as either a delay or a denial. The distinction becomes especially difficult when denial is interpreted to require that a party be irretrievably foreclosed from obtaining some part of what the [the injured party seeks], Sosna, 419 U.S. at 406, 95 S.Ct. at 560, 42 L.Ed.2d at 544 (emphasis added). Additionally, the fact that substantial hardship may be worked by the delay, a point raised by the dissent in Sosna, was apparently not regarded as significant by the majority. [24] A close question is presented by the delay versus denial distinction, partly due to its inherent difficulty in application, and partly due to the nature of the program under scrutiny. [25] Although the result is not as clear as under the other two distinctions already considered, we still conclude that this case falls in the non-strict scrutiny camp. Under the terms of the program, it is clear that there is no absolute denial. A new resident is immediately eligible for some portion of a dividend; and this new resident's achievement of the level of dividends currently held by a long-term resident who has been here since 1959 (twenty-one dividends, or a minimum of $1050) is only a matter of delay- i.e., the new resident would have to remain a resident for twenty-one years. On the other hand, it could be said that the new resident will never achieve parity with the current long-term resident, as the latter will always be twenty-one dividends ahead of the former if both remain in the state. Under this view, the new resident is consistently denied that twenty-one-dividend differential. Both characterizations of the program are accurate, and one could label the situation either a delay or a denial. However, the significance of the latter characterization is considerably diluted by several factors. First, as the state points out, it is entirely possible that the new resident will catch up and even surpass the number of dividends granted to the long-term resident, depending on the longevity of each. Additionally, the size of each dividend will vary from year to year, and is expected to increase during the foreseeable future so that the attainment of twenty one dividends in the year 2001 is likely to be worth much more than the attainment of twenty-one dividends in 1980. Last, the new resident who arrives in 1980 and stays twenty-one years will not only get twenty-one dividends in 2001, but will have received a total of 210 dividends during the intervening years. In that respect also, the new resident may be better off, in that the twenty-one-year resident of 1980 receives twenty-one dividends in 1980, but no back payments for the 210 dividends he or she would have received had the program been established in 1959. Taking these factors into account, we cannot say that a new resident can be properly characterized as being consistently denied parity with long-term residents. Although the delay/denial distinction is analytically difficult to apply in this context (indeed, one may question whether it has any applicability at all here), we are sufficiently satisfied that this is more properly classified as a delay than as a denial, and thus strict scrutiny analysis is not triggered here. [26] The last possible distinction is suggested by the characterization of Dunn found in Maricopa County indicating that a state's denial of fundamental rights- e.g., voting rights-to new residents but not to old will invoke strict scrutiny. [27] This distinction perhaps renders the right-to-migrate aspect of the case unnecessary, as it would seem that the denial of the additional fundamental right would in and of itself be enough to trigger strict scrutiny, with or without the presence of the right to migrate. [28] But assuming, arguendo, the validity of the distinction, it seems clear that this case again falls into the Sosna non-strict scrutiny category. If the right involved in Sosna -that of filing a lawsuit for divorce-does not trigger strict scrutiny, then the denial of initial equality in the distribution of permanent fund earnings, at stake here, also fails to do so under this distinction. Thus, whatever distinction is applied, this case falls outside the strict scrutiny standard. Under traditional federal equal protection analysis, this means that the case comes within the lower tier, to be assessed under the rational basis standard. [29] As such, we think it is clear that this statute withstands constitutional scrutiny. However, we postpone discussion of the state's purposes until our analysis under the Erickson test. It is not necessary for us to assess the state's purposes under the rational basis standard here. If the purposes and the relationship between means and ends satisfy the stricter Erickson test, then they a fortiori meet the requirements of the less strict rational basis test; and if the statute fails to pass muster under the state test, then it is invalid regardless of whether it passes federal constitutional muster.
Examination of the nature and extent of the infringement of the constitutional right involved has led us to conclude that this legislative scheme cannot be said to penalize the right of interstate migration. In commonsense terms, it is easy to see that the imposition of a tax primarily on new residents, with older residents exempt, can be perceived as a penalty imposed on a person who chooses to exercise his or her right to move into Alaska. [31] It is much more difficult to perceive such a penalty here. The new resident does, in fact, receive financial gain for exercising his or her right to move into Alaska; and whatever penalty may accrue from the fact that this gain is not as large as that realized by a long-term resident we regard as de minimis. In making this judgment, we are aware of the statements by the United States Supreme Court that a showing of deterrence is not necessary to a finding of an infringement upon the right to migrate; but it is also true that the Court has consistently relied upon the severity of the penalty inflicted upon the individual for exercising the right of interstate migration in reaching its results in various cases. [32] In our view the permanent fund earnings distribution statute can only be characterized as a penalty with great awkwardness. We are therefore convinced that the exercise of the right of interstate migration is not penalized by the statute in question. Turning to the state's purported interests in establishing the system and the fairness and substantiality of the relationship between the ends ( i.e., the purpose or state interest) and the means ( i.e., the classification), we find three purposes listed in the statute itself: (1) to provide a mechanism for equitable distribution to the people of Alaska of at least a portion of the state's energy wealth derived from the development and production of the natural resources belonging to them as Alaskans; (2) to encourage persons to maintain their residence in Alaska and to reduce population turnover in the state; and (3) to encourage increased awareness and involvement by the residents of the state in the management and expenditure of the Alaska permanent fund (art. IX, sec. 15, state constitution). The state argues that the link between residency and number of dividends bears a fair and substantial relationship to the legitimate purpose of making an equitable distribution, the first listed purpose. In so arguing, the state urges the court to recognize the contributions of various kinds, both tangible and intangible, which residents have made during their years of state residency: Many have paid taxes; many have contributed to the cultural life of the state and have fostered the cultural diversity that makes Alaska so unique; many have contributed their ideas and have participated in the political life of the state; all have endured the rigors of a harsh climate; and all have borne the impact of a high cost of living. It is perfectly reasonable for the legislature to have concluded that it would be unfair in distributing permanent fund income to fail to recognize those years of residence during which people have had and will have a share in the mineral resources-years during which residents have made and will make contributions to the state. In response, the Zobels cite us to Cole v. Housing Authority of the City of Newport, 435 F.2d 807, 813 (1st Cir.1970), in which Judge Coffin, although granting that giving a preference to older residents may have a certain facial appeal, held that such a vague sentiment, even if permissible, does not rise to the level of compelling state interest. Although the question is a close one, we must hold that the purposes underlying this statute are legitimate under state law, and also that a fair and substantial relationship exists between those purposes and the classification made under the distribution scheme. Throughout its history, from the days of the Gold Rush to the recent oil pipeline period, Alaska has been prone to the phenomenon that large numbers of people from without the state move in, derive great financial and other benefits from the state's resources and opportunities, and then move out to enjoy the fruits of their labors elsewhere. This obviously results in a great drain of financial and other resources from the state. [33] Of course, every state is equally subject to this phenomenon as a necessary by-product of the right of interstate migration; but Alaska is especially affected by this, due to its harsh climate, its high cost of living, and its geographical isolation from the other states. Although the problem is not unique to Alaska, the extent to which this problem affects the state is probably unparalleled. [34] Since this problem is a necessary by-product of the free exercise of the right of interstate migration, neither Alaska nor any other state may attempt to ameliorate it by penalizing an individual for choosing to exercise the right to migrate. However, this does not preclude an attempt to reward those Alaskan residents who have chosen to stay, to enjoy the fruits of their labor here, and to make a lasting contribution, tangible or intangible, to the state's culture and commonwealth. Such an attempt does not penalize those who choose to leave any more than a firm's awarding of a gold watch to a fifty-year employee penalizes employees who leave before working for fifty years. Thus, we find this purpose permissible. We need not take issue with Judge Coffin's statement in Cole that it does not rise to the level of a compelling state interest, inasmuch as we have ruled that durational residency requirements do not, under Erickson's approach, automatically trigger strict scrutiny. [35] In finding that the state may reward long-term residents for their past intangible contributions, we are guided by the analysis set forth in our opinions in the other half of this case, concerning former AS 43.20.017 (ch. 22, SLA 1980), the tax exemption statute. In that context, the parties argued over the legitimacy of the state recognizing past tax contributions in granting tax relief. The plurality opinion found this purpose absolutely impermissible, under Shapiro v. Thompson, 394 U.S. 618, 632-33, 89 S.Ct. 1322, 1330, 22 L.Ed.2d 600, 614 (1969). See Williams v. Zobel, 619 P.2d 422, 428-29 (Alaska 1980). The concurrence rejected this absolutist position, id. at 434 (Rabinowitz, C.J., concurring), noting that it would be inconsistent with the Supreme Court's affirmance in Starns v. Malkerson, 326 F. Supp. 234 (D.Minn. 1970), aff'd without opinion, 401 U.S. 985, 91 S.Ct. 1231, 28 L.Ed.2d 527 (1971), cited with approval, Vlandis v. Kline, 412 U.S. 441, 452 n. 9, 93 S.Ct. 2230, 2237 n. 9, 37 L.Ed.2d 63, 72 n. 9 (1973), in which the district court specifically relied upon a past tax contributions rationale. We also note that the absolutist position is undercut by the Supreme Court's opinion in Reeves, Inc. v. Stake, ___ U.S. ___, 100 S.Ct. 2271, 65 L.Ed.2d 244 (1980), which upheld South Dakota's policy of selling cement from its state-owned plant only to state residents, against a commerce clause attack. The Supreme Court stated, The State's refusal to sell to buyers other than South Dakotans is `protectionist' only in the sense that it limits benefits generated by a state program to those who fund the state treasury and whom the State was created to serve. ___ U.S. at ___, 100 S.Ct. at 2280, 65 L.Ed.2d at 254 (emphasis added). We think that this analysis is persuasive in concluding that rewarding past intangible contributions is also a permissible purpose, albeit not a particularly compelling one. The Zobels argue, and the superior court found, that even if the purpose is permissible, there is no fair and substantial relationship between recognizing past contributions and the classification based on length of residency: [T]he state admits that, in order to qualify for a share in the resources trust, it is not even necessary that a person have made any contribution to the state at all. All that is required is that a person be a resident. Although we recognize that length of residency may be an imperfect measure of past contributions, we have concluded that the state may recognize these contributions. The fit between means and ends need not be perfect. We think the relationship is fair and substantial. There clearly is a correlation between one's length of residency and the extent to which that individual has been able to make contributions to the community. We are not convinced that any workable alternative method of measuring past contributions is clearly preferable. Although the existence of a preferable alternative would not automatically render the relationship unfair or insubstantial, the absence of any preferable workable alternative is a strong indication that the classification chosen by the legislature is acceptable. We think that the relationship is as fair and substantial as the Alaska Constitution requires in this context. The second of the listed purposes is clearly related to the classification system. A significant financial incentive is created to encourage persons to establish and maintain residency in Alaska; and the stabilization of long-term residents clearly reduces population turnover. The Zobels do not argue that this is an impermissible purpose, [36] but rather that it does not rise to the level of compelling. They argue that the state enjoys wide latitude in possible approaches to the population turnover problem, but that penalizing new residents for having recently exercised the fundamental right to migrate is not among them. As above, we do not regard this system as imposing a penalty on new residents. Thus, we hold this purpose to be permissible and the relationship clear, as these points seem uncontested. [37] The third justification proffered is, perhaps, the most interesting: that the distribution scheme encourages increased awareness and involvement by the residents of the state in the management and expenditure of the Alaska permanent fund. The state puts forward two related purposes which revolve around prudent management of state resources. First, this classification system installs a greater motivation for the public to urge prudent management of the fund itself. Were the distribution made per capita, the state argues, as population increases, each individual share in the income stream is diluted. The income must be divided equally among increasingly larger numbers of people. If residents believed that twenty years from now they would be required to share permanent fund income on a per capita basis with the large population that Alaska will no doubt have by then, the temptation would be great to urge the legislature to provide immediately for the highest possible percentage return on the investments of the permanent fund principal, which would require investments in riskier ventures... . Under AS 43.23, each resident will receive an increasing number of dividends the longer he or she resides in the state. Each person's share will have increased substantially after twenty years, instead of having been diluted as it would have been under a per capita distribution system. Under AS 43.23, all generations of residents, not only today's residents but future residents as well, will therefore have an interest in insuring that the payment fund is managed prudently so that a healthy income stream will be available twenty, thirty, and forty years after they have begun to accumulate their individual dividends. A similar point is raised by the state in regard to prudent management of the state's natural resources. A per capita distribution is more likely to encourage the public to press for immediate and rapid development of the state's mineral resources, as each set of dividend recipients would want to see as much revenue as possible flowing immediately into the fund. Allowing benefits to increase with residency installs a counterbalance to this motivation, in that each year's recipients may stand to gain more by slowing development somewhat and increasing the size of the dividend in subsequent years, when those residents will presumably be getting an additional dividend for their additional year of residency. The superior court and the Zobels seem to have misunderstood this point. The superior court apparently interpreted the argument as meaning that granting full benefits to the newcomers would result in the newcomers putting pressure on the legislature. [38] This is the same misconception that is reflected in the Zobels' response: The idea that if new residents are treated fairly, they will just get greedy and try to drain the fund is without basis in logic or fact. It has no basis in the record and represents little more than a gratuitous insult to everyone who has not been here since 1959. This fundamentally misconstrues the argument the state makes. All recipients, not just long-term or short-term residents, would be subject to these incentives and motivations. We think that installing this counterbalance incentive system is a permissible goal, and that the classification system is fairly and substantially related to it. Having assessed the factors on both sides of the Erickson scale, the balance must be struck. The guidance which can be gleaned on this point from prior case law is limited. This distribution scheme, and indeed the permanent fund itself, are novel solutions to an unusual problem created by several relatively recent political concerns. The convergence of these concerns-administering and husbanding Alaska's new-found wealth, avoiding the cost-free expansion of government, coping with an acute population turnover problem, and containing and counterbalancing the push for immediate development of Alaska's resources-has been dealt with legislatively by enacting a relatively simple, but unusual distribution scheme. Unlike the tax exemption statute, this program has little or no precedent in American political thought. If the privileges and immunities cases indicated that a distinction drawn between residents and nonresidents would be impermissible for a benefit distribution plan like this one, we would have an a fortiori argument that such a classification based on term of residency would be impermissible. [39] However, our reading of the applicable law leads us to conclude that a state would be justified in drawing a distinction between residents and nonresidents in distributing the permanent fund earnings dividends. [40] See Baldwin v. Fish & Game Commission of Montana, 436 U.S. 371, 98 S.Ct. 1852, 56 L.Ed.2d 354 (1978); cf. Califano v. Torres, 435 U.S. 1, 98 S.Ct. 906, 55 L.Ed.2d 65 (1978); Starns v. Malkerson, 326 F. Supp. 234 (D.Minn. 1970), aff'd without opinion, 401 U.S. 985, 91 S.Ct. 1231, 28 L.Ed.2d 527 (1971). This does not make the distinction drawn here automatically permissible; it merely means that simple residency requirement cases do not provide clear guidance. The case law does inform us that since we deal here with a constitutional attack upon a law providing for governmental payments of monetary benefits [, s]uch a statute `is entitled to a strong presumption of constitutionality.' Califano v. Torres, 435 U.S. 1, 5, 98 S.Ct. 906, 908, 55 L.Ed.2d 65, 69 (1978), quoting Mathews v. De Castro, 429 U.S. 181, 185, 97 S.Ct. 431, 434, 50 L.Ed.2d 389, 394 (1976); see also Fisher v. Reiser, 610 F.2d 629 (9th Cir.1979). Beyond that general principle, the case law is less helpful here than in the balancing of the tax exemption scheme. [41] Given that this distribution system works no infringement on the exercise of the right of interstate migration, the purposes put forward by the state need not be as strong as would be required if the provision penalized the exercise of that right. On that basis, coupled with our conclusions that the purposes put forward by the state are legitimate and sufficiently weighty, and that the classification system has a fair and substantial relationship to these purposes, we conclude that the permanent fund income distribution statute is constitutional. [42] Thus, for the foregoing reasons we conclude that the permanent fund income distribution statute is valid under both the Alaska and United States Constitutions. The judgment of the superior court as it pertains to the constitutionality of the permanent fund statute is therefore Reversed. BOOCHEVER, J., not participating.