The Alaska Permanent Fund is worth more than $76 billion according to the most recent reports, and it’s not at risk of running out of money, but it could fall short of helping pay for state government and dividends in just a matter of years.
New modeling presented at the Alaska Permanent Fund Corporation’s Board of Trustees meeting last week showed that even under the middle-ground projections, the fund’s spendable account could hit zero by the summer of 2027. Under the low projection, it’d be out of spendable money by summer 2026.
And that’s with inflation at 2.5%, which is much lower than what we’re currently experiencing.
“The outcomes of this are quite troubling,” said Trustee Craig Richards, who last year was at the center of the controversy over the abrupt firing of former CEO Angela Rodell. “They’re quite troubling. I don’t care how you model it and how nerdy you get. Where we are right now with the earnings reserve balance where it is and with the inflationary environment we’re in, we’ve got very realistic, not tail-event scenarios where the ERA does not have sufficient funds to pay its obligations—even without inflation-proofing at full amounts—in the next couple years depending on very not-unreasonable market outcomes given where the market is, too. It’s a big deal.”
The Alaska Permanent Fund has become one of the main pillars of Alaska’s annual revenue picture, providing what most hope to be a bit of stability to balance out the roller coaster ride that is notoriously volatile oil tax revenue. Under former Gov. Bill Walker, legislators approved a system allowing a portion of the fund’s total value to go to fund government (and dividends) through the percent of market value draw or POMV draw that legislators have been following since.
The underlying problem here, though, is how the Alaska Permanent Fund is set up under state law. The fund is split into two accounts, with the vast majority of the fund sitting in the constitutionally protected principal of the fund, where it’s invested in a far-ranging portfolio of stocks, real estate and other business investments around the world. That fund can’t be spent without a change to the Alaska Constitution. The income from those investments is deposited into the fund’s earnings reserve account, which is not constitutionally protected from spending. Of the fund’s $76 billion size, less than $5 billion is in the earnings reserve account.
The POMV draw only works if the spendable earnings reserve account has enough money to cover the draw. Because the size of the earnings reserve account is largely a function of how well the investments are doing, it doesn’t take much for it to start running into risky territory, even if the fund’s overall size is going well.
That’s essentially what’s happening here. The fund is experiencing disappointing returns in public equities—the stock markets—after the fund’s investment strategy that expected poor performance in big tech companies while relying on other value stocks proved to be “the exact opposite of how the market performed,” Chief Investment Officer Marcus Frampton told the board at the meeting.
The dwindling of the earnings reserve account isn’t exactly the end of the world for the state, as there are some ways the Alaska Permanent Fund could still scrounge together the money—such as selling investments early—but none are great for the fund’s long-term health.
None of this is an unforeseen problem, and the Board of Trustees recommended a fix more than 20 years ago. Under that proposal, the fund’s two accounts would be merged, and the Permanent Fund would make the POMV payout from the entire fund instead. As a bonus, it would take a big, technically spendable account away from politicians.
Gov. Mike Dunleavy and his legislative allies suggested pulling additional money from the earnings reserve account ahead of the 2022 election to pay for a larger dividend. That request was largely stopped by higher-than-expected oil prices that helped fuel a larger dividend, but it would have also faced stiff opposition from legislators who worried it would deplete the account.
The move would also have the benefit of taking the inflation-proofing of the fund out of politicians’ hands. As it currently stands, inflation-proofing the fund is a discretionary action done by the Legislature through transfers into the fund’s principal. It’s largely conditional on the appetite of legislators to lock away money from spending and has come in fits and spurts in recent years.
At the meeting, Board of Trustee vice-chair Steve Rieger said the current situation reinforces the need for such a change.
“I think it’s a stronger argument to go to a POMV payout and get rid of the whole inflation-proofing mechanism on the one hand,” he said. “On the other hand, if we stick with it the way it is, it is probably going to portray inflation-proofing as a problem.”
If you want to do it right (as in making it a rule rather than a guideline), such a move would require a change to the Alaska Constitution, and that hasn’t gained much traction with legislators who’ve been largely consumed with the size of the dividend, making cuts to state services and talking around the edges of new revenue.
It’s possible that an earnings reserve account hitting zero could change that and fast.
Matt Acuña Buxton is a long-time political reporter who has written for the Fairbanks Daily News-Miner and The Midnight Sun political blog. He also authors the daily politics newsletter, The Alaska Memo, and can frequently be found live-tweeting public meetings on Twitter.
