Permanent Fund not immune to inflation, investment losses
May 31, 2023
For 41 years, Alaskans have benefitted from Permanent Fund dividends. More recently, the fund also has been the biggest source of money to pay for state public services. Permanent Fund managers have long known it could one day have less available to spend than is needed. They now say that day could be coming uncomfortably soon, in perhaps just three years.
Since last July, it’s been a bad year for fund income as it’s defined by state law. And that’s raising the possibility that the amount the state can spend from the fund could hit zero without changes in either investment returns or state policy. The board of trustees that manages the fund doesn’t see easy solutions.
Board Chair Ethan Schutt said the same factors that drove down fund investment income this year may recur next year. “I don’t think any of us are anticipating a herd of unicorns running by to save us from ourselves.”
The amount of income flowing into the spendable account this year is on pace to be more than $2 billion less than projected, fund staff told the trustees at a May 17 meeting in Soldotna.
The Permanent Fund is divided into two parts: 1) the principal, which includes most of the fund’s money and is protected from being spent by the Legislature under the state constitution; and 2) the earnings reserve account, which can be spent. The principal grows from state oil royalties, as well as when the Legislature moves money into the protected account from the earnings reserve. The earnings reserve grows when the fund earns income from selling investments.
Fund Executive Director Deven Mitchell said the spendable amount, based on recent projections, would be smaller than what the fund expects the Legislature to withdraw over the 2024-2025 fiscal year for spending on dividends and public services and to partially offset the effect of inflation on the principle.
“I don’t think anyone was truly anticipating the level to which it’s declined,” Mitchell said of the amount of fund income as defined by state law. “It’s … something that can’t be overemphasized.”
Mitchell said in an interview that without a return to the kind of investment gains the fund has experienced historically, the earnings reserve would be in trouble the following budget year, which ends in June 2026.
Mitchell said what happens to the fund’s investments over the next year will be pivotal. “It’s a year to pay attention, in my view.”
The earnings reserve’s size today is deceptively large. While its value stood at $14.3 billion at the end of April, out of a total fund value of $76.6 billion, spending and inflation transfers will chip away at that reserve. In addition, a third of the earnings are tied up in investments that would be difficult to sell.
Through April, income was $1.85 billion in the first 10 months of the current fiscal year. That’s in contrast with the $4.54 billion the fund projected it would earn this year.
For years, supporters of the fund have expressed concern that fund managers could be pressured to sell investments to cover short-term needs for dividends and the state budget.
The earnings reserve isn’t the only part of the fund under pressure. The nonspendable principal is being eroded by inflation and investment losses. The market value of its assets was pegged at the end of April at $62 billion, down from $65.8 billion on Dec. 31, 2022.
The Legislature appropriated $1.4 billion in the budget it passed this month from the earnings reserve to the principal to partially offset inflation. But that amount is much smaller than what the fund would need to grow to keep pace with inflation — estimated at more than $4 billion this year.
That means the real value of the principal — the amount it could buy in goods and services in the face of rising prices — could fall. That follows a year when inflation ravaged the entire fund: From July 2021 to June 2022, the Permanent Fund had its second-worst year of the past 20 in terms of a decline in real value.
And when a fund is supposed to be permanent, a sustained reduction in value is a cause for worry.
The Alaska Beacon is an independent, donor-funded news organization. Alaskabeacon.com.