Spending on dividend and public services squeezes Permanent Fund
October 18, 2023
The Alaska Permanent Fund isn’t running out of money, but it may be running out of money that can be spent.
After years of earning less than it needed to beat inflation and the demands of the state treasury, the Permanent Fund’s spendable reserves may be exhausted within four years.
Alaska relies on an annual transfer from the Permanent Fund for more than half of its general-purpose revenue, used to pay for state services and dividends. If the spendable account runs dry, it would trigger an instant statewide crisis.
With that scenario in mind, the managers of the Alaska Permanent Fund Corp. and state legislators are considering structural changes to the way the Permanent Fund operates.
The worst-case scenario isn’t certain, but “I would say we’re starting the bad journey,” said Craig Richards, a member of the Permanent Fund Corp.’s board of trustees.
The trustees have directed corporation staff and outside experts to begin analyzing the situation and intend to finish a paper, likely with formal recommendations to the Legislature, later this year.
While the board of trustees has historically refrained from taking political positions, it has repeatedly recommended fixing the spendable account. In 2000, trustees went so far as to draft a proposed constitutional amendment. That was never adopted, and the problem has persisted.
“We the trustees, and the executive staff … are trying to do our duty to look ahead at what is reasonably possible and do something that prevents the foreseeable crisis situation,” said Ethan Schutt, board chair.
When the Permanent Fund was created in 1976, Alaskans divided it into two accounts. There’s the principal, which can’t be spent without a constitutional amendment, and the earnings reserve, which can be spent with a simple majority vote of the Legislature and the consent of the governor.
The principal is invested, and the earnings from those investments automatically flow into the earnings reserve.
At the start, the Permanent Fund’s creators knew there was a drawback to this approach. Unless the Legislature regularly transfers money from the earnings reserve to the principal, inflation will wear away the principal’s value.
“Inflation is like a thief in the night,” former Permanent Fund Corp. board chairman Elmer Rasmuson said in 1982.
That year, the Legislature began regular transfers from the earnings reserve to the principal, ensuring that the fund’s value would continue to grow, in effect putting the “permanent” into Permanent Fund.
Twenty years later, the fund’s then-chair, Jim Sampson, declared that “inflation-proofing has been — and will continue to be — a key component of the fund’s success.”
Lawmakers occasionally canceled the annual inflation-proofing payments in order to save money in the earnings reserve for the Permanent Fund dividend, but they always resumed.
In 2018, legislators set up a system that annually transfers money from the earnings reserve to the state treasury in order to pay for both services and dividends. There is a cap on that annual transfer, at 5% of the fund’s market value, but that transfer must come from the earnings reserve, not the principal.
The annual withdrawal has increased the pressure on the Permanent Fund. Now, not only does the Permanent Fund need to earn enough money to beat inflation, it needs to earn enough money to keep state government and dividend funded.
A pre-COVID boom in the fund’s investments increased the earnings reserve, but in four of the past five years, the fund has earned less than withdrawals and inflation combined.
This spring, in order to ensure the amount of money available for spending in the earnings reserve, the Legislature capped the amount of this year’s inflation-proofing transfer.
The same thing could happen again when the Legislature convenes in 2024, reducing the chances that the spendable account will run out of money soon — but it also creates a long-term problem.
“It’s — in some ways — the easiest path, but it does tend to shortchange future generations of Alaskans,” said Schutt. “It means that in relative terms, the fund shrinks for future generations.”
“We’ve got to keep track of inflation, or you slowly erode your Permanent Fund. So you can skip or lighten up a year (on inflation proofing) if you want. But you’ve got to keep up in the long run,” said Sitka Sen. Bert Stedman, co-chair of the Senate Finance Committee.
But if the Legislature continues inflation-proofing at the expected rate, it will reduce the amount of money in the earnings reserve, increasing the chances of an eventual short-term fiscal crisis.
This spring, after holding hearings on the issue, the Senate Finance Committee drafted a budget that decreased the annual inflation-proofing transfer, and that figure was eventually adopted by the Legislature.
“It wasn’t because we wanted to,” Stedman said. “It was a prudent financial thing to do to ensure that we keep that steady stream of dividends coming to the public. And, the funding of core services at the state, which goes to the people.”
The solution, many legislators and advisers believe, is to write and pass a constitutional amendment that restructures the Permanent Fund.
“It’s the most difficult to achieve, but it’s the most durable solution,” said Deven Mitchell, who leads the Alaska Permanent Fund Corp, on a day-to-day basis as its executive director.
As envisioned, a constitutional amendment would combine the Permanent Fund’s two accounts into one. The state treasury would take a percentage of the fund’s overall value each year to pay for dividends and services, and legislators wouldn’t be able to spend more than that percentage without amending the constitution again.
The idea isn’t a new one — variations have been proposed for years — but the concept has repeatedly run aground on political disputes.
Amending Alaska’s constitution requires the support of two-thirds of the state House and two-thirds of the state Senate, plus a majority of voters in the next general election.
Getting legislative supermajorities “to agree on which day of the week it is might be tough at times,” Schutt said.
Although an amendment wouldn’t have to say how much should be spent on the Permanent Fund dividend, it’s almost impossible to divide the two issues.
“I think that’s a challenge in the political environment. All things involving the Permanent Fund are thrown into the bucket and talked about at the same time,” Stedman said.
Several members of the state House, including Speaker of the House Cathy Tilton, R-Wasilla, and Rep. Bryce Edgmon, I-Dillingham and a member of the House Finance Committee, have said they don’t see the Legislature significantly advancing a comprehensive long-term state fiscal plan, but single measures could advance in the spring.
“The Legislature does have within its control the ability to appropriate less than the (annual transfer), but given the state’s budget situation lately, that doesn’t seem like a very politically achievable issue,” Schutt said.
Any reduction in the annual transfer would limit spending on the dividend and public services.
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