Wrangell Sentinel -

The board in charge of the Alaska Permanent Fund is amping up its warnings about an impending state financial crisis.

Without action by the Legislature, there’s a small but growing chance that within three years, the Permanent Fund — source of more than half of Alaska’s general-purpose state revenue — won’t be able to pay for services and the annual Permanent Fund dividend.

“We are facing a potential crisis, and it warrants the consideration of a change, whatever that change may be,” said Deven Mitchell, executive director of the Alaska Permanent Fund Corp., which manages the $78 billion fund.

“I think this is a clear and present danger, and we need to get it out there,” said Craig Richards, a member of the corporation’s board of trustees.

If financial markets crash, Alaska could be in crisis as soon as July 1, the start of the state’s fiscal year.

“In six months, we could be looking at a problem,” said board chair Ethan Schutt. “If it turns … we’re in boiling water on July 1 this year.”

The problem is the unique structure of the Permanent Fund, which has a spendable account called the “earnings reserve” and a nonspendable account, referred to as the “principal.”

Both accounts are invested in a variety of ways, but all of the earnings from both accounts are considered in the earnings reserve, which can be spent with a simple majority vote by the Alaska Legislature and the assent of the governor.

In 2018, the Legislature and then-Gov. Bill Walker set up a system of annual transfers from the earnings reserve to the state treasury to help pay for public services and the annual dividend to Alaskans. The transfer was set at what lawmakers thought was a sustainable level, but over the past six years, withdrawals have exceeded new deposits.

In addition, legislators have repeatedly transferred more money from the earnings reserve to the principal than normally required.

This means that the earnings reserve could soon run out of money, which would be catastrophic for the state.

The annual transfer from the Permanent Fund is Alaska’s No. 1 source of general-purpose revenue — more than oil revenue in every year but one since the transfer was established.

The state’s savings accounts have dwindled, meaning that if the earnings reserve fails to make a payment, the state would instantly be forced to make unprecedented cuts to services and the dividend. Even if lawmakers wanted to raise taxes, there would not be time.

On Friday, Feb. 16, the board of the Alaska Permanent Fund Corp. voted to release a detailed analysis paper — one of only 10 since the corporation’s inception in 1980 — that presents a menu of potential solutions to the Legislature.

The paper’s top recommendation is a double-barreled constitutional amendment that would combine the two accounts of the Permanent Fund into one, then put a hard cap on the amount of money that could be withdrawn in a given year.

Greg Allen is the CEO and chief research officer of Callan Associates, the third-party adviser to the Permanent Fund Corp.

Under his analysis, without a constitutional amendment, there’s a 5% chance that the fund isn’t able to transfer money to the state treasury within three years.

An internal analysis by the Permanent Fund Corp. indicated a higher risk, but Allen said that even a 5% chance of a “doomsday” scenario is alarming.

Imagine walking across the room, said Mitchell, the corporation’s executive director. “What if there was a 1 in 20 chance that you broke your leg when you walked across the room?”

With a constitutional amendment, the problem goes away, he said. “No matter how bad the market gets, you’re going to be able to pay out something.”

While the doomsday scenario remains distant, the corporation’s board of trustees is being driven to act now by the fact that it may take years to propose, analyze and pass a constitutional amendment.

Any amendment requires a supermajority vote of the state House, the state Senate, then approval by voters during a statewide vote.

“There’s not enough time, when you hit the cliff, to pass a constitutional amendment,” Allen said, which means action is needed now.

“This is the first step of the process. Call it the first salvo. The Legislature has to take it up,” said Adam Crum, commissioner of the Alaska Department of Revenue and a member of the board of trustees, after the board voted to release its analysis.

“Hopefully they’re thinking about this issue, because they should be,” Mitchell said.

Legislative committees have considered the issue for several years, but lawmakers have never agreed on how to solve the problem. Lawmakers have struggled to disentangle the long-term future of the Permanent Fund dividend from questions about the fund’s structure.

The Alaska Beacon is an independent, donor-funded news organization. Alaskabeacon.com.