For 41 years, Alaskans’ bank accounts have been refilled with dividends – usually more than $1,000 – from the $76.6 billion Alaska Permanent Fund. More recently, the fund also has been the biggest source of money paying for state government. But what if there was no money available for either dividends or the state budget?
Permanent Fund managers have long known the fund 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 fund investment growth or state policy. The board of trustees of the corporation that manages the fund don’t see easy solutions.
Board of trustees Chair Ethan Schutt said the same factors that drove down fund 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,” Schutt said.
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 taxes and royalties, as well as from the Legislature moving money to it from the earnings reserve. The earnings reserve grows when the fund gets income from selling investments.
Fund Executive Director Deven Mitchell said the spendable amount, based on recent income, would be smaller in July 2024 than what the fund expects the Legislature to withdraw over the following 12 months for spending 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. He added: “It’s, I think, something that can’t be overemphasized.”
Mitchell said in an interview that fund income should be enough between now and June 2025 to cover those spending and inflation transfers, but without a return to the kind of income gains the fund has experienced historically, the earnings reserve would be in trouble the following budget year, which ends in June 2026.
Mitchell said that what happens to the fund’s investments over the next year will be pivotal.
“It’s a year to pay attention, in my view,” he said.
The earnings reserve’s size today is deceptively large. While its value stood at $14.3 billion at the end of April, the spending and inflation transfers will chip away at that amount. In addition, a third of the remaining earnings are tied up in investments that would be difficult to sell.
This wouldn’t be an issue if the income was close to what was projected, but that hasn’t happened. 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 receive this year. And while the fund considered a range of possible outcomes, even its “low” income estimate was for roughly $3.5 billion.
Mitchell said the unexpected poor income reinforced the potential benefit of making a change the trustees have long advocated for – constitutionally protecting the entire amount managed by the fund, including the earnings reserve.
“You don’t have to worry about overdraws of your fund,” if that were to happen, Mitchell said.
An opportunity to amend the Alaska Constitution could come as soon as October, when Gov. Mike Dunleavy may call the Legislature into a special session to consider a long-term plan to bring state spending and revenue into balance. While Dunleavy has proposed protecting the earnings reserve, he’s also called for a level of Permanent Fund dividend that many legislators say is unsustainable without large new taxes.
Legislators put forward different ideas for amending the constitution’s Permanent Fund provision this year – one, by Anchorage Democratic Rep. Cliff Groh, is similar to the trustees’ position. But proposals to constitutionally protect the earnings reserve have been mired in the Legislature for years, with lawmakers focused on disagreements over the dividend.
Amendments require two-thirds of both the House and Senate to agree, as well as the approval of Alaska voters – a high bar in a state with deep policy disagreements.
“It’s a heavy lift,” Mitchell acknowledged.
For years, supporters of the fund have expressed concern that fund managers could be pressured to sell investments for cash to cover short-term state costs, rather than to solely focus on pursuing the fund’s mission “to benefit all generations of Alaskans.”
The earnings reserve isn’t the only part of the permanent fund under pressure. The nonspendable principal is being eroded by inflation. It’s currently valued at $62 billion. The Legislature appropriated $1.4 billion in the budget it passed this month from the earnings reserve to the principal to offset inflation. But that amount is much smaller than what the fund would need to grow to keep pace with inflation, which is on track to be 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 last 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.
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