Correction: The quote “Inflation is like a thief in the night” was misattributed in the original version of the article. Elmer Rasmuson said it, not Ed Rasmuson.
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.
Inflation as a ‘thief in the night’
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 assent 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.
That 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 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.
Two problems face the Permanent Fund
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.”
For example, on July 1, 2022, the Permanent Fund had $77.7 billion in assets. On the same day this year, it had $79.2 billion — a larger number, but a figure that was worth less because of inflation. Nationally, inflation was 3% over that period, which would have required the fund growing to $80 billion to retain its value.
Money that’s spent can’t be transferred to the principal and saved to be reinvested for future returns.
“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 Sen. Bert Stedman, R-Sitka and 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.”
Constitutional amendment floated as a solution
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 participating 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 the amendment — the latest version was introduced this spring by Rep. Cliff Groh, D-Anchorage — doesn’t 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.
“I think legislation to create an endowment would be a good first step,” Edgmon said.
Changing Alaska’s spending habits
If a constitutional amendment — with its two-thirds legislative supermajority — is too hard, the Legislature could consider passing legislation that reduces the annual transfer from the Permanent Fund to the state treasury.
Shrinking that figure would make it easier for the Permanent Fund’s investments to keep pace with spending and inflation.
But because reducing the transfer would mean reducing the amount of money available for dividends and services, that’s not likely to happen.
“It’s more unlikely than likely at this point in time,” Edgmon said.
The Legislature could also take an approach like New Mexico. When oil prices spiked in 2022 after the Russian invasion of Ukraine, that state’s legislators deposited $8 billion into the state’s various permanent funds, saving it for the future.
Oil prices right now are running higher than expected, and the Alaska Legislature could do something similar to New Mexico if trends continue, but it isn’t seen as likely.
“It’s hard,” Mitchell said, “because that’s where people have this expectation of these ‘makeup’ dividends, if you will, when times are good. And so that ability to reduce the draw becomes challenged.”
In the past few years, lawmakers have saved some money but have spent more — on special one-time dividends and one-off projects.
“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.
Increasing the Permanent Fund’s earnings
If the state can’t reduce its spending from the fund, could fund investors instead earn more for the state?
At a special Oct. 30 meeting of the Alaska Permanent Fund Corp. Board of Trustees in Juneau, the board will consider changing the corporation’s strategic plan.
Those changes could have the fund take riskier investment approaches in order to increase its earnings. For example, the fund might borrow money in order to invest, or it could put more money into high-risk, high-reward investments.
Schutt and Mitchell said those approaches come with a drawback: They increase the volatility of the fund’s performance. Good years would be better, but bad years would be worse, and in the end, the results could even out.
In December, the trustees expect to finish work on a paper outlining the broader problem with the earnings reserve, — including possible solutions — in detail.
Schutt said that once those recommendations are finished, it will be out of the Permanent Fund’s hands.
“We don’t control it in the end. We’ll try to put all the pieces together and do what’s right in the end for the state and its residents,” he said.
• James Brooks is a longtime Alaska reporter, having previously worked at the Anchorage Daily News, Juneau Empire, Kodiak Mirror and Fairbanks Daily News-Miner. This article originally appeared online at alaskabeacon.com. Alaska Beacon, an affiliate of States Newsroom, is an independent, nonpartisan news organization focused on connecting Alaskans to their state government.
