The Alaska Permanent Fund Corp. is warning that the state’s $65 billion trust fund may not be able to sustainably pay both a traditional dividend and for government expenses at present rates while still compensating for inflation.
In a two-day meeting in Fairbanks this week, the corporation’s governing board of trustees was told by staff that the fund’s earnings reserve “cannot sustainably pay dividends per the existing statutory formula, retain sufficient earnings for inflation-proofing, and completely fund the fiscal gap.”
An analysis conducted by a hired firm indicated there is a 15% chance the reserve will run out of money at some point during the next 10 years even if the Alaska Legislature restricts itself to a spending limit approved in 2018.
“Continuing the status quo doesn’t feel like a comfortable place to be. No question,” said Permanent Fund Corp. CEO Angela Rodell during the meeting.
Trustees declined to make specific recommendations to the Alaska Legislature, which controls spending from the fund. Trustees could make a recommendation in February, when they are scheduled to meet in Juneau.
The Permanent Fund’s health is now critical to Alaska’s fiscal health as a whole. This year, money from the fund accounts for 47% of state government revenue, more than all taxes combined.
“We essentially have just under half of our state budget coming out of a savings account,” said Craig Richards, chairman of the board of trustees.
Lawmakers have argued for years about how much money should come out of the fund and how that money should be split between government services, dividends and the long-term growth of the fund. The idea that the limit is already unsustainably high may exacerbate debates in the upcoming legislative session, which begins Jan. 21.
The Permanent Fund consists of two main accounts: the principal, which is constitutionally protected, and the earnings reserve, which can be spent with a simple majority vote of the Alaska Legislature and the assent of the governor.
Both accounts are invested, but the earnings reserve collects the proceeds of the investments from both. If lawmakers or the governor want to protect that money from being spent, it needs to be manually transferred to the principal. But if they want to spend that money on dividends or government services, they need to keep it in the earnings reserve.
This year, the Permanent Fund transferred $2.9 billion from the earnings reserve to the state treasury. Next year, that transfer will be $3.1 billion. The earnings reserve contains $16.6 billion as of Oct. 31, a little under 26% of the Permanent Fund’s total value.
The corporation hired Callan LLC to stress test the reserve, examining what might happen in the next 10 years under various market conditions.
“There is a 15% chance of at least one shortfall year even with the current healthy balance in the (earnings reserve),” stated the resulting report.
If the reserve shrinks because of a declining market or spending over the limit on dividends or government expenses, the risk rises. If the reserve were about $3 billion, the probability of a shortfall is 30%.
For that reason, said Greg Allen, CEO of Callan, his firm is recommending the corporation keep at least $12 billion — four times next year’s scheduled transfer — in the reserve.
“A big ERA balance is helpful, in my opinion,” he said.
Richards pointed out a problem with that idea. Because the earnings reserve is unprotected, there’s a risk the Legislature could simply spend the money.
That would be a political consideration, Allen said. His firm was hired simply to look at the investment impact.
Anything else is up to Alaskans.