The Alaska Permanent Fund started the fiscal year on July 1 facing a possible $600 million shortfall.
Legislators have earmarked $3.8 billion from the fund for next year’s budget, which includes the Permanent Fund dividend. An additional $1 billion has been set aside for inflation proofing. Both draws would exceed currently available revenue in the fund’s spendable account.
“That’s the first time that we’ve been in this scenario,” Deven Mitchell, CEO of the Alaska Permanent Fund Corp., told a joint legislative committee on June 24.
Investment earnings over the next year should bridge that fiscal gap. But a “doomsday scenario” of poor investment returns could leave fund managers unable to meet the 5% annual draw required by state statute for state services and the dividend, Mitchell said.
“We don’t want to be alarmist,” he said, adding, “there’s a lot of opportunity to make adjustments to eliminate this perceived cliff.”
The $80 billion Permanent Fund is split between two accounts. Just under $70 billion is in the constitutionally protected principal, which is unspendable without a constitutional amendment. About $10 billion is in the earnings reserve account — a fund that can be spent by a simple majority vote of the Legislature. But most of that revenue has already been allocated.
The annual 5% draw of the fund’s total value was established by the Legislature in 2018. Permanent Fund earnings have been the state’s primary source of revenue in all but one year since then.
The fund’s managers have warned that the state’s nest egg has a small but growing risk of financial crisis. In February, advisers to the board of trustees said there was a 5% chance the earnings reserve could be exhausted within three years.
“If I drove to work every day and every 20th time I was going to have an accident, I would modify my behavior,” Mitchell said to lawmakers June 24.
Extend the horizon out to 10 years and the risk of draining the spendable account at least once in the next decade grows to 20%, a recent report shows.
The Permanent’s Fund’s board of trustees in February issued their 10th analysis paper of the fund’s future. For more than 20 years, the trustees have recommended a constitutional change to create a single-fund structure with a hard cap on draws from the fund — no more fluctuating earnings reserve.
Supporters say that would avoid the need for annual inflation proofing and that a single fund would better allow corporation staff to invest for the long term.
“You eliminate the concern about one generation of Alaskans taking more than their quote, unquote, ‘fair share,’” Mitchell said.
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