Alaska Permanent Fund headed for fiscal crisis, as state budget increasingly relies on it

The Alaska Permanent Fund is on course for a fiscal crisis.

As the Alaska Beacon reports, that’s because the state is using more money from the spendable portion of the Permanent Fund than the fund is generating through its investments. It’s the state government’s single largest source of general purpose revenue, and, as of July 1, it didn’t have enough money to cover the draw needed for the state budget.

Alaska Beacon reporter James Brooks says the fund is expected to make up the difference in the coming months, but, as Brooks puts it, it’s like the state is putting down railroad tracks right before the train rumbles over them.

Listen:

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This interview has been lightly edited for length and clarity.

James Brooks: So we’ve been drawing down the spendable part, what’s known as the Earnings Reserve, and now we’re at a point where that can’t immediately pay for what we’re calling it to pay for. And we’re in a position now, or at least the Permanent Fund is, where it has to earn money in order to have enough money to pay for what the state budget calls for.

Casey Grove: And how is that? I mean, like, how did we get into that situation? Just just by having the budgets that we’ve had, and maybe the markets haven’t performed the way that we want, or what?

JB: So back in the 2010s when oil prices crashed and state revenue crashed along with them, the Legislature decided, “OK, oil’s not coming back up. It’s not earning what it used to. So what we need to do is we need to take a portion of the Permanent Fund each year out in order to pay for dividends and services.” And so they set that at an average of 5% of the fund’s value, and this is over multiple years, so the actual withdrawal is less than 5%. The problem is the fund hasn’t earned as much as is being withdrawn, and that draw rate may be too high.

Now, maybe the fund needs to be invested more aggressively. Maybe something else needs to happen. But we’re at the point now where if the Legislature and the governor don’t act within the next few years, there might not be enough to pay for dividends and services, and the state will be in a position of having to do some pretty aggressive changes — new taxes, severe budget cuts — because the Permanent Fund (accounts) for about 60%, two-thirds, of the state’s general purpose revenue. I mean, we’re not so much an oil state anymore as we are an investment state.

CG: Yeah. Now, you wrote in in your recent story at alaskabeacon.com that we’re calling this an “impending fiscal crisis,” but it’s not necessarily, like, this year or the next even, but it’s maybe 2026, that we’re looking at.

JB: Right. We’re, right now, if investments stay stable — and after the past day or two, that’s less certain than it used to be — then we’re looking at two years as the near-term danger zone. And that could be stretched out to 10 years, potentially. And what has me worried, though, is that fixing this might take a few years. It takes a few years to get changes through the Legislature. And when I was talking to lawmakers to check my own assumptions, they were like, “Yeah, it’s reasonable to think that a fix might take at least two years, and maybe longer.” Because it’s possible that there would be need to be a constitutional amendment in order to change the structure of the Permanent Fund and the way money is taken out of it, and that would take even longer.

CG: When you you talk about that taking a long time, that requires both chambers of the state Legislature and a vote of the people, right?

JB: Exactly. Yeah.

CG: Is anybody talking about actually using the money from the fund, I mean, what is now the not-spendable portion of the fund?

JB: One of the solutions that’s been discussed, and actually was recommended by the Permanent Fund’s board of trustees, is the idea that you combine the spendable and non-spendable parts, and then you firmly cap the amount of money that can be taken out of this new combined fund. That would take a constitutional amendment, but there would need to be discussions about what the withdrawal limit looks like. Is 5% too high? Does it need to be 4%, as some of the Permanent Fund’s advisors have recommended? And if that happens, that means there’s less money to spend on dividends, on services. And that creates whole other problems, political problems and annual budgetary problems, even as you fix the issue with the dwindling Permanent Fund.

CG: I don’t follow the stock market very closely, to be honest, but I’ve heard in the past that, like, daily downturns, even over like somewhat longer periods of time, tend to not affect the Permanent Fund and that it’s somewhat insulated against that. Is that right? I mean, how does that work?

JB: Right. The Permanent Fund’s invested in a lot of different things. So while the Japanese stock market might be down, but the Australian market’s up, or, I mean, there’s lots of different things that the Permanent Fund is invested in. It’s designed, its investment mix is designed, to reduce the problems caused by these fluctuations. Real estate prices, for example, haven’t dipped substantially in the past day (as of Monday). The Permanent Fund has a lot of real estate holdings. It has a lot of bonds. It has a lot of investments in companies that haven’t yet started trading on the stock market, and all those different investments are designed to iron out the ups and downs of market fluctuations, like we’ve seen in the past day.

When I was talking with Deven Mitchell, the CEO of the Permanent Fund, he actually said Alaska is in a lot better position than a lot of other states that might rely only on property taxes or income taxes. If those taxes dip, that state will have to make immediate budget cuts to compensate. In Alaska, we’re diversified. We have oil. We have investments all around the world. So even if one part of our investments goes down, we have other parts that are still stable. So it’s an odd thing, in a state that’s been so reliant on boom and bust, that we’re actually more stable now because of the Permanent Fund’s diversified investments.

CG: That’s good to hear.

JB: Yeah, a small silver lining for what is a pretty big, dark cloud out there.