The Alaska Permanent Fund is at risk
Seems like some of the investments are doing good and some of the investments are doing not so good.
Happy Friday, Alaska!
In this edition: The Alaska Permanent Fund’s Board of Trustees met this week, getting new modeling that suggests the fund may run out of money to pay for government (or dividends) in just a matter of years. While the immediate problem is a product of the ups and downs of the financial markets, it illustrates the underlying issues with how the state’s golden goose is structured and managed. I’ll do my best here to explain the problem, the underlying problem and the fix that’s been on the table for two decades. Meanwhile, the Board of Trustees’ obsession with an Anchorage office continues. Plus, the reading list and weekend watching.
Current mood: 📉
The Alaska Permanent Fund is at risk
The Alaska Permanent Fund Corporation’s Board of Trustees got some pretty bleak news at its meeting this week that suggests it’s entirely possible the fund could run out of spendable money in just a matter of years. According to new—and admittedly limited—modeling presented by CEO Deven Mitchell, the fund’s spendable account could run out by the summer of 2026 under the “low” scenario, which expects near-zero growth, and the summer of 2027 under the “mid” scenario, which expects growth roughly on par with historical trends.
Mitchell also noted that the modeling forecasts an inflation rate of 2.5%, much lower than what we’re currently experiencing. While it seemed that the trustees had some reservations about the modeling itself—triggering a lengthy discussion about the need for trustees to work more closely with the analysts doing the modeling, perhaps without public scrutiny—they conceded the outlook isn’t great.
“The outcomes of this are quite troubling,” said Trustee Craig Richards, who last year was at the center of the controversy over the abrupt firing of former CEO Angela Rodell. “They’re quite troubling. I don’t care how you model it and how nerdy you get. Where we are right now with the earnings reserve balance where it is and with the inflationary environment we’re in, we’ve got very realistic, not tail-event scenarios where the ERA does not have sufficient funds to pay its obligations—even without inflation-proofing at full amounts—in the next couple years depending on very not-unreasonable market outcomes given where the market is, too. It’s a big deal.”
Why it’s a big deal: The Alaska Permanent Fund has become one of the pillars of Alaska’s annual revenue picture, providing what most hope to be a bit of stability to balance out the roller coaster ride that is notoriously volatile oil tax revenue. Under former Gov. Bill Walker, legislators approved a system allowing a portion of the fund’s total value to go to fund government (and dividends) through the percent of market value draw or POMV draw.
However, the problem with that plan is that it only works if the spendable earnings reserve account has enough money to cover the draw.
The Alaska Permanent Fund is set up as two accounts—the principal and the earnings reserve account—that make up about $76 billion together. The principal makes up most of the fund and is invested in stock markets, real estate and directly with companies. It’s protected by the Alaska Constitution from being spent, meaning it’d take a constitutional amendment to tap into. The earnings reserve account is filled with the earnings from those investments, does not enjoy that constitutional protection and sits just below $5 billion. It can be spent if a majority of legislators agree to it (and if the governor doesn’t veto it).
Because the size of the earnings reserve account is largely a function of how well the investments are doing, it doesn’t take much for it to start running into risky territory, even if the overall size and health of the fund are going well.
That’s essentially what’s happening here. The fund is experiencing disappointing returns in public equities—the stock markets—after the fund’s investment strategy that expected poor performance in big tech companies while relying on other value stocks proved to be “the exact opposite of how the market performed,” Chief Investment Officer Marcus Frampton told the board at the meeting.
The dwindling of the earnings reserve account isn’t exactly the end of the world for the state, as there are some ways the Alaska Permanent Fund could still scrounge together the money, but none are great for the fund’s long-term health.
In the big picture: The situation reinforces the need for a sensible reworking of how the Alaska Permanent Fund is handled. In a news release after the initial round of headlines about the hearing, the Alaska Permanent Fund Corporation reiterated its support for merging the two accounts of the fund into a single fund.
“In anticipation of a market cycle such as the one we are currently in, the Board of Trustees has been on record for more than 20 years to transition the Fund from its current two-account system to a one unified account system, which would protect the intergenerational sustainability of the fund to provide for all generations,” says the unattributed statement.
In basic terms, managing the Alaska Permanent Fund as a single account would make it easier for managers to meet the annual POMV draw instead of relying on a variable earnings reserve account to have enough money. As a bonus, it would have the effect of taking a big, technically spendable account away from politicians like Gov. Mike Dunleavy and his allies, who have suggested tapping to pay for a larger PFD (because it’s not in the Alaska Constitution, the POMV law passed under Gov. Walker is effectively just a guideline that legislators can ignore, as they do with the PFD law).
In practice, it would be a firm spending limit for legislators as they wouldn’t have the option of spending money they told themselves they wouldn’t spend.
It would also have a benefit when it comes to inflation-proofing the fund. As it currently stands, inflation-proofing the fund is a discretionary action done by the Legislature through transfers into the corpus of the fund. It’s largely conditional on the appetite of legislators to lock away money from spending and has come in fits and spurts in recent years.
At the Board of Trustees meeting, vice-chair Steve Rieger said the possibility of a dwindling earnings reserve account reinforces the need for that change.
“I think it’s a stronger argument to go to a POMV payout and get rid of the whole inflation-proofing mechanism on the one hand,” he said. “On the other hand, if we stick with it the way it is, it is probably going to portray inflation-proofing as a problem.”
If you want to do it right (as in making it a rule rather than a guideline), such a move would require a change to the Alaska Constitution, and that hasn’t gained much traction with legislators who’ve been largely consumed with the size of the dividend, making cuts to state services and talking around the edges of new revenue.
It’s possible that an earnings reserve account hitting zero could change that and fast.
Stay tuned.
Trustees’ fixation with Anchorage
The board’s fixation with an Anchorage office continues, largely undeterred by the plan not looking like it makes all that much sense for the fund. Of the staff surveyed, only three said they were interested in moving to Anchorage sometime in the next two years. An additional two were maybes. It also comes at a time when the fund is considering a more expansive work-from-home and work-remotely policy to accommodate corporation staff who want to live anywhere in Alaska, so it calls into question the necessity of investing nearly a million dollars into office space.
At a not-insignificant cost to set up, there’s also the significant issue of where the corporation—whose budget is approved by the Legislature—plans to get the money for the new office. Even though the idea has been floating around for a while, it wasn’t brought up in this year’s budget cycle. Yet, it sounds like the trustees are pushing for the office—of which only three people have indicated any interest in relocating—to open sooner than later. There was some talk about creative accounting that could get the existing budget redesignated for the office, despite warnings that doing so could sour an already-tense relationship with the Legislature.
Former Fairbanks state Sen. Gene Therriault questioned the underlying justifications the board has made for the office, warning that moving forward outside of the regular budget process “may irreparably damage the corporation’s relationship with the Alaska Legislature.”
“Although addressing high staff turnover is the suggested reason for establishing an Anchorage office, the historical turnover information indicates that turnover is not unusually high currently,” he said, later adding, “Without a compelling and time-sensitive reason to move forward now ... your actions would likely cause long-standing tensions with the legislative branch of government.”
Did the trustees get the message? Judging by the corporation’s account of the meeting, it doesn’t look like it. From that statement:
The Board reiterated its aim to establish an APFC satellite office in Anchorage to support the retention and recruitment of professional staff. In full recognition of the Board’s direction, staff will continue to work to ensure successful implementation including a timeline and process to bring forth funding, while addressing details essential to guaranteeing operational and staff success.
The reading list
Nick Begich III is setting himself up to go 0-3 for the U.S. House. From The Alaska Current: Nick Begich hopes the third time’s the charm in new bid for U.S. House
Mayor Dave Bronson continues to cost the city of Anchorage. From The Alaska Current: Mismanagement of City-Owned Building by Bronson Administration Proves Costly
Parts of the Alaska Marine Highway System might have to halt sailing next week thanks to the ongoing difficulty in hiring and keeping staff. The Alaska Beacon: Alaska ferry system’s hiring woes continue and could halt another ship
Alaska’s overburdened legal system could be getting a lifeline under a new system that allows specially trained nonlawyers to represent Alaskans on a handful of issues. From the Alaska Beacon: Nonattorney advocates to represent Alaskans in court under new waiver
Alaskans working on diversity issues say there are many unknowns about the U.S. Supreme Court’s anti-affirmative action decision. From KNBA: Alaskans assess impact of US Supreme Court’s affirmative action ruling
A recent ruling on clearing homeless camps doesn’t look like it’ll have a big impact on Anchorage, at least for now. From Alaska Public Media: Can Anchorage clear homeless camps? Here’s where lawyers and the courts stand.
It turns out Alaska’s food stamp program isn’t just slow in handling applications, but it’s getting a ton of them wrong. From the ADN: Alaska had a 57% error rate paying out food stamps last year, five times the US average
Weekend watching
Grief and illness can be difficult to navigate, so here’s some good advice from cancer patient Hank Green—who has been documenting his experience with cancer and chemo with a lot of earnestness—about what to get for a cancer patient.
Have a nice weekend, y’all.
“The fund is experiencing disappointing returns in public equities—the stock markets—after the fund’s investment strategy that expected poor performance in big tech companies while relying on other value stocks proved to be “the exact opposite of how the market performed,” Chief Investment Officer Marcus Frampton told the board at the meeting.” So did the amazing investment strategy come into force after the board axed Rodell to make Dunleavy happy...?