OPINION: Alaska’s operating funds could be exhausted

Astonishment. That was my reaction to the July 12 article on the Alaska Permanent Fund Corp. by longtime Alaska reporter James Brooks. APFC has two components — the Earnings Reserve Account (ERA) and the Principal Account. The ERA currently funds about $3.5 billion per year for Alaska’s operations.

APFC performs risk assessment by economic modeling the capacity of the ERA to fund the government.

Brooks reported that APFC modeling for both “low” and “mid-” growth scenarios indicates the ERA will soon be exhausted and unable to fund annual payments; “low” would be exhausted in 2026 and “mid-” would be exhausted in 2027. Exhausted means that the $3.5 billion annual payments will cease, stop, and end. There should be a loud alarm ringing in all parts of Alaska. Do you hear one? I don’t.

To remain a “permanent” fund, the principal should remain locked from spending. To be a true sovereign wealth fund, the Permanent Fund should have an expected life of hundreds of years.

Alaska could run out of operating money in just a few short years. How did Alaska get to this perilous position?

Alaska, about a decade ago, went from saving money and depositing that money into Alaska’s savings accounts to withdrawing from its Statutory Budget Reserve and Constitutional Budget Reserve accounts. Since 2013, about $18 billion has been withdrawn from those accounts, nearly depleting them.

Then annual withdrawals started from the ERA in 2019. The withdrawal is based on a system called POMV — percent of market value. So far, about $18.5 billion has been withdrawn from the ERA. Brooks’ article raises a serious problem: If either the “low” or “mid-” scenarios occur when no money is available to make the annual payment to fund Alaska’s day-to-day operations.

But, let me present one more economic point before getting back to my question of how Alaska got to this perilous position. I recently read a July 2023 article by Michael Lebowitz, a portfolio manager with RIA Advisors and author of Real Investment Advice. It was titled ”Fed Warning: The End of an Era for Stocks.” Lebowitz referenced a white paper by the Federal Reserve, written by Michael Smolyansky, which warned of “significantly lower profit growth and stock returns in the future.” Another loud alarm should be ringing as we depend upon stock market returns to withdraw funds from the ERA.

The article’s essence: The tailwind for 30 years of stock returns (1989 – 2019) was “reduction in interest rates and corporate tax rates.” This “was responsible for over 40% of the growth in real corporate profits.” The 30-year decline in interest rates and corporate tax rates had the “mechanical effect of significantly boosting corporate profit growth.” This led Lebowitz to say: “Simply put, investors will not be willing to pay an above-average valuation (for stocks) for below-average profit growth.” Smolyansky’s conclusion: “Both stock returns and corporate profit growth are very likely to be substantially lower in the future.”

Markets are known for cycles and risk and many other things. One investing risk is years when stock returns are flat or negative. Can our Principal Account even survive for 50 years given our weakened starting position and yearly demands for $3.5 billion or more?

Why was Alaska forced to withdraw $18 billion from its CBR and SBR savings accounts and compelled to start annual withdrawals (so far totaling $18.5 billion) from the ERA? In 2013, Alaska changed its oil production tax to SB21.

Alaska lost and will continue to lose billions and billions of oil production revenue dollars because of SB21.

SB21 promoters promised Alaskans a million barrels per day; as of July 13, Alaska’s production is 442,595 barrels per day. SB21 promoters promised more oil and gas workers in Alaska; oil and gas workers are thousands fewer now (and too many are nonresidents) than in 2012-2013. SB21 promoters promised more revenue to fund the state; if that had been true, Alaska would not be in this perilous position. SB21 promoters promised you secure Permanent Fund dividend checks; each of you and each of your family members has lost many thousands of dollars because there was inadequate money for PFDs. Alaska is losing population. (Do not even bring up the Willow oil project, as that is on federal land, so Alaska gets $0 for royalty and must pay SB21′s abhorrent $8 per barrel credit.) SB21 has failed.

Alaska needs to stop bleeding. A first change to remove Alaska from its perilous position — get rid of SB21.

Joe Paskvan is a lifelong Alaskan and retired attorney. He served in the Alaska State Senate from 2008 to 2012, including a year as co-chair of the Senate Resources committee. He lives in Fairbanks.

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