OPINION: We need to protect Alaska’s Permanent Fund from multiple threats

The Permanent Fund is a critical Alaska institution that is getting even more important. It faces at least four serious threats that we must guard against. These significant threats jeopardize future Permanent Fund dividends and the State of Alaska’s ability to provide good roads, schools and public safety. The steps required to protect the Permanent Fund include both an amendment to the Alaska Constitution and more legislative oversight of how the Permanent Fund Board of Trustees governs our $80 billion fund.

First, a little background. The constitutional amendment adopted in 1976 establishing the Permanent Fund divides it into two components: the principal and the earnings. The principal is constitutionally protected and can only be invested; it cannot be spent without a public vote. In contrast, the earnings can be accessed by a simple majority of the Legislature and are kept in the Permanent Fund Earnings Reserve Account (ERA). The Permanent Fund now faces the risks of overspending and inflation; depletion of the ERA; excessively risky or imprudent investments; and cronyism/favoritism/corruption.

Overspending is simply the Legislature appropriating more from the Fund’s earnings that it can sustainably support, and this risk of overspending is compounded by the danger of inflation eating away the Fund’s purchasing power. While the Legislature once inflation-proofed the Fund annually, this practice has become irregular. The optimal solution is to eliminate the outdated distinction between principal and earnings and instead adopt a constitutional amendment creating a single-account structure. This new framework would impose a sustainable and enforceable spending limit of 5% or less per year, automatically accounting for inflation and stopping overspending.

A second risk is the ERA running out of sufficient funds. In 2018, the Legislature implemented a Percent of Market Value (POMV) system, which uses Permanent Fund earnings to finance both Dividends and a sizable portion of the state’s conventional budget. For fiscal year 2024, the POMV draw accounted for 56% of the state’s unrestricted General Fund revenues. This system, combined with inconsistent inflation-proofing and unpredictable investment returns, increases the likelihood that the Earnings Reserve Account could fall short in providing the money used for dividends, roads, schools, and public safety. A recent study predicts a substantial risk of insufficient funds or even zero distributions starting as early as 2027. Adopting a single-account structure with a sustainable spending limit would mitigate this risk.

The third risk is excessively risky or imprudent investing that loses money. The Permanent Fund Board of Trustees and the professional staff must walk a careful line. The Fund’s investment approach can’t be too cautious, as investment returns consistently below inflation are a recipe for the Fund’s real value to fall. Taking on excessive risk, on the other hand, is dangerous, particularly for a sovereign fund like the Permanent Fund. The Permanent Fund has mostly struck the right balance, although a recent proposal from the Board of Trustees to borrow as much as $4 billion to use as leverage to try to increase returns goes in the wrong direction. Particularly dangerous, however, would be proposals to use the Permanent Fund as collateral for a loan to pay for a risky economic development scheme that cannot be financed through the market.

The fourth risk is selection of investments based on cronyism, favoritism or even corruption. The Board of Trustees and the staff have worked hard for years to aim for returns and not be tainted by other motivations. Recent revelations of contacts between the professional staff and a member of the Board of Trustees who has since resigned, however, have raised disturbing questions of conflicts of interest that the Board needs to avoid.

The Permanent Fund is a great gift that the people of Alaska gave themselves. We need a constitutional amendment, more oversight from the Legislature and additional vigilance from the public to keep that gift secure.

Cliff Groh represents House District 18 (Government Hill, JBER, North Muldoon, Downtown) in the Alaska Legislature. He helped create the Permanent Fund Dividend while a staff member with the Alaska Legislature in the 1980s.

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