Permanent Fund’s spendable account faces first potential shortfall starting in July

JUNEAU — The Alaska Permanent Fund will start the next fiscal year on July 1 facing a $600 million shortfall.

Lawmakers have earmarked $3.8 billion from the fund for next year’s budget and Permanent Fund dividend. An additional $1 billion has been set aside for inflation proofing. Both draws would exceed available revenue in the fund’s spendable account.

“That’s the first time that we’ve been in this scenario,” said Deven Mitchell, CEO of the Alaska Permanent Fund Corp., to a joint legislative committee on Monday.

Investment earnings over the next year should bridge that fiscal gap. But a “doomsday scenario” would see poor investment returns, meaning fund managers may then be 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 corpus, which is considered unspendable. Around $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 was established by the Legislature in 2018. Permanent Fund earnings have been the state’s primary source of revenue each year since then, except for 2022.

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 Account 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 on Monday.

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 issued their 10th analysis paper into the fund’s future in February. 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.

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.

Nikiski Republican Rep. Ben Carpenter suggested on Monday that lawmakers could approve a “performance audit” to study the Permanent Fund and its investment decisions. Carpenter said that an audit could help determine whether the trustees are meeting the Legislature’s intent for the purpose of the fund.

The Permanent Fund and its board of trustees have recently faced heightened scrutiny.

In May, the website Alaska Landmine published internal staff emails that raised ethical concerns about trustee Ellie Rubenstein. She was shown to have set up meetings between Permanent Fund staff and business associates or companies with ties to a company she owns.

Carpenter, chair of the joint Legislative Budget and Audit Committee, said a performance audit could help “reassure Alaskans” that any perceived conflicts of interest at the fund are not impacting investment decisions.

In response to the Rubenstein emails, the board of trustees discussed in May changing how investment referrals are made to improve transparency. The board also tried to find who at the corporation leaked the emails without success.

Rep. Cliff Groh, an Anchorage Democrat, had called for a legislative hearing into the fund. He said there had been an inadequate response by the board of trustees into “disturbing conflicts of interest” alleged in the leaked emails. He said there should be greater legislative oversight into the fund and corporation.

Last month, the Permanent Fund’s board sparked further controversy. Trustees voted 4-2 to keep an Anchorage office open, despite legislators instructing them to shut it down.

Palmer Republican Rep. DeLena Johnson, who manages the operating budget in the House, said on Monday that she had concerns about the board’s decision. Johnson said the Legislature and the board should not work at “cross purposes.”

After Monday’s hearing, Groh said in addition to “hot button issues,” legislators should further study the fund’s structural issues that could see the spendable account drained in short order.

“The Permanent Fund is critical,” he said. “Alaskans need to keep our eyes firmly focused on it.”