How did Alaska get so close to not being able to pay its bills?

To get you up to speed – the Alaska Permanent Fund Corporation performed a risk assessment as to the ability of the Earnings Reserve Account (ERA) to fund the yearly payment for our state’s day-to-day operations. The conclusion was, under either the “mid” or “low” scenarios, the ERA would not be able to pay the multiple billions per year under the 5% drawdown rate.

Alaskans should be terrified of the potential of an immediate $4 billion loss of revenue. If the events which trigger the initial loss did not change, Alaska’s $4 billion loss could repeat.

Alaska’s 5% drawdown rate is excessive compared to Norway’s oil fund 3% maximum drawdown.

Also, Alaska’s Permanent Fund shot itself in the foot when it invested about 44.3% of the entire worth of the Fund (as of August 25, 2025) in riskier, alternative investments, called “alts”. 

What are alts? Alts are assets that are not publicly traded on a daily market like stocks and bonds. Because alts are not bought or sold in a market, they are illiquid and lack transparency. An illiquid asset is much harder to sell than a stock or bond, which trade daily. Because alts are not traded, the alts’ manager, not an objective market, assigns value.

In addition to being harder to sell and opaque as to its value, alts come with substantially higher costs: often the 2 and 20 model – fees at 2% of gross value yearly and 20% of all selling profits, if any. A typical Dow Jones Industrial or S&P 500 fund has a one-time fee of less than 1%.

Hard to sell alts are costly, and have uncertain and non-transparent value determined by a manager. Alts are also complex and have higher risk. The contract to own an alt is a long legal document which may block the timing of your sale or substantially reduce its value. Higher risk closely correlates with alternative assets; they don’t always make money.

Illiquid assets are illiquid for a reason. You are stuck with them when you badly need cash.

Why might Alaska’s Permanent Fund buy alts? Chasing higher rates of return is a pretty good guess. But a blind race for return can turn out badly.  When times are good, there is little thought of liquidity. But in hard times, when cash is scarce, the need for liquidity is immediate. In hard times, there is panic.

If any fund has around 50% of its assets invested in alts, that institution could run out of cash in two years.

Have alts recently been a good investment? A study of endowments concludes: no. Endowments are underperforming by 9.1%, suggesting something went terribly wrong. 

“The typical endowment is now worth 70% of what it would have been worth had it been invested in a comparable index fund. …. For each percentage point increase in alts exposure, there is a corresponding decrease of 28 basis points in excess return. … Why have alts had such a perverse influence on performance? The answer is high cost. … Allocating to alts… has been a losing proposition since the GFC [2007-2009 Great Financial Crisis]. And the more you own, the worse you do.” Big Funds, Small Gains: Rethinking the Endowment Playbook by Richard M Ennis CFA.

The 44% of the Permanent Fund invested in alts would mathematically look like: 44 x .28 = 12.32% underperformance.

“Starting January 1, 2010, the S&P 500 generated a total return of 566.8%… through the end of Q1 2025. The Nasdaq 100 has nearly doubled that.” Ritholtz, A Spectacular Underappreciated 15 Years, April 28, 2025.

Did the Permanent Fund even match publicly traded investments, with low-cost, index fund investing in publicly traded American businesses? Likely, since 2010, it did not.

Is the push to end constitutional protection of the Fund’s principal driven by a deflection by the Fund’s board from their excessive investment of our public money in risky alts? If the Fund is worried about not being able to pay the 5% annually during these good times for investing, imagine what would happen to Alaska in hard times.

There are two reasons why the ERA might not be able to pay 5% yearly: 1) the 5% drawdown is too high and 2) alts at 44% of the Fund is excessive.

Alaskans need to protect our Permanent Fund and protect the Fund’s Principal. Don’t change Alaska’s Constitution by combining the ERA and the principal of the Permanent Fund. 

Born in Fairbanks, Joe Paskvan served in the State Senate from 2019-2013. He holds an undergraduate degree from the University of Alaska, Fairbanks and a law degree from Seattle University School of Law. He is now retired after working four decades as a lawyer.