Endowments have been around for decades. Several universities have been blessed with generous alumni donations that have resulted in endowments nearly as large as our own Alaska Permanent Fund. Those universities have set up rock solid rules to draw a certain percentage each year.

I don’t ever recall hearing about “overdraws” or “backdoor draws” and I’m pretty sure Harvard has never uttered the phrase “eating our seed corn.” As prudent stewards of multi-billion-dollar accounts, they have put in place rules to prevent drawing more than they earn which, makes perfect sense.

Alaska’s Permanent Fund is bigger than the Harvard endowment. But we are Alaskans and instead of following the tried and true roadmap that dozens of endowments have followed, we must apply a level of paranoia usually not seen in other parts of the country, or the world for that matter.

Having lived in Alaska for nearly four decades, I too have been known to put on my tinfoil hat occasionally, especially when it comes to Alaska politics. The ulterior motives seem to run deep on both sides of every topic discussed in our state.

So, do both sides have ulterior motives for the Permanent Fund? Turning the Permanent Fund into an endowment shouldn’t be that toxic of an idea, but apparently it is. There is a simple one sentence solution that has not been discussed by either side that will not only solve the problem but expose those that are against the idea and perhaps explain why they need easy access to the fund.

Before we get into the details of the issue and the simple one sentence solution, let’s lay the facts out on how the Permanent Fund is currently constructed so we all understand the thesis for the underlying debate.

There is a portion protected by the Alaska Constitution that nobody can ever access. This is referred to as the corpus and is by far the largest portion. There is also a portion protected merely by statute (just like the PFD…) that funds the draws we are currently using to pay for government and whatever is left of the Permanent Fund Dividend (PFD). This is referred to as the earnings reserve account or the ERA.

A simple way to look at this structure is as follows: let’s say you have two $100 bills. One is locked in your bedroom safe. This would be the corpus of the permanent fund. The other is sitting on your bedside nightstand unprotected and there for any thief to walk in and grab. This is the ERA portion. And yes, our full PFDs used to be sitting unprotected on the other bedside nightstand and guess what happened to that pile of cash?

Even though your front door is wide open and everyone knows it, the $100 bill on your nightstand has not been stolen because the thieves in the neighborhood have taken the cash off the other nightstand and are currently fat and happy. But what happens when that money runs out? They’ll walk through your front door and grab that unprotected $100 bill in a split second.

Will turning the Permanent Fund into an endowment solve this problem? It certainly will. But that’s only half the debate that needs to take place on the endowment idea. Moving the statutorily protected portion (ERA) into the constitutionally protected portion (corpus) is simple and would obviously protect the entire fund much better. Or in simpler terms, we take the $100 bill off the nightstand and lock it in the safe. Easy Peasy.

Is locking both $100 bills in the safe controversial? Of course not. It makes perfect sense. However, the debate the two sides find themselves in is not the protection of the fund but how to access the $200 in the safe once it is 100% constitutionally protected. This is where the very simple sentence I referenced earlier comes into play.

I’ve seen neither side promote this simple solution. Have they overlooked it? Are they fully aware of it but pray that you and I don’t uncover it?

The bottom line is this – one side wants to lock away the entire Permanent Fund into an endowment just like the university endowments have done to prevent overdraws. The other side wants to leave things as they are even if it keeps a portion exposed, sitting on our nightstands to overdraw. Which side is right? Or better stated, whose tinfoil hat is tighter? Is it really paranoia or do both sides have ulterior motives (as I casually reach for my own custom tinfoil hat)?

Let’s discuss the second part of this debate: accessing the fund once it is 100% locked under the constitution. Those that want to leave things as they currently are certainly must understand that the ERA will be overdrawn in the next few years. And that is after the PFD is gone next year. We are out of revenue streams and a mere majority to access that pile of ERA cash will be too tempting, especially if the alternative is introducing a bill to start taxing our income.

There is always an election “coming up” and our elected decision makers are not known for making tough decisions. If you care about future generations of Alaskans and believe they should have access to the Permanent Fund as I do, there must be a change to the current structure. Otherwise overdraws are inevitable and will begin perhaps a soon as this coming legislative session.

The “leave it alone” crowd do bring up an important point that the pro-endowment crowd needs to address (I promise…the simple sentence is coming shortly). Their main issue centers around the draws exceeding the earnings. If we change the constitution to say a 5% draw is allowed but the fund only earns 4%, then we are not only overdrawing the fund but we are now technically overdrawing the constitutionally protected portion of the fund.

While this may be true, it also leads to an entirely different discussion on why professional investors overseeing an $80+ billion fund can’t even clear a 5% hurdle! We definitely need to discuss the performance of the Permanent Fund and why the management at the board and executive levels have done so poorly for Alaskans. They have been sorely underperforming even in this robust stock market. But that is for a different article.   

This leads me to my original point. There is a simple one sentence solution that neither side has suggested which is why I had to dust off my tinfoil hat. Why haven’t they brought it up? This sentence would go into the constitution and will certainly need some “lawyering” but here it is:

“The draw from the endowment shall not exceed the lesser of 5% OR the average actual earnings of the previous three fiscal years.”

As I said, it definitely needs a legal touch and we can debate whether three years is appropriate but the simplicity of the solution itself cannot be debated. It 100% solves the “draw 5% but only earn 4%” scare tactic that the “leave it alone” crowd has been promoting.

So why has it not been introduced and discussed by either camp? Does the “leave it alone” crowd want the ERA to remain exposed so they can continue to pursue statutory PFDs even though the revenue we would need to pay for everything would be astronomical and economy killing? Does the pro-endowment crowd really have ulterior motives to “back door” the endowment and overdraw it regardless of return performance? Is my tinfoil hat too tight? Perhaps. But this solution is simple and solves the problem for both sides.

Leaders from both camps need to address this issue and discuss this simple solution. If either side digs their heels in against this solution, we will have our answer as to their ulterior motives.

Bruce Tangeman has been an Alaska resident for 34 years and currently calls Anchorage home. He has served in a variety of leadership positions inside and outside of state government, including as Governor Dunleavy’s first Revenue commissioner. He has also served as vice president and CFO of the Alaska Gasline Development Corp., deputy commissioner for Department of Revenue, CFO of Doyon Utilities, and a fiscal and budget officer for legislative and executive branch divisions.