Sometimes we are accused of “burying the lead” to these columns by only reaching our primary point a few paragraphs down.

Maybe that’s true. So, this time we will put it right at the top: Contrary to the headlines in a recent Alaska Beacon story and a related Anchorage Daily News editorial board editorial, there is NOT – repeat, NOT – a “fiscal crisis” brewing at the Permanent Fund, at least not of the type discussed in the story. Instead, the situation both cover is the result of an accounting gimmick being manufactured by some likely to help stage a break-in into the Permanent Fund corpus.

We explain.

The ADN editorial claims the problem is this:

But despite how obvious it should be that the Permanent Fund and its Earnings Reserve should be held sacrosanct (and, when possible, augmented to expand their ability to make up for shortfalls elsewhere), lawmakers have been cavalier about withdrawing more from the reserve account than it earns in the name of distributing supersized PFDs.

That’s false. The problem facing the Earnings Reserve is not “distributing supersized PFDs.” Instead, it lies with two ad hoc – that is, not required by statute – $4 billion (each) accounting transfers the Legislature made from the Permanent Fund Earning Reserve Account (Earnings Reserve) to the Permanent Fund Principal (Principal or Corpus) in Fiscal Years (FY) 2020 and 2022.

Here are the ins and outs of the uncommitted portion of the Earnings Reserve from FY2017 to FY2025 as reflected in the Permanent Fund Corporation’s Annual and periodic “History and Projections” Reports. The “ins” are the “realized earnings” from each year, net of operating expenditures and the so-called Amerada Hess revenues separately payable to the Alaska Capital Income Fund (ACIF). The “outs” are the portions distributed for the Permanent Fund Dividend, to the General Fund or for the percent of market value (POMV) draw, for inflation proofing or as an ad hoc draw not required by statute.

Including only part of the FY2025 results, the uncommitted balance currently is the $571 million referenced as drawing concern in the recent Alaska Beacon article. But that only reflects part of the projected results for FY2025. After filling in the blanks, the actual FY2025 end-of-year balance projected in the Permanent Fund Corporation’s most recent “History and Projections” Report is a relatively healthy $5.67 billion.

More significantly, as the chart makes clear, the reason that the Earnings Reserve Balance is even that low is not because of “supersized PFDs,” but because of the two $4 billion ad hoc accounting transfers to the Corpus made in FY2020 and FY2022. (The amounts were transferred from the “Uncommitted” portion of the Earnings Reserve to the “Committed” portion – essentially, a holding account – in FY2019 and FY2021, respectively. They were then transferred from the “Committed” portion to the Principal in the following fiscal years.)

Absent those two ad hoc accounting transfers, the FY2024 end-of-year balance would be at a near 10-year high of $12.36 billion, assuming all of the other accounts remained the same. Even the $571 million cited with concern in the Alaska Beacon article would be $8.57 billion. The actual projected FY2025 end-of-year balance would be a very healthy $13.67 billion.

Those transfers are clear from the Permanent Fund Corporation’s public reports posted on its website. And doing the math, it’s hard to miss their impact as the primary driver behind the current status of the Earnings Reserve. We have no idea why both the Alaska Beacon story and the Anchorage Daily News editorial board failed even to mention them in their publications.

Of course, due to the ad hoc accounting transfers, the $8 billion is no longer in the Earnings Reserve account. So, even though the cause is dramatically different from that falsely claimed in the ADN editorial, doesn’t that mean that the Earnings Reserve is still facing a “crisis?”

The answer is no.

As the Permanent Fund Corporation’s own “History and Projections” reported at the time the first ad hoc accounting transfer was made (report as of June 30, 2019), “in FY20, an additional $4 billion was appropriated from the ERA to principal to forward fund inflation proofing.” While a portion of the ad hoc accounting transfers subsequently have been used for that purpose in some years, additional amounts for inflation-proofing have been transferred from the Earnings Reserve in others. As a result, a significant portion of the ad hoc accounting transfers still remain available today for that purpose on the books of the Permanent Fund Corporation.

The right side of the following chart shows the amounts and the effect:

Including the ad hoc accounting transfers, the combined balance of the Earnings Reserve plus the portion of the ad hoc accounting transfers that remains available to offset future inflation proofing is $9.57 billion as of the end of FY2024 and, using the FY2025 projections made in the Permanent Fund Corporation’s most recent “History and Projections” Report, $9.07 billion as of the end of FY2025. Both are healthy amounts historically; neither of those balances suggests that the Permanent Fund is facing a “fiscal crisis.”

Does the Permanent Fund ever face such a “crisis” within the current forecast period used by the Permanent Fund Corporation?

Here is the continuation of the above chart using the Permanent Fund Corporation’s most recent “History and Projections” Report through the end of the forecast period. In developing this chart, we use the remaining balance of the ad hoc accounting transfers to offset inflation-proofing until the remaining balance is fully utilized.

While the end-of-year balance of the Earnings Reserve continues to drift down over the period, it doesn’t reach the same level as that causing concern in the recent Alaska Beacon article until FY2032, near the very end of the forecast period. By then, any of several other factors could have intervened to change the outcome.

But that doesn’t mean there aren’t issues that should be addressed. 

The reason that the Earnings Reserve continues to drift down even during the forecast period is not because of “supersized PFDs,” no matter how many times the ADN editorial board and others repeat that falsehood. It’s because the Permanent Fund Corporation itself projects that it will consistently continue to fall short in producing earnings, net of operating expenses and the portion separately payable to the ACIF, equal to the “inflation plus 5%” returns on which the Legislature bases the annual POMV draw.

As we explained in a previous column last year, combining the two accounts – the Corpus and the Earnings Reserve – in that environment doesn’t solve the problem, it simply uses the Corpus as an additional cushion to soften the decline. As long as the earnings fall short of the “inflation plus 5%” standard used to calculate the POMV draw, the decline will continue, eventually depleting the Corpus after it has the Earnings Reserve.

As a consequence, the real solution to the Permanent Fund’s long-term issues isn’t combining the Corpus and Earnings Reserve. As we’ve explained in a recent column, that’s just a route to an even bigger disaster, eventually draining the Corpus. The only beneficiaries of going down that road would be those in the top 20%, non-residents, and the oil companies who would benefit from draining the Corpus in an effort to continue to avoid taxes even after the PFDs are depleted.

Instead, the real solution to the Permanent Fund’s long-term issues is to reduce the POMV draw to a level that is sustainable over the long term. While some suggest that withdrawals should be calculated at another fixed number – such as 4% or even less over the rate of inflation – in the past, we have suggested using a rate that reflects the actual experience over time. Looking at the rolling average over the same period as the average value for the POMV approach is calculated (first five of the last six years), for example, the rate for FY2025 would be approximately 4.4% over the rate of inflation, adjusted further for operating expenses and the ACIF payment.

Here’s that calculation of the base number taken from the Permanent Fund’s regular “Performance Reports”:

Assuming there are no other ad hoc or extraordinary withdrawals over the period, using the realized rolling average rate of return over inflation (further adjusted for operating expenses and the ACIF payment) would help ensure that the dollars are regularly available in the Earnings Reserve in the normal course of business regardless of the circumstances.

Whether a fixed rate or a rolling average, however, a statutory fix is all that is required to implement the solution (assuming the Legislature subsequently follows the law). A constitutional amendment – which would crack open the Corpus and start the state down a very dark path – is unnecessary.

As we’ve explained in previous columns, the state is currently facing a number of problems related to the Permanent Fund and its Board.

But a “fiscal crisis” of the type described in the Alaska Beacon and hyperventilated over by the Anchorage Daily News editorial board isn’t among them. That has been created by two ad hoc forward funding deposits that still have remaining balances available to be used to offset future inflation payments. And any concerns arising from continued subpar earnings can be resolved going forward simply by reducing the POMV draw rate to a level that more accurately reflects the actual earnings being produced by the Fund.

They are issues that can be handled in the normal course. A constitutional amendment is not only superfluous but dangerous.

Brad Keithley is the Managing Director of Alaskans for Sustainable Budgets, a project focused on developing and advocating for economically robust and durable state fiscal policies. You can follow the work of the project on its website, at @AK4SB on Twitter, on its Facebook page or by subscribing to its weekly podcast on Substack.