Permanent Fund endowment is needed to protect Alaska’s fiscal future

Endowments have been around for a long time. Many universities have had them for decades and are major revenue generators. Have you ever heard a threat to overdraw an endowment fund? Probably not, because they are set up precisely to prevent that from happening. Unfortunately, our current Permanent Fund structure has a gaping hole in it that allows for all sorts of overdraw shenanigans to take place. Many would like to keep this topic as confusing as possible, but really it is quite simple and comes down to this: Would you rather have a portion of our largest savings account continually exposed to ill-advised ideas or would you rather have it all locked up and only allow a known amount to be drawn each year? I realize there are several iterations of how folks want to address this issue but if we are attempting to change the constitution, there is only one responsible way to do it: Move the entire fund under the constitutionally protected corpus.

Let’s start by discussing how the Alaska Permanent Fund Corp. views all the unwise ideas the Legislature has proposed to overdraw the fund. The APFC’s only concern is how much cash they need to keep available in case an imprudent idea passes. Legislation that causes uncertainty and thereby impairs the APFC’s ability to invest that cash has a profoundly deleterious impact on overall returns for the fund. 

There are two past examples which expose the need to protect the Permanent Fund from bad ideas. First, a few years ago the House was once again tied up in knots trying to balance their budget. To break the logjam, an amendment was introduced by a member to fund the entire budget, federal funds and all, from the earnings reserve account. I recall this would have amounted to a $12 billion draw. Fortunately, it failed.

Another example occurred when an overdraw of over $5 billion to back-fund PFDs actually passed due to a member being absent. The APFC had to take defensive measures and be prepared to have this additional $5 billion available for distribution.

What the funds were to be used for in either example is not relevant to this discussion even though the PFD continues to be a third-rail item. What is critical to understand is that the APFC had to keep cash available in case either idea passed. This prevents the APFC from keeping that money invested at a much higher rate than holding cash.

Let’s go over the Permanent Fund’s setup once more so we are all clear why the endowment plan is critical to the long term health of the fund. A noble goal espoused by many is to grow the fund to $100 billion, although we seem to have been stuck at about $80 billion for the past few years. We currently have a constitutionally protected portion — known as the corpus — which as of the end of February was about $60 billion of the $80 billion total. This cannot be touched without a constitutional amendment. The other $20 billion, or 25%, is in the earnings reserve account in various forms and is only statutorily protected. As an example, the PFD is also statutorily protected, and we have witnessed how closely that statute is followed. 

These past, real attempts to raid the fund demonstrate the exact reason an endowment is needed to protect the entire fund moving forward, so that future generations can enjoy the same benefits we have all enjoyed for the past four decades. Currently, it is too easy for individual legislators to introduce massive overdraw amendments. All that cash available with a mere majority vote is too tempting. The temptation will only worsen as oil prices drop.

If a constitutionally protected endowment is in place, the APFC would have the comfort and knowledge that a certain percentage of the fund — let’s use the current 5% — and only up to that amount would be required each July 1. Without getting into the more complex draw equation to minimize the annual changes to the draw, the draw of 5% would equate to about $4 billion.

Some might argue that goal is far too aggressive based on historical returns. History demonstrates that mistaken argument is based on the APFC having to sit on far too much cash in case the Legislature or executive branch takes action to overdraw the earnings reserve account. If this option is removed, the APFC would be able to be more aggressive in their investments. Loosening this restraint, even just a bit, could result in a percentage point or two increase in their annualized returns, leading to a real path toward $100 billion and beyond.  

I’ve heard so-called experts over the past few months misleading folks into believing the endowment plan is meant to expose the corpus to spending. Those same folks even suggest the fund will be drained. As a former APFC trustee, I know the endowment concept is to protect the fund for future generations. The concept is simple: Move the statutorily protected — in reality unprotected — earnings reserve account into the constitutionally protected corpus and allow for a known draw for years to come, thereby eliminating the opportunity for decision-makers to even introduce amendments to overdraw the fund. Anything other than moving the entire fund into a constitutionally protected status is not acceptable. The flexibility of always having the earnings reserve account there to overdraw as a “backup plan” has allowed decision-makers to kick the can down the road and not make the tough decisions that will benefit future generations.

The Legislature once again is wrapped around the budgetary axle as they engage in their annual battle on how to fund an ever-expanding government. There are too many variables at their disposal to distract them, such as the earnings reserve account,  oil prices and PFDs. As legislators continue to view the PFD as the main variable, this trainwreck will only get worse. I’m like many others who wish the PFD issue had been addressed when the percentage-based draw took effect several years ago. But it wasn’t, so here we are. Currently the debate is over how much money should be disbured through the PFD and how much new money should be directed to education.  

A constitutionally protected endowment fund producing a fixed, known amount at the beginning of each session coupled with a fairly known, but dwindling, oil revenue projection would take the PFD variable off the table. I’m not proposing anything when it comes to the future of the PFD. This is all about stabilizing the revenue streams we currently enjoy. Introducing income or sales taxes to fund our ever-expanding wish list is for another column.  

We will not be able to have an honest, educated discussion on future revenues and expenditures or the future of this great state until this issue is resolved and the ability to overdraw one of the last few accounts is removed as an option.