Permanent Fund loses value after bad market year and draw for state spending

The fund’s managers say its long-term future is solid and a bigger concern could be overdrawing it
The Permanent Fund provided more for state revenue than it made in earnings in FY20, but fund...
The Permanent Fund provided more for state revenue than it made in earnings in FY20, but fund managers are more concerned about overdrawing it.(KTUU)
Published: Oct. 1, 2020 at 7:10 PM AKDT
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JUNEAU, Alaska (KTUU) - The Permanent Fund will provide more revenue to the state than it made in earnings over the last fiscal year, according to the latest financial report from the Alaska Permanent Fund Corp.

The Permanent Fund’s managers reported that the total value of the fund was $65.3 billion when the last fiscal year ended on June 30.

The fund did grow by roughly $1.9 billion in investment earnings and royalty deposits over the past fiscal year. Those earnings will then be used for a $2.9 billion Percent of Market Value draw to pay for state spending.

Factoring in the POMV draw, the fund lost roughly $1 billion over the last fiscal year.

Big stock market losses due to COVID-19 saw the value of the Earnings Reserve Account (ERA) briefly plummet. The Permanent Fund’s managers had cash on hand and invested aggressively to make back their losses.

“We do try to be in a position to hopefully take advantage of market disruptions when they occur,” said Angela Rodell, the CEO of the Alaska Permanent Fund Corp.

Rodell said the fund losing value in a bad market year was factored into Senate Bill 26 when it was written in 2018.

“I don’t think we should get too concerned,” she said.

Nolan Klouda, the director of the University of Alaska Center for Economic Development, agreed that a long-term view is more important.

“I would not make too much of that happening in any one year compared to the general trends of what’s going on with spendings and earnings from the Permanent Fund,” he said.

The Alaska Permanent Fund Corp. still estimates that the fund will make a 6.75% total return by 2030 which would see it grow to roughly $80 billion.

A bigger concern for Rodell than one year of losses is overdrawing the Permanent Fund

Pat Pitney, the former head of the nonpartisan Legislative Finance Division, told lawmakers in April that for every $1 billion they take out of the fund, Alaskans would lose $50 million per year in investment earnings, forever.

The Board of Trustees of the Alaska Permanent Fund Corp. has also repeatedly warned lawmakers not to overdraw the fund. “It is something the Board of Trustees is talking about, it’s something we continue to be concerned about,” Rodell said.

But there are also concerns about cutting back state spending either through the Permanent Fund dividend or to state services, particularly during the COVID-19 pandemic.

“The state potentially cannot afford to not pump more money into the economy, given the severity of the crisis it’s facing,” said Mouhcine Guettabi, an economist with the Institute of Social and Economic Research.

Guettabi emphasized that if legislators overdraw the fund during the pandemic, they should only do it with a clear fiscal plan.

Changing revenue picture for Alaska

A big change in recent years has been to Alaska’s revenue picture.

In 2014, the oil and gas industry accounted for roughly 88% of Alaska’s unrestricted general fund revenue. According to the Department of Revenue’s spring revenue forecast, oil and gas will pay for less than 20% of the state budget in 2021.

The Permanent Fund will now account for over 70% of Alaska’s state spending.

“The state has become an investment state,” Guettabi said. “The state does rely on an investment account much more than it does oil.”

Rodell, a Department of Revenue commissioner in 2013 and 2014, spoke about the scale of that shift. “When you think about that, it’s amazing to me how quickly the world has changed for us,” she said.

That change also puts pressure on the Permanent Fund, the dividend and the budget.

Alaska’s operating budget was roughly $4.5 billion in state spending for the fiscal year that ended on June 30. A full statutory Permanent Fund dividend would cost around $2 billion in 2021 and pay roughly $3,100 to each eligible Alaskan.

If the budget stays flat and a full PFD is paid, the state would be more than $2 billion in deficit. Big decisions will be needed if legislators choose not to exhaust the ERA which can be spent down by a simple majority vote.

“We’re really at the point where we have to decide what we want the Permanent Fund to be used for, it can’t do it all,” Rodell said. “There’s just not enough money, or ways to earn money, to do it all.”

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