Alaska faces ongoing fiscal uncertainties, with the Alaska Permanent Fund at the center of discussions impacting the state’s budget and economic future.
The performance and structure of the Fund are essential to understanding its role concerning the Permanent Fund Dividend (PFD) and the overall economic health of the state.
Recent evaluations argue that the existing division between the Earnings Reserve Account (ERA) and the principal is hindering financial sustainability.
Angela Rodell, a former executive director of the Alaska Permanent Fund, has highlighted that this division is leading to a gradual depletion of spendable savings.
Merging the two accounts into a single constitutionally protected fund is gaining traction as a necessary reform not merely for simplification but for correcting a flaw that endangers the Fund’s long-term viability.
To understand this proposed change, it is crucial to recognize the current structure of the Fund.
Presently, the Fund consists of two accounts: the principal, protected by the constitution and accessible to the public only through a vote, and the ERA, which contains realized investment earnings that are fully spendable with a simple legislative majority.
Since 2018, Alaska has utilized a Percent of Market Value (POMV) system for drawing sustainable earnings from the Fund.
This system allows for a 5% annual draw based on the average total market value of the entire Fund, which includes both the principal and ERA.
However, a fundamental issue arises when examining the way withdrawals are executed.
While the POMV draw is calculated using the entire Fund’s value, legislators can only draw from the ERA, as the principal is constitutionally protected from direct spending.
Thus, the actual cash available for use does not reflect the full value of the Fund, leading to an imbalance that threatens the sustainability the POMV was intended to ensure.
Realized gains from investments flow into the ERA and can be spent, but unrealized gains, which represent a significant portion of the Fund’s growth, remain locked in the principal.
As a result, the Legislature draws 5% of the Fund’s average value annually exclusively from the ERA, even though a substantial portion of growth is unrealized and not available for expenditure.
This situation accelerates the depletion of the ERA, especially during periods of market volatility or lower realized returns.
The circumstance is exacerbated by the fact that the ERA can be accessed with a simple majority vote, leaving it susceptible to political pressures where overspending may be tempting.
Merging the ERA with the principal into a unified, constitutionally protected fund presents a solution to these issues.
By doing this, all earnings, both realized and unrealized, would remain securely within the fund, allowing withdrawal solely through a constitutional POMV draw mechanism.
This approach represents a significant shift in fiscal policy, establishing a hard cap on Fund spending that directly correlates with its performance and sustainability.
Instead of treating realized gains akin to a checking account, the change would ensure the entire fund is safeguarded, establishing a long-term spending limit.
Ultimately, this proposed reform is crucial for safeguarding the Fund, maintaining the PFD, and supporting Alaska’s long-term fiscal health.
Originally intended to transform a temporary resource boom into a lasting financial legacy, the Fund requires preservation from immediate political pressures and short-term decision-making.
This is not merely a fiscal discussion but a commitment to secure the Fund’s future for generations, ensuring the longevity of the PFD and promoting stable economic growth in Alaska.
Merging these accounts is essential to fostering the discipline necessary for Alaska and preserving the legacy that all Alaskans rightfully deserve.
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