Growing the Permanent Fund is good, but it forces decisions

By Larry Persily

Spending money can be a lot of fun, while saving money can be pretty boring. Sure, you get to watch your account grow — assuming you invest it wisely — thinking about spending it someday, though thinking about that someday is not nearly as much fun as spending today.

But when you do a good job of saving, life is much better as you grow old and life will be much better for the future generations who may benefit from your savings.

As Alaskans depend ever more heavily on the Permanent Fund as the largest single source of stable revenue to pay for public services, schools, construction and, yes, the Permanent Fund dividend too, it becomes ever more important to ensure that the fund grows as large as possible so that it generates as much investment earnings as is responsible.

Voters created the fund when they approved a constitutional amendment in 1976 to set aside a portion of oil and gas royalties to save for the future, knowing that North Slope oil production would decline — it did, starting in 1989 — and knowing that the fund’s investment earnings would have to carry the state budget.

That day came in 2018, when the Legislature voted to start taking an annual draw of the fund’s earnings to pay for services.

That annual draw is limited by law to 5% of the fund’s total market value, averaged over the past five years. Seems manageable, but remember that inflation erodes the value of the fund, so to stay even in real dollars for the years ahead, the fund needs to earn enough on average to cover the 5% withdrawal plus inflation.

That would be 7.6% a year, according to the Permanent Fund’s own projections. That’s easily achieved in strong investment years but never guaranteed and not achieved in bad years. Over the past 10 years, the fund has lost money in two years, made less than 7.6% in three years, come in around the long-term assumption in two years and did really well in three years.

Which gets us to this year. The fund was at almost $89 billion as of Feb. 28. It averaged better than an 8% return on investments in the first seven months of the fiscal year through Jan. 31 (the fiscal year ends June 30). But the stock market has dropped more than 6% since the U.S.-Israel war on Iran started four weeks ago, as escalating energy costs and concerns of a wider war are hitting the global economy.

Ever since the Legislature adopted the 5% annual draw, cautious lawmakers have questioned whether that is too high and risks drawing out too much today at the risk of shortchanging tomorrow’s generations.

The State Senate Finance Committee is considering a bill that would lower the maximum annual draw to 4.5% of the fund’s value. The projections show less money for the state general fund for several years, but a larger Permanent Fund as more money stays in the account to invest. In time, taking less today would produce larger withdrawals in the future as the fund grows bigger.

But it’s not that easy. Cutting back on withdrawals from the fund to allow it to grow bigger and stronger for the future means finding additional cash in the meantime to pay for the services, and the dividend, that Alaskans want.

Not easy, but not impossible. It may mean taxes, a smaller dividend, spending cuts — maybe all three. But making those changes today to have billions more in the fund for the future is a smart savings investment.

• Larry Persily is the publisher of the Wrangell Sentinel, which originally published this column.