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The Permanent Fund cannot do everything for everyone. It may not survive.

A major problem challenging Permanent Fund (PF) survivability is a 5% withdrawal rate with 50% of that for PFDs. The 5% withdrawal, since 2018, funds Alaska’s government. Divide a $3 billion [5%] PF withdrawal in half and $1.5 billion is not available to fund Alaska’s already-cut budgets.

50% to PFDs creates an instant, massive deficit of $1.5 billion, which must be filled by taxes to not destroy government services.

It is doubtful this legislature can enact $1.5 billion in new revenue to fill the annual deficits to fund education, public safety, judiciary, highway maintenance, ferries etc. Pressure to drain the PF would increase.

We have another problem. Can Alaska’s $80 billion PF sustain Alaska for generations? If Alaska’s $80 billion Permanent Fund is to financially survive for 30 years, new revenue from oil, income, sales and miscellaneous other sources is mandatory. Otherwise, the $80 billion, including the 5% withdrawal and PFDs, could disappear in much less than 30 years. [I am aware of Art. IX Sec. 15]

While $80 billion is a lot of money, Alaska’s Permanent Fund is not “permanent” unless it has capacity to fund citizen-demanded governmental services for generations.

A classic rule-of-thumb is a 4% withdrawal rate for a fund to survive for 30-years. The PF’s 5% withdrawal rate is too high, even without allocation of significant amounts towards PFDs. While not a perfect comparison, the 5% bumps into the classic 4% safe retirement rule. At the 5% withdrawal rate, the PF risks running out of money in less than 30 years.

Loosely stated, the PF looks similar to a 401(k) for a retired person, meaning application of the 4% rule has merit.

Some may argue that the PF has “new” money deposited in it. Recently, the new money added was about $300 million. But, yearly tax deductions from NPR-A [federal land] are imposed on Prudhoe Bay [state land]. This obligates Alaska to pay oil companies $300 million more per year for about the next decade. The “new” money is wiped-out by additional expenses. [Alaska has 0% royalty from NPR-A.]

There is financial risk to Alaska’s PF from very high U.S. stock valuations. CAPE price-to-earnings analysis is at its second highest valuation ever. Warren Buffet’s Indicator rates the market: “significantly overvalued.” Risk of negative future returns exists when the market reverts towards historical average or lower valuations. Simply stated: markets are at nosebleed valuations and Alaska’s PF could lose many billions.

Political talk of the amount of money received in 2021 from PF investments is a decoy that hides Alaska’s risk from high valuations. The talk enhances recency bias, that the current rate of return and/or amounts of money received may be considered normal or extra-money- when they are not. Political talk attempts to convince voters to ignore real risks.

Without capital improvement budgets and maintaining our infrastructure, Alaska will not participate in the nation’s future economic growth. Other than small Alaska contributions to get federal highway monies, Alaska has not had significant capital budgets for 1) infrastructure growth, 2) continually accruing maintenance needs or 3) the $2 billion in currently existing deferred maintenance expenses. Money must be spent on maintenance or infrastructure decays. Alaska is slowly destroyed by neglect without capital budgets.

There is real risk that over the next 10-30 years the world will need less oil. Renewable energy now produces electricity at a cost cheaper than any fossil fuel. If unrestricted general fund oil monies, which currently do not go to Alaska’s PF dry up and are unavailable to fund government [as they are currently], the risk of drawing down the PF by more than 5% increases dramatically.

Without new taxes, a $1.5 billion PFD distribution would be in addition to the $3 billion, 5% PF withdrawal. A 7% to 8% PF drawdown is much greater than the 4% safe drawdown, increasing risk of emptying the PF.

Risks decreasing generational survivability of the Permanent Fund include:

• stock valuations reverting to historic or lower levels,

• a 5% or greater drawdown rate which exceeds the safe 4% rule for 30-year fund survival,

• the necessity for capital improvement budgets,

• the continuing need to fix decaying infrastructure,

• a world which purchases less oil over the coming decades,

• demands for PFDs, and

• no additional oil, income and other taxes.

As of August 2021, the earnings reserve account [ERA] of the PF only contains about $7 billion in uncommitted funds. If the ERA is reduced to $0 because of risks, where is Alaska’s available source for money?

The Permanent Fund is not capable of doing everything for everyone; PF generational survivability is questionable.

Joe Paskvan is retired after almost 40 years as an attorney in private practice. He is a former state senator who served as chairman of the Senate Resources Committee. He lives in Fairbanks.

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