Alaska’s Permanent Fund: The Great Debate

The People of Alaska vs. The Legislature

Part I: Inflation-Proofing: Where’s the Problem?

By JON FAULKNER

Author’s Note: This is the first of a series that frames Alaska’s “Great Debate” regarding Alaska’s Permanent Fund. The series will invite debate but promote a protective view of both the management of the corpus, and the original dividend plan. We start this series with inflation-proofing, a topic which has broad consensus and clear legal direction.   

Alaskans feel the effects of inflation.

We all know the effects of inflation, how it robs each of us of purchasing power, especially the poor.  Fund managers, legislators, Alaska citizens—we all agree that inflation-proofing the Permanent Fund is wise.  

Alaskans understand what it takes to inflation-proof.

To inflation proof means to follow a strategy designed to protect the purchasing power of the Permanent Fund against the eroding effects of inflation. One such strategy is to invest in assets that are more likely to increase in value at a rate equal to or exceeding inflation, such as real estate or Treasury Inflation-Protected Securities.

But once an investment strategy is implemented, there are only two ways to inflation-proof. Option one is to deposit hard cash to the main corpus of the Fund annually to offset the impact of inflation.  Option two is not to deposit hard cash, but instead to calculate the value of the Fund portfolio annually, and assuming the value has increased at a rate at least equal to inflation, declare such increase as de-facto inflation-proofing.

There is a distinction between these two options that matters to Alaskans. Option one is conservative, meaning ‘safe”. Option two, while logical, does not impose fiscal discipline—which politicians hate. Yes, we might achieve positive returns, but any so-called “unrealized gain” is equity, not cash, and until such gains are monetized and added back to the corpus of the Fund, inflation proofing has not actually occurred.  Years of low returns combined with high inflation, such as we have experienced, confirm the risk. Only option one unequivocally secures the public trust—and did for many years until our modern legislature changed course.

Inflation-proofing should be non-negotiable.

Inflation proofing should be consistent, in cash, “off the top”, and the Legislature’s first priority.  Deposits should NOT be linked to annual budget prioritization.   

When the legislature or Fund board talks about how investment returns that exceed inflation are “automatically inflation proofing”—they are misleading you.  Alaskans know better; we want the cash “in the bank” and off-limits, not an I.O.U.

Inflation proofing is the law.

That’s right, the law! The legislature pretends to be victims of “contradictory” statutes, as though they aren’t accountable for both creating the problem—and not fixing it! Who among our legislators admits to flouting the law, or will stand firm to follow it?    

The simple truth is the Legislature is required by statute annually to inflation proof the Permanent Fund. Their mandate in AS 37.13.145(c) is clear. The formula they are to use is crystal clear: transfer enough money from the Earnings Reserve Account (ERA) to the Fund’s corpus every year to cover inflation. Simply put, this rule implements option one; it transfers cash from realized gains to the corpus of the Fund, where the legislature can’t touch it. This rule, enacted in 1982, and has withstood the test of time.

The legislature flouts the law.

The legislature’s history of inflation-proofing is published here, which shows that in the ten years from 2016-25, they failed to deposit any money at all in half the years. (Some records show a deposit of $250m in 2018–half needed to meet the law)  In 5 out of the last 10 years, deposits were statutorily sufficient, but the net effect has been to erode Alaska’s wealth fund.  Since 2016, the legislature has failed to deposit approximately $2.4 billion needed to meet the law.

High returns are great, but never a substitute for protecting the public trust.    

The legislature is pursuing option two, but the law, 30-year historic precedent, and the public interest all confirm option one as the ONLY course.  Between 2010 and 2025, the CPI changed from ~218 to ~338, indicating inflation of 55%. Thankfully, the Fund’s 2010 Corpus of $32 billion has grown to $72 billion today, outpacing inflation. So where is the problem?  The problem is not the outcome, it’s the broken process—and promise. The truth is the legislature has abandoned fiscal discipline, just like our federal government. During the 16- year span above, based on APFC’s website,  inflation deposits amounted to $14.85 billion— short of the $17.6 billion required by law.  Where would the Fund be today if prior legislatures, since 1983, had not consistently followed option one and the law?   

Stay informed. Follow MRAK’s series on this topic.   

How does the legislature get away with this, as they did last session when the Democrat-led majorities axed the transfer of $1 billion for inflation proofing and passed a paltry $1,000 PFD, the lowest inflation-adjusted in history? One answer is that we, the voters, let them; another is that Juneau is controlled by politicians who place their own interests ahead of Alaskans.     

Governor Jay Hammond, the father of the Permanent Fund, said: “As the dividend goes, so goes the Permanent Fund”. He predicted the greed of power-seeking politicians would jeopardize the Fund and hoped to secure the people’s vigilance with the dividend program, a concept honoring the sovereignty of every resident that is unique in the world. Imagine a world where this model can spread!  With inflation proofing seemingly optional to the legislature, and dividends going down a predictable path, the Fund itself—perhaps even the concept of citizen sovereignty itself–appears in jeopardy.