Dunleavy inflates size of Permanent Fund earnings account by billions

The earnings reserve of the Permanent Fund does not contain $19 billion, even though Gov. Mike Dunleavy keeps using that inflated figure.

On Monday, in an interview with Kyle Hopkins of the Anchorage Daily News, the governor was asked how he intends to pay for a plan to pay billions more in dividends to Alaskans. Dunleavy has outlined plans that would cost $6 billion in the next fiscal year, with about $2.4 billion of that to make up for dividend reductions from 2016-2018.

“You pay for the PFD through the $19 billion in the earnings reserve,” Dunleavy told Hopkins. “That’s not a hard one.”

Hopkins replied, “Isn’t it less than $19 billion?”

Dunleavy answered that it contains $18.8 billion, “projected to grow over the next couple months, probably will surpass $20 billion here shortly.”

The problem with the $6 billion Dunleavy plan is that it is a hard one.

The available balance in the earnings reserve is not $19 billion or $18.8 billion. And no one can say with certainty that it will grow to $20 billion shortly because no one can successfully predict oil prices or investment returns.

The future size of the earnings reserve, the portion of the giant savings account that can be spent, rises and falls with investment returns and withdrawals.

What is the right number to use now?

The Alaska Permanent Fund Corporation said the earnings reserve contained $17 billion as of Sept. 30. That is the statistic the corporation posts in a prominent position on its website.

Of that amount, $899 million has already been committed to inflation proofing, meaning that about $16 billion was available.

October was a rough month for many investments and the earnings reserve, which is invested in many different types of assets, dropped in value by several hundred million dollars.

As of Oct. 31, the amount of the earnings reserve available for spending by the Legislature was $15.7 billion, taking into account the money already set aside to deal with inflation.

But a portion of that account includes unrealized gains that have not been officially “captured.” Subtract about $1.7 billion in unrealized gains on assets and the total amount that could have theoretically been spent from the earnings reserve on Oct. 31 was $14.05 billion, according to the corporation.

The principal of the fund, the portion that can’t be spent, was $44.8 billion as of Oct. 31.

Dunleavy defenders have taken me to task on my criticism of his inflated numbers, claiming that when he says the earnings reserve contains $19 billion he is referring to projections of what the fund is likely to contain by next July, when the new fiscal year begins. The amount available for spending now is irrelevant, they claim.

The flaw in that argument is that the fund might have a series of good months in which billions of additional earnings are accumulated, but it also might have a difficult run and post billions in losses by next summer. No one can say for sure. That’s why no state official is in a position to be confident the earnings reserve will surpass $20 billion “shortly” or justify a $6 billion withdrawal.

One of the things that concerns me is that there are billions in unrealized gains within the Permanent Fund. There has always been a threat that a governor would pressure the APFC to dump stocks and other assets prematurely to transform those gains to swell the size of the earnings reserve. The threat has increased with the growing dependence of the state on the Permanent Fund.

Alaskans need to watch closely in the months ahead to ensure that the long-term investment horizon of the fund is protected. The fund has $4.5 billion in unrealized gains that could be cashed in to bump up the earnings reserve.

With other large state savings accounts nearly wiped out by the use of $14 billion from savings in recent years to deal with low oil prices, the state must take a conservative approach to its handling of the earnings reserve.

That starts with recognizing the importance of what the account contains now and admitting that there are no guarantees about future returns.