In Fiscal Year 2020, the net income of the Alaska Permanent Fund was $1.63 billion while the Percentage of Market Value (POMV) draw was nearly $3 billion, a loss of about $1.3 billion after the draw. That was a shock to me. I’ve always trusted that the body of the Fund would not be subject to reduction except from market losses.
Draws for dividends should be a result of the income of the Fund. The Anchorage Daily News reported on the increased income recently projected in the fall forecast released by the Commissioner of Revenue.
The earnings of the Permanent Fund reported should not include special restrictions on income and expense.
Permanent Fund earnings should be reported simply as required by Generally Accepted Accounting Principles (GAAP). According to the Harvard Business Review, 95% of businesses use GAAP to accurately report earnings. Shouldn’t we have the same system as banks and virtually all publicly regulated businesses?
Why are we discounting our earnings? For the Alaska Permanent Fund, the Legislature created special discounts to income, such as the POMV, special statutory income and almost impossible to follow deductions for unrealized gains or losses. Unrealized gains are stocks that gained value without a sale. Unrealized losses are the opposite. Each of these has the same effect, to reduce our dividend. None of them have been approved by the shareholders, Alaska’s people.
If you want to see growth of the dividend with monitored spending, require legislators to use an accounting method that is simple, transparent and in compliance with Generally Accepted Accounting Principles.
The POMV draw is the primary culprit of confusion. Harvard uses the POMV as its method for calculating its billions in endowments. The Alaska Permanent Fund is not a university. Its only purpose is to bring the best return on investment possible to its shareholders of the Fund, the people of Alaska. Some legislators claim we can’t afford to pay a full dividend because it would exceed that allowance under the POMV statute. They claim we don’t have the money to pay the dividend. Neither are true. Change the statute to the universally accepted GAAP.
PFDC statutory income redefines the method of calculating income and expense. It adds deductions for unrealized income as a mandatory deduction prior to calculating the net income. In FY 2021, income calculated at the special rate for statutory income for the PFC was $8 billion. Calculated under the GAAP rules, income was $19.4 billion.
The deduction of unrealized income cost Alaskans $11.4 billion. The solution is easy. Realize the earnings by sale so that the values are identical. A strategy of selling and buying back the stock can stabilize the dividend. Understating the actual income of the Alaska Permanent Fund is not good for any one of its shareholders.
According to the Anchorage Daily News, “Overall, Alaska is expected to collect nearly $6 billion in unrestricted revenue this fiscal year and more than $6.1 billion in 2023. Approximately $3 billion of the state’s yearly spendable income comes from the Permanent Fund Earnings Reserve account, based on the percent of market value, or POMV, formulae lawmakers passed in 2018”.
According to the fall Revenue Forecast, the income to Alaska for petroleum next year will be $2.9 billion. The POMV draw will be $3.1 billion. Added together, you hit the News $6 billion forecasts for next year. But read the fine print. It’s not all the income of the Permanent Fund. The forecast last year was short by $16.4 billion. In the upcoming year, it’s short $3 billion.
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It took me a while to find the $16.4 billion. That money came from last year’s earnings, net of the money set aside for POMV and was relabeled as Other Restricted Revenue. The actual earnings are still sitting in the Earnings Reserve Account.
Counting a discounted POMV draw as full Permanent Fund income reduces the total forecasted earnings. Alaska is projected by APFC staff to collect $5.6 billion from Permanent Fund earnings next year. Oil and gas income and other income are projected by Revenue staff at $3 billion next year. Total forecast $8.6 billion.
Add that $8.6 billion in state earnings to the federal funds for next year of $5 billion. That’s a total of $13.6 billion. This year, Covid Federal appropriations were an additional $7.6 billion.
We are awash with cash.
If you want to see growth of the dividend with monitored spending, require legislators to use an accounting method that is simple, transparent and in compliance with Generally Accepted Accounting Principles. Then use those real earnings to calculate our 50% for dividends and 50% to provide the Legislature’s ability to cover the bureaucracy. Sustainable, simple, predictable, and accountable.
The views expressed here are those of the author.
