“How are you going to pay for all that?” a reporter asks Governor-elect Dunleavy.

“$19 billion in the ERA. That’s how” he quips.

Since well before the press conference following the election, reporters, journalist, columnists, bloggers, opinion havers, and fiction writers have been questioning how the promises made on the campaign trail would turn into legislative action.

And pretty much all of them have got it wrong.

Now, I am not trying to defend the Governor-elect, but I do want to speak for the numbers that don’t have a voice when they are being tortured to death. I tried to explain the numbers to some people, but I ran into a wall of willful ignorance.

So, I thought some of you all might be interested in the truth.

The Plan

The new Governor has been a vocal proponent of following the PFD formula that Alaska has been using for nearly 40 years. He also wants to reverse the reductions that have been made to that formula for the last 3 years.

The full PFD for FY20 would run about $2 billion. Repayment for prior reductions would cost another $2.5 billion or so.

Tack on another $1.5 billion needed to fill the gap in UGF funding. Add it up and we are talking about $6 billion. The only place that has that kind of money, is the earnings reserve.

The Opposition

Opposition to this plan mounted an attack quickly.

Charles Wohlforth took a simplistic approach of subtracting that $6 billion from the realized earnings balance, concluding that the new Governor was proposing to spend 35% of the fund balance in his first year.

“An empty Permanent Fund Earnings Reserve Account spells fiscal calamity for Alaska” Wohlforth writes.

Dermot Cole went further, accusing the Governor-elect of not paying attention to what is happening in that fund. He titled a recent blog piece “Dunleavy keeps making a $2 billion mistake on permanent fund holdings”.

“But the earnings reserve no longer contains $19 billion. It contains $17 billion, as the future governor should know” Dermot claims with a tone of condescension and a hint of arrogance.

He furthers his attack with this statement: “The lack of awareness about a critical statistic by someone with years of state government experience is worrisome.”

In ironic fashion, it is Dermot (a person following these issues for many years) that lacks awareness. When I pointed this out to him, he buried his head in the sand rather than attempting to get clarity about what is really going on.

The Numbers

Here are the numbers, from the APFC. I understand that these financial forms are hard to read.

So, I’ll interpret it for you by changing the words and format:

Balance as of Sept 30, 2018
Total Assets Held $65,781,000,000
Minus Assets Protected in Principle Account $40,268,900,000
Equals Unprotected Earnings $25,512,100,000
Minus Appreciation on Protected Assets $6,648,800,000
Equals Total Assets Held in Earning Reserve $18,863,300,000
Minus Known Future Costs from the ERA $1,862,800,000
Equals Uncommitted ERA Funds $17,000,500,000
Minus Appreciation on Unprotected Assets $2,409,200,000
Equals Net ERA Balance of Realized Funds $14,591,300,000

So, what is the current balance of the ERA?

There are about $19 billion of assets in the account right now, $17 billion of which are available if the legislature were to call a special session on Sept 30 (there’s actually less than this right now, because the fund lost money in October).

Another $7 billion could be accessed by the legislature if they tell the APFC to sell some assets that have appreciated since they bought them.

But, what is the balance available to deal with FY20 budget issues?

That is actually the question that is being asked. The amount of money available on September 30 is a meaningless number.

To get to the actual answer, we have to project what will happen between now and June 30th.

Let’s start by looking at the revenues for the year so far, and project what the rest of the year will look like.

Low Average High
Jul-18 $848
Aug-18 $572
Sep-18 $256
Oct-18 -$1,001
Nov-18 -$1,143 $519 $2,179
Dec-18 -$1,153 $523 $2,196
Jan-19 -$1,167 $527 $2,217
Feb-19 -$1,174 $533 $2,240
Mar-19 -$1,157 $526 $2,221
Apr-19 -$1,165 $529 $2,225
May-19 -$1,189 $533 $2,247
Jun-19 -$1,178 $540 $2,261

We know what the earnings during July-Sept have been. While we don’t have October numbers quite yet, I can make a reasonable estimate.

Based on what happened in the stock market and the asset allocation of the fund, I’m estimating that they lost a billion dollars in October.

But, there’s no reason to assume that the rest of the year will be any different than the fund’s historic record. When I run simulations of the future based on the range of past outcomes, I get the range above.

Caution – Use Ranges Properly

Now, you can’t just add up the low numbers to get the reasonable estimate of the low for the year. Doing that would give you a much lower number than is actually represented.

Think about flipping a coin for a moment. There is a 50% chance of heads, right? Does it make sense to add up the number of heads on two flips and say that outcome has a 50% chance of happening? No.

The appropriate range of what to expect for FY19 works out to $5 billion ± $5 billion. In other words, plan on the total return for the year to be $5 billion. But, don’t be surprised if it ends up being $0 or $10 billion (those outcomes are probably not going to happen, but they are equally likely to each other).

Realized or Unrealized Earnings?

The next question is, which account will those earning be held in at the end of the year. According to the APFC projections, all of them will be realized earnings. But, history suggests that might not be the case. To be safe, let’s assume 80% is realized and 20% is appreciation on assets they don’t sell.

Fund Balance Available to the 31st Legislature

What does all this mean for the balance the legislature will be planning on for FY20?

Here you go:

Projected Balance on June 30, 2019
Total Assets Held $67,995,689,495
Minus Assets Protected in Principle Account $41,660,800,000
Equals Unprotected Earnings $26,334,889,495
Minus Appreciation on Protected Assets $6,843,723,356
Equals Total Assets Held in Earning Reserve $19,491,166,138
Minus Known Future Costs from the ERA $0
Equals Uncommitted ERA Funds $19,491,166,138
Minus Appreciation on Unprotected Assets $2,647,980,839
Equals Net ERA Balance of Available Funds $16,843,185,299

Once accounting for the FY19 earnings on the fund, the authorized draws for FY19, and the deposits from royalties, the next legislature should have about $19 billion in the ERA as a starting place for FY20 (plus another $7 billion in the other bucket of earnings).

If the market does poorly the rest of the year, it might be $15 billion. If it does well, it might be $25 billion.

The $6 Billion Question

So, how about that $6 billion draw. Will it really consume 35% of the fund balance.


You can’t count the costs and not the earnings. That’s not fair.

FY20 Projections

With the conservative projection provided by the APFC, there will be around $4 of earnings during FY20, meaning the balance of the fund would be reduced by $2 billion.

By that low projection, the ERA balance would still be $17 billion after making the refund for the last 3 years, paying the full FY20 dividend, and balancing the budget.

If you use a more reasonable rate of return projection of 8% (like the retirement fund does), and assume the rest of FY19 will have that type of return too, you get a little over $5 billion of earnings.

And, if you use the fund’s historic performance as a guide, it works out to an expected $7 billion of earnings during FY20.

The bottom line is, the ERA balance will still be very healthy, even with the $6 billion draw.

When I run simulations to account for the uncertainty of the stock market, there is only a 10% chance the balance is below $10 billion. There is also a 10% chance it will be over $30 billion.

And that doesn’t even count the unrealized gains on the principle assets. Those earnings represent another $7 to $11 billion waiting to be realized at the end of FY20.


As a non-partisan individual, I don’t have any affinity toward the new Governor. I’m not trying to defend him.

But, I do get annoyed by people that misuse numbers to score political points. So, I am speaking in defense of sound logic. If you are going to quote numbers, please show your work.

The reality is, the earnings reserve account does in fact have $19 billion in it (as of the last reported numbers). The $17 billion number that opinion writers are quoting is only accurate if you deduct future expenses without adding future revenues.

If you do the math correctly, you will also see that there will be about $19 billion in the ERA for the legislature to consider using to pay for “all these things.”



One thought on “The Fuzzy Logic of Columnists Writing about the Earnings Reserve

  1. When we lost 3 billion in the E RESERVE
    …it was said ” oh that happens allot.
    It will bounce back in a few days…. Uuhhhh really (?) Then, we never REALLY NEEDED IT!!!!

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