What Are Permanent Funds in Government Accounting?

Permanent funds are maintained by various state governments to serve different purposes. Some hold revenues received from the sale or lease of the state’s natural resources, such as gas and minerals, while others serve to provide support to nonprofit organizations to help them further their missions, such as the Rotary Foundation permanent fund. The New Hampshire Community Loan Fund is a permanent fund that loans its capital to support community projects, including child care and community facilities and the preservation of jobs and housing.

Permanent funds were established by generally accepted accounting principles as a vehicle to assist governments with management of certain funds. Permanent funds may serve to distribute money, such as dividends, or generate money from interest. The purpose and requirement of the fund is to preserve a sum of money as capital, and use it to generate interest income to provide payments for a specific obligation or benefit. A fund can also be classified as permanent if used to cover payments for accounting services toward endowments of government-operated cemeteries or libraries.

The Governmental Accounting Standards Board, or GASB, is not a government agency although it has the authority to set accounting standards for state and local governments in the United States. GASB issued statement 34 with guidelines to improve government accounting and bring it closer to the standards of accounting practices in the private sector. GASB statement 34 defines the use for permanent funds in government accounting, requiring money in permanent funds to be legally restricted, meaning only earnings, not principle, may be used to support governmental programs.

The Alaska Permanent Fund was established in 1976 by a state constitutional amendment. The fund serves to hold a minimum of 25 percent of the state’s income from mineral lease rentals, royalty sale proceeds, mineral revenue-sharing payments from the federal government and bonus money received by the state. Revenue in the fund is invested in public and private assets to make up a diversified portfolio with acceptable risk levels. Realized investment income may be used, and most is paid as dividends to residents of Alaska that qualify.

Some states, such as New Mexico, are looking to their permanent fund as a potential source of borrowing. New Mexico’s permanent fund holds approximately $14 billion in revenue from leasing mineral and land rights along with severance taxes on natural gas and oil. The state is looking for potential solutions to its current budget difficulties, and is considering a loan of as much as $300 million from the fund as revenue bonds, which would be repaid over five years, with interest at 4 percent.