A shaken titan: How the Alaska Legislature is harming the Alaska Permanent Fund

Budget brinksmanship cost millions in missed investments

The Alaska Permanent Fund is a $62 billion titan.

 

It spans the world. It owns half of the largest shopping mall in northern Virginia. It owns shares in companies from Sweden to Singapore, from Argentina to Austria.

Each year since 1982, it has paid a dividend to hundreds of thousands of Alaskans, and the amount of that dividend has steadily risen in recent years along with the success of the fund.

The Permanent Fund is a titanic achievement unmatched by anything else in the United States and by few others in the world.

But even titans can tremble.

This year, the Alaska Legislature flirted with the idea of yoking that Permanent Fund titan to the service of government. Lawmakers considered one way, then another, and in an effort to avoid a government shutdown, even proposed having the Permanent Fund cover most state government expenses.

Jerked between different ideas and different proposals, the Permanent Fund pulled billions of dollars out of investments to meet demands the Legislature might — but never did — make.

Instead of earning 12.5 percent interest from booming stock market investments, the Permanent Fund earned little on the billions it prepared.

It still isn’t clear how much money the Permanent Fund lost as a result.

“I think you can imagine. If you’re not putting that money into the market, it’s not earning that 12.5 percent that we were holding,” Angela Rodell, the CEO of the Alaska Permanent Fund Corporation, told the Empire.

The problem is going to get worse.

In the spring, the Alaska Legislature will have no choice but to turn to the Permanent Fund to cover at least a portion of the state’s $2.8 billion annual deficit. If lawmakers seek that money without a long-term plan, without rules to bind future spending from the fund, managers will again have to plan for a worst-case scenario.

They will again have to draw billions from investments, costing the fund (and by extension Alaskans) millions in lost earnings.

“What I would like to see is a new compact with Alaskans,” Rodell said. “That way, we know what the rules are.”

Permanent Fund basics

To understand the problem, it helps to understand how the Permanent Fund works.

You know the Permanent Fund best through its annual dividend, but when voters created the Alaska Permanent Fund Corporation with a constitutional amendment in 1976, the dividend wasn’t anywhere in sight.

The dividend was only added later, to encourage Alaskans to leave the Permanent Fund alone and allow its investments to grow. It worked: Lawmakers have never spent money from the Permanent Fund on anything but dividends and keeping the fund up with inflation.

The Permanent Fund has two main parts: The corpus, and the earnings reserve. The corpus is the heart of the Permanent Fund. It can’t be spent, except with a vote of the people.

The earnings reserve is different.

It’s made up of the money the state has earned from investing the corpus. That money is invested just like the corpus is, but it can be spent with a simple majority vote of the Legislature. This is the section of the fund that dividends come from, and it’s the section that the Legislature may use for annual expenses.

It has never done so because using the earnings reserve for anything but dividends would inevitably decrease the amount of money available for dividends.

You don’t know

Back in January, Rodell and the staff of the Alaska Permanent Fund Corporation knew the Legislature would try to harness the state’s fiscal titan. The year before, the Alaska Senate had passed a Permanent Fund spending bill, but the House failed to pass it and the idea died.

Things seemed different in January 2017.

The trouble was, no one knew how much money would be needed.

“You don’t know what the draw is for dividends, you don’t know what the draw is, period. That’s what’s challenging,” Rodell said. “Two, three, four, five billion is not easy to do prudently, effectively, without overly impacting the rest of the fund.”

In March, the Senate passed Senate Bill 26, which would require about $2.1 billion per year.

The bill went over to the House, where lawmakers passed a different version of SB 26 on April 12.

And then the bill sat, as the House and Senate tried to agree on its final look.

Meanwhile, the Alaska Permanent Fund Corporation was sitting on billions of dollars in cash (or safe, easily cashable assets) rather than investing in something more profitable for the state.

“What was making me uncomfortable was the lack of agreement on what it was going to be,” Rodell said.

The longer the Legislature went without solving the budget, the worse things got for the fund.

The fund couldn’t take the risk of investing in something that might drop in value, so it had to sit on several billion dollars at a time when stock markets were racing upward.

As the threat of a state government shutdown grew, so did the problems for the fund, whose managers would also be pink-slipped under a shutdown.

As Rodell told the Empire in a September interview, she had to explain to each of the fund’s billion-dollar partners what would happen. It was akin to a bank telling its customers that no, they wouldn’t be able to access their money, but to trust the bank that the money would still be there when it reopened.

“How do we manage, how do we make sure everything is taken care of when we’re furloughed?” she said. “It was a lot of sleepless nights, in all seriousness. There’s no other way to describe it.”

An ‘Oh my God’ moment

Then, as that preparation was ongoing, the Alaska House dropped its nuclear option.

It passed a plan that would have funded state government from the Permanent Fund rather than using the state’s Constitutional Budget Reserve.

It was as if an unexpected bill had arrived by mail, only this bill would cost $5 billion.

“That was an ‘Oh my God’ moment because that was a number none of us saw coming,” Rodell said.

She had been watching the legislative debates on TV with Paulyn Swanson, a former Legislative Budget and Audit expert and now the APFC’s communications manager.

“We were sitting there stunned,” Rodell recalled.

The Senate quickly rejected the idea, but it was a worse worst-case scenario than even the Permanent Fund Corporation had thought about, and it’s now shaping the fund’s future.

What comes next

This January, the Alaska Legislature will again convene in regular session in Juneau. This time, the fiscal cliff is in view. The state’s Constitutional Budget Reserve will be exhausted sometime in late 2018 or early 2019. That means the Legislature must either raise taxes, chop the budget, or turn to the Permanent Fund.

More realistically, it will do some version of all three.

So, in January, Rodell will again begin to pull billions of dollars out of the Permanent Fund’s investments.

Again, because the Legislature has set no rules for what it might do, she has to plan for the worst-case scenario.

“Starting in January, we would start preparing for a draw, because we don’t want to sell into a losing market,” she said. “We start trying to plan around that, and the challenge is we have no idea what number we should be planning around.”

This week, Rodell will testify in front of the Alaska House and Alaska Senate finance committees. She won’t say how she thinks they should fix the state’s deficit, but she will say that regardless of the strategy, she needs rules.

She needs lawmakers to bind themselves to particular guidelines when it comes to using the Permanent Fund. She needs to know how to prepare Alaska’s fiscal titan for the work it must now do.

Without those rules, even the $62 billion Permanent Fund could falter and fall.

“I have my fingers crossed that at the end of the day, legislators will do the right thing,” she said. “I’m counting on that at the end of the day to hold true.”


• Contact reporter James Brooks at james.k.brooks@juneauempire.com or call 523-2258.


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