OPINION: Permanent Fund trustees should pump the brakes on risky growth plans

Alaska’s Permanent Fund trustees have been excoriated in recent months, including by former Gov. Frank Murkowski, a Republican, over what many consider an ill-advised and risky plan to aggressively expand the Fund’s investments.

To their credit, the trustees backed off, for now. They will revisit the idea at their December meeting.

Here’s what was in the works: Some trustees want to grow the fund to $100 billion quickly, in five years. The only way to accomplish this is to increase the fund’s return target above its current 5% after inflation to about 7-8%, also inflation-adjusted.

And the only way to achieve this is to take on risky investments that promise high returns but could easily go sour.

What I never understood about this is why we want to grow the fund to $100 billion so quickly in the first place, and take on risks, when we’ll get to $100 billion in nine or 10 years with the Fund’s current growth and with a more conservative and less risky strategy. I never heard a justification.

Was the November meeting just a brainstorming session, with the trustees wanting to think “outside the box?” Maybe, but it appears at least two of the trustees really wanted to risk it.

The fund’s chief investment officer was asked to put together an implementation plan, which wound up at 88 pages. That required some work, so it appeared a serious initiative.

The trustees backed away from the accelerated return idea after the Fund’s outside advisors, including Microsoft treasurer George Zinn, said it wasn’t a very good idea.

Reporters jumped on it, too, leading some trustees to grumble about the press digging into their business. Of course, that’s what reporters are supposed to do.

This isn’t over, however. Part Two is coming in the trustees’ December meeting, and for many it sounds even more dangerous. It is to borrow from the fund to buy equities. Borrowing $4 billion is one figure mentioned. Think about this: Would you take a second mortgage on your home to play the stock market?

The Permanent Fund’s trustees are supposed to be independent, so who can stop such wacky ideas?

The Legislature has little control over the trustees’ setting of return targets and allocations of investments, but its approval may or may not be needed to borrow from the Fund, depending on how a loan is structured.

One would think borrowing $4 billion would require a vote, but it’s not clear. The governor appoints the trustees and can also fire them, so that’s the ultimate safeguard. I hope it never gets to that.

Over the years the Alaska Permanent Fund has been a big success mainly due to the diligence and caution of its trustees as well as its excellent staff. The fund pays out dividends to Alaskans and now supports more than half of the state budget, so residents don’t have to pay taxes.

The trustees’ caution with the fund’s investments started right at the beginning with Elmer Rasmuson, the fund’s first chairman. Rasmuson was a highly respected banker well known for his financial acumen, and Alaskans trusted him with their money.

The trustees following him were equally careful and were mindful that their first responsibility is to preserve the Fund for future generations, and that means being cautious.

We’re lucky no big mistakes have been made with the fund so far. But we did have some near misses.

The biggest one came in 1979, as the Legislature was setting up the fund’s organizational structure (Voters approved the constitutional amendment creating the fund in 1976).

There were two concepts debated for the fund. One was as a development fund, to invest in the state and grow the economy. The second was as a trust fund to manage long-term sustainability for the future.

The trust fund was pushed in the state House — interestingly, by liberal Democrats. The development fund was championed by state senators, who wanted to see the fund invest in big projects.

There was a big fight over this; the trust fund won out, but narrowly. Had the vote gone the other way, we would likely have seen the Fund depleted.

Another near miss came more recently, when Gov. Mike Dunleavy wanted to draw from the fund’s earnings reserve to pay a large Permanent Fund dividend. Luckily, we had trustees who pushed back.

Now we have ambitious ideas coming from the trustees themselves. One was to start investing in Alaska business ventures. In-state investing can be a slippery slope because it’s tempting for politicians to influence this.

The fund has traditionally avoided in-state investments precisely for this reason — plus we have other institutions that do this, like the Alaska Industrial Development and Export Authority.

But at the trustees’ request, the fund did put several hundred million dollars into an in-state investment portfolio. However, returns did not meet expectations, and the trustees have wisely stopped putting new money into the program.

Now there are new ideas, like borrowing from the fund to buy stocks.

Let’s allow the fund to grow to $100 billion, but let’s do it safely. We should think back on what has allowed the Permanent Fund to be successful.

We should ask: “What would Elmer Rasmuson do?”

Tim Bradner is publisher of the Alaska Legislative Digest and Alaska Economic Report.

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