House struggles could risk Permanent Fund Corp. in long term

As session nears end, no deal yet to protect state investments

Correction: A quote about divisions within the House Majority, previously attributed to House Majority Leader Chris Tuck, should have been attributed to Speaker of the House Bryce Edgmon.

 

As the Alaska Legislature careens toward the end of its 2018 regular session, the head of the Alaska Permanent Fund Corporation is urging lawmakers to put brakes on their ability to spend from the fund.

A divided Alaska House of Representatives may not be able to deliver.

In a talk with reporters Friday, Speaker of the House Bryce Edgmon, D-Dillingham, said his 21-member caucus is having problems reaching agreement on a plan to draw money from the fund. Rep. Neal Foster, D-Nome and the lead negotiator for the House Majority, concurred with Edgmon’s assessment.

Since last year, the coalition House Majority has pushed a budget-balancing plan that includes modest cuts, increased oil taxes, a state income tax, and spending from the Permanent Fund. The Senate has rejected changes to oil taxes and an income tax, which leaves the House Majority faced with the choice of a budgetary deadlock (and potential government shutdown) or using the Permanent Fund alone.

“Our caucus, we did not seek — in terms of filling to the fiscal gap — to pursue a Permanent Fund-only solution, so we’re still struggling … and we don’t have a unified position on it,” Edgmon said.

House Majority Leader Chris Tuck, D-Anchorage, suggested that language in this year’s budget is just as good as long-term rules constraining Permanent Fund spending.

“As long as we’re behaving in a structured draw this year, I think that’s the most important thing,” Tuck said.

“It is not the same,” said Angela Rodell, director of the Alaska Permanent Fund Corporation, by phone.

“It is an ad-hoc draw because there is nothing written in agreement between the House, the Senate and the governor.”

“It only constitutes a rule for this budget, for this year,” she said, then asked: What happens when lawmakers return next year?

Since last year, lawmakers have been debating Senate Bill 26, a proposal that includes rules limiting lawmakers’ ability to spend from the Permanent Fund. Right now, lawmakers could spend up to $15 billion from the fund with simple majority votes in the House and Senate. That isn’t expected, but very little prevents it from happening.

Even SB 26 is an imperfect fix: One legislature cannot bind another with statute, which is why the Legislature can bypass the 90-day session limit imposed by a 2006 ballot initiative.

Nevertheless, Rodell and some lawmakers believe it represents an important statement of principle.

Most of the $65 billion Permanent Fund is constitutionally protected and requires a vote of the Alaska people to spend, but a significant section of the fund is not protected. The fund’s earnings reserve, which contains money earned by investing the protected portion of the fund, can be spent with a simple majority.

Sen. Anna MacKinnon, R-Eagle River, is the senator leading negotiations on the Senate side over SB 26. She agrees with Rodell: Budgetary language is not enough.

“It is not, because it is ad-hoc from the board’s perspective,” she said. “What that does, it affects asset allocation and how much they hold in the earnings reserve account in anticipation of what might happen.”

As Rodell explained, what’s on the label of the Permanent Fund is what’s inside: Its investments are arranged with an eye toward long-term benefit. Some investments are not expected to become ripe for 10 or 20 years.

If the Legislature doesn’t have rules, fund managers will be forced to consider what would happen if the Legislature asked for the maximum allowable amount tomorrow. They might have to shift investments out of better-earning long-term investments and into investments with less risk but lower returns, things that could be converted to cash in a short period.

If the Legislature operates without rules, “they’re changing the risk profile of the portfolio, but they’re not giving us enough information to build the portfolio,” Rodell said.

The Permanent Fund’s board of trustees has scheduled a meeting in May to consider whatever action (or lack of action) the Legislature takes. Depending on the Legislature’s moves, the meeting could lead to a change in the way the fund makes its investments.

While Rodell said a constitutional amendment limiting the Legislature would be preferable from her position, she needs rules.

“I want them to pass SB 26 and appropriate as SB 26 envisions,” she said.

The Permanent Fund’s board of trustees agrees: It has passed a resolution urging the Legislature to approve some kind of rules-based approach.

Late last year, it passed a separate measure urging the Legislature to inflation-proof the fund, but lawmakers appear less interested in that idea. The Senate included no inflation-proofing in its budget, and the House included only one year’s worth. (Lawmakers haven’t inflation-proofed the fund since Fiscal Year 15.)

“I really want to encourage the Legislature to get to conference committee, to put a rule like SB 26 in place, and they really need to recognize how well the Permanent Fund has done and give back to the principle that which is owed,” Rodell said.

 


 

• Contact reporter James Brooks at jbrooks@juneauempire.com or 523-2258.

 


 

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