Anchorage trust fund takes a hit

The savings account is a trust fund set up about a decade ago with proceeds from the sale of the old city-owned Anchorage Telephone Utility. It has grown and shrunk over the years in rhythm with the general economy, from almost $130 million in 1999 to as little as $112 million in 2002.

The fund had swollen to $141 million by the end of 2007, and was still $131 million six months ago. But then the economy started its nosedive.

The fund is projected to end this year at $96.9 million after paying a $6.6 million "dividend" to the city general fund.

The trust fund -- just like the Alaska Permanent Fund and most individual retirement accounts -- has been savaged by the mortgage and credit crisis and the ensuing Wall Street meltdown. About half the fund was invested in domestic stocks and another 15 percent in international stocks, with some 35 percent in bonds, U.S. treasury and agency notes, and 5 percent in real estate.

That seemed like a sound investment strategy, and still does in the long run, said Sharon Weddleton, the city's chief fiscal officer.

"We still believe that our strategy is fundamentally sound," Weddleton said in an interview this week.

"It's that the markets are in turmoil right now, not that there was ever anything wrong with the strategy of the trust fund."

Sound strategy or not, the big drop in the fund's value means the city will get much less money from it at least for the next few years. When the trust was originally set up, the Assembly was allowed to decide how much of it to use each year to subsidize city services.

Initially, the city took an annual dividend of $9.4 million.

The rules were changed in 2002, and since then the city has been able to draw up to 5 percent of the fund's average value over the preceding five years. That has worked out to a dividend of about $6.5 million a year.

Mayor Mark Begich and city finance officials now plan to ask the Assembly to reduce that cut to 4 percent until the trust recovers from this year's losses. Weddleton said that probably will mean the city can pull out about $1 million less, starting with the 2010 budget.

That's a comparatively small hit -- the city's 2009 budget is about $433 million -- and whether it means cuts to city services or a bigger charge for taxpayers won't be clear until the Assembly starts building its next spending plan in the fall.

But a draft memorandum explaining the change predicts the reduction "is likely to last at least several years." And the longer the fund's slump continues, the smaller the dividend will become.

Some Assembly members worried about the shaky economy -- the drop in oil prices, an increasing Alaska jobless rate -- already are proposing a three-month freeze on city hiring and asking for regular monthly reports on city finances.

Begich will be gone to Washington, D.C., as Alaska's next U.S. senator by the time an ordinance to reduce the dividend reaches the Assembly. Assembly chairman Matt Claman, who is expected to step in as interim mayor, said Tuesday he thinks the reduction is a good idea.

"We have to be very cognizant of what's going on both locally, nationally and internationally, economically," Claman said. "We're going to have to address it the way any household would. ... I think most homes in the same situation would probably head in the same direction (and) modify the spending pattern."

Weddleton said the city's shorter term investments are doing better, essentially breaking even this year. And Begich noted that the trust fund's decrease in value is a paper loss. The fund still owns the stocks, which should eventually recover their value as the economy improves, he said. In the interim, taking a smaller annual dividend for services -- up to 4 percent instead of 5 percent -- should help the fund rebuild value, they said.

"We look at these funds in a long time horizon," Begich said, how they perform "in a couple of decades, not two years or three years."

Assembly members Sheila Selkregg, Debbie Ossiander and Harriet Drummond are sponsoring the hiring freeze, and Ossiander said the trust fund's plummeting value is one of the reasons.

"Absolutely," said Ossiander, who represents Eagle River-Chugiak. "There are a number of reasons to be concerned, that's just one. ... We just need to be on top of everything right now."

The city also has signed new contracts this year with most of its employee unions, extending wage increases out five years. Begich said it was a good idea and that he is confident the unions will come back to the table if the city finds itself in precarious financial straits over the life of the agreements.

In any event, Begich said, Anchorage is weathering the global economic storm better than most American cities.

"Are we going to have some issues? Absolutely," he said. "We have to manage our money very carefully. We're seeing a little bit of the effects of the national economic problems, but other cities are facing it way more severe."

While mayors in other cities already have imposed layoffs, Anchorage is not in that position yet, Begich said.

"Could we be in that position first or second quarter (of 2009)? Possibly," he said. "But ... as one of those things we look at, not necessarily that you must do.

"Will we have some hits on our cash flow? Yes. But I still feel very good about where we are. We're cautiously optimistic."

Find Don Hunter online at adn.com/contact/dhunter.