Business/Economy

Investment earnings plunge as state looks to savings to fund government

JUNEAU -- Alaska's investment earnings last year plunged by nearly 70 percent from the previous year's record earnings of $8 billion.

The bulk of this year's investment earnings of about $2.6 billion came from the Permanent Fund for the fiscal year that ended June 30.

The investment earnings are the profits the state makes from its more than $60 billion in savings, not counting savings obligated for responsibilities, such as the state's retirement trust funds.

The decrease in investment earnings comes as state leaders are increasingly looking to use the Permanent Fund to solve the problem of how to pay for state government at a time when declining oil prices have dramatically reduced revenues.

"There's absolutely no way to avoid the Permanent Fund being part of the solution," said Randy Hoffbeck, commissioner of the state Department of Revenue.

The $8 billion in investment earnings that Alaska made in 2014 was enough to fund the state's entire unrestricted general fund budget that year of $7 billion. The $2.6 billion in 2015 investment earnings would not even be enough to cover this year's expected budget deficit, likely to top $3 billion, but brought in more than declining oil revenues did.

While the year was not a good one for stocks, other parts of the well-diversified Permanent Fund did much better, with private equity and real estate earnings coming in strong for Alaska.

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The Permanent Fund's earnings calculated under accounting rules are different from the earnings numbers calculated by state statute, which is a more conservative method based on "realized" earnings. That means that if a stock goes up in price and is counted as gain under accounting rules, under the statutory method it is only counted as earnings when the stock is sold and the profit is actually "realized."

The big gains of 2014 also included $1 billion in earnings from another state savings account, the Constitutional Budget Reserve, that the state is unlikely to ever see again. That $1 billion in profits that year came mostly from a sub-account of the CBR which is invested much more aggressively than the main account.

During 2015 that sub-account made only $179 million before being liquidated and its holdings moved into low-yielding but less risky investments.

That change helped the state avoid some losses in stocks since then, but treasury chief investment officer Gary Bader said that while hindsight has shown that to be a "wise investment decision," it was one that was required by state law because of the state's declining financial situation.

Under CBR statutes, money can only be in the sub-account if it won't be needed within five years. This year, the state is expected to take billions from the CBR to balance the state's budget, and more deficits are forecast in future years.

"The revenue forecast says we're going to be out in less than five years," so the CBR must be more conservatively managed, he said.

That means no more $1 billion paydays for the state from the Constitutional Budget Reserve.

Revenue Commissioner Hoffbeck told the Permanent Fund Board of Trustees recently that there may need to be changes to the way the Permanent Fund operates if the state ends up relying on it for state government funding, and that's likely to happen.

"There's a realistic expectation that the fund will become an important part of government funding going forward," he said.

That may mean constitutional changes, he said, as a portion of the fund is considered to be its principal, with dividends only paid out of the fund's earnings. Hoffbeck did not say what such changes might mean for dividends.

With dividend checks of $2,072 being deposited in most Alaskans' bank accounts this past week, legislators were competing to voice support for using the funds to pay dividends.

Rep. Craig Johnson, R-Anchorage, an influential member of the House leadership, praised the dividend program in a press release, saying it not only boosts local economies but also principal or "corpus."

In a competing release, Sen. Bill Wielechowski, D-Anchorage, urged the Senate to adopt his legislation to put the dividend program in the Alaska Constitution.

The dividend program is now only in statute, meaning that legislators can alter or eliminate it with a majority vote at any time.

"We always hear politicians talk about how they will protect the Permanent Fund. Here's a chance for them to prove it," Wielechowski said in his release.

Hoffbeck said that even when oil prices increase, they are not likely to provide enough money to run state government and the state must look to investments to help do so.

"We're going to see a shift away from oil prices being a primary funding source of government to our investment earnings," Hoffbeck told the trustees.

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"Investment earnings for the last couple of years have made substantially more than we've made in taxes and royalties on oil and gas," he said.

Correction: This story originally erroneously stated that oil tax cuts contributed to declining revenues.

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