Opinions

Profit pressure will complicate Alaska Permanent Fund's future

Over the last year, the state of Alaska has gained hundreds of millions more from a $128.5 million investment in a speculative biotech stock than it collected in oil production taxes.

The success of the Alaska Permanent Fund holdings in Juno Therapeutics — which have not been cashed in but are now valued at more than $900 million, after peaking at $1.75 billion last June — hints at one of the key challenges the state will grapple with if it begins to pay for state services with some of the fund earnings.

Balancing the need for short-term results with the goals of a long-term fund will complicate the future for the managers of the Permanent Fund if the Legislature and governor agree on a plan to stabilize state finances with a new approach. Oil dropped below $30 Monday, continuing a march downward that has widened the gap between oil and investment income.

With a new role possible for the Permanent Fund, it's easy to imagine a future circumstance in which the demands for short-term revenue may conflict with long-term prospects, but both will have to be considered.

As is the case with about $5 billion of its other holdings, the Alaska Permanent Fund has not cashed in its Juno Therapeutics gains to realize the earnings, preferring to hold onto the stock for its growth potential.

The company is focused on efforts to use genetic engineering so that white blood cells in the immune system can be made to identify malignant cancer cells and destroy them. It could be a long while before the results and the economic potential are clarified.

The length of time that the fund holds onto any stock or other investment is subject to decisions about risk and reward that the fund does not announce in advance, with good reason.

ADVERTISEMENT

That billions remain in the category of unrealized earnings is the clearest sign that the Permanent Fund board and its managers believe the prospect of long-term gains in those holdings override the appeal of short-term payoffs.

The fund contains about $50 billion as of this week, down by $2.6 billion since the end of November, largely because of the stock market correction.

Of the total fund assets, about $39 billion is in the principal and can only be allocated to "income producing investments."

The rest is either in the earnings reserve, meaning that it can be appropriated by the Legislature, or it is in the category of earnings on paper that cannot be spent unless or until they are turned into cash.

As part of a complicated overhaul proposed by Gov. Bill Walker, $3 billion would be transferred from the Constitutional Budget Reserve Fund into the earnings reserve of the Permanent Fund to create a cushion the Alaska Department of Revenue predicts will be sizable enough to become a stable source of state funds to fund government.

One potential issue to be dealt with is that if the underlying assumptions about oil prices, investment returns and demands for state services don't hold up over the long term, the cushion will not be large enough — which could lead to political pressure to cash in more of those unrealized gains.

Until now, fund earnings have largely paid for dividends and been used to protect the principal against inflation.

Pressure to sell investments and produce immediate returns has probably occurred on occasions in the past without public acknowledgment, but this will become a greater issue in the years ahead with more demands and higher expectations for the Permanent Fund.

The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)alaskadispatch.com.

Dermot Cole

Former ADN columnist Dermot Cole is a longtime reporter, editor and author.

ADVERTISEMENT