Craig Richards, Gov. Bill Walker's former attorney general, has asked the Alaska Permanent Fund trustees to buy state oil-tax credits. It's a "Blazing Saddles" next-move-and-the-sheriff-gets-it gambit.
For the past two years, Walker vetoed the appropriations to pay the credits. Richards is now a $275-per-hour consultant to Walker on oil and gas taxation and credits.
According to KTVA, Permanent Fund Executive Director Angela Rodell tried to explain the Walker-Richards scheme:
"In a sort of head-scratching way, you, the State would pay $1 out of the general fund that then, or would have paid $1 out of the general fund, but then pays 60 cents out of the Permanent Fund to buy that $1 and then the general fund pays the Permanent Fund $1, so the Permanent Fund gets an extra 40 cents on that."
The fund's own "An Alaskan's Guide to the Permanent Fund" makes clear why this is such a bad deal: "The primary emphasis in all investment decisions is to maintain the safety of the principal."
Alaska Statute 37.13.120 requires the fund to exercise the prudence of an institutional investor in making investments. The statute incorporates two cardinal hallmarks of prudence: (1) diversification of investments; and (2) avoidance of speculation.
According to the Wall Street Journal, hedge funds and banks provided loans, backed by the tax credits, at rates up to 20 percent, but that was before Walker vetoed the credit appropriations. Since then, the market for offloading the credits has dried up.
If other institutional investors won't go for this deal, how can it be prudent for the Permanent Fund to do so? Richards' answer is to dangle an enormous payoff of 30 cents on each 70 cents invested – a return of 43 percent. How is this not the speculation not permitted by state law? Investopedia.com defines speculation as a financial transaction where "a significant risk of … loss is more than offset by the possibility of a huge gain."
Richards pooh-poohs the risk of loss. "The proposal to the Permanent Fund would be that they view these tax credits very much like a State of Alaska bond," he told the Alaska's Energy Desk. He said, like bonds issued by the state, tax credits are debt Alaska has to pay.
Richards was Walker's attorney general? I guess "was" is the word. State debt requires voter approval. Is Walker proposing a referendum on tax credits? I don't think so. State debt to pay tax credits is not even constitutional.
Article IX of the Alaska Constitution allows state debt only for capital improvements and veterans housing loans. Bailing out oil company holders of tax credits is not an allowed purpose. That's why holders of the credits can't sue the state to compel payment. Payments are subject to legislative appropriation. And with vetoes, companies can't even sell the credits. Unlike the tax credits, state debt has a market.
The most fatal flaw in the Walker-Richards proposal goes beyond legal requirements. If the fund risks its assets by buying purported "debt" of the state, it doubles down on the fortunes of the state. At the very moment the state may be forced to turn to the fund for help, it would by definition be unable to make good on the tax credits. In the state's greatest hour of need, the fund would be hobbled in its ability to respond.
As the state's prime financial backstop, the fund has a duty to diversify away from Alaska in general, and away from the oil industry – the state's secondary, if once primary, fiscal prop. Buying tax credits concentrates risk, violates fund statutes, and is fundamentally at odds with the very purpose of the Permanent Fund.
Let's hope fund trustees understand their legal and moral responsibilities to the fund better than Richards, the former trustee and former attorney general.
As deputy commissioner for the state treasury, Milt Barker sat on the State Bond Committee and authored HB 547, the legislation that first brought state retirement and endowment funds under the prudent investor rule. He lives in Juneau.
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