Mental health trust ignores state law with Outside investments

For more than 20 years, a clear state law has mandated that the Alaska Mental Health Trust "shall contract with the Alaska Permanent Fund Corp. for management of the mental health trust fund."

But four of the seven members of the trust board claim to have secret legal advice, based in part on a 1956 federal law, that they don't have to follow the mandate.

The Permanent Fund manages $460 million for the trust, most of its assets, but the agency has also invested $39 million on its own in seven commercial properties in Texas, Utah, Washington and Anchorage.

Two things come immediately to mind.

First, the secret legal advice clearing the commercial investments should be made public, to provide a basis upon which to judge its merits and the decision to contradict state law.

Second, the decision to keep it secret probably means there are reasons to doubt the clear-cut existence of a higher power.

If there is a good case to be made that federal law supersedes the state requirement, the board should have presented its legal interpretation to the governor and Legislature and asked for a change in state law.

That the board failed to ask for permission or forgiveness — substituting its interpretation for that of elected officials — shows bad judgment, justifying the alarm sounded by three former state officials who took part in the negotiations more than two decades ago that led to the trust settlement.

The lack of consensus on the board is another troubling sign, one that points to the need  for a new approach. What the trust board does not need is a $250,000 annual public relations campaign to polish its image. The four-member majority contends that all this fuss stems from a personnel matter — its decision to demote long-time executive director Jeff Jessee — but his status is a side issue.

The underlying policy question is whether the diversified mix of investments in the Permanent Fund is the best place for all trust cash assets or if the agency should be allowed to be investing in real estate on its own.

This is a matter for Gov. Bill Walker and the Legislature to decide, not for the unelected board of the trust, given the longstanding restriction in state law. I am glad to see that the board has called a halt to its investment plan while the attorney general's office reviews the situation.

The board has set off on a plan with a goal of quintupling the income from the Trust Land Office over the next 20 years. That may or may not create risks worth taking but the subject should be examined.

The trust has invested on its own — earning 15.6 percent last year on its real estate investments — because it needs to make more money than it is getting from the Permanent Fund, trust board member Larry Norene told Alaska Dispatch News reporter Nathaniel Herz.

By contrast, the Permanent Fund earned about 10 percent on its $7 billion real estate portfolio last year as of the end of November.

"If we can't beat the Permanent Fund, there's no point in it," said Norene, a semi-retired real estate broker. "The only reason we do it is to make more money."

The trust is already a heavy investor in real estate, as it owns 1 million acres in Alaska, set aside to generate money to support mental health services. It also has about $50 million to $60 million invested in real estate through the $460 million trust account managed by the Permanent Fund in accordance with state law. That money is invested in malls, office buildings, apartments, hotels and industrial properties in the U.S. and other nations.

John Morrison, the executive director of the Trust Land Office, wrote in the 2016 annual report that the commercial real estate ventures boost the goal of diversifying "through a myriad of land uses, geographic locations and markets."

But a diverse mix of real estate investments is not the same as a diverse mix of investments, which is what the Permanent Fund relies upon to balance risk and reward over time.

Harry Noah and Bruce Botelho, two former state commissioners who called attention to the discrepancy between state law and the recent investment practices of the trust, both identified the step that should have been taken.

"If they wanted to do what they're doing, there was nothing stopping them from going to the Legislature," said Noah, a former commissioner of the Department of Natural Resources.

"The simple solution was/is for the trust authority to persuade the Legislature that its approach is better in the long run," said Botelho, the former attorney general.

Columnist Dermot Cole can be reached at dermot@alaskadispatch.com. 

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