Opinions

Billions in 'unrealized earnings' held by Permanent Fund need more controls

The state has big decisions to make about the Permanent Fund, mainly centered on splitting earnings among dividends, savings and state government operations.

Here's one more you may not have thought about—the conflict between long-term investment goals and the need for ready cash. Billions of dollars are on the line.

The fund has about $7 billion in paper profits that cannot be spent unless or until the Alaska Permanent Fund Corp. cashes in the underlying investments.

The paper profits are neither fish nor fowl, as they are really not part of the $40 billion principal — which can't be spent — or the $10 billion earnings reserve, which is available for appropriation.

As Alaskans struggle with a gigantic deficit, there will be more political pressure to turn these billions of unrealized earnings into cash, making them available for appropriation.

For a fund that exists to benefit Alaskans today as well as all of those who are yet to come, this presents a challenge. It's easy to imagine a governor or powerful legislator could suggest informally to the corporation that assets be sold to generate short-term profits and boost the amount available for appropriation.

When the fund sells a stock, or bond or collects rent for office space, the profit goes into the earnings reserve. The fund has a long-term goal of earning 5 percent a year, after inflation, from a broad mix of worldwide investments.

When the fund began 40 years ago, it invested heavily in bonds, which paid a predictable rate of return. Its range of investments today are not nearly as predictable.

The tension over how long to hold onto billions in paper profits will grow as the Legislature and governor begin to think of the fund as the centerpiece of state revenue.

The expectation the fund has to produce some annual earnings has always existed, in part because that's where the money to pay the Permanent Fund dividend and inflation-proofing has come from, but lobbying to produce greater returns will intensify in the future.

Some uncertainty about when to take profits is recognizable by any investor. The stock market has surged since the election of  President Donald Trump, generating paper profits for individuals and institutions.

The fund ended 2016 with a market value of $55.4 billion and climbed to $57.3 billion Monday, with a mixture of realized and unrealized earnings.

One advantage of limiting withdrawals by a set percent of market value—if a reasonable percentage is established—is that it would reduce some of the uncertainty about investment targets and limit political interference.

The Permanent Fund structure and management has performed well for decades, but this new period requires the Legislature and governor clarify their expectations about the trade-off between income and growth.

The four biggest stocks owned by the fund are Apple, Microsoft, Facebook and Alphabet, parent company of Google. The total cost was about $400 million and as of the end of December, the holdings were priced at more than $600 million.

The decision to hold those stocks reflects the belief they will be worth more in the long run than the unrealized earnings.

The fund managers say they do not manage money to hit specific cash targets. I believe that, but I also think without clear safeguards, the pressure for them to think more about the immediate situation will increase.

Politics puts a premium on the present.

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

The views expressed here are the writer's and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary@alaskadispatch.com. Send submissions shorter than 200 words to letters@alaskadispatch.com or click here to submit via any web browser.