CEO: Permanent Fund still source of stability for state

  • Alaska Permanent Fund Corp. CEO Angela Rodell acknowledged the economic concerns the virus has generated in addition to the broader public health crisis in a formal statement, but stressed that “the fund continues to be a source of stability” for the state. (Photo/Andrew Jensen/AJOC)

Alaska Permanent Fund Corp. leaders stress that they are working to find investment opportunities that will have long-term benefits for the fund amid the drastic market downturn brought on by the COVID-19 pandemic.

The Permanent Fund, which has become the state’s primary source of budget revenue in addition to providing annual dividend checks, has seen its value drop from nearly $66.7 billion at the end of January to $58.7 billion at the close of markets March 16, a decline of about 12 percent. Over that time, the Dow Jones Industrial Average lost a full quarter of its value, closing at 21,328 on March 12.

The market index rebounded to almost 23,000 near the end of trading March 13 following President Donald Trump’s national emergency declaration in response to the virus. Airline industry groups have begun requesting government assistance to weather the pandemic, with Airlines for America, which represents 10 of the largest domestic passenger and cargo carriers, on March 16 asking for up to $50 billion in government grants and loans.

Trump administration officials on March 17 began pitching an $850 billion national economic relief package to Congress.

Stock investments currently comprise about one-third of the value of the Permanent Fund, according to unaudited financials provided by the corporation.

However, markets fell further in initial trading March 16 following additional domestic travel restrictions and economic disruptions from trying to contain the spread of the virus. Officials were forced pause trading Monday for 15 minutes in an attempt to slow the sell-off, a move that has been made three times in the past week.

The Dow closed trading March 17 up more than 5 percent at 21,237. It was at a record high or more than 29,000 points as recently as Feb. 21 before beginning a precipitous fall.

APFC officials said via a statement issued March 13 that they “remain diligent” in their management of the fund and they will be able to meet the state’s near-term expected cash calls despite the tough times. The APFC is scheduled to transfer $3.1 billion from the Permanent Fund’s Earnings Reserve Account to the general fund in the 2021 state fiscal year, which starts July 1.

The money has been dispersed in installments as it is needed by the Department of Revenue since the Legislature and former Gov. Bill Walker approved an annual percent of market value, or POMV, draw on the fund in 2018 to help fund state services.

CEO Angela Rodell acknowledged the economic concerns the virus has generated in addition to the broader public health crisis in a formal statement, but stressed that “the fund continues to be a source of stability” for the state.

“Yes, we have taken losses, but the diverse mix of assets along with our long time horizon means we are keeping our commitment to provide a stable source of revenue for Alaskans to rely on,” Rodell said.

McKinley Capital Management CEO Rob Gillam offered a similar perspective. In an interview, Gillam stressed that while immediate concerns are rightly over the health of individuals who have contracted the virus and others whose livelihoods have been affected; however, from a financial standpoint the pandemic and its impacts are likely to be relatively short-term for investments that are intended to grow over many years and even decades in some instances, he said.

“This is a disruption event. Disruption events tend to be short-lived,” Gillam said.

“Whether it’s a week, month or three months — that’s relatively short-lived.”

Prior to the POMV draw, APFC officials are first scheduled to transfer $4 billion from the Earnings Reserve into the corpus of the fund where the money cannot be appropriated by lawmakers. The large transfer is intended to cover inflation-proofing payments for up to the next four years.

Legislators originally approved a $9 billion transfer in the 2020 operating budget but that was vetoed down to $4 billion by Gov. Mike Dunleavy, who has pressed the Legislature to appropriate additional funds from the earnings reserve to fulfill full, statutory Permanent Fund dividend payments that have not been made since 2015 as the state continues to grapple with billion-dollar-plus annual deficits.

The Earnings Reserve held roughly $18 billion as of Jan. 31, but that was down to $16.1 billion by March 16 and according to an APFC statement, the fund had lost approximately $6.2 billion in unrealized gains through the first half of March. About $1.1 billion in unrealized gains remained as of March 16. More than $7 billion of the ERA balance is committed to the inflation proofing and general fund transfers.

On March 5 the APFC Board of Trustees passed a resolution recommending the Legislature restructure the fund into a single account through a constitutional amendment and limit annual draws to 5 percent of the fund’s overall value. The change would help ensure the corporation can meet the state’s cash calls during times challenging financial times when the fund’s near-term earnings are limited, according to APFC officials.

If the high thresholds for passing a constitutional amendment cannot be met this session, the board urged lawmakers to make statutory amendments to their guidelines for using the fund.

Those include a periodic review of the average annual real return assumption of 5 percent and working to maintain a “four-times buffer” in the Earnings Reserve that would keep at least four times the annual POMV draw amount in the account to allow managers to absorb times of low market performance and still meet the state’s cash needs from the fund.

Spokeswoman Paulyn Swanson wrote in an email that the $4 billion transfer, which is currently listed as “committed” in the fund’s monthly financial statements, is scheduled for the end of the fiscal year in late June. Swanson noted that the APFC trustees have not considered a resolution asking the Legislature to amend the transfer in any way.

Senate Finance Committee co-chair Sen. Natasha von Imhof said in a brief interview that legislative leaders are “looking at everything right now” pertaining to the budget and as of March 13 were not considering changing or delaying the $4 billion transfer to the fund’s corpus.

House Finance members heard from Legislative Finance Division officials last week that even under the corporation’s low annual return scenarios for the year the Permanent Fund would likely still realize at least $1 billion to $1.5 billion in statutory net income to the Earnings Reserve this year in dividends, interest and rent from real estate investments that are independent from market performance.

Legislative Finance budget analyst Alexei Painter noted the fund could still capture income from stocks bought several years ago even if those same investments have lost value recently as long as the value when they are sold is greater than when they were purchased.

“It won’t be a realized loss because, really, the last two years have been positive and this is just an unwinding of some of that. It’s not like 2008 when we were actually selling at a loss,” Painter said.

Von Imhof noted lawmakers were still waiting for the Revenue Department’s spring revenue forecast update and the Senate is still forming its version of the state operating budget.

Elwood Brehmer can be reached at [email protected].

03/18/2020 - 9:08am