It’s a good thing Jeffrey Scott likes a challenge. Kayaking in the Alaskan wilderness, scaling mountains, skiing down unmarked trails and completing ten triathlons should serve him well as the CIO of the Alaska Permanent Fund Corp. gears up for his biggest test yet: bringing the latest thinking on risk management techniques to 698,473 Alaskan citizens who fear any change to their $33.3 billion pool of assets.
The Alaska Permanent Fund is an oil-revenue-based sovereign wealth fund designed to preserve that income for future generations of Alaskans. Because it also provides an annual payout to every Alaskan resident, it comes under greater public scrutiny than the average institutional pool of money. Scott discovered that when he was hauled in front of the state legislature in 2009 after they got wind of the changes he’d made to the fund’s asset allocation. In a state where many people depend on the annual dividend paid by the Permanent Fund, tampering with it can be deadly to a politician’s career. Since the first dividend of $1,000 in 1982, annual payments have ranged from $331 in 1984 to $2,069 in 2008, with $16.7 billion in total distributions. Since its inception, $14.9 billion has flowed into the fund. Keeping up with the math falls in large part to Scott.
One of the reasons the Permanent Fund dividend is so important to Alaskans, explains Robert Maynard, a former APFC deputy executive director, is that it is the biggest source of cash in many of the villages outside the bigger cities like Anchorage and Fairbanks. At the time oil was starting to flow in the mid-1970s, many towns had no phone lines or roads. Isolation and extreme cold take a toll.
“It’s a spectacular place, but it’s not friendly,” says Maynard, a former 18-year Alaska resident who now serves as an adviser to the fund as well as the CIO of the Public Employees Retirement System of Idaho. “Every year I would lose a friend or close acquaintance in a hiking, kayaking or airplane accident.”
Argument and debate are part of the history of the Permanent Fund, which goes back to 1969 — ten years after Alaska achieved statehood. It began when large-scale oil production became viable and state-owned land along Prudhoe Bay was auctioned off to oil production companies, netting the state $900 million. The total Alaska budget at the time was $112 million and fewer than 300,000 people lived in what, geographically, is the largest state in the union. From its western tip in the Aleutian Islands to the eastern border with Canada, Alaska covers a distance further than that from Seattle to Miami.
At first Alaskan legislators, like nouveau riche on a shopping spree, quickly spent down their windfall on infrastructure — airports, roads, schools, sewers — and other financial needs. But more money was on the way as Prudhoe Bay, located on the Arctic Ocean in northern Alaska, was about to become the largest oil field in North America. As work began on a trans-Alaskan pipeline, the populace woke up to the need to conserve their state treasure. A lengthy debate ensued about the best way to use future oil revenues. The winning proposition incorporated three ideas: preserving wealth for future generations of Alaskans; segregating oil revenues from future legislative appropriation; and creating an investment pool to generate future income.
In 1976 Alaskan voters approved a Constitutional amendment that created the Permanent Fund, which passed by a two-to-one margin. The initial deposit of $734,000 into the fund was made on February 1977 from the first oil production and invested in bonds. This triggered another debate: Should the fund be managed as an economic development bank or as an investment fund? The latter won out, and in 1980 the APFC was created by the legislature to manage the investments of the Permanent Fund, starting with $900 million in surplus oil revenues.
The Alaska Legislature also approved the first Permanent Fund dividend program, which provided an annual payout to all citizens based on length of residency. When that scheme was deemed unconstitutional by the U.S. Supreme Court, the annual dividend was awarded in equal amounts to all citizens with more than one year of residency. Unlike the typical endowment that calculates an annual payout based on the market value of the fund, the dividend payment of the Permanent Fund is based upon earned income, a holdout from the days when it was primarily invested in fixed-income securities that had a steady stream of interest income. Now that the fund has a large equity tilt, proposals have been made to convert its payout formula to a percentage of market value structure (POMV) to achieve greater consistency in annual withdrawals. This led to yet another controversy.
Both the board of trustees and APFC executive director Michael Burns advocate a conversion to a 5 percent of market value formula. But, warns Patrick Galvin, Alaska’s commissioner of revenue and a fund trustee, “Any hint there’s a threat to the Permanent Fund by any state legislative policy has significant political consequences.” The POMV debate, along with oil and gas production rights issues, helped bring down the career of former Alaska governor and U.S. senator Francis (Frank) Murkowski, clearing the way for Sarah Palin to win the 2006 gubernatorial election.
There hasn’t been a major change to the workings of the APFC since 2005, when the legislature removed the list of permissible investments from state law, leaving the trustees to make these judgments based on prudent investor guidelines. But the tricky issue of how the funds will be used when the oil runs out awaits future discussion. “The thing we haven’t decided is how the Permanent Fund fits into the future,” says Burns. “We’re going to have a difficult political debate when that time comes. People prefer not to talk about it.”
