There’s an old brown church, with a steeple on top, just across the street from the state Capitol. But it isn’t a church anymore. Now it’s where the director of the legislative finance division, David Teal, works.
Unless you’ve been living under a rock, you know that Alaska’s budget is a mess. After three years of fighting it off, the legislature seems to have finally agreed to tap into the state’s Permanent Fund.
Breaking into the state’s biggest piggy bank carries a lot of political and financial risk. But, it turns out that maybe lawmakers have more control over the outcome than they thought.
Alaska’s Permanent Fund, at last count, is worth about $66 billion.
It’s basically made up of two parts — there’s the corpus, or main account, worth nearly $50 billion. It’s protected by the constitution, so lawmakers can put money in it but they can’t take money out of it.
The second part is called the Earnings Reserve. This is the account that holds the earnings — the money the Permanent Fund makes on its investments. And it can be spent. It’s worth more than $16 billion.
When legislators talk about spending the Permanent Fund, they mean the Earnings Reserve.
Teal says the Earnings Reserve is fundamentally different than other reserves the state has used to pay its bills.
“It can vanish without being spent,” he said.
There’s volatility in that account because of the way that it’s invested. Sometimes that’s a good thing: those investments have doubled the size of the fund in the last decade, adding billions to that piggy bank.
But, big risks can also bring big losses. In early February, there was a stock market slide and the fund lost 4 percent of its value. That’s nearly $3 billion dollars.
Losing value isn’t the same as losing money. The market goes up and down on a daily basis a lot of those losses can be regained quickly. But if something catastrophic happens and those losses were to stick? Teal said the Earnings Reserve can lose a lot of real money, real fast.
But, it can be hard for lawmakers to plan for true losses because, in the entire history of the Permanent Fund there has been just one year where its investments lost more than they made. That was 2009.
Remember that global recession? It triggered some of the worst years the U.S. stock market has ever had.
In Alaska, Teal says, the Earnings Reserve — that’s the one lawmakers want to use now — was drained.
“There was some concern right up until the final month of the fiscal year that there was no money for dividends,” he said.
That’s right, the Earnings Reserve is the account that pays Permanent Fund Dividends every year too.
So, back when that financial crash took a big bite out of the Permanent Fund and its managers were faced with the prospect of losses in both accounts, they chose to protect the main one.
Managers transferred money into it from the Earnings Reserve to keep that main account from taking a loss.
“Based on standard accounting practices in place in 2009,” wrote Permanent Fund Corporation spokersperson Paulyn Swanson in an email.
Ten years later, the state’s in a recession again. But some things are different.
This time, there’s enough cash in the Earnings Reserve to pay dividends, but the politics have changed. Now, the governor, along with the legislature, has been capping PFDs.
This leaves millions in that Earnings Reserve for lawmakers to potentially spend. They haven’t yet, but it is hugely controversial.
One senator said it’s illegal, and so he sued. That case made it all the way to the state Supreme Court last year.
It’s pretty widely known as “The Wielechowski Decision.”
But, when you talk to Sen. Bill Wielechowski, D-Anchorage, it’s clear that it’s not a decision that he would have made.
“Well the lawsuit stemmed from my belief, my firm belief after reviewing the case law and the statutes, and the legislative history, and the constitutional history — that that the governor did not have the right to go and veto the dividend,” Wielechowski said. “Unfortunately it didn’t turn out the way we had hoped.”
Not only that, but the court’s ruling had a much broader meaning.
That’s because the crux of Wielechowski’s case was that sometimes money automatically flows out of the Earnings Reserve account and it doesn’t require the legislature’s appropriation.
The state argued that everything that comes out of that account has to be officially approved by the legislature.
“And so we had this knock down drag out battle over whether or not it was a dedicated fund, what the legislature intended in 1976, what the voters intended in 1976, what the legislature intended when they created the Permanent Fund dividend program in 1982 … and so the court sided with the state,” Wielechowski said.
Remember back in 2009 when the Permanent Fund lost more money than it made? Well, its managers didn’t ask permission to use that earnings account as a buffer; they just did it. And if that crash were to happen again? They couldn’t do it that way again because Wielechowski lost that case.
But that was not immediately clear from the ruling. At least not to the Permanent Fund Corporation’s legal counsel, Teal or even Wielechowski.
“That wasn’t something that we focused on,” Wielechowski said.
He was focused on dividends. Most people were. He says, the secondary impact is a big deal.
He sees it as a power shift from the Permanent Fund’s managers to the legislature.
If lawmakers start relying on the Earnings Reserve to pay the bills, Wielechowski doesn’t trust that they’ll transfer money out of it to protect an account they can’t touch.
But David Teal sees it differently. He says now that losses are spread out between both accounts, running out of cash to spend from that Earnings Reserve is less likely. And maybe that’s a good thing if the state is going to rely on it to pay bills.