Alaska Stock Loss Grows to $1.5 Billion as Palin Seeks Oil Cash
By Michael B. Marois
March 26 (Bloomberg) -- Alaska’s losses from a stock bet last year widened by 38 percent to $1.5 billion in January and February, a state official said.
Jerry Burnett, a deputy commissioner in the state’s Department of Revenue, provided the updated figure to Bloomberg News after Alaska disclosed in January that it had lost $1.1 billion as of Dec. 31 on a $4.1 billion investment made by a fund used to finance budget deficits when the price of its oil falls.
The money came from a windfall Alaska enjoyed as crude tax and royalty revenue soared along with oil costs. Five months after the April investment, credit markets froze and the Standard & Poor’s 500 Index was embarking on a 49 percent one- year plunge, though stocks have risen 19 percent in March.
Now, with oil down 63 percent from its July 11 high, Governor Sarah Palin faces a record $1.3 billion deficit in next year’s budget and has proposed tapping that rainy day fund for the first time in five years. Lawmakers are considering a rival proposal to trim spending in fiscal 2010 and use money from the fund for education programs in 2011 instead.
Alaska has the second-largest U.S. crude reserves after Texas and gets more than 80 percent of its operating budget from oil production taxes and royalties. The tumbling fortunes of its stock and top revenue source coincides with plans to sell $165 million of transportation bonds next month, its first general obligation issue since 2003. Even with $6.6 billion remaining in the rainy day fund, credit analysts give Alaska less-than-top ratings because so much of its money comes from oil.
‘Should be AAA’
“If you looked only at the money the state has in the bank, you might think that its ratings should be AAA,” said Ted Hampton, an analyst with New York-based Moody’s Investors Service Inc. in New York. “We have long viewed its extreme reliance on a single revenue source as a material credit weakness.”
Moody’s and Fitch give Alaska’s general obligation bonds their third-highest ranks, Aa2 and AA, respectively. Standard & Poor’s rates them AA+, its second-highest mark. Seven states have top ratings from all three: Delaware, Georgia, Maryland, Missouri, North Carolina, Utah and Virginia.
Palin administration officials said they turned to stocks so the state wouldn’t be so dependent on oil, which fell to a six-year low of $32.40 a barrel on Dec. 19 before rebounding to $54.34 in trading on the New York Mercantile Exchange as of yesterday.
‘Prudent Investment’
“A prudent investment strategy diversifies risk and incorporates an expectation of when funds will need to be tapped,” said Patrick Galvin, Alaska Department of Revenue commissioner. “The state has done that.”
Palin, Republican Senator John McCain’s running mate in last year’s presidential campaign, proposed a slimmed down version of her fiscal 2010 budget in February, cutting $445.5 million from the $4.9 billion plan she offered in December. The cuts came from eliminating some new programs, including one to study renewable energy and another to promote the film industry, and reducing funding for health care and other services.
The drop in oil prices “will require reductions in the budget and access to reserves to keep Alaskans employed and the economy moving,” Palin said when she released the new budget and proposed spending $1.3 billion from the rainy day fund. Her budget, including withdrawals from the fund, is subject to legislative approval. Palin declined to comment for this article.
Past Withdrawals
The state withdrew $498 million from the fund in 2003, when oil output dropped to 1988 levels, a total of $45.7 million in 2004-05 and nothing in 2006-08.
Alaska has two major pots of money used to share oil wealth with its 700,000 residents. The Alaska Permanent Fund was created in 1976, as the Trans Alaska pipeline neared completion. It was established to accumulate oil tax and royalty money for when the state runs out of crude and to give residents annual dividends. The payouts ranged from $331 a person in 1984 to $3,269.00 in 2008, including an extra $1,200 to offset increased gasoline costs.
The second fund, the Constitutional Budget Reserve, was created in 1990, as Alaska’s rainy day fund. Initially funded with settlements from tax and royalty disputes with oil companies, the reserve is used to plug budget holes in years when oil prices drop and is supposed to be replenished in surplus years.
With oil racing toward its $147.27-a-barrel record, state officials predicted Alaska would have more than it needed to pay its bills in the fiscal year ended June 30, 2008, and decided to put $6 billion into the rainy day fund.
Two Investment Pools
The money went into the reserve fund’s two investment pools. In July, $1.9 billion was deposited into a pool for low- risk bonds and U.S. Treasuries. That one earned 5.67 percent in calendar year 2008 and totaled $3.2 billion as of Feb. 28.
The other pool, known as the sub-account, is for riskier stock market bets, and that’s where lawmakers gave the Department of Revenue permission to put $4.1 billion of the surplus. The money was deposited there in April, increasing the sub-account’s balance almost 10-fold to $4.6 billion, from $546 million.
Between May 1 and Feb. 28, the value of the sub-account declined by $1.5 billion, or 32 percent, reducing the size of the entire rainy day fund to $6.4 billion, from $7.8 billion, said Burnett, the Department of Revenue official.
“Nobody told us the market was going to crash,” Burnett said.
Investment Mix
As the end of February, 44 percent of the sub-account was invested in the Russell 3000 Index of the largest U.S. companies; 19 percent was in the Morgan Stanley Capital International Europe, Australasia and Far East Index, which has more than 1,000 stocks; and 37 percent was in fixed-income securities.
Both stock indexes have recovered some of their losses since Feb. 28. The Russell 3000 declined to a 52 week low of 384.38 on March 6, from a 12-month high of 836.41 last May 19. It closed at 482.03 yesterday, up 13.7 percent this month. The MSCI EAFA has fallen 43.9 percent in the past 12 months; it’s up 10.7 percent in March.
State officials said Palin wasn’t to blame for the soured investment.
“No governor exercises daily oversight of our investment funds,” Galvin said. “They hire skilled and competent people to do that task. Governor Palin established the standard that we will act prudently in our management of the people’s money, and she holds the members of her administration to that standard.”
Alaska Permanent Fund
The Alaska Permanent Fund, which isn’t as important to credit rating companies because officials cannot tap it for the state’s operating budget or debt repayments, declined 26 percent to $28.4 billion as of March 25 from a record $38.4 billion in June, according to the fund’s Web site.
More than half of the Permanent Fund is invested in U.S. and foreign stocks. Its U.S. stock portfolio lost 41.2 percent since June, while its non-U.S. stock investments fell 49.6 percent, according to the site. The rest of the fund is invested in bonds, real estate and cash equivalents.
To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net
Last Updated: March 27, 2009 00:01 EDT |
