Thanks to an article in the Daily News, Alaskans have finally been made aware of the status of some of the loans that were made by the Permanent Fund Board alone.
The details of the Permanent Fund withdrawing $200 million for investing in Alaska firms, first allowed McKinley Capital to invest up to $100 million of Permanent Fund money in the Peter Pan Fish Processing Plant in King Cove. The additional $100 million went to Barings, LLC — an outside Alaska company.
The details from the Daily News article should bring to the attention of Alaskans the need for full disclosure of the status of these public Funds, as well as the identification of who has the responsibility for overseeing this credit loan.
With the Legislature now in session, it is clearly an obligation of the Legislative Budget and Audit Committee to review the status of this special loan fund and the status of the original $200 million of funds belonging to all Alaskans.
If the Legislature feels that it does not have the in-house expertise to pursue an audit, they should consider retaining an experienced Certified Public Accountant.
As Elmer Rasmuson, the first chair of the Permanent Fund Trustees, stated when the fund originated in 1976, “making Permanent Fund investments in Alaska sounds good, but reality dictates otherwise.” As the extended debate proved, with the board taking $200 million from the fund and loaning it to the two Alaska firms demonstrated — yet the then Trustees were aware of Elmer’s warning at the time they made the loans but chose to ignore his advice.
Elmer explained that making loans in Alaska would subject the Permanent Fund and its trustees to political pressure. I know through personal experience as a commercial banker for 20 years and as governor, that state legislators will lobby the Permanent Fund to make loans to constituents. The lobbying pressure will result in bad deals and losses to the fund as has happened here.
The fact that the loans to McKinley Capital and Barings LLC were a bad deal is borne out by their overall performance. The APFC reports that Barings, LLC’s internal rate of return as of September 2022 was 11.6% and McKinley Capital Management, LLC’s internal rate of return was -1.6%. In other words, McKinley is losing money on $100 million of Permanent Fund money that could have been invested outside Alaska and made money. McKinley’s Peter Pan loss shows that poor performance continues as evidenced by the apparent loss to date of $29M.
This high risk was known when the direct loan program was first proposed and it was pointed out that the State’s bank, Alaska Industrial Development Authority had the role of meeting state funding requirements at the time. The dispute resulted in the resignation of the Permanent Fund chair, an experienced Alaska banker.
The details of the loan negotiations with McKinley Capital and Barings LLC remain confidential, but clearly the arrangements did not have the checks and balances that other Permanent Fund investments require. There is competition among experienced investment managers who make decisions by balancing the risks and rewards of an investment. If one fund manager does not generate a comparative rate of return, he or she is replaced. There was no such oversight competition when the trustees made the loan directly to McKinley Capital and Barings LLC.
The continuation of the board’s policy on confidentiality is fraught with growing concern. The $200 million is public funds belonging to all Alaskans. With the acknowledged losses to date, the board needs to share full accounting of the two recipients, McKinley Capital and Barings LLC. Specifically, how much and to whom proceeds were advanced. Is there any further amount due to borrowers? What collateral, if any, is available? And what are the chances of repayment?
There is a lot more information that Alaskans have a right to receive. Most importantly, is accountability for the poor judgement calls to date that have been made, and what action is appropriate? Again, the current trustees should provide this information to the public or have the Budget and Audit Committee do a review, or as I have stated, hire a qualified CPA to perform an audit.
I noted in a recent article in the Wall Street Journal last week that our governor had an opinion piece on the appropriateness of our federal government entering a Commonwealth authority, which he compared to our Permanent Fund in Alaska. There was no mention of the trials or the exposures we’ve experienced.
It’s clearly a time for accountability.
Frank Murkowski is the eighth governor of Alaska.
