Is this a naked grab on the Permanent Fund?

It's magic! The Permanent Fund can pay off the debt of the operating budget.
It’s magic! The Permanent Fund can pay off the debt of the operating budget.


Mere mortals are having a difficult time understanding why Alaska’s Permanent Fund should purchase debt the State of Alaska owes a handful of small oil and gas explorers.
The debt is said to be about $775 million in tax credits, although that amount each is owed is not easily verifiable. There are various types of tax credits for different parts of the oil and gas sector, and this is why journalists writing about this stick to generalizations: The outstanding credits are not easy to track because they are part of companies’ confidential financial information.

Some companies in the middle of developments are Caelus Energy’s Nuna project and Brooks Range Petroleum’s Mustang Project. Then there’s Blue Crest Energy’s Cosmopolitan site in Cook Inlet. The combined development of these three alone would bring 25,000 barrels or more per day by 2018.

“It doesn’t work without the tax credits or some type of incentive,” said Benjamin Johnson of Blue Crest earlier this year. “We know that we have large amounts of resources…These resources need to be developed. The tax credits are really critical to make sure that that’s done.”

They have all been stiffed on their tax credits by Walker and the Democrats in the Legislature.

Now, the governor is asking the Permanent Fund to pay for something the General Fund owes. This means using the Permanent Fund corpus to pay for government itself.


Our resident private equity underwriting expert puts it this way: The tax credits Governor Walker wants the Permanent Fund to buy are what is known as a distressed investment. They’re distressed debt, to be more precise.

1. How did Alaska’s tax credits get to be distressed investments? The State of Alaska caused them to be distressed when the governor did not fund their payment. Companies interested in exploring in Alaska were given a book titled, “Dispelling the Fear Factor,” which showed how the State would help take the risk out of exploring in Alaska through attractive tax credits. It’s so expensive to drill and produce in Alaska that tax credits helped improve our state as an investment opportunity.
That worked until the governor decided to stop paying the credits. At least one company has undergone reorganization due to not having the cash flow expected from the payments due.
The Legislature could have overridden the veto but did not have the votes because Democrats, who until two years ago were the biggest cheerleaders for the tax credits, have distanced themselves from them and now don’t want anything to do with tax credits.
2. Why would any investor be interested in such an investment? Public pensions, sovereign wealth funds and private equity firms like to buy distressed assets that have a clear path to a government treasury. It’s easy money.

3. What makes this one unique? What’s odd is that we have a governor who has simply stopped payment. This same governor is now courting the Alaska Permanent Fund, which is our own sovereign wealth fund, to pay for something the operating budget owes.

What’s more, if the Permanent Fund buys a major portion of these distressed tax credits, then the governor will know the price the Permanent Fund paid.

He then has all the information on both sides of the transaction, as he has two commissioners and a former commissioner sitting on the board Permanent Fund Board, one of whom is the commissioner of Revenue, which approves the credits in the first place.

Revenue Commissioner Randall Hoffbeck would be both in charge denying the payment of them (as part of the governor’s inner economic circle) and now deciding if the Permanent Fund should buy them.

4. Why would that matter? There may be overlapping interests. This means the governor can fund the tax credits at a rate where the Permanent Fund makes a profit, but not as much as the tax credits’ full value. It also matters because it’s an end run around the people of Alaska.
5. Who gains? The Permanent Fund might get a higher return — if the state pays the credits off quickly to the Permanent Fund.
6. How much are the credits worth? They appear to be what is called a Level 2 or Level 3 investment, which means a market value is uncertain and not easily ascertained. The amount owed right now in arrears are said to be $775 million.
7. Who else might be looking at the tax credits as an investment? Other sovereign funds or pensions may see these distressed investments as a way to extract a higher yield than the low government bonds out on the market.
There is likely a lot going on behind the scenes as private equity companies start “sniffing around,” as Richards told the Permanent Fund board they are already doing.
Usually, the buyers of  distressed debt are the large institutional investors with access to a lot of resources, such as hedge funds and private equity underwriters.
The Carlyle Group, one such company, has been in communication with Richards, probably to walk him through how to do this unusual and highly specialized transaction.

Companies that specialize in this bottom-feeding trading are sometimes referred to as vulture funds. Carlyle has not specialized in distressed debt up until two years ago when the firm, owned by David Rubenstein,(husband of one of the governor’s economic advisors, Alice Rogoff) purchased debt in Texas Competitive, a failing utility. Rubenstein bought the debt at a discount, with the plan of making good money when restructuring took place.

The speculation is that Carlyle is looking to buy up distressed companies at the same time advising the State of Alaska on how to restructure its debt through the Permanent Fund. Rubenstein, speaking about distressed energy companies at international conferences recently, said this will be a target-rich environment for investors.

8. Does this have anything to do with actual restructuring of the Permanent Fund? Not directly. The governor attempted to restructure the fund during the last legislative session, but his SB 128 legislation did not pass. The current attempt on the fund does, however, fundamentally change the relationship between the fund and the people of Alaska.
The Permanent Fund’s integrity is kind of like virginity: You only have it until you don’t have it. If political decisions start influencing the fund’s investments now, what else might the governor want from it in the future as he makes an effort to restructure the fund? Collateral for a gasline?
9. Is this a raid on the Permanent Fund? It is actually a naked grab. This is the governor using the executive branch to influence some obscure financial moves that allows him to put his hand into an account that he is not allowed to put his hand into. If the board approved this proposal, it would likely draw a constitutional challenge that would take years to resolve.
10. What happens next? It’s likely the current board will not approve the proposal. But the governor controls two to three seats on the board, and will probably replace another one in less than a year, which will give him majority control of the Permanent Fund. He now has total control over the Alaska Gasline Development Corporation and the Alaska Oil and Gas Conservation Commission. When he has control over the Permanent Fund itself, we don’t know what will happen. We can only guess.