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Alaska could loan to natural gas authority Legislation would allow Permanent Fund loans for gas pipeline Larry Persily Petroleum News Government Affairs Editor
An Alaska House committee has endorsed legislation that would change state law to specifically allow the $28 billion Alaska Permanent Fund to make loans for a state-owned natural gas pipeline.
The State Affairs Committee on March 8 passed out House Bill 466 without objection, including an amendment from Committee Chair Bruce Weyhrauch allowing loans to the Alaska Natural Gas Development Authority.
“I simply wanted to have that pool of funds available to the authority,” said Weyhrauch, R-Juneau. “It was not my intent to force the hand of the corporation to invest in the authority.”
The bill moves next to the House Finance Committee and then, if successful there, to the full House before going to the Senate, running against the Legislature’s May 12 adjournment deadline.
The measure’s main intent is to update the Permanent Fund’s investment restrictions in state law. In addition to setting out limits for the fund’s investments in stocks, bonds and real estate, state statute also allows the fund to put up to 5 percent of its assets in other investments. The bill would allow investments in that so-called “basket clause” to reach 15 percent of the fund’s total assets. Bill’s main intent is investment flexibility “This is necessary because the 5 percent limit is too small to allow the trustees enough flexibility to keep up with changes in investment practices,” the Permanent Fund said in its statement of support for the legislation.
The legislation also would allow the fund to venture into hedge funds that use futures contracts and other areas currently off-limits to the state’s 27-year-old oil royalty savings account.
Weyhrauch’s amendment would allow the fund to make loans to the gas authority without counting the investments against the basket clause.
The amendment would clarify in statute that the fund could loan money to the state gas authority, as long as the investment met all of the fund’s standards including the prudent investor rule. The provision “would not lessen the fund’s ability to say ‘no,’” the representative said.
The freshman legislator earlier this session said Alaskans are frustrated with the lack of progress in building a project to carry North Slope natural gas to market, and he believes there would be support for loaning money from the Permanent Fund to help the project.
The Alaska Natural Gas Authority, created by voters in November 2002 to build a gas pipeline from the North Slope and a liquefied export terminal at Valdez, has no money for construction and would need to borrow money to finance its estimated $12 billion venture. Its state funding covers only feasibility studies and other preliminary reviews. Investor rule would still cover Permanent Fund decision Permanent Fund Executive Director Bob Storer told the State Affairs Committee the board of trustees has not taken a position on the provision allowing direct loans to the gas authority. He did, however, explain to the committee that the fund is limited by the prudent investor rule in how much money it can put into any one investment.
The rule requires the fund to diversify its investments, to minimize potentially large losses in any one company or asset, Storer said. “As we diversify our portfolio, we own over 4,000 stocks.
“In our equity portfolio, our largest holdings are probably Pfizer (pharmaceuticals) or GE, around $250 million each,” he said.
“As a practical matter … probably the most we would be able to invest (in the state gas authority) would be $50 million, $100 million tops,” Storer said. “I’m assuming any loans to the authority would be ill-liquid and below investment grade.” Permanent Fund would look at collateral, risks Ill-liquid, Storer explained, means there likely would be no secondary market for the Permanent Fund to sell its loan, as there are for publicly traded stocks and bonds. “The less liquid the investment, the less one would be inclined to invest in it.”
The fund also would look at whether the loan was backed by any collateral, and whether the expected rate of return was comparable to other investments with similar risks, Storer said.
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