Chilkat Valley News - Serving Haines and Klukwan, Alaska since 1966

 
 

Permanent Fund interest unspent

 


For years, the Haines Borough has not used the full share of the interest it’s authorized to spend annually from the borough’s $8 million permanent fund.

Whether to tap into that pool – about $1.4 million in the fund’s “earnings reserve” – likely will be a topic for borough assembly leaders as they take up the coming year’s budget.

At last week’s assembly meeting, Mayor Stephanie Scott said she would like to open borough access to the earnings reserve.

Assembly member Debra Schnabel also wants to have that discussion. She said last week she never realized all of the available revenue wasn’t going to the general fund every year. Schnabel said she thought the manager automatically rolled over any additional income into the general fund, and that this was reflected in the manager’s proposed budget.

“I think there is an underlying assumption that we are budgeting the full amount we are authorized because why would a manager not do that? Why would a manager who needs revenue not budget the full amount allowable?” Schnabel said.

The permanent fund, created in 1984, holds and invests income generated by borough land sales. Code prohibits the borough from touching the fund’s principal without a vote of the people, but interest generated from investments may be spent.

The earnings reserve balance essentially works as a savings account within a savings account. It consists of money, earned through investments, that is left over after expenses are covered, including paying the fund manager and inflation-proofing the fund’s principal.

For example, in fiscal year 2013, the permanent fund made $382,000. Of that amount, $145,000 was added to the principal of the fund for inflation-proofing. Another $21,000 was used to pay for expenses related to the permanent fund, including fund management fees.

Former manager Mark Earnest transferred $140,000 into the general fund, leaving $76,000 unspent. That “leftover” and others now add up to $1.4 million.  

While borough code allows the municipality to spend interest from its “savings account,” it also limits the amount to 3.5 percent of the fund’s average value from three of the past four fiscal years.

Accessing the earnings reserve would require changing that percentage requirement.

“If we want to access that ($1.4 million), we need to change this percentage in code. And I’m willing to bring that to the assembly,” Scott said.

When asked what percentage Scott would like to change it to, she proposed 100 percent. “We don’t have to spend it if we don’t have to spend it. I am so tired of staff not having the equipment they need in order to do the job they are required to do... to me that is unacceptable,” she said.

Chief fiscal officer Jila Stuart said the $1.4 million earnings reserve is intended to act as a cushion for when the fund’s investments don’t do well. Since the fund is subject to market fluctuations, it is possible it couldn’t make enough to inflation-proof the principal or pay its expenses, let alone have extra to go into the general fund.

“If you grab all of this when it is available, you won’t even have enough to take a little bit in the lean years,” Stuart said.

Some fiscal years – including 2008, 2009 and 2010 – saw no permanent fund revenue transferred into the general fund. Stuart said these were likely years when additional general funds weren’t needed, and the assembly decided to keep the money in the fund, where it continues to generate interest and therefore income.

When asked why she thought former manager Earnest proposed to cut museum and pool funding last year instead of take more money out of the earnings reserve to pay for those expenses, Stuart speculated Earnest was preparing for long-term funding decreases.

“His expectation was this is just the beginning of the crunch where state and federal revenues are going to continue to dwindle and continue to dwindle, so I think he was in a mode to start reducing programs and take baby steps reducing programs that a bigger chunk might have to be taken out of in later years,” Stuart said.

Last year, the borough spent about $650,000 from its fund balances – another form of savings – to balance its $12.2 million budget. Former manager Earnest also warned of increasingly difficult financial times due to decreasing state and federal funding.

Schnabel said it’s time to look at the earnings reserve. “I have lived in Haines long enough to remember when we created the permanent fund and it was for a rainy day,” Schnabel said. “I think our rainy day is here.”

Robert Venables, who worked as borough manager from 2004 to 2007, said he wouldn’t dip into the earnings reserve to pay for ongoing expenses.

“I don’t think that should be counted on to subsidize a specific, ongoing need,” Venables said. “If it’s a one-year hit that looks like it is going to recover, sure, those things could be plugged (with savings), but where you know you have an unsustainable situation, taking savings is not the philosophy I would recommend.”

Venables characterized his stance on spending permanent fund earnings as “very conservative,” and said using money for ongoing operational expenses (like the pool, which consistently brings in less revenue than it needs to operate) is irresponsible.

“To me, that’s not honestly looking at your fiscal situation,” Venables said.

Assembly member Jerry Lapp also said he doesn’t want to touch the earnings reserve, as the more money that stays in the fund, the more income is generated.

“The permanent fund was designed to get big enough to where it could supplement our budget... Using it at this point in time would defeat that purpose,” Lapp said.

When asked at what point he would consider using more money from the fund, Lapp didn’t specify a number but said the fund “would have to be pretty big. A lot bigger than it is now.”

“How is it going to grow if you keep taking money away from it? You can’t do that,” he said.

Chief fiscal officer Stuart predicted at a recent pre-budget workshop the borough will again face a $500,000 general fund deficit in fiscal year 2015.

Interim manager Julie Cozzi, who is charged with crafting the budget this year, said she is trying to learn more about the permanent fund before she puts together that part of the budget. Cozzi said she doesn’t know whether she will budget any money to be transferred into the general fund from the earnings reserve balance this year.

“I don’t have a philosophy right now. I have to learn more,” she said.

The assembly will meet at 5:15 p.m. Feb. 26 to discuss its local legislative priorities and a list of budget topics recommended for discussion by Mayor Scott, including spending permanent fund income.