Putting Alaska’s Assets to Work for Alaskans Approved by the Commonwealth North Board of Directors on January 20, 2004
Co-Chairs: Nancy Bear Usera Nelson Page
Editor: Duane Heyman
Underwriters: First National Bank Alaska Alaska USA Federal Credit Union

Study Group Members Co-chairs Patricia DeMarco, Ph.D. Carol Howarth Tana Myrstol Nancy Bear Usera UAA College of Business UAA Commonwealth North Alaska USA and Public Policy Federal Credit Union Jim Knapp Arden Page Patrick K. Gamble SKW/Eskimos Inc. Burr, Pease & Kurtz Nelson Page Alaska Railroad Corporation Burr, Pease & Kurtz Jonathan Kumin Mead Treadwell Joe Griffith Kumin Associates, Inc. Venture Ad Astra Chugach Electric Association Editor Benjamin C. Linford Graham W.C. Vanhegan Duane Heyman Representative Technology Research & ConocoPhillips Alaska, Inc. Commonwealth North Cheryll Heinze Development Center Alaska State Legislature of Alaska Richard Wilson Study Group Members Ted Stevens Anchorage Patrick Burden Governor Walter Hickel James W. Mendenhall, P.E. International Airport Northern Economics Mendenhall & Associates Bill Dann Holland Consulting Matt Moon Professional Growth Institute of the North Systems, Inc.

Study Group Charge In 1998, Commonwealth North (CWN) assessed how well Alaska was managing the land grant transferred under the Statehood Compact and the various enterprises capitalized with revenue derived from this land grant. Specifically, the study looked at whether the state’s returns on these assets could be improved through better management strategies and structures.

That study identified successful models such as the Alaska Housing Finance Corporation, Alaska Permanent Fund Corporation and Alaska Industrial Development and Export Authority, among others, that were generating returns both in terms of benefits to individual Alaskans and for the collective good through financial contributions to the General Fund. These public corporations or Government Sponsored Enterprises (GSEs) were established by statute and capitalized with the income from development of Alaska’s resources.

The Government Sponsored Enterprise model has seen several notable successes in Alaska. However, the study identified a number of ways for GSEs to operate even more effectively to improve returns. Additionally, the study suggested that the GSE model could be used to put more of Alaska’s assets into production to achieve returns. Putting Alaska’s assets to work more effectively can enhance the state’s revenue stream to the General Fund, as well as produce other benefits for Alaska.

In this follow-up study, the Commonwealth North Study Group was asked to:

• assess whether the recommendations made in the earlier study have been implemented and whether they resulted in more effective management and accountability;
• explore additional opportunities for using the GSE model to improve asset management and returns; and
• suggest a roadmap to implementation that will result in better financial and beneficial returns on Alaska’s assets.

Why does Alaska need to rethink and What makes Alaska’s government obligations What principles should govern the structure the state Treasury to meet the state’s overall needs. Executive Summary However, “beneficial returns” are also important. These returns benefit individuals directly through This report is essentially about money, and how the program subsidies or indirectly through job creation state of Alaska can earn more of it by better and business activity. Identifying and keeping track structuring the management of its assets for the of the balance between these two types of returns is long term. It is also about improving regulatory and at the heart of our recommendations. Our focus is financial oversight. on long-term returns. In fact, this report advocates Alaska has proven management models that have for development of a perpetually sustainable been successful in serving both a public purpose as economy. well as producing revenue. These models include This report builds on the work of the 1998 report: the Alaska Housing Finance Corporation, Alaska “Alaska’s Asset Portfolio, Managing for Maximum Industrial Development and Export Authority, and Return.” Please note that the following summary of the Alaska Permanent Fund Corporation, among recommendations is not self-explanatory, and needs others. These Government Sponsored Enterprises to be considered in conjunction with the data and (GSEs) are established in statute, operate as background presented in this report. businesses and are accountable to their shareholders, the people of Alaska. This report Recommendations recommends expansion of the Government Sponsored Enterprise business model. 1. Enhance Alaska’s revenues by expanding the successful Government Sponsored Enterprise In addition to the financial benefits that can accrue model. Specifically, establish an Alaska Land to the state from this approach, the state’s and Natural Resource Management Trust to regulatory oversight responsibilities can be better maximize investment and financial returns executed when separated from and applied to a from Alaska’s land grant holdings. third party public corporation, rather than through the same or sister line government agencies. 2. Enhance oversight, coordination and asset allocation strategies through the creation of an Alaska is different from other states in two Alaska Commons Enterprise Group (Group) fundamental ways: charged with reporting to the people regarding 1. At statehood Alaska was given 104 million financial and beneficial performance of the acres plus mineral rights with the expectation state’s GSEs and recommending strategies for that this huge amount of land could be long-term investments and returns. converted into a sustainable economic base; 3. Engage Alaskans in the financial performance of all the state’s enterprises, not just the 2. The economic evolution of Alaska’s land Permanent Fund. Amend the current dividend grant into financial assets has produced a program to include consolidated net returns concentration of wealth in the hands of the from all Alaska GSEs. This program could state that eclipses that of the other United include a community dividend and is not States. inconsistent with the current Permanent Fund As Alaska works to attain a sustainable economy endowment proposal. and a reliable stream of revenues, it needs to clearly articulate its goals. The central focus of this report is on “financial returns.” These are funds paid to

General Fund by way of “dividends.” Several GSEs Introduction have been doing this for a number of years. This report builds upon the research and During the Alaska statehood debate, it was recommendations of the 1998 Commonwealth recognized that the state’s population would likely North Study: “Alaska’s Asset Portfolio, Managing never have the critical mass to finance government for Maximum Return” (Assets I). services through conventional means employed by other states, primarily per capita taxation. In Assets I concluded that Alaska’s GSEs could be recognition of the need for Alaska to have means more effectively managed to increase their to produce its own revenue, the state was granted potential to produce returns. The study concluded 104 million acres of land and mineral rights to this could be done by: significant acreage on federal lands. From this, it

• Providing more effective management was felt Alaska could build and sustain an economy accountability for revenue and returns. and pay for necessary government services.
• Clarifying roles and responsibilities between This experiment has proven successful. Alaska has program managers and elected policy makers. supported its economy, created jobs and financed government services from the revenues generated • Measuring and disclosing performance to from putting to work the land grant conveyed by assure that the public is aware of the total Congress at statehood. For the past twenty-five returns produced and how those returns are years, the vast majority of state revenue was allocated. generated from oil and gas resources extracted in partnership with the private sector. • Managing the state’s assets as a portfolio to assure that resources are appropriately The revenue from the land grant and natural allocated to achieve long-term sustainable resources has been used in three primary ways: revenue and return objectives. 1. To fund general state and local government. • Paying returns to the General Fund when revenues exceed operating costs and 2. To capitalize infrastructure development. appropriate reserves. 3. To capitalize or subsidize Government These findings and recommendations from Assets I Sponsored Enterprises such as the Alaska remain valid and CWN has reaffirmed them. In Housing Finance Corporation (AHFC), fact, a great deal of progress has been made in Alaska Industrial Development and Export satisfying the management principles contained in Authority (AIDEA), the Alaska Permanent these recommendations. Fund Corporation (APFC) and the Alaska Railroad Corporation (ARR), among others. This report builds on the conclusions of Assets I and recommends practical ways to use Alaska’s However, the direct revenue flow from oil and gas enterprises to create or enhance a sustainable into the General Fund has diminished over the supplemental revenue stream to the state of Alaska. years, producing what is commonly known as the fiscal gap. As a result, the state is looking for new revenue from other sources to meet its needs. One source of additional revenue has been to have the state’s enterprises share their earnings with the

Why does Alaska integration and continued funding, is well positioned to lead Alaska into the future. Huge federal spending in Alaska has been an need to rethink and underpinning of our economy, but will not continue forever. restructure how it What Alaska needs now is a way to link its citizens manages its assets? more effectively to the resource potential of the commons.

The economic future of Alaska is in a highly Indeed, the Alaska Constitution mandates that the precarious position. state’s land and resources be used, developed and conserved for maximum benefit of its people. This Both oil and fishing revenues are half of former mandate has not been fulfilled. peak production. The timber industry is hidebound by federal regulations. Other natural resource It is important to note that the current condition is revenues are marginal. Tourism continues to be not a reflection on any specific administration. The strong, but is dominated by large corporate cruise dynamics of the governmental system, combined and tour companies that contain most of the with lots of money, have conspired to avoid revenue generated within their integrated contending with deep-seated fundamental operations. structural issues. Foremost among these has been the failure to recognize the obligations of land Because of the “Alaska disconnect” the state grant ownership. collects very little revenue from workers who are consuming state and local government services. The “Alaska disconnect” is a concept that describes the lack of correlation between job creation and What are Alaska’s tax revenue. As a consequence, both state and local governments are running deficits that are beginning to impact essential services, including assets? those like education that are the key to Alaska’s Alaska’s assets are its land, labor and capital. future. The Constitutional Budget Reserve, the • Alaska received 104 million acres plus mineral state’s cash buffer, is being eroded every year with rights on federal lands to provide an economic its depletion in sight. base to make Alaska economically sustainable. The situation is grave and urgent. • Alaska’s labor is its population—widely However, Alaska still has substantial tools to help distributed across a vast landscape, but work its way out of this dilemma. It has a $27 becoming increasingly urban. While regional billion Permanent Fund derived from converting differences exist, Alaska’s population is better oil wealth into financial wealth. It has the educated and younger than national averages. successful GSE models already discussed that have Recent Commonwealth North studies have been capitalized by natural resource revenue. It has focused on the labor side of the equation: the a substantial private and public infrastructure that “Urban Rural Unity Study, U.R. US,” “The can physically enable future economic growth. It University of Alaska: A Key to Alaska’s has an educational system that, while needing future, A time for ALL to invest” and “Alaska’s Jobs for Alaska’s People.”

• Alaska is fortunate to have converted general government, regulatory and proprietary meaningful amounts of revenue from natural responsibilities. As with the other 49 states, Alaska resource development into a substantial government has the obligation to provide for the capital base. Investments in the Alaska public welfare. This includes basic government Industrial Development and Export Authority, services such as education, public safety, the Alaska Housing Finance Corporation, the transportation, etc. Additionally, like other states, Constitutional Budget Reserve, the Alaska Alaska has regulatory functions to protect the Railroad Corporation, the Alaska Aerospace public interest for safety and environmental Development Corporation and the Alaska concerns. Permanent Fund have resulted in tens of However, Alaska also has an obligation to assure billions of dollars of financial equity for the that the statehood land grant and financial assets state. derived therefrom are used effectively for the Commonwealth North believes that changes to the purposes for which they were intended: to build an way Alaska manages its land and capital can help economy and fund necessary government services. optimize the state’s return on these assets over time. These “proprietary,” or ownership, functions of These changes, in conjunction with workforce managing the state’s assets include the obligation to development, can result in a coherent, coordinated take affirmative steps to optimize their value over and sustainable asset portfolio. time.

Although Alaska’s circumstances and What makes responsibilities may be unique, it has structured the management of its natural resource assets in a Alaska’s government traditional way, through a traditional regulatory government structure. Government agencies that obligations different have responsibility for these assets combine both the regulatory and the proprietary functions. Thus, from other states? these agencies may be responsible for facilitating development of a resource and generating income from it, while at the same time being charged with Alaska is different from other states in two oversight and regulation of that development. fundamental ways: A fundamental conclusion reached by this Study 1. At statehood Alaska was given 104 million Group is that separating the two functions can be acres plus mineral rights with the expectation an effective way to enhance both activities at once, that this huge amount of land could be by focusing those charged with development converted into a sustainable economic base. activities, while clarifying the role of those charged 2. The economic evolution of Alaska’s land with regulation and oversight. grant into financial assets has produced a concentration of wealth in the hands of the state that transcends other parts of the United States. What is a return? There are two types of returns produced by state A crucial underlying concept in the management of assets. Financial returns are those produced as Alaska’s assets is the distinction between Alaska’s earnings on operations. Beneficial returns are those that inure to the users of the product or service By contrast, if the timber were cleared selectively, provided. The following definitions are quotes from with access roads laid out to be compatible with the previous CWN Assets I study: future development, or with future regeneration of the forest in mind, the land would be able to

• “Beneficial returns benefit individuals produce additional returns in the future through directly though program subsidies, or forest re-growth, land sales, leasing or by remaining indirectly through the multiplier effect of job aesthetically and environmentally attractive. The creation and business activity. Beneficial immediate earnings might be less, but the total returns serve a public purpose by providing return over time could be more. Recently the goods and/or services otherwise unavailable or Alaska Mental Health Trust Authority did exactly unaffordable to meet a perceived public need.” this with its land in Yakutat. Examples of beneficial returns are affordable housing for Alaskans provided by the Alaska As for financial resources, the state must also Housing Finance Corporation or the ability to manage its investment portfolio to provide for both transport goods to remote residences by the short-term income and growth for the future. The Alaska Railroad. most notable example of this is the asset allocation responsibilities of the Trustees of the Alaska
• “Financial returns are paid to the Treasury Permanent Fund Corporation. and then appropriated to meet the state’s needs. They directly contribute to the state’s This notion of “portfolio management,” while most solvency. Through the appropriation process, commonly employed in investment funds, should these returns are also used to sustain be applied to the entirety of different types of assets management operations.” Examples of owned by the state of Alaska. The Permanent Fund financial returns are the dividends paid to the Trustees constantly monitor the balance between General Fund by the Alaska Housing Finance stocks, bonds, real estate and cash, as well as the Corporation and the Alaska Industrial smaller divisions within each of these broad asset Development and Export Authority. categories. Similarly, almost all for-profit corporations constantly analyze their lines of It is in the public’s overriding interest to maximize business, rates of return on their different both types of returns over time. Government must investment categories, and life cycles thereon to manage its assets based on long-term, in fact, assure a continuity of cash flow in the future. unending, life cycles. This obligation applies to financial as well as natural resources, and it has far- However, the state of Alaska, in the aggregate, has reaching consequences for planning and seldom, if ever, taken a long-term strategic development. approach to management of its financial, human and natural resources. Application of this approach For example, if the goal is to generate maximum can endow Alaska with a future economic base that immediate earnings from a resource such as would exist after its finite natural resources are timberlands, clear cutting at minimum expense might yield the most money fastest. However, such an approach would almost certainly do damage to the long-term value of the resource, and destroy other values such as scenic and environmental What is a GSE? values. Sustainable financial and beneficial returns A Government Sponsored Enterprise (GSE) is a would be compromised in exchange for legal entity with a public purpose created by unsustainable short-term gain. statute. It is governed by a board of directors or trustees appointed and/or designated by the • Long-term professional management executive branch or by statute. continuity promotes stability and confidence among private business partners and lessees. Examples of GSEs at the national level include: Federal Home Loan Bank, Federal Home Loan • Enhanced business performance of GSEs can Mortgage Corporation, Federal Farm Credit Bank, expand the state’s General Fund pool and Resolution Funding Corporation and the Student improve government services. Loan Marketing Association. In Alaska, they Because GSEs are established to serve a public include the: purpose, they are subject to multiple influences in
• Alaska Housing Finance Corporation addition to the policies established by their boards
• Alaska Industrial Development and Export of directors. Unfortunately, these competing Authority influences can adversely impact the performance of the GSE. Beneficial returns may be affected by the
• Alaska Railroad Corporation need for financial returns, and vice versa.
• Alaska Permanent Fund Corporation Therefore, it is important that there be a balance between the two, and that there be a mechanism
• Alaska Aerospace Development Corporation for reaching this balance.
• Alaska Student Loan Corporation Currently, both the legislative and executive
• Alaska Municipal Bond Bank branches have some responsibility for determining
• Alaska Energy Authority this balance. However, the lines of accountability and responsibility are vague. As a result, decisions
• University of Alaska regarding how to balance these often-competing
• Alaska Mental Health Lands Trust considerations are made piecemeal, usually biased There are numerous reasons to consider further toward immediate political or budgetary needs. application of GSEs as a way to generate revenue While financial return benchmarks may not and manage assets more effectively: ultimately determine a particular decision, a responsible decision cannot be made without
• The GSE structure heralds a fresh financial considering them. and business discipline that can create conditions for opportunity in new areas. GSEs must manage short-term returns, long-term returns, and the balance between beneficial returns
• Alaska needs a better means of diversifying its and financial returns, while juggling various revenue stream…one that becomes more stakeholder groups and political constituencies. In independent of oil and gas income. This can the few cases where the balance of these two best be accomplished by turning to tried and returns cannot be reconciled, it can fall to the true business models, not through more courts to make those decisions. regulatory government policies. Despite these acknowledged shortcomings, they are
• Alaska benefits from greater consistency and minor. Government Sponsored Enterprises clearly longevity of its management and leadership provide a superior alternative to asset management cadre, creating better opportunity to transition by regulation…the method used by line from a reactive style of short-term tactics to government departments. one highlighted by thoughtful long-term strategy.

The biggest opportunities to increase returns result b. An “Investment” GSE that manages money, from the practical application of the principle of such as the Alaska Permanent Fund segregating the regulatory and proprietary functions Corporation. of government. This is a significant change in how c. A “Financing” GSE that allows for lower cost the state conducts its business. Regulators will be financing, such as AIDEA or AHFC. able to do a better job of regulating and protecting the public interest if they can focus on logical and d. A “Management” GSE charged with timely interpretation of laws and regulations. maximizing the long-term financial returns of Resource managers will be able to focus on a particular asset, such as the Alaska Mental entrepreneurial ways to maximize long-term Health Trust Authority. returns, while dealing with state regulators like any Certain principles should be applied to all GSEs other private corporation. including: Alaska will never be independent of its need to 1. GSEs should utilize clear and consistent collaborate and cooperate with its major financial reporting based on Generally landowner, the federal government. Alaska will Accepted Accounting Principles (GAAP). never be independent of the inter-relationships between state and federal governments with respect 2. GSEs should be entrepreneurial in nature and to traditional government programs. However, outlook. They should have relative Alaska can be better empowered to exercise firmer independence to make management decisions control over its lands, resources and other assets in that will permit them to achieve measurable order to benefit the state and its people. goals.

3. GSE management should be accountable for its success or failure, and be answerable, What principles through its board, to its owners (the citizens of Alaska) for meeting its goals. should govern the 4. GSEs should serve a specified public purpose.

structure and 5. GSEs need adequate capital investment and reinvestment to achieve their missions over operations of GSEs? time.

6. GSEs should have clearly defined Return on Alaska’s GSEs fall into four categories, each with Investment (ROI) expectations, which should its own set of parameters for return on capital, include the value of beneficial returns. amount of capital needed, dividend potential to the 7. Revenues in excess of operating and capital General Fund and beneficial returns to requirements of the GSEs long-term plan stakeholders. They are: should be available as financial “dividends” to a. An “Operating” GSE that runs a business with its owner, the state of Alaska. operating expenses and capital requirements, 8. GSEs should have the flexibility to achieve such as the Alaska Railroad Corporation. their goals. They should not be subject to the restrictions of line government agencies for administration of their operations, particularly invest, reinvest and extract value is essentially done in the areas of personnel and procurement. on an ad hoc basis.

9. GSEs should interface with other government The dynamics of managing assets as a portfolio departments in the same way and on the same require a coordinated, consolidated and terms as a private entity. They should not comprehensive approach to state assets and how receive any advantage or dispensation in their best to use them to greatest advantage. Currently dealings with the regulatory arm of the state. no entity measures or plans for the long-term cumulative economic impact of Alaska’s substantial 10. GSEs must be subject to appropriate oversight collection of investments, natural and human both individually and as part of the state’s resources, including its GSEs. overall business portfolio to assure the appropriate balance of investment, and of The best example of the value of portfolio beneficial and financial returns. management and asset allocation is the overwhelming success of the Alaska Permanent 11. GSEs should be given incentives to leverage Fund. The Fund’s trustees are charged with efforts by working cooperatively with other determining how best to invest the assets into GSEs and with other governmental agencies appropriate categories to achieve the greatest to accomplish goals. returns over time. This strategy has served the state and Alaskans well. These same principles can be applied to state’s entire portfolio of financial and What is Portfolio land grant assets.

Management In looking at the state’s assets, a coordinated oversight of asset management can result in better and why is it long-term strategies for reinvestment, timing of business opportunities, capital improvements and revenue extraction. Consolidated reporting would important? also provide significant improvement in overall understanding by the state’s shareholders (its Investing fundamentals emphasize the need for citizens) of the value and contributions of these asset allocation strategies. Simply stated, any assets to the state’s overall economic health. investor, whether an individual or a holding company, needs to look at the totality of assets and In addition to the value derived from more determine how to best manage them for the effective investment management strategies, greatest overall return over time. efficiencies can also be achieved through collaboration between enterprises. Capitalizing on There is currently no means or mechanism for the the expertise and operational capabilities of one state of Alaska to achieve this overview of its asset another’s resources, each enterprise can operate at management strategies. In fact, reporting and maximum levels of productivity. performance of the state’s assets are “siloed,” with each enterprise reporting vertically and independently. While there is informal coordination through the budget and appropriation process, a comprehensive look at how best to rather a realization that these principles simply Findings make good common sense. It makes the timeliness of this report all the more pertinent to see that While the findings drawn by the Study Group other institutions, both governmental and private, generally represent a consensus, there are always are addressing similar management and corporate differences in perspective and opinion. Findings governance issues. were drawn based on interviews with present and former officials, legislators, and executive directors Explore additional opportunities for using the of various government sponsored enterprises, as well GSE model to improve asset management and as in-depth discussions among the Study Group returns. participants. Based on the successes seen in the effective The Study Group was charged to: management of assets in a GSE model, it was evident that this approach could be used to create Assess the recommendations made in the earlier other opportunities. It is important to note that study on asset management to see whether they there have also been disappointments in the use of resulted in more effective management and the GSE structure. Some of the problems have been accountability. the result of “mission creep,” or evolving away from The Study Group was surprised by how much has core competencies. Alternatively, failure can result been accomplished since 1998, consistent with the from a mission not clearly defined or expectations earlier study’s recommendations, specifically as they not explicitly stated (see Assets I). related to GSEs. Professional management has However, successes exceed disappointments. If the provided consistency in leadership, there are better lessons learned from prior mistakes are coupled with standards of accounting and accountability, and the successful features of ongoing enterprises, the dividend formulas have been revised and are paid to GSE as an asset management tool is indicated. the General Fund. The most obvious and potentially lucrative One of the principles outlined in the Assets I study opportunity lies in the management of Alaska’s was the importance of separating the regulatory land and mineral resources. It was emphasized functions from the development functions within during discussions that much of the asset the same entity. It was particularly timely to see management now done through the Department of recent headlines discussing that very principle in Natural Resources works exceedingly well, management change being considered by the especially as it pertains to oil and gas development. Securities and Exchange Commission and the New York Stock Exchange. However, it was noted that by incorporating these functions into an enterprise model, this expertise Another recommendation from Assets I addressed can be leveraged to the state’s advantage. Marginal the need for appropriate and coordinated oversight income received from a more entrepreneurial effort of these entities on a portfolio basis. Headlines in land and mineral uses could also contribute to regarding Congressional review of the oversight of the state’s fiscal health. The model most commonly the federal GSEs Fannie Mae and Freddie Mac used to illustrate this potential is the management have also been in the forefront. structure utilized by the Mental Health Lands This is not to say that the Assets I study was ahead Trust. of its time in making these recommendations, but

Suggest a roadmap to implementation that would result in better financial and beneficial returns on Alaska’s assets. Recommendations The goal of the following recommendations is to While Commonwealth North analyzes policy issues shift the management of Alaska’s assets to a and proposes recommendations, the road to sustainable long-term business model. Indeed, the implementation of public policy is of necessity Alaska Constitution mandates that the state’s through the political process. Clearly, to chart that land and resources be used, developed and path to success means to engage both the public conserved for the maximum benefit of its people. and elected leadership in the practical benefits of change. Recommendation One Change for change’s sake is nonproductive. It is the recommendation of Commonwealth North However, we believe in building on the successes that the state expand the use of the Government achieved by GSEs such as the Alaska Permanent Sponsored Enterprise model as an effective means Fund Corporation, the Alaska Housing Finance to generate income while serving the public Corporation and the Alaska Mental Health Trust purpose. Specifically, we believe the highest Authority, among others. Using such examples the potential for maximizing income opportunities lies state and its citizens can benefit from financial and in using this model for more effective management beneficial returns in a more direct and tangible of its natural resource assets. Therefore we propose way. the following: The cornerstone of any change in public policy is The Alaska Land and Natural Resources Management Trust of the policy, both in terms of what it will achieve for the public welfare, as well as for the various Mission affected stakeholders. Careful consideration has On behalf of the citizens of Alaska, fulfill Alaska’s been given to the recommendations offered herein constitutional mandate to provide maximum and we believe that, on balance, it is in the public returns consistent with public purposes from land and financial interests of the state to move and natural resources owned by the state of Alaska. expeditiously toward implementation. Promote public understanding and accountability We therefore strongly advocate that the roadmap for the returns generated on these assets. to our state’s financial security includes Created along lines similar to the Alaska Mental implementation of proven GSE models that have Health Trust Authority, duties and responsibilities achieved notable success for Alaska. We also are to: support preserving those systems and processes currently in place that are effective and efficient 1. Provide oversight and coordination for and free from conflict. If this is done, we believe Alaska’s developable land with respect to oil, the state will robustly fulfill its land grant gas, minerals, timber and other potential management obligations to Alaskans and Alaska’s revenue generating activities. future. 2. Maximize state revenue from Alaska's natural resources on a sustained, perpetual basis by managing lands and resources as a coordinated portfolio of assets.

3. Return a dividend to the state from net Second, it provides for and promotes decisionincome of the Trust's operations. Maintain all making by the Trust based on long-term financial current Constitutional and statutory transfer and strategic goals. Because the enabling legislation requirements to the Alaska Permanent Fund. requires an initial determination as to the financial viability of a project, the Trust places the proper 4 Implement projects only upon a finding by the focus on financial returns. A project must meet the Trust that a project will provide positive criterion of making good economic sense before the financial and/or significant beneficial returns question of other beneficial returns such as "job to the state and that a project is economically creation" are considered. advantageous to the state (see the similar provision for AIDEA at AS 44. 88.095). Third, the structure of the Board provides for more independent and business based decision-making. 5. Keep lands under the jurisdiction of the Trust Trust operations span administration or legislative subject to all regulations and permitting terms to enhance decision making for the long requirements per the Alaska Lands Act, just term. like other state lands. Note that these regulations include the ability to negotiate Fourth, current Constitutional or statutory payment sales and leases rather than competitively bid requirements to the Permanent Fund from natural them when it is found to be in the best resource royalties would not be affected. interest of the state. Additionally, best practices for land and resource management and leasing should be transferred with 6. Provide annual reports and audited GAAP minimal disruption from the Department of Natural statements to the governor, legislature and the Resources to the Trust, thus utilizing existing public regarding its activities and returns. expertise. 7. Consult with appropriate regional officials on Finally, one of the major benefits will be supporting projects. This ensures local input regarding a long-term professional staff that can develop and natural resource actions that may have a implement a strategic vision for natural resource significant impact on a particular community. development in Alaska. Maintaining sound strategy will provide a framework for more effective short- Structure term tactical opportunities. The structure of the trust would be a board of trustees consisting of the commissioners of Natural Recommendation Two Resources and Community and Economic Create a system of portfolio management for all of Development, as well as a designated number of Alaska’s assets that maximizes financial and public members. The governor would nominate beneficial returns of the total commons on a trustees for staggered five-year terms and removable perpetual and sustainable basis. only for good cause. The nominees would be subject to approval by the legislature. For administrative Specifically, we recommend establishment of an purposes, the trust reports to the public through the Alaska Commons Enterprise Group consisting of Department of Natural Resources. representatives of Alaska’s GSEs and members of the public. Advantages First, it is similar to other successful Alaska business enterprise models.

Mission of the Alaska Commons Oversight Enterprise Group The Group reports to the legislature, governor and On behalf of the citizens of Alaska, fulfill Alaska’s public at least annually. For administrative constitutional mandate to provide maximum purposes, it shall report through the Office of the returns consistent with public purposes from the Governor. land and financial assets owned by the state of Duties and Responsibilities Alaska. Promote public understanding and provide 1. Assist the administration and legislators with accountability for the returns generated on these information and policy guidance needed to assets. The Group’s authority does not preempt any accomplish their oversight responsibilities. enabling statutes for existing GSEs, nor does it preempt case law or traditional regulatory functions 2. Provide the governor, legislature and the that remain with various departments of Alaska public annual consolidated financial government. statements and report financial and beneficial performance, mission goals and overall return The Alaska Commons Enterprise Group would also on investment for all of Alaska’s Government work to develop an education and communication Sponsored Enterprise businesses. program to assist the public, legislators and key government and industry leaders to better 3. Identify and balance between beneficial and understand the role of Government Sponsored financial returns. Enterprises and their contributions to the financial 4. Develop and adopt rates of return and health of the state. performance expectations to evaluate asset Structure management operations. The Group is an independent oversight board, 5. Make recommendations to the governor and established in statute, and accountable to the legislature regarding risk, debt and capital governor, legislature and people of the state of requirements. Alaska. 6. Recommend opportunities for investment in Composition and leveraging of GSEs as appropriate. The Board shall be comprised of the chairpersons of 7. Recommend appropriate reinvestment and each of the state’s Government Sponsored financial dividend levels for GSEs. Enterprises (at this time, AHFC, AIDEA, ARR, APFC, AADC, UA, AMHT, AEA, ASLC and 8. Cross-fertilize options among GSEs. subsequently, the Alaska Land and Natural Coordinate the collaboration between GSEs Resources Management Trust). Additionally, there to maximize expertise and resources. will be three public representatives in staggered 9. Maintain a long-term perspective that five-year terms, with termination only for cause. produces maximum returns over time for both Public representatives will be nominated by the current and future generations. governor and confirmed by the legislature. GSE chairpersons shall serve concurrently with their 10. Maintain an ongoing economic development terms as GSE chairs. The Director of the Office of plan for Alaska. Management and Budget shall serve as a nonvoting advisory member of the board.

Operational Strategic policy accountability and planning

The People of Alaska (Shareholders) Governor & Legislature

Alaska Land & Alaska Alaska Alaska Alaska Alaska Commons Natural Permanent Housing Railroad Industrial Aerospace Enterprise Resources Fund Finance Corporation Development Development and Export Group Trust Corporation Corporation Authority Corporation

Advisory Board of Board of Board of Board of Board of Board of Board Trustees Trustees Directors Directors Directors Directors

• Three • Public Public Mbr. Trustees
• AIDEA • DCED
• ARRC
• APFC

Authority Staffing The Alaska Commons Enterprise Group shall adopt The Alaska Commons Enterprise Group Trustees and implement measures to determine the financial may hire an executive director, and other and operational performance of Alaska’s portfolio of appropriate staff or contractors as necessary to carry assets. Its authority shall rest on its ability to out its responsibilities. analyze, monitor and recommend policies, procedures and investment goals to the public and government.

Funding Funding for the Alaska Commons Enterprise Group What it shall be appropriated from the General Fund.

Recommendation Three will take to Engage the public in the economic performance of implement these the state’s assets by making citizens direct stakeholders in the financial success of the assets. recommendations Specifically, Commonwealth North recommends The recommendations contained in this report are all GSE net earnings, to the extent permitted by commended to the Commonwealth North law, be pooled and that the citizen dividend membership, the public and state elected leadership program be amended to include the combined for consideration and implementation. The financial performance of GSEs, as well as the recommendations are best viewed together as an Permanent Fund. integrated plan, but they are separable actions the state can take to improve the management of its The Study Group has a strong intuitive sense that assets. To implement the three primary if Alaskans could benefit directly from increased recommendations, individual legislative action is earnings of the GSEs, that they would develop a recommended. personal interest in GSE performance. That personal interest could result in greater political • The study’s first recommendation, establishing support for long-term effective management of the a Land and Natural Resource Management GSEs, thereby helping guarantee their future and Trust, will require authorizing legislation. shoring up the underpinnings of an ongoing Many models are available from which to economy. The obvious example of such a linkage is draw, including the authorizing legislation the Permanent Fund Dividend. establishing the Alaska Mental Health Lands Trust, Alaska Housing Finance Corporation Creating a joint pool of earnings from all enterprise and Alaska Industrial Development and and investment entities such as the Permanent Export Authority. Using the best and most Fund and GSEs would focus public awareness on all effective language and powers from those avenues of potential revenue. If dividend legislative models will facilitate legislative distributions were made from a combined account development, assure a result that incorporates citizens would react more like shareholders and best practices, and instill public confidence in expect appropriate returns on their assets and the resulting organization. appropriate levels of investments in the GSEs to maintain revenue streams. It is our hope that the principles associated with recommendation one, that is, using the This approach could be developed in conjunction public corporation as a framework for better with a community dividend program and is managing the state’s assets, will also be applied compatible with the Percent of Market Value to management of other asset categories. Such (POMV) endowment proposal under consideration additional corporations would then be for the Permanent Fund. integrated with the leadership of the Alaska Commons Enterprise Group outlined in the second recommendation.

• The second recommendation, to establish an investment in perpetuity and in the public interest, Alaska Commons Enterprise Group to can, and will, fulfill the promise of Alaska coordinate and recommend strategic direction statehood. It will provide an economy based on for management of the state’s corporate assets, local control and empowerment, and an enviable will also require legislative action for quality of life for all Alaskans. empowerment. While in theory this body could be the result of an executive order from the governor to establish a working group, it is believed that only through statutory authority Additional will the group be able to sustain the long-term strategic value envisioned in this report. Information
• Recommendation three realigns the income To get an overview of the magnitude of the state of flow from management of the state’s assets. Alaska’s assets, please refer to the following website. This consolidated earnings account can then It is part of the University of Alaska Anchorage be allocated for the purposes determined. Institute of Social and Economic Research Again, we believe that to accomplish the goal publication “The Alaska Citizen’s Guide to the of this recommendation, to better engage the Budget,” subsection “A Look at the State’s Assets.” public in the state’s return on assets, this income flow and distribution should be 6.State_Assets.htm established in statute.

The means to public policy implementation is the political process. Public debate and thoughtful consideration by our elected leadership in both the legislative and executive branches of government is the foundation of that process. Commonwealth North and the members of this Study Group stand ready to constructively contribute to this process.

Conclusion Alaska is at an economic crossroads. Oil and fishing revenues, the state’s financial lifelines since statehood, are at half their peak. Other sectors are unable to make up for diminishing oil revenues. Huge federal economic inputs to the state are unlikely to continue forever.

HOWEVER, Alaska is far from impoverished. In fact, Alaska has great wealth, with both financial and investment grade natural resources available. Putting these assets to work in a comprehensive and organized way, based on sound principles for

Board of Directors President Joe Griffith, Chugach Electric Association Vice Presidents James Yarmon, Yarmon Investments, Inc. Jonathan Kumin, Kumin Associates, Inc. Janie Leask, Alyeska Pipeline Service Company Secretary Morton Plumb, Jr., Ted Stevens Anchorage International Airport Treasurer Jan Fredericks, UAA Small Business Development Center Past President Nancy Bear Usera, Alaska USA Federal Credit Union

Board Members Richard F. Barnes ENSTAR Natural Gas Company (retired) Carl Brady Brady & Company Dr. Alice J. Galvin BP Exploration, Inc. Patrick K. Gamble Alaska Railroad Corporation Edward Lee Gorsuch University of Alaska Anchorage Governor Walter J. Hickel Co-founder of Commonwealth North Max Hodel Founding board member of Commonwealth North Jerry Hood Gerald L. Hood & Associates Karen L. Hunt Retired Judge, State of Alaska Marc Langland Northrim Bank Betsy Lawer First National Bank Alaska James Linxwiler Guess and Rudd, P.C. Loren H. Lounsbury Founding board member of Commonwealth North Jeff B. Lowenfels Lewis & Lowenfels Matthew Nicolai Calista Corporation Thomas Nighswander, M.D Alaska Tribal Health Consortium, University of Washington School of Medicine Mary Ann Pease Alaska Communications Systems, Inc. Mike Sexton Anchorage Daily News Governor William Sheffield Founding board member of Commonwealth North, Port of Anchorage Jeff Staser Denali Commission Marvin Swink Lynx Enterprises William J. Tobin Founding board member of Commonwealth North, The Voice of the Times Mead Treadwell Venture Ad Astra Graham W. C. Vanhegan ConocoPhillips Alaska, Inc. David Wight Alyeska Pipeline Service Company.

Executive Director Duane Heyman

About Commonwealth North The purpose of Commonwealth North is to educate its members and others on significant public policy issues affecting Alaska and its future, and to assist in their resolution. It was founded in 1979 by former Alaska Governors Walter J. Hickel and the late William A. Egan. Commonwealth North is a non-partisan 501 (c) 3 educational organization where cultural and professional diversity is welcomed. Monthly Forums are held to hear from renowned speakers on a wide variety of stimulating and controversial subjects. Study Groups, such as the one that produced this report, are comprised of volunteer members to research critical issues. Commonwealth North is funded by individual memberships and private sector funds.

Study Group Underwriters

First National Bank of Anchorage Alaska USA Federal Credit Union www.commonwealthnorth.org

Contact: Commonwealth North Anchorage, Alaska 99501 Phone: (907) 276-1414 E-mail: exec@commonwealthnorth.org