Wall Street woes drive trust fund below $1 billion

UPPER FRUITLAND, N.M., Sept. 4, 2008

T

he slumping stock market has taken a substantial toll on the Navajo Nation's Permanent Trust Fund - dropping the fund's overall value from $1.330 billion in December to $1.272 billion in March.

By the end of June, it had declined further to $982 million, according to Navajo leaders in contact with the tribe's Wall Street financial manager, RV Kuhns and Associates Inc. of New York.

The trust fund's 26-percent decline - on paper - was due to the combination of recessionary factors affecting global markets including the housing-bubble burst, record-high oil prices, economic stagnation, and the shrinking value of the U.S. dollar overseas.

"It's significant," said LoRenzo Bates (Upper Fruitland), chairman of the Budget and Finance Committee. "(It was) not just one specific downfall, it was a rippling event."

"The Fannie Mae-Freddie Mac situation had an impact," he said, referring to losses by the nation's two main mortgage guarantors. "The price of oil had an impact. That led to people losing their jobs. That is just part of the big picture as to why we are in the shape we are now."

Nine members of the nation's Investment Committee, including Bates and two other B&F members, Speaker Lawrence T. Morgan and Auditor General Elizabeth Begay - as well as members of the Department of Justice and three staff members - met last week with the tribe's stock portfolio investment managers in New York to discuss the situation.

Working capital needed (sub)

Investment Committee members are considering two ways to get the dollars needed to build infrastructure on the nation without touching the Permanent Trust Fund.

Former President Peterson Zah, who first proposed setting up the Permanent Trust Fund, has urged the Navajos to let it keep growing.

"The Permanent Trust Fund is working in terms of saving dollars. Where it is not working is in terms of being able to provide something back to the Navajo people," Bates said. "So we have all these funds. The question is what are we going to do with it? ... Those dollars need to begin working for the people."

The fund was set up with protections against raids - a voter referendum would be required in order to spend any part of the trust fund principal.

Bates said he favors a two-front approach to finance the infrastructure needs of the reservation and attract business development.

The first approach is to invest the interest earned by the trust fund in businesses outside of the Navajo Nation. Currently all earnings of the Permanent Trust Fund are reinvested in the fund.

That interest could earn additional dollars, he said, which in turn could be used to build infrastructure on the reservation, needed to attract businesses and create jobs.

Bates said Navajos need to consider how best to use the trust fund interest, adding that it currently does not do anything except to help the trust fund earn more money that no one can touch without a referendum.

"Navajo is not there. Navajo in my opinion is not going to get there at the pace or the thought process we are at now. That's why we are thinking outside," Bates said. "Make the dollars, bring them back, build the infrastructure, provide those jobs within Navajo as a result of outside revenue coming in."

Another approach to paying for infrastructure improvements is to float a loan, and the Investment Committee is actively pursuing this idea, he said. The committee has met with bankers in New York and is close to securing a loan for $50-$75 million, he added.

A paper loss (sub)

The tribe sees the trust fund's stock and bond losses as "paper" losses, rather than actual dollars, he said.

"It's a paper loss, or unrealized loss. That's different than a cash loss. If we had drawn that money out that would have meant the loss of actual cash dollars," said Bates, adding, "But at the end of the day it is not what we would have liked."

The strategy of keeping the Permanent Trust Fund intact has been profitable for the tribe. By reinvesting interest and dividends, the trust fund kept growing its principal, leading to more interest and dividends even when per-share stock and bond prices were down.

The fund grew from $321 million in 1995 to more than $1 billion by the end of 2007, an increase of over three-fold in 12 years.

The fund did hit a bump when the high-tech stock bubble burst in 2001-02, sending stock prices tumbling. At that time the Navajos' fund fell from $824 million to $760 million. But it rebounded to a high of $1.330 billion by the end of last year.

Even with the current market declines, the fund is still worth more than if the tribe had bypassed stocks and stuck only with bonds, which are safer but don't pay as well, Bates said. In that scenario the fund would have been at $829 million - instead of $1.272 billion - at the end of March.

Bates, on his first trip to New York, said he was surprised at how expensive the city is, including a $30 taxi ride from La Guardia Airport to his hotel in Manhattan, a short distance in miles.

Jim Snyder can be reached at premwriter@yahoo.com.