Legislature(2015 - 2016)HOUSE FINANCE 519
02/24/2016 02:00 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Investments & Structure of the Permanent Fund |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 256 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
February 24, 2016
2:04 p.m.
2:04:21 PM
CALL TO ORDER
Co-Chair Neuman called the House Finance Committee meeting
to order at 2:04 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Pete Ecklund, Staff, Representative Mark Neuman; Joan
Brown, Staff, Representative Mark Neuman; Angela Rodell,
Executive Director, Alaska Permanent Fund Corporation.
SUMMARY
HB 256 APPROP: OPERATING BUDGET/LOANS/FUNDS
HB 256 was HEARD and HELD in committee for
further consideration.
PRESENTATION: INVESTMENTS & STRUCTURE OF THE PERMANENT FUND
HOUSE BILL NO. 256
"An Act making appropriations for the operating and
loan program expenses of state government and for
certain programs, capitalizing funds, making
reappropriations, making supplemental appropriations,
and making appropriations under art. IX, sec. 17(c),
Constitution of the State of Alaska, from the
constitutional budget reserve fund; and providing for
an effective date."
Co-Chair Neuman reviewed the agenda for the day. He
explained that the new Committee Substitute (CS) for the
operating budget was stripped of the governor's items that
included his proposed revenue measures.
Co-Chair Thompson MOVED to ADOPT the proposed committee
substitute for HB 256, Work Draft 29-GH2740\S (2/23/16,
Wallace). There being NO OBJECTION, it was so ordered.
2:06:43 PM
PETE ECKLUND, STAFF, REPRESENTATIVE MARK NEUMAN, discussed
the general changes in the committee substitute. He
remarked that the language section of the governor's
version included changes to the Permanent Fund (PF)
predicated on passage of his proposals. The legislation
that proposed the changes were still in committee. He
voiced that the operating budget could not be passed
containing language that presumed passage of the PF
legislation. The CS removed all of the PF related
transactions the governor had included and was replaced
with the basic statutory dividend calculation and inflation
proofing. In addition, the money necessary to issue Pension
Obligation Bonds was not included in the CS as well as "a
couple" technical changes. He characterized the language
section in the CS as "status quo." He revealed that the CS
was introduced so the subcommittee recommendations and
other language section changes would be incorporated into
the CS version.
JOAN BROWN, STAFF, REPRESENTATIVE MARK NEUMAN, described
the changes to the language section in the CS. She read
from a prepared statement as follows:
Committee Substitute for HB 256 (Finance), the FY17
operating budget bill, version 29-GH2740\S, Wallace,
2/23/1016
Mr. Co-Chair, this version of HB 256 includes the
Governor's December 15 numbers section as section 1.
As Pete, Mr. Ecklund mentioned, we included two key
changes that affect several language sections and made
some minor technical changes. The Language sections
begin on page 53.
Mr. Co-Chair, all references to the Governor's Alaska
Permanent Fund Protection Act (HB 245) have been
removed from the bill. Section 8 re the Alaska
Permanent Fund on page 53 now contains the standard
appropriations for dividends and inflation proofing.
Mr. Co-Chair, we changed section 27(b) Constitutional
Budget Reserve on pages 72 and 73 so that it is the
standard language to balance revenue and general fund
appropriations - the language to cover the deficit.
The Governor's original subsection (b) appropriated
the balance of the Constitutional Budget Reserve Fund
to the Statutory Budget Reserve Fund.
Mr. Co-Chair, we deleted section 28, Statutory Budget
Reserve Fund on page 73 as this section was part of
the Governor's fiscal plan. (Subsection (a)
appropriated $3 billion to the earnings reserve fund
and subsection (b) had the Statutory Budget Reserve
Fund cover the budget deficit.)
Mr. Co-Chair, we deleted section 31, Contingent
Effect, as it related to both the original
Constitutional Budget Reserve language and the
Statutory Budget Reserve section.
Mr. Co-Chair, this version of HB 256 also accepted the
Governor's amendment that deletes all reference to
Pension Obligation Bonds. This affected the Debt and
Other Obligations section 19 (had been subsection (m)
on page 59 of the Governor's original bill (page 64 of
this version) for the estimated $12,725,000 million
for bond issuance costs) and the Retirement System
Funding section 23 on pages 65-67 in the original bill
(now this section is on page 70).
Mr. Co-Chair, a technical change in this version also
removes reference to the Alaska Aerospace Corporation
from section 20 Federal and Other Program Receipts on
page 64 as it was redundant since section 6 on page 52
already appropriates any additional receipts to the
corporation.
Mr. Co-Chair, another technical change we made was to
add a new Section 28 on page 73. This is for the
repeal submitted by the Governor of section 11(a), ch.
25, SLA 2015, as we corrected the transfer for the
FY17 permanent fund dividend payment in our revised
section 8(b). The repealed language was in HB 72 last
year and it had an incorrect date.
The replacement language in the Permanent Fund section
8(b) makes it clear that earnings through June 30,
2016 are to be used to pay the FY17 dividends in
October 2016, exactly as we have always done.
Dividend payments have always followed the statutory
framework, but a date in the appropriation language
was incorrect.
New Section 31 has an April 17, 2016 effective date
for the repeal of the permanent fund dividend transfer
in our new section 28.
2:11:42 PM
Representative Gara asked what the amount was for payment
of pension debt included in the current budget. Ms. Brown
responded that the payment was $116.7 million for the
Public Employees' Retirement System (PERS) and $99 million
for the Teachers Retirement System (TRS).
Co-Chair Neuman interjected that if the one-time $3 billion
payment from the Constitutional Budget Reserve (CBR) to the
retirement systems had not been made several years ago the
current payment would be roughly over $1 billion.
^PRESENTATION: INVESTMENTS & STRUCTURE OF THE PERMANENT
FUND
2:13:59 PM
AT EASE
2:14:07 PM
Reconvened
ANGELA RODELL, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, introduced the Power Point Presentation:
"Alaska Permanent Fund" dated February 24, 2016 (copy on
file).
2:14:57 PM
Ms. Rodell began with slide 2:
1969: The debate begins.
Alaska receives $900 million in Prudhoe lease sale
bonuses
Prior year state budget: $112 million
Ms. Rodell turned to slide 3:
1976 Voters Guide
"Alaska's state government [should] set aside a rainy
day fund to benefit this and future generations of
Alaskans."
Alaska State Chamber of Commerce
Alaska Voters Agreed:
By a margin of 75,588 to 38,518, voters decided to
create the permanent fund
Ms. Rodell moved to slide 4: "The Alaska Constitution":
At least twenty-five percent of all mineral lease
rentals, royalties, royalty sale proceeds, federal
mineral revenue sharing payments and bonuses received
by the State shall be placed in a permanent fund, the
principal of which shall be used only for those
income-producing investments specifically designated
by law as eligible for permanent fund investments. All
income from the permanent fund shall be deposited in
the general fund unless otherwise provided by law
[Effective February 21, 1977].
Ms. Rodell discussed slide 5:
From 1976 to 1980, Alaskans debated the Fund's
purpose:
Development Bank or Investment Fund
Ms. Rodell relayed that ultimately it was decided to create
and investment fund "and preserve the financial resource
for future generations."
Ms. Rodell continued to slide 6:
1980: Investment Fund Concept adopted, and with it:
Senate Bill 161
Created the Alaska Permanent Fund Corporation to
manage the investments of the Fund, separate from the
state's other investments managed by the Department of
Revenue. This bill also created a Board of Trustees to
oversee the Fund and started the legal list of allowed
investments.
Senate Bill 122
Created the Permanent Fund Dividend program.
Ms. Rodell reported that the corporation resided within the
Department of Revenue (DOR).
Ms. Rodell advanced to slide 7:
APFC Board of Trustees.
•Six board members
•Two state members
•Four public members
-Appointed by Governor
-Experience in finance, investments, or business
management
-May only be removed "for cause"
2:19:12 PM
Ms. Rodell scrolled to slide 8:
Statutory investment rules evolve
· Evolution from legal list to prudent-investor
· Starting in 2005: "Prudent-investor rule" guides
investment of Fund assets
· -Duty of care
· -Duty of loyalty
· The Board will maintain a reasonable diversification
of assets
Ms. Rodell continued to slide 9:
Fund Advantages:
Size
· Access to investments
· Ability to negotiate fee savings
Time Horizon
· No set liability
Ms. Rodell discussed slide 10: "Fund Challenges":
Location
· Business travel to financial centers
· Recruitment from financial centers
Flexibility
· New resources often arrive long after they are
needed due to lengthy budget process
Staff size
· Small staff limits bench strength, creates gaps
during travel and vacancies
Representative Guttenberg indicated that "a great deal of
investing" was accomplished with "outside consultants and
fund managers." He wondered whether the fund had grown
large enough and matured to a point where all of the
investing could be done "in-house." Ms. Rodell stated that
the fund was at that point. She reported that two previous
chief investment officers had won national awards for
institutional investment. The officers were able to recruit
capable staff and attributed their legacy to the growth and
success of the fund within the last 10 years and subsequent
to the prudent-investor rule. She shared that the
corporation wanted to selectively hire certain types of
financial managers "strategically" in-house. She believed
that paying investment fees was prudent if the returns from
the investment justified the fees.
2:24:48 PM
Vice-Chair Saddler asked whether the prudent-investor rule
"imply any specific kinds of management, policies, or
techniques. Ms. Rodell responded that the rule did not
speak to any particular policy or management style. The
rule guided investing towards the duty of care and duty of
loyalty.
Representative Kawasaki asked why the state did not
outsource the entire investing function since the purpose
of the fund was to "make money." Ms. Rodell suggested that
outsourcing was a policy call for the legislature to make.
She indicated that outside management was expensive.
Internal management enabled more "nimble and strategic"
investing and the investment decisions were made
exclusively for the benefit of the fund and Alaska. When
management was given to an outside entity, the decisions
made benefitted the entity's business model and not
necessarily the fund and "may not be the best course of
action." Representative Kawasaki questioned why outside
investor management was not a good choice for the fund. He
asked that "if it was just money and the sole purpose was
to make more money under the prudent-investor rule why were
Alaskans involved in the {investing} decision." Ms. Rodell
responded that the policy call was made to have the state
manage the fund.
Co-Chair Thompson interjected that he saw figures related
to in-house investment of the fund that saved the state
money. Ms. Rodell responded that the corporation calculated
that $28 million in fees was saved annually by in-house
investing.
Representative Pruitt opined that the state should move
more management of the fund in-house. He felt that outside
management's goal was commission and in-house investor's
goal was the fund. He thought that in-house management
increased the amount of money that stayed in the fund.
Co-Chair Thompson thought there were three additional
investment positions included in the current budget. Ms.
Rodell answered that 6 positions were requested and 5 were
investment professionals.
2:30:55 PM
Representative Kawasaki maintained that his questions were
related to the investment challenges noted on the slide
regarding being located far from financial centers,
flexibility, and limited staff. He wondered whether the
state could make more money with outside financial
managers. Ms. Rodell responded in the negative. She
referred to national studies concerning in-house versus
outside management and reported that typically the
difference amounted to "5 basis points of improved
performance as a result of in-house management." She
disagreed that exclusive outside management would improve
performance of the fund.
Representative Edgmon wanted the record to reflect the
service of Mike Burns [former Director, APFC]. He added
that the creation of the Permanent Fund Dividend was not
universally embraced. The Hammond administration embarked
on an arduous year-long effort to advance the fund. He
shared that historically many citizens wanted "the money
spent on public services because the state was so poor."
Ms. Rodell moved to slide 11:
Target Asset Allocation:
Bonds 20%
Stocks 36%
Real Estate 12%
Special Opportunity 4%
Private equity 6%
Infrastructure 4%
TIPS 2%
Cash 2%
Absolute Return 11%
Ms. Rodell explained slide 12 titled "Risk vs. Return." She
discussed that diversification of the fund was attempting
to balance the effort of "risk versus reward." The chart
demonstrated that state would have a risk volatility that
was too high if the amount of return chosen was too high in
the area of 7 percent to 9 percent.
2:35:04 PM
Ms. Rodell pointed to the yellow line on the chart on slide
13 titled "The effect of diversification." She commented
that the corporation was trying to "create an all-weather
portfolio" that contained an "upside strategy" regardless
of what was happening in the market and limiting the
downside potential losses. She advanced to slide 14: "Stock
Portfolio." She pointed out that as of June 30, 2015 the
fund contained $20.9 billion in stocks. The graphic
depicted the breakdown of the stock investments. The
heaviest concentration of stocks was in the United States
(US) economy. Approximately one third of the stocks were
invested in the US market and the remainder was invested
globally. The funds were also invested by management
strategy; active, passive, and quasi-passive.
Ms. Rodell reviewed slide 15:
Bond Portfolio Composition
$11.1 billion as of 06/30/2015
Non-U.S. Government 11%
Mortgage-backed 7%
CMBS 4%
Non-U.S. Corporate 10%
Ms. Rodell reported that the bond portfolio was in
existence since the inception of the fund and was managed
exclusively in-house. The bond fund contained some limited
global exposure.
Ms. Rodell turned to the pie chart on slide 16:
Real Estate
$6.5 billion as of 06/30/2015
58 directly held properties
Exposure to Europe growing
Office 27%
Industrial 4%
REITs 20%
Multifamily 24%
Retail 25%
[REIT - real estate investment trust]
Ms. Rodell remarked that the corporation's real estate
investments were fairly balanced. She indicated that the
corporation recently began investing in industrial property
as well as in Europe. Three properties were purchased in
the prior two years located in Portugal, Spain, and
England, United Kingdom.
Vice-Chair Saddler asked how much revenue the fund
generated from Alaska based investments. Ms. Rodell
reported that currently the only real estate asset in the
portfolio was the Goldbelt Building in Juneau, Alaska.
Ms. Rodell transitioned to slide 17: "APFC Real Estate."
The map graphic of the US depicted the location of the
fund's real estate investments. She offered that the color
of the circles signified the type of real estate. She
discussed the corporation's "crown jewel" of real estate
that was highlighted on slide 18: "Tysons Corner Center."
She communicated that the center was located in Tysons,
Virginia and was purchased in 1985 along with the partner,
Macerich. The mall contained over 300 stores and received
22 million visitors each year. Virginia extended its public
transit system and included a stop at Tysons Corner.
Subsequently, the corporation engaged in its first
construction project and added a luxury apartment building,
a 22 story office building with two anchor tenants; Deloit
and Telestat. She added that a Hyatt Regency Hotel was also
constructed on the sight. She declared that the investment
was tremendously successful.
2:41:00 PM
Representative Wilson thought it was a missed opportunity
not to invest in the State of Alaska. She wondered whether
a statute change was necessary to direct investment in the
state or if there were not any worthy investments in the
state. Ms. Rodell thought that it was a challenging
question to answer. She explained that the statue
authorized Alaskan investment but part of the problem was
finding quality investment opportunities. She added that
the corporation was periodically approached with offers to
invest in the state and was evaluated and seriously
considered but ultimately the goal of the fund was to
maximize income to the fund. She wondered what the issues
were that prevented strong investment opportunities in
Alaska.
Ms. Rodell moved to slide 19:
Absolute Return
$5.3 billion as of 06/30/2015
Externally Managed-$2.5 billion
Internally Managed-$2.8 billion
Ms. Rodell advanced to slide 20:
Private Equity
$3.2 billion as of 06/30/2015
2,800 underlying companies
Co-investment program implemented in FY2014
Ms. Rodell shared that the co-investment program consisted
of co-investing with another fund or investor in private
equity.
2:45:15 PM
Ms. Rodell continued to slide 21:
Infrastructure Holdings
$1.5 billion as of 06/30/2015
Transportation 38%
Energy 50%
Water & Waste Management 11%
Co-investment program implemented in FY14, currently
at $35 million
Properties in the U.S., U.K., India, Argentina and
Canada
Ms. Rodell detailed that co-investing allowed the
corporation to save on management fees.
Representative Kawasaki referenced the PFC's investment in
a LNG export facility and wondered why the state was
investing in its "competitors." He asked her to discuss the
investment. Ms. Rodell responded that she was not aware the
energy sector investment.
Co-Chair Thompson referred to slide 20 and asked about the
bullet point that noted "2,800 underlying companies." He
asked for clarification. Ms. Rodell answered that the
companies were privately held companies seeking to raise
capital and avoid the publically traded markets. The
corporation invested in funds that capitalized the
companies. The companies were chosen based on specific
strategies. Co-Chair Thompson asked whether any Alaska
companies were involved. Ms. Rodell answered that a timing
issue caused a missed opportunity to indirectly invest in a
fund that contained a significant Alaska-based company. The
corporation invested in Apollo that offered a fund that
contained Callis but was not able to include the specific
fund in the portfolio at the time it was offered. She
identified the situation as one way to invest in Alaska
companies. Co-Chair Thompson recapped that there were
indirect opportunities like the Apollo fund that took its
investment money and invested in the Callis oil company in
Alaska. Ms. Rodell answered in the affirmative.
2:50:00 PM
Representative Pruitt thought that if the state's policy
shifted to turn the fund into a development bank then a lot
of the funds investing would "flow into Alaska." He
ascertained that the decision to make the fund an
investment structure meant that the fund was seeking the
greatest return on investment. He opined that "he had no
problem taking money from Virginia and spending it in
Alaska." He felt that the current conversation was the
"crux" of the initial decision on how to invest the
permanent fund.
Vice-Chair Saddler noted that the state had the Alaska
Industrial Development and Export Authority (AIDEA), Alaska
Energy Authority (AEA), Alaska Housing Finance Corporation
(AHFC), and other agencies that provided money to help
develop the state's economy. He asked for the definition of
co-investment (slide 20). Ms. Rodell replied that APFC made
an investment into a company alongside another investment
fund investing in the company and used the same terms as
the co-investor's fund. She noted that the practice was not
a direct investment in a company. Vice-Chair Saddler stated
that the corporation "invested in the fund and then made a
side bet on the same terms…" He asked whether the amount
was the same as the investment in the fund. Ms. Rodell
responded in the affirmative and related that the
corporation called the co-investment "sidecars." She
answered that the investment amounts could differ from the
co-investor's amount.
Representative Wilson voiced that due to low population
Alaskan investments could not compare to investments in
other states. She wondered whether a portfolio of Alaskan
investments could exist in the PF to help "boost" the
Alaskan economy when the fund grew large enough. She
realized the issue was a policy call. Ms. Rodell replied
that the possibility existed but current statute was clear
and a new policy directive would be in order. She felt that
the purpose of the fund needed to be revisited to ensure
that the state was not harming itself with its PF
investments and that "sometimes it was not just about the
money."
2:55:43 PM
Ms. Rodell moved to slide 22:
Special Opportunities:
· Direct investments in private companies-examples: Juno
Therapeutics and Denali Therapeutics.
· Direct investments in specialized funds - examples:
Dyal and Blackstone funds.
· 1.9 billion as of 06/30/2015
Ms. Rodell discussed what happened to the income and
earnings after the investments were made and continued to
slide 23:
Statutory Net Income
Principal (income-producing investments)
Net Income gets deposited into the ERA {Earnings
Reserve Account]
Income in ERA available for Appropriation
Ms. Rodell defined that Statutory Net Income (created in
statute) accounted for the realized earning and losses
which was different from the generally accepted definition
that defined income to include unrealized earnings.
Representative Edgmon cited the governor's proposed
Permanent Fund Protection Act. He wondered whether the same
flow of earnings would still be applicable. Ms. Rodell
responded in the affirmative. Representative Edgmon
remembered a provision that required four times the amount
of the annual fixed draw to be in the Earnings Reserve
Account (ERA). He asked whether the bill would change the
investment strategy if adopted. Ms. Rodell answered that
currently she did not believe so. She was unclear whether
the bill would change the ERAs asset allocation and how the
fund was invested due to demand on the fund. He wondered
whether the permanent fund board fully studied the act. Ms.
Rodell reported that the board recently had a meeting
regarding all of the PFD legislation and the potential
ramifications. Through modeling the board determined that
none of the proposals would change the core mission to
manage the principal and move earning into the ERA. The
board would adjust as necessary management of the ERA. She
voiced that "it was too premature for the board to make any
adjustments or take any action." She noted that the ERA was
managed under the legislature's request.
3:01:08 PM
Representative Munoz referenced the various rates of return
from 4.5 percent to 6.5 percent from the three plans being
proposed. She asked whether Ms. Rodell was comfortable with
the "conservative rate of return" and its impact. Ms.
Rodell responded in the negative. She added that all of the
plans were fairly close in terms of results and it was left
to policy decisions on the specific withdraws and deposits
into the account. On balance, all three plans were much
more similar than different.
Representative Kawasaki asked whether the board had a
recommendation regarding the PFD proposals. He also asked
whether discussions ensued regarding the size of deposit
into the fund or inflation proofing. Ms. Rodell replied in
the negative for all parts of the questions.
Vice-Chair Saddler asked for clarification about the
definition of Statutory Net Income. Ms. Rodell answered
that the state's Statutory Net Income definition remained
in statute to exclusively include realized earnings. She
reiterated that the recent GAAP (generally accepted
accounting principles) definition of income changed to
include unrealized earnings. He asked whether there was a
specific schedule when accounting for realized earnings.
Ms. Rodell responded in the negative and elaborated that
realized earnings were accounted for when earned. At the
end of the fiscal year the corporation calculated the
Statutory Net Income for the year according to a specific
distribution formula within statute. Subsequently, the
corporation prepared financial statements in accordance
with GAAP. She noted that the GAAP income reported was very
different than the Statutory Net Income figures.
Ms. Rodell advanced to slide 24: "Fund breakdown." She
pointed to the chart that reported the following:
ERA $7.2 ($6.6 deposits, $1.1 unrealized gains)
Principal $45.6
•$39.2 in deposits
•$6.4 unrealized gains
3:05:23 PM
Ms. Rodell explained that when the gains were realized they
moved into the ERA and the unrealized gains in the account
were due to ERA investments. She highlighted slide 25: "Pro
rata share of main fund assets, not cash, are transferred
to ERA." She delineated that the pie charts depicted the
distribution of the pro rata shares. She turned to slide
26: "Statutory Net Income" and indicated that the chart
portrayed the realized net income and realized return
(listed as a percentage over the last ten years. She
pointed to the losses in 2009.
Ms. Rodell reviewed slide 27: "Use of Realized Net Income."
She highlighted that the pie chart illustrated the
distribution of realized income as follows:
General fund $536.3 million
Dividend appropriations $23,002.7 billion
Inflation proofing transfer to principal $16,236.4
billion
Special appropriations to principal $4,340.3 billion
Undistributed realized income balance $6,146.5 billion
Ms. Rodell remarked that the undistributed realized income
was deposited into the ERA.
Vice-Chair Saddler announced that the legislature had
appropriated approximately $16 billion in inflation
proofing and $4 billion in special appropriations totaling
$20 billion back into the corpus that the legislature could
have spent but did not. He asked whether his statement was
correct. Ms. Rodell stated that he was correct.
Ms. Rodell discussed inflation proofing on slide 28:
Inflation proofing
· Provides a deposit back to corpus
· Maintains purchasing power of corpus
· Added $16.2 billion to corpus
· Based on value of corpus on June 30 and inflation rate
for prior two calendar years
Fiscal Transfer
Year
2005 $641
2006 $856
2007 $860
2008 $808
2009 $1,144
2010 $0
2011 $533
2012 $1,073
2013 $743
2014 $546
2015 $624
Ms. Rodell elucidated that the only way the corpus of the
fund grew was through the "mineral royalty deposits" and
any other appropriation deposited directly into the
principle. The buildup of wealth from the fund was credited
to the ERA. She recommended that the legislature consider
"if and how" the deposits should continue into the corpus.
3:10:20 PM
Ms. Rodell scrolled to slide 29:
Money in and out, and current value
$39.2 billion Deposited into Principal
$45.6 billion Market Value of Principal
$52.8 billion Total Fund Value 6/30/15
Ms. Rodell reported a small loss since the beginning of
2016 and noted the current value of the fund was over $50.2
billion.
Ms. Rodell turned to slide 30:
Principal vs. Earnings Reserve
•The Fund buys an investment for $20
-Earnings reserve reflects 25% of total fund
-$20 investment was funded with
•$15 of principal
•$5 of earnings
Ms. Rodell advanced to slide 31:
Capital Appreciation
•The value of the investment appreciates from $20 to
$40
-$20 in unrealized gains are distributed
proportionally
•Principal's share now worth $30
•Earnings reserve's share now worth $10
-Unless APFC sells (realizes) a portion of the
investment,
•The increased value reflects unrealized
gain, not statutory net income
•No income is transferred from principal to
earnings
Co-Chair Thompson asked whether the recent losses were
considered unrealized losses. Ms. Rodell responded in the
negative. Co-Chair Thompson surmised that an investment was
still part of the fund until it was sold. Ms. Rodell
affirmed his statement and added that the value depended on
a moment in time. She provided an example to illustrate
that realized gains or losses changed with the market
conditions at the time.
Representative Munoz asked Ms. Rodell to talk about Juno
Therapeutics. Ms. Rodell explained that Juno Therapeutics
was a venture capital investment. The venture was a
strategy to fight blood born cancers through cell
manipulation. The research was conducted under a joint
venture between Memorial Sloan Kettering Cancer Center and
Fred Hutchinson Cancer Research Center in Seattle. The PFDC
invested $129 million in the venture. The biotech venture
offered an initial public offering (IPO) in December, 2014,
and the corporation used stock performance to measure
returns on the investment.
Ms. Rodell turned to slide 32:
Harvesting Gains
•APFC sells the investment for $40, and the $20
unrealized gain is realized
-$15 remains in principal to cover its cost
-$15 realized gain is transferred to earnings reserve
-Earnings reserve now has $25
•$5 original cost
•$5 of its realized gain
•$15 of realized gain from principal
Ms. Rodell noted that the slide illustrated her point that
the inflation proofing deposits were the only way the
principle grew.
3:15:16 PM
Representative Kawasaki referred the Callan report [Callan
Associates Inc.] that spoke to the PFD proposals that
eliminated inflation proofing and cited one proposal that
deposited 25 percent instead of 30 percent into the corpus.
He related that the 10 year total projection with status
quo inflation proofing totaled $12.5 billion added to the
principle and only $3 billion with each of the three
proposals without inflation proofing. He asked why the
board had not discussed the issue. Ms. Rodell stated that
the Callan reported assumed a 2.25 percent inflation rate
and wanted to inform the committee that Callan used an
assumption to quantify the $12.5 billion anticipated
inflation proofing over the next ten years. She stressed
that the board's position was that its role was to manage
the principle corpus of the fund but not the ERA.
Ms. Rodell moved to slide 33:
Capital Depreciation
· The value drops from $20 to $12
· principal investment is valued at $9,
reflecting unrealized loss of $6
· Earnings investment is valued at $3,
reflecting unrealized loss of $2
· Should APFC sell or hold?
Ms. Rodell turned to slide 34:
Realizing Losses
•Assume we conclude it is prudent to sell the
investment for $12
-$12 is returned to principal from sale proceeds
-$3 is moved to principal from earnings reserve
-Leaving earnings reserve with a loss of $8
•Note: with a long-term time investment horizon, this
activity is rare (example-2009).
Ms. Rodell discussed slide 35:
ERA Going Forward
Liquidity Consideration
· Some APFC asset classes, like private equity, are
illiquid, making a portion of the ERA liquid
· Yet all of the ERA is "available for
appropriation"
Volatility Consideration
· Permanent Fund and ERA are subject to ups and
downs experienced by capital markets
· Going forward, is a long-term time horizon for
ERA workable?
Ms. Rodell scrolled to slide 36:
ERA Going Forward
Counterweight
· Net Income in ERA is immediately invested
alongside main fund
· Allowing the nominal value of this income to
remain deployed and continue earning income until
it is appropriated
· Over the last ten years, the Fund's annualized
return was 6.4%
Co-Chair Thompson pointed out that the unrealized losses
did not mean that the fund lost cash and stated that losses
did not occur until the asset was sold. He judged that the
ten years average of 6.4 percent which included 2009 was
"pretty good." He voiced that over the long-term the fund
made up its losses and wondered whether the statement was
correct. Ms. Rodell responded in the affirmative.
3:20:46 PM
Vice-Chair Saddler returned to slide 32. He inquired
whether the corpus itself was inflation proofed since every
realized gain was shifted into the ERA. Ms. Rodell felt
that his statement was accurate. She added that under the
status quo a natural inflation proofing existed. The
challenge and policy call going forward was consideration
of how much and how fast the ERA would be drawn on if
restructured. She revealed that the ERA acted as a
"counterweight" to the activity in the corpus and drawing
down the ERA would strip the fund into one principle fund.
Vice-Chair Saddler asked whether she had concerns with the
ERA restructuring proposals. Ms. Rodell did not have any
concerns with the plans. She added that the PFC was
performing its statutory requirement dealing with the
corpus. She remarked that the ERA was always presented as a
reserve fund. She did not hold any legal concerns. He asked
whether she knew of any independent authority or legal
opinion on the matter. Ms. Rodell believed that PFC had all
of the necessary legal authority that was needed to invest.
She revealed that when the Constitutional Budget Reserve
(CBR) was established, statutes granting the corporation
authority (passed through the Commissioner of the
Department of Revenue) to manage the CBR. She added that
the authority was never utilized since its inception in
1991. She regarded the debate over appropriation of the
various funds out of the board's prevue.
3:25:09 PM
Vice-Chair Saddler asked whether she had any independent
authority or was relying on the Attorneys General's (AG)
opinion to maintain the position she stated in her previous
answer. Ms. Rodell asserted that she was relying on the
accumulation of all of the former AG's over the past 30
years.
Representative Gara wondered how the 6.4 percent return
over the last decade compared to the S&P (Standard and
Poor's) index. Ms. Rodell was uncertain and stated the
corporation did not use it as a benchmark. He deduced that
the corpus of the fund was "somewhat" inflation proofed by
the royalties deposit each year. Ms. Rodell was unsure but
there was a general sense that minerals royalties provided
some amount of natural inflation proofing. Representative
Gara noted that last year the inflation proofing amount was
$624 million and was projected at roughly $800 million in
the current year. Ms. Rodell reported that the inflation
proofing calculation for 2016 was $27 million.
Co-Chair Thompson mentioned a presentation that showed that
$800 million in royalties were deposited into the fund last
year.
Representative Gara suggested that the ultimate question
was whether she had an opinion if "just inflation proofing
the fund was enough with royalties and additional money to
meet the rate of inflation for the prior two years was
reasonable" until the state had sufficient revenue again.
Ms. Rodell thought it was a reasonable approach to take
under the circumstances and reminded him that the
legislature had the "power of the purse."
Co-Chair Thompson thanked Ms. Rodell for her presentation.
He reviewed the agenda for the following day.
ADJOURNMENT
3:30:06 PM
The meeting was adjourned at 3:30 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 201602_APFC_HouseFinance.pdf |
HFIN 2/24/2016 2:00:00 PM |
|
| HB 256 CS WorkDraft vS 2-23-16.pdf |
HFIN 2/24/2016 2:00:00 PM |
HB 256 |