Legislature(2009 - 2010)SENATE FINANCE 532
02/18/2009 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Constitutional Budget Reserve Performance Review | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 95 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
February 18, 2009
9:07 a.m.
9:07:02 AM
CALL TO ORDER
Co-Chair Hoffman called the Senate Finance Committee meeting
to order at 9:07 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice-Chair
Senator Johnny Ellis
Senator Kim Elton
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
None
ALSO PRESENT
Pat Galvin, Commissioner, Department of Revenue; Jerry
Burnett, Deputy Commissioner, Division of Treasury,
Department of Revenue
PRESENT VIA TELECONFERENCE
None
SUMMARY
SB 95 "An Act making supplemental appropriations,
capital appropriations, and other appropriations;
amending appropriations; making appropriations to
capitalize funds; 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."
SB 95 was POSTPONED.
^CONSTITUTIONAL BUDGET RESERVE PERFORMANCE REVIEW
Co-Chair Stedman related that the meeting would continue a
discussion of the Constitutional Budget Reserve (CBR), which
was begun last week. He explained that the CBR is the
state's main savings account. It requires a three-quarter
majority vote of the legislature to access the funds. The
CBR has two components; the main account and the subaccount,
which differs in size and in investment strategies than the
main account. He referred to handouts included in the
Finance Committee members' packets. A single page from SB
256, the FY08 supplemental bill, shows the CBR intent
language, lines 6-9. Alaska Statute 37.10.430 deals with
the management of the budget reserve fund.
9:10:41 AM
PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, introduced
himself.
Co-Chair Stedman referred to the document entitled
"Constitutional Budget Reserve Fund - January 31, 2009
Results" (copy on file) and requested an explanation of it.
9:11:47 AM
JERRY BURNETT, DEPUTY COMMISSIONER, DIVISION OF TREASURY,
DEPARTMENT OF REVENUE, explained that the top line shows the
balance in the corpus and the subaccount of the CBR as of
January 31, 2009, and the total balance of both accounts.
The next columns show the performance forecast for both
accounts; 4.53 percent for the corpus, and 7.61 percent for
the subaccount. He referred to the combined income loss for
FY09.
Co-Chair Stedman requested to know when the performance
numbers were updated. Mr. Burnett replied that the forecast
numbers were done, based on capital market projections, in
early 2008. The performance in 2008 did not meet
expectations. The forecast did not match expectations for
the last three years.
9:13:55 AM
Co-Chair Hoffman asked if the three-year performance ended
January 31, 2009. Mr. Burnett said it did.
Co-Chair Stedman asked if it was net or gross. Mr. Burnett
said net.
Co-Chair Hoffman asked what timeframe was anticipated. Mr.
Burnett said a 5-year expected performance.
Co-Chair Stedman commented how performance numbers were
presented. He wondered about the breadth of the data. Mr.
Burnett said it shows actual performance, fiscal year to
date. He offered to provide numbers for a five-year
schedule. Co-Chair Stedman asked for further explanation of
the balance and combined columns. Mr. Burnett clarified
that the combined column shows the corpus at the beginning
of the fiscal year, then with additional cash added, net
investment results, and the total.
Co-Chair Stedman asked if "gain/loss" should be included.
Mr. Burnett further clarified that that was depicted on the
right hand side of the column.
9:16:39 AM
Senator Elton asked when the subaccount was created. Mr.
Burnett said in 2000. Senator Elton asked who makes the
determination how much money is in the subaccount. Mr.
Burnett explained that when the subaccount was created in
2000, there was temporary language in statute that directed
the Department of Revenue to deposit $400 million to the
subaccount. There were no other deposits to the subaccount
prior to April of 2008. The amount was determined by the
commissioner of revenue and the deputy commissioner working
together.
Mr. Burnett referred to the second set of numbers; account,
balance, asset allocation. They show the breakout of the
corpus into broad market fixed income, intermediate-term
fixed income, and short-term fixed income. It shows the
percentages of asset allocations as of January 1, 2009.
Co-Chair Stedman described the broad market fixed income
actual and target amounts. Mr. Burnett continued to explain
asset allocation, actual allocation, and year-to-date income
of the corpus.
9:19:28 AM
Mr. Burnett commented on the year-to-date income. A
majority of the contributions were made later in the fiscal
year. When determining the performance, the income is based
on the actual amount that was in there at any time, rather
than a beginning or ending total. Looking at the income and
comparing it to the total does not yield the same results as
a percentage basis. Co-Chair Stedman added that it is a
timing issue.
Mr. Burnett explained the asset allocations of the
subaccount; domestic equity, international equity,
conservative aggregate, emerging income plus fund, and
short-term fixed income.
Co-Chair Hoffman asked if they are the original allocations
from 2000 for both accounts, or if they had been adjusted.
Mr. Burnett thought the only change since 2000 was the
addition of the emerging income plus fund - the
international fixed income fund - in 2008.
Co-Chair Stedman restated it as "rebalancing". He asked how
the portfolio was rebalanced and when it was done.
9:22:42 AM
Commissioner Galvin explained the timing of the initial
allocation and the rebalancing, which occurs continuously,
as needed.
Co-Chair Stedman said it looks like the domestic equity
asset allocation is done monthly. Commissioner Galvin said
it is monitored on a daily basis. Rebalancing is done as
needed and rebalancing is done on a regular basis. He
suggested asking Gary Bader for a further explanation.
9:24:59 AM
Senator Thomas asked what the conservative aggregate is.
Mr. Burnett said it is a broad market fixed income fund.
Mr. Burnett continued to explain the year-to-date income
statement of the subaccount. No additional contributions
were made into the subaccount after the first of the year.
All were made in April of 2008. There was a loss of income
with a balance of about $3.39 billion as of January 31,
2009.
Co-Chair Stedman maintained that the subaccount was
previously a fairly static portfolio. Mr. Burnett said
there was only one transaction into the subaccount in 2000.
The next transaction was made in April of 2008.
9:26:51 AM
Mr. Burnett explained the aggregate of fixed income and
equity investments to the subaccount. Co-Chair Stedman
expressed confusion about the percentage column.
Commissioner Galvin corrected that it should be 31 percent,
not 72 percent.
Co-Chair Hoffman pointed out a loss of over $1 billion for
12 months ending January 31, 2009. Mr. Burnett said it was
for the fiscal year; for seven months beginning July 1 and
ending January 31. Co-Chair Hoffman asked if the
performance forecast of 7.6 percent for five years was
accurate. Mr. Burnett said it was correct.
9:28:34 AM
Mr. Burnett continued to explain the major contributions to
the CBR from July 2007 to today.
Co-Chair Stedman referred to handouts entitled, "AY10: FY
2009 Proposed CBRF Investment Guidelines - Subaccount" and
AY19: FY 2009 Proposed CBRF Investment Guidelines - Main
Account" (copy on file). He wondered if they were updated
quarterly. Commissioner Galvin said they were reviewed
quarterly and approved annually. Co-Chair Stedman observed
that a 1 percent fund was not included on the list, but that
it was insignificant.
9:30:21 AM
Co-Chair Hoffman returned to the contribution list and noted
authorization in last year's and this year's budget to
deposit $5.8 billion into the CBR. He asked if the dates
listed were the dates that deposits were made to the corpus.
Mr. Burnett explained the various deposits by date.
Previous to April of 2008, they amounted to tax settlements
and after that they were dates when the cash was transferred
to the CBR.
Co-Chair Hoffman asked if on April 30, 2008, a transfer was
made from the corpus to the subaccount. He wondered if
there were subsequent deposits and how the amounts were
determined. Commissioner Galvin said there was one transfer
and the amount was determined by Deputy Commissioner Andrews
and himself, recognizing the intent language in the budget.
The transfer was made at that time to recognize that this
was the total amount that would come in over the fiscal
year.
9:32:42 AM
Co-Chair Stedman referred to a handout containing intent
language of SB 256. He noted a reference on line 3
appropriating $2.6 billion from the general fund to the CBR.
He maintained that there was no reference in the bill for
transferring an additional $1 billion from the corpus to the
subaccount. He asked if there were conversations with
finance co-chairs regarding that number. Commissioner
Galvin explained it was a combination of a broader
discussion of the subaccount being for aggressive
investments. The account was intended to be a five-year
cash flow. Historic use of the fund was also considered.
Co-Chair Stedman questioned if there were conversations with
finance committee co-chairs about potential cash flow needs
and priorities of the state. Commissioner Galvin said he
relied upon Mr. Andrews' discussions with co-chairs of the
finance committees. Commissioner Galvin shared information
that Mr. Andrews provided.
9:36:23 AM
Co-Chair Stedman reiterated that he strongly spoke against
modifying allocations. Co-Chair Hoffman said he had no
discussions with Mr. Andrews as to how allocations to the
subaccount should be made.
Co-Chair Stedman referred to lines 6 - 9 and suggested that
the committee decide how that intent language should be
modified.
Commissioner Galvin said that was language in the FY 08
supplemental, not the budget.
9:38:34 AM
Co-Chair Stedman understood that it was supplemental
language. He referred to subsection (c) of AS 37.10.430,
which contains language about the subaccount of the CBR.
Co-Chair Stedman noted that line 8 of the supplemental says
"in a manner of maximizing the long-term earnings of the
fund while meeting the minimum liquidity requirements of the
state". He commented that he did not understand how
"maximizing the long-term liquidity requirements of the
state" relates to a savings account. Mr. Galvin commented
that the subaccount remains entirely liquid, which is
distinguished from the investment period or the amount of
risk. The allocation is between equities and fixed income.
The equity market that the fund is invested in is completely
liquid. He agreed that the language could be understood
differently than what the subaccount is currently used for.
9:40:14 AM
Co-Chair Stedman said the way he reads lines 8 and 9 is,
"the liquidity requirements of the state, not the liquidity
of the assets held". In other words, "the need to draw on
the money to meet our obligations, versus an execution by a
portfolio manager to liquidate a particular holding and put
it in cash". Commissioner Galvin emphasized that there are
two accounts. The subaccount is statutorily designated as
the "plus five years". The language says "maximize the
long-term earnings", which, given two choices, means "move
it into the one that has the maximum return". Liquidity
could have multiple meanings. In terms of liquidity of the
state, the interpretation "in the context of the existence
of the subaccount, and the direction between the main and
the sub, I think the language seems fairly clear that the
minimum liquidity requirements of the state is a recognition
that the subaccount is set up for five-plus years".
9:42:19 AM
Co-Chair Stedman disagreed. He referred to conversations
prior to inclusion of the language, about whether to include
it in a bill or in letters from the co-chairs. Commissioner
Galvin reported on a request to Mr. Andrews to get direction
from the legislature on the use of the CBR. He said there
has to be a conversation as to the process of which funds to
access first. Historically, the CBR has been the fund for
the last draw. There is currently almost $10 billion in
various reserve funds. The question is when the legislature
will go to the CBR, first or last.
9:44:39 AM
Senator Elton related that he has not thought of the CBR as
the last draw. He requested a prioritized list of the
rankings of the draws. Commissioner Galvin did not see that
as part of his role, but rather as the legislature's role to
rank the fund sources. He reiterated that, historically,
the CBR has been used when there are no longer reserves. He
listed several reserves; the statutory budget reserve, the
public education fund, and Alaska Housing Finance funds.
When looking at a potential 5-year draw, there was a need to
prioritize the draws. It remains an unanswered question
about potential draws in the future. It will be a
reflection of legislative intent. It is a question of
liquidity.
9:48:36 AM
Co-Chair Stedman returned to the issue of added language in
the supplemental bill. He wondered if there would be any
restrictions to allocating a heavier concentration of the
CBR into the subaccount if the language wasn't in there.
Commissioner Galvin did not believe so.
Co-Chair Stedman thought that the language was not needed
and it was "cover your butt" language. He maintained that
there was not conversation last year with the Senate Finance
Committee regarding the fund. Commissioner Galvin replied
that it was a conversation between the executive and
legislative branches as it relates to the fund. He
maintained that the language makes sense in terms of
communicating legislative intent. He thought that the
language being included in the supplemental was meaningful.
9:51:27 AM
Co-Chair Stedman recalled conversations with the governor
regarding needing capital projects in response to the
economic slow down. No one saw the magnitude of the
decline, but it was recognized last spring. Those
conversations played into a lack of interest in reallocating
a heavier concentration of funds in the CBR into aggressive
accounts. Now the conversation is about the exposure of a
large portion of CBR, the possibility of needing to
liquidate, and scaling back on capital spending. It is all
related and is a point of agitation. He concluded that
there was an attempt to circumvent the Senate Finance
Committee.
9:53:57 AM
Co-Chair Hoffman stated that it is known that there will be
amendments to the FY09 budget and a shortfall of $1.2 to
$1.6 billion. There is $6.6 billion in the CBR. He
questioned where the state would find the funds to make up
for the shortfall and if there would be a reallocation
between the corpus and the subaccount of the CBR. He asked
Commissioner Galvin how that decision would be made.
9:56:00 AM
Commissioner Galvin replied that legislative language would
determine the source of the funds for the shortfall, either
the CBR, the statutory budget reserve, or somewhere else.
Co-Chair Hoffman said he was assuming it would come out of
the CBR. Commissioner Galvin said it would come from the
corpus of the CBR. The subaccount is intended for "five
years plus". He addressed the question of a potential
reallocation. He would be looking for guidance from the
legislature as to expectations about future CBR use.
Reallocation is possible, but not absolute. It depends on
input from the legislature. He appreciated that individual
legislators have a different view regarding the budget;
however, he emphasized that this is the budget that was
passed. He pointed out that his department has to have
legislative direction.
9:58:57 AM
Co-Chair Stedman reminded the commissioner that line 3,
Section 33, of the supplemental bill lists the sum of $2.6
billion, not $4.1 billion. Another issue is the amount
above $2.6 billion, which is not reflected anywhere.
Commissioner Galvin said that was a helpful clarification.
Senator Elton pointed out that the language "it is the
intent of the legislature" is permissive and allows for
making deposits to the subaccount, but it also allows for
moving money out of the subaccount and back to the corpus.
He assumed that both accounts are fairly actively managed.
He wondered if Commissioner Galvin considered getting in
touch with the co-chairs of both finance committees about
reallocating funds back to the corpus. Commissioner Galvin
said he did not. He spoke of the expectation that the
subaccount is the "plus 5 years" investment. He talked of
investment strategies. He said the primary question is, did
things change so dramatically that the funds would need to
be moved before five years is up. He said a clearer picture
of this year's budget cycle is needed.
10:03:33 AM
Senator Elton observed that now was the time to take a look
at reallocating those funds.
Co-Chair Stedman reminded the committee that there was a
shortfall of at least $1.2 for FY09. At $50 per barrel of
oil, the shortfall would be about $2 billion. He maintained
that the conservative side of the CBR would be wiped out by
FY10 at that price. Commissioner Galvin noted that part of
the difficulty is that the decision making regarding this
process is awkward. It requires the legislature to give
direction as to which of the funds to access and when they
will be needed. The significant driver in the need to
reallocate is the change in revenue expectations. The
state's reserve needs ought to be examined.
10:08:12 AM
Senator Elton emphasized that all accounts could be depleted
by FY14, which is a five-year forecast. It does not matter
which account is drawn from first if all funds will be gone.
He thought it better to be conservative when making
projections. Commissioner Galvin suggested, when talking of
"five years and out" from an investment standpoint, asking
what is the expectation for the funds. He spoke of
reasonable projections. He maintained that in three months
there will be a clearer picture. There was no point in the
fall where the decision to reallocate was reached, but there
could be a point reached in the near future.
10:12:15 AM
Co-Chair Stedman clarified that, generally speaking, the
last reserve account fallback is the permanent fund, not the
CBR. The permanent fund has $3 million in losses, which
makes it not a stop gap. He recalled previous testimony
about the earnings reserve. He maintained that there would
be a high reluctance to liquidate forward funding in
education. He spoke of the SBR account, which requires a
simple majority vote to access. After the CBR is
liquidated, about $1 billion remains in the SBR. There are
not a lot of options. He addressed the revenue forecast and
the CBR at different oil prices. Soon, the legislature will
be engaged in a discussion about how long the CBR will last
and which assets to liquidate first. He wished to work with
the DOR on this in an orderly process. Commissioner Galvin
agreed.
10:16:02 AM
Co-Chair Stedman returned to Co-Chair Hoffman's question
about the forecast for earnings projections in the CBR for
FY09 and FY10.
Commissioner Galvin explained the way that the budgeting is
done. He explained the performance forecast for the CBR and
how it is adjusted.
Mr. Burnett spoke of a pending updated forecast for each of
the funds. He expected it to be sent to the committee's
staff by the afternoon.
Senator Huggins expressed disappointment regarding methods
of adding language and the direction the CBR is taking. He
wanted the committee to be involved in decisions and asked
for future documentation and cooperation from the
commissioner.
10:19:59 AM
Commissioner Galvin assured the committee that he would
cooperate. He questioned the effectiveness of the
legislature's involvement in the decision making process.
Co-Chair Stedman cautioned not to underestimate the
sensitivity of a billion dollar loss in the future interest
of the Senate Finance Committee to exercise its authority to
protect the treasury.
Senator Thomas spoke of a concern regarding the performance
forecast of the CBR and the capital market forecast.
10:24:04 AM
Commissioner Galvin explained that the performance forecast
for the various classes does not meet the near-term historic
returns. He restated Senator Thomas's concern "was there a
different allocation between equities and fixed that would
have returned the same amount without the same amount of
risk."
Senator Thomas spoke about the five-year timeframe.
Commissioner Galvin concluded that if there were an asset
allocation that would have provided a similar target return
with less risk "we would have taken it". This mix is based
on forward-projected returns.
10:27:03 AM
Co-Chair Hoffman recalled when the CBR was discussed and
adopted. The concept of that budget was initiated by the
legislature, not the administration. It is time to look at
the statute and re-evaluate how the two accounts work. One
of the goals is to stretch the savings account out as far as
possible, and to do so, be cognizant as to how the funds are
invested.
Co-Chair Stedman said, "It's more important - return of your
money than return on it."
ADJOURNMENT
The meeting was adjourned at 10:27 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DOR CBR Chart.pdf |
SFIN 2/18/2009 9:00:00 AM |
|
| CBRF Investment Guidelines.pdf |
SFIN 2/18/2009 9:00:00 AM |