Legislature(2009 - 2010)SENATE FINANCE 532

02/01/2010 09:00 AM Senate FINANCE


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09:06:46 AM Start
09:10:02 AM Overview by Department of Revenue of State Savings Accounts and Budget Reserves.
10:24:45 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Overview by Dept of Revenue: State TELECONFERENCED
Savings Accounts and Budget Reserves
                 SENATE FINANCE COMMITTEE                                                                                       
                     February 1, 2010                                                                                           
                         9:06 a.m.                                                                                              
                                                                                                                                
9:06: 46 AM                                                                                                                   
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  Stedman   called  the  Senate   Finance  Committee                                                                    
meeting to order at 9:06 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Johnny Ellis                                                                                                            
Senator Dennis Egan                                                                                                             
Senator Donny Olson                                                                                                             
Senator Joe Thomas                                                                                                              
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Charlie Huggins, Vice-Chair                                                                                             
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Senator  Joe Paskvan;  Pat Galvin,  Commissioner, Department                                                                    
of Revenue; Jerry Burnett,  Deputy Commissioner, Division of                                                                    
Treasury,   Department  of   Revenue;   Gary  Bader,   Chief                                                                    
Investment   Officer,  Treasury   Division,  Department   of                                                                    
Revenue.                                                                                                                        
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
^Overview  by   Department  of  Revenue  of   state  savings                                                                    
accounts and budget reserves.                                                                                                   
                                                                                                                                
9:10:02 AM                                                                                                                    
                                                                                                                                
PAT GALVIN, COMMISSIONER,  DEPARTMENT OF REVENUE, introduced                                                                    
his colleagues. He explained that  Mr. Burnett would provide                                                                    
the committee  with an overview of  the department's various                                                                    
savings accounts,  with himself  and Mr. Bader  available to                                                                    
answer questions.                                                                                                               
                                                                                                                                
JERRY  BURNETT, DEPUTY  COMMISSIONER, DIVISION  OF TREASURY,                                                                    
DEPARTMENT  OF REVENUE  provided a  PowerPoint presentation:                                                                    
"An Update  on the  State's Savings Accounts"  and discussed                                                                    
Slide 3:  "General fund and other  non-segregated funds." He                                                                    
stated that as  of December 31, 2010, the  account was worth                                                                    
$6 billion.  He explained  that the  general fund  was where                                                                    
tax money  is held  until it  is used  to make  payments. He                                                                    
pointed out that approximately $1  billion was in a type one                                                                    
Memorandum  of Understanding  (MOU)  account.  The type  one                                                                    
account includes various funds.  Some are available to spend                                                                    
and others are  not. The funds retain their  earnings at the                                                                    
end of the  year.  Another $2 billion of  the $6 billion was                                                                    
in a type  two MOU account, which  includes various accounts                                                                    
where  the   earnings  remain  in  the   general  fund.  The                                                                    
unrestricted general fund  begins each year at  zero, so the                                                                    
balance of $3  billion was from the current  year; the money                                                                    
was appropriated in previous years but had yet to be spent.                                                                     
                                                                                                                                
9:14:40 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  asked  for  explanation  of  the  reverse                                                                    
sweep. Mr. Burnett replied that  since 1993, there have been                                                                    
borrowings from  the Constitutional Budget Reserve  (CBR) to                                                                    
balance  the budget.   Over  time, approximately  $5 billion                                                                    
was borrowed.  At the  end of each  fiscal year,  all unused                                                                    
money  that is  not appropriated  from the  general fund  is                                                                    
moved into  the CBR by  operation of the  constitution. Each                                                                    
year in either  the operating or capital budget,  there is a                                                                    
provision   that    appropriates   the   money    that   was                                                                    
automatically paid from  the general fund into  the CBR back                                                                    
into subfunds  of the general fund.  Following a legislative                                                                    
appropriation to  repay working  capital funds  the previous                                                                    
year,  the  unrestricted  general  fund would  have  a  zero                                                                    
balance, but the fund's balance  was restored with a debt to                                                                    
the CBR of about $401 million.                                                                                                  
                                                                                                                                
9:17:29 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  agreed there must  be a sweep to  zero and                                                                    
then  a  reversal  of  the   sweep  to  meet  the  technical                                                                    
requirements  to  operate  the state;  the  structures  will                                                                    
change with  the eventual  payoff of  the CBR.  He requested                                                                    
definitions of  the terms  illustrated in  the pie  chart on                                                                    
Slide 3.                                                                                                                        
                                                                                                                                
9:19:30 AM                                                                                                                    
                                                                                                                                
GARY  BADER, CHIEF  INVESTMENT  OFFICER, TREASURY  DIVISION,                                                                    
DEPARTMENT OF  REVENUE, explained  that the  depicted short-                                                                    
term fixed  income is  depicted cash  of thirteen  months or                                                                    
less, and the intermediate term  is depicted as one to three                                                                    
years.                                                                                                                          
                                                                                                                                
Co-Chair  Stedman  clarified  that the  term  "money  market                                                                    
account" would be a better  way to describe the accounts for                                                                    
the public.                                                                                                                     
                                                                                                                                
Mr.  Burnett noted  the  market value  over  the past  three                                                                    
years, specifically remarking on  the good tax collection in                                                                    
2008.  The  year-to-date  (YTD) earnings  in  the  "Returns"                                                                    
section refers to the calendar  year of 2009, and the fiscal                                                                    
year-to-date (FYTD) earnings are from  July 1 to December 31                                                                    
of  2009. He  thought the  funds had  done well  relative to                                                                    
bench marks and expectations.                                                                                                   
                                                                                                                                
Co-Chair Stedman noticed the  substantial spread between the                                                                    
benchmarks of  the general fund,  and requested  the numbers                                                                    
be explored further.                                                                                                            
                                                                                                                                
9:22:04 AM                                                                                                                    
                                                                                                                                
Co-Chair Hoffman  wondered how  the forecast of  3.6 percent                                                                    
was determined, because  the FYTD was only  1.6 percent. Mr.                                                                    
Burnett responded  that the  FYTD was  only six  months, but                                                                    
when  doubled  it  was  3.2  percent,  a  little  below  the                                                                    
forecast of 3.6 percent.                                                                                                        
                                                                                                                                
9:23:04 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  noted that  Alaska was  reclassifying $700                                                                    
million in other  state funds to general  funds, and queried                                                                    
the impact  on managing  the investment. Mr.  Burnett stated                                                                    
that  Alaska  will continue  to  invest  funds in  the  same                                                                    
manner.                                                                                                                         
                                                                                                                                
Mr. Burnett  continued with Slide 4:  "Constitutional Budget                                                                    
Reserve Fund." He mentioned that  the subaccount is actually                                                                    
larger than  the main  account. He  explained that  the main                                                                    
account refers  to available money invested  in intermediate                                                                    
term, short term, and broad  market securities with moderate                                                                    
risk. Most of the growth  from 2007 to 2009 occurred because                                                                    
of  appropriations  and settlements  in  the  range of  $5.6                                                                    
million and some from the sweep of the last fiscal year.                                                                        
                                                                                                                                
Co-Chair  Stedman  requested  definitions  of  each  of  the                                                                    
division's  titles in  the  pie  chart, specifically  "Broad                                                                    
Market." Mr.  Bader explained that  the broad  market refers                                                                    
to what was  previously known as the  Lehman Aggregate fixed                                                                    
income  benchmark,   and  is  now  known   as  the  Barclays                                                                    
Aggregate.  The composition  of the  aggregate is  generally                                                                    
mortgages,  treasury  bills,   corporate  bonds,  and  other                                                                    
asset-backed securities.   The corporate  bond's composition                                                                    
changes  as the  market changes,  but the  aggregate is  the                                                                    
benchmark. The  intermediate term refers to  a Merrill Lynch                                                                    
1-3 Government Index and the  short-term fixed income refers                                                                    
to money market or cash.                                                                                                        
                                                                                                                                
Co-Chair  Stedman   asked  whether  the  broad   market  was                                                                    
actively  managed or  indexed. Mr.  Bader responded  that it                                                                    
was actively managed.                                                                                                           
                                                                                                                                
9:26:35 AM                                                                                                                    
                                                                                                                                
Mr.  Burnett  furthered  that about  $16  billion  of  fixed                                                                    
income is actively managed by the Treasury Division.                                                                            
                                                                                                                                
Co-Chair  Stedman  asked   what  was  specifically  actively                                                                    
managed  and  indexed.  He  realized  the  presentation  was                                                                    
generic and  would include more  detail later,  but remarked                                                                    
that  the worst  market in  years was  not reflected  in the                                                                    
presentation.                                                                                                                   
                                                                                                                                
Senator  Thomas   wondered  whether   the  yield   was  only                                                                    
interest. Mr.  Bader explained that the  returns represented                                                                    
interest  earnings   plus  losses   or  gains   from  market                                                                    
movement.                                                                                                                       
                                                                                                                                
Senator Thomas  queried the  benchmarks. Mr.  Bader answered                                                                    
that the benchmarks  for the broad market  were the Barclays                                                                    
Aggregate, the  intermediate term was the  Merrill Lynch 1-3                                                                    
Government  Index,  and the  cash  was  the 90-day  Treasury                                                                    
Bill.                                                                                                                           
                                                                                                                                
9:28:34 AM                                                                                                                    
                                                                                                                                
Mr. Burnett pointed out that  the [2009] YTD actual was 4.23                                                                    
percent, the  FYTD actual was  2.46 percent,  the three-year                                                                    
actual was 5.56  percent, and the five-year  actual was 4.81                                                                    
percent. An  exception was for the  three-year actual, which                                                                    
did  not   outperform  the  benchmarks.  Based   on  capital                                                                    
assumptions  and benchmarks,  the forecast  of 4.18  percent                                                                    
was higher than the FYTD of 2.46 percent.                                                                                       
                                                                                                                                
Co-Chair Stedman asked whether Mr.  Burnett had the one year                                                                    
actual   with  him.   Mr.  Burnett   offered   to  get   the                                                                    
information.                                                                                                                    
                                                                                                                                
Mr. Burnett  continued that  the other part  of the  CBR was                                                                    
treated  as  an investment  fund,  and  was created  by  the                                                                    
legislature  in  1998. At  that  time,  the legislature  was                                                                    
considering  borrowing  money, and  wanted  to  be sure  the                                                                    
investments were earning  a higher rate than  what was being                                                                    
borrowed.  The  decision  came out  of  the  Senate  Finance                                                                    
Committee. The subaccount lost 25  percent in the first year                                                                    
and had  $400 million, but it  did rebound a bit.  The fixed                                                                    
income  was  the  same  as  the broad  market  in  the  main                                                                    
account. It  has international equities, which  is a Europe,                                                                    
Far East, and Asia (EFA) index fund.                                                                                            
                                                                                                                                
Mr. Bader continued that the  international equities are EFA                                                                    
index,  but  are   also  80  percent  active.   The  EFA  is                                                                    
considered both indexed and actively managed.                                                                                   
                                                                                                                                
9:31:21 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  observed that  the  EFA  was basically  a                                                                    
80/20 split. Mr. Bader agreed.                                                                                                  
                                                                                                                                
Mr. Bader pointed  out that the Domestic Equity  is based on                                                                    
the Russell 3000  Index. The Russell 3000 Index  is an index                                                                    
of approximately  3000 domestic  companies with  the highest                                                                    
market value. Russell looks at  the companies and creates an                                                                    
index based on them.                                                                                                            
                                                                                                                                
Mr. Burnett continued that the  Russell 3000 Index is a much                                                                    
broader index  than the Dow  Jones Industrial  Average (DJI)                                                                    
or  Standard &  Poor's 500  (SP 500).  He remarked  that the                                                                    
Russell  3000  index  mirrors   the  domestic  economy  more                                                                    
closely than the DJI or SP 500.                                                                                                 
                                                                                                                                
Co-Chair  Stedman  pointed  out   that  the  DJI  represents                                                                    
industrial stocks and the SP  500 represents the 500 largest                                                                    
stocks, so the  Russell 3000 Index is  merely broadening out                                                                    
to the 3000 largest stocks.                                                                                                     
                                                                                                                                
Co-Chair  Hoffman asked  whether the  forecast included  the                                                                    
fiscal year.  Mr. Burnett replied  that it was  the forecast                                                                    
for  the asset  allocation,  and is  based  annually on  the                                                                    
capital market.                                                                                                                 
                                                                                                                                
Co-Chair Hoffman wondered whether  the general fund forecast                                                                    
was for  the fiscal year  or the calendar year.  Mr. Burnett                                                                    
specified that it was for the fiscal year.                                                                                      
                                                                                                                                
Co-Chair Hoffman  revisited the  general fund (Slide  3) and                                                                    
pointed out that the FYTD  was 1.6 percent, but the forecast                                                                    
was  3.6 percent.  The forecast  results  from doubling  the                                                                    
FYTD and factoring in a  0.4 percent growth. He then queried                                                                    
a discrepancy  in the CBR subfund  returns, specifically the                                                                    
FYTD of 16.61 percent with a forecast of only 7.87 percent.                                                                     
                                                                                                                                
9:34:08 AM                                                                                                                    
                                                                                                                                
Mr.   Bader  explained   that  the   high-risk  funds   were                                                                    
predominantly stocks,  which have  far greater  returns, but                                                                    
also suffer from greater volatility.                                                                                            
                                                                                                                                
Co-Chair Hoffman  wondered whether  the stock  markets would                                                                    
lose  funds, because  the forecast  was so  much lower  than                                                                    
that FYTD.  Mr. Burnett explained  that the forecast  was as                                                                    
expected at  the beginning of  the fiscal year, so  the FYTD                                                                    
has done better than what was forecast.                                                                                         
                                                                                                                                
Co-Chair  Stedman   added  that  the  broad   market  had  a                                                                    
substantial rebound above what was expected.                                                                                    
                                                                                                                                
Co-Chair Hoffman assumed that the  forecast was for the next                                                                    
six months,  and noted  that the  forecast should  have been                                                                    
updated. Mr.  Burnett explained that his  presentation would                                                                    
later  highlight forecast  incomes for  the Revenue  Sources                                                                    
Book, which would update the  actuals using the 7.87 percent                                                                    
earnings rate as the forecast.                                                                                                  
                                                                                                                                
Co-Chair Hoffman  clarified that the forecast  was obsolete.                                                                    
Mr. Burnett conceded.                                                                                                           
                                                                                                                                
Co-Chair   Stedman  explained   that  historical   data  and                                                                    
assumptions are used when projecting  a return in a volatile                                                                    
equity market.  There is variance  with the forecast,  so it                                                                    
is difficult  to forecast the  equity market in  advance. He                                                                    
suggested exploring how benchmarks are created.                                                                                 
                                                                                                                                
9:38:55 AM                                                                                                                    
                                                                                                                                
Mr.  Bader stated  that projected  earnings assumptions  for                                                                    
each of  the asset  classes were  presented to  the Treasury                                                                    
Division and the Alaska  Retirement Management Board (ARMD).                                                                    
Results  were   put  into  an   optimizer  that   looked  at                                                                    
combinations of  risk and return,  which could be used  as a                                                                    
central tendency forecast.                                                                                                      
                                                                                                                                
9:40:25 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman   requested  a  ten-year   return  actual,                                                                    
because  the  last  ten  years  were  historically  low  for                                                                    
rolling ten-year averages. He suggested  a focus on range of                                                                    
outputs and  dollars based on  allocations, rather  than the                                                                    
broad  distribution  of the  7.87  percent  forecast of  the                                                                    
high-risk investments. He anticipated  a presentation of all                                                                    
the  major  accounts  at once,  including  the  $35  billion                                                                    
permanent  fund, the  $15 billion  retirement accounts,  and                                                                    
the  savings   accounts.  He  clarified   that  he   is  not                                                                    
interested  in going  into the  retirement accounts,  but he                                                                    
stressed  the importance  of understanding  how  all of  the                                                                    
accounts in  the state  are managed.  He projected  that the                                                                    
permanent fund will need some  serious attention after a few                                                                    
decades, because the oil and  gas basins will mature and dry                                                                    
out.                                                                                                                            
                                                                                                                                
Co-Chair Stedman queried the  definition of "moderately long                                                                    
investment horizon."  The year before, the  account had been                                                                    
referred  to  as  "moderately  long  savings  account."  Mr.                                                                    
Burnett reported that both referred to the same thing                                                                           
                                                                                                                                
9:44:06 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman thought  an evolution  may occur,  because                                                                    
there  had been  some  internal  discussion among  committee                                                                    
members  as  to whether  the  state  should hedge  with  oil                                                                    
prices. There had  also been discussion that  the large cash                                                                    
reserves were  the hedging mechanism. He  suggested that the                                                                    
taxes are structured  to capture spikes, so  the revenue was                                                                    
held to protect against implosions  in price. He pointed out                                                                    
that  there  were  peripheral influences,  and  the  finance                                                                    
committee  needed  to  reassure the  administration  of  the                                                                    
committee's direction.                                                                                                          
                                                                                                                                
Senator  Olson   addressed  the  subfund  of   the  CBR  and                                                                    
requested explanation  of the difference between  the market                                                                    
values  from  2007 and  2008,  because  it jumped  over  650                                                                    
percent in  just one  year. Mr.  Burnett explained  that the                                                                    
appropriation of $2.3  billion for the CBR was  put into the                                                                    
subfund and  transferred to the  main account. In FY  08 and                                                                    
FY  09,   the  legislature  appropriated   approximately  $5                                                                    
billion to the  CBR. The difference was an  addition of $4.1                                                                    
million and investment losses.                                                                                                  
                                                                                                                                
Co-Chair  Stedman recommended  the committee  have a  policy                                                                    
discussion  regarding  how the  money  should  be spent.  He                                                                    
stated  that  the  committee may  want  to  restructure  the                                                                    
allocation.                                                                                                                     
                                                                                                                                
Senator  Olson wondered  whether Co-Chair  Stedman wanted  a                                                                    
more conservative approach.                                                                                                     
                                                                                                                                
9:48:03 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  explained that he would  like a discussion                                                                    
among committee  members, but he anticipated  that the group                                                                    
would  decide  on  a more  conservative  structure  for  the                                                                    
savings account.                                                                                                                
                                                                                                                                
Mr.   Burnett   continued   with  Slide   5:   "Power   Cost                                                                    
Equalization Fund."  The Power Cost Equalization  Fund (PCE)                                                                    
is  an endowment  fund for  paying power  cost equalization.                                                                    
The  fund  has  a  7   percent  annual  payout,  20  percent                                                                    
international  equity,  37  percent  fixed  income,  and  43                                                                    
percent  domestic equity.  The  fixed income  refers to  the                                                                    
broad market and  the domestic equity refers  to the Russell                                                                    
3000 Index.                                                                                                                     
                                                                                                                                
Co-Chair  Stedman  surmised  that   the  allocation  was  63                                                                    
percent equity and 37 percent  income and was similar to the                                                                    
subaccount of the CBR. Mr. Burnett agreed.                                                                                      
                                                                                                                                
Co-Chair Stedman asked  how far behind the CBR  was from the                                                                    
initial  investment.  Mr.  Burnett   reported  that  it  was                                                                    
currently behind by about $300 million.                                                                                         
                                                                                                                                
Co-Chair  Stedman queried  the numbers  at the  beginning of                                                                    
January,  in  order  to  have  numbers  align.  Mr.  Burnett                                                                    
explained  that  the  CBR was  about  $200  million  behind,                                                                    
stating that it was approximately the same as June 2008.                                                                        
                                                                                                                                
Co-Chair   Stedman   asked   whether  the   allocation   was                                                                    
intentional. Mr.  Burnett explained that the  allocation was                                                                    
set to  achieve the  return necessary to  pay out  7 percent                                                                    
per  year. On  an efficient  frontier with  specific assets,                                                                    
there will be similar asset allocations.                                                                                        
                                                                                                                                
Co-Chair Stedman  queried the time  horizon of the  PCE. Mr.                                                                    
Burnett stated  that the horizon  was long term with  no end                                                                    
to  the PCE  endowment fund,  likening it  to the  permanent                                                                    
fund.                                                                                                                           
                                                                                                                                
9:51:41 AM                                                                                                                    
                                                                                                                                
Co-Chair Hoffman pointed  out that the CBR  has two classes:                                                                    
moderate  and high  risk. He  wondered  where the  direction                                                                    
came to invest  all the PCE on high risk.  Mr. Burnett noted                                                                    
the statute  that sets  up the endowment  fund requires  a 7                                                                    
percent  annual  payout, so  it  is  invested assuming  a  7                                                                    
percent return.                                                                                                                 
                                                                                                                                
Co-Chair  Hoffman requested  they focus  on a  more moderate                                                                    
investment scheme. Mr. Burnett noted  that 37 percent of the                                                                    
PCE is invested in fixed-income securities and broad index.                                                                     
                                                                                                                                
Co-Chair Hoffman  surmised that a high-risk  investment will                                                                    
only bring  in 7 percent.  Mr. Burnett explained  that based                                                                    
on the  asset mix and  the capital assumptions,  the central                                                                    
tendency  over  time  would  be   to  achieve  the  forecast                                                                    
earnings of  about 7 percent.   Furthermore, the  higher the                                                                    
rate  of  return  that  one tries  to  achieve,  the  higher                                                                    
probability of a loss in any given period.                                                                                      
                                                                                                                                
Co-Chair Hoffman requested the ten-year actual.                                                                                 
                                                                                                                                
Co-Chair   Stedman   considered   the   7   percent   return                                                                    
unsustainable,  because  common  payouts  are  closer  to  4                                                                    
percent. He worried  that the ten-year actual  would be less                                                                    
than 7 percent,  because the five-year actual  was only 3.55                                                                    
percent.   He  reiterated   the  importance   of  a   policy                                                                    
discussion   about  the   potential  erosion   of  the   PCE                                                                    
purchasing power and actual value.                                                                                              
                                                                                                                                
9:55:58 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman discussed  the  portfolio  as a  long-term                                                                    
time  horizon in  perpetuity, which  is  different from  the                                                                    
five-year  time  horizon  of   the  CBR.  He  suggested  the                                                                    
committee look at the difference later.                                                                                         
                                                                                                                                
Mr.  Burnett  pointed out  that  the  YTD return  was  21.64                                                                    
percent, the  FYTD return was  15.77 percent,  the five-year                                                                    
actual  was  3.71 percent,  and  the  three-year actual  was                                                                    
zero.  Most  of the money went into the  account about three                                                                    
years prior.                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  reiterated  that   there  was  an  equity                                                                    
infusion, and suggested it be  measured by weighing the cash                                                                    
flow based  on time. Mr.  Burnett indicated that  the timing                                                                    
was not the best.                                                                                                               
                                                                                                                                
Co-Chair  Stedman  mentioned  the  equity  infusion  to  the                                                                    
courts accounts. He understood good and bad timing.                                                                             
                                                                                                                                
9:58:12 AM                                                                                                                    
                                                                                                                                
Mr. Burnett  addressed Slide 6: "Public  School Trust Fund."                                                                    
The  income account  is 100  percent  fixed income,  because                                                                    
that was where the money was  spent from on an annual basis.                                                                    
The  principle account  is moderate  risk,  with 43  percent                                                                    
domestic equity,  and 57 percent fixed  income. He explained                                                                    
that  the fund  lost money,  but  has regained  it. The  YTD                                                                    
returns  were 17.64  percent, the  FYTD were  12.28 percent,                                                                    
the three-year actuals were 1.38  percent, and the five-year                                                                    
actuals were 3.59 percent, with a forecast of 6.95 percent.                                                                     
                                                                                                                                
Co-Chair Stedman  requested an inflation column  be included                                                                    
in a revised chart. He  stressed the importance of observing                                                                    
the  benchmarks,  purchasing  power,  and  performance.  Mr.                                                                    
Burnett  agreed and  explained  that the  income  fund is  a                                                                    
cash-only account.                                                                                                              
                                                                                                                                
Co-Chair Stedman inquired  about the pay out  for the income                                                                    
account. Mr. Bader responded that  the interest earnings and                                                                    
dividend  earnings  go into  the  income  account, which  is                                                                    
available for appropriation by the legislature.                                                                                 
                                                                                                                                
Co-Chair  Stedman asked  how the  losses are  allocated. Mr.                                                                    
Bader  replied  that  the  capital   gains  and  losses  are                                                                    
retained in the principle fund.                                                                                                 
                                                                                                                                
10:01:12 AM                                                                                                                   
                                                                                                                                
Mr.  Burnett   discussed  Slide  7:  "PERS   &  TRS  [Public                                                                    
Employees'   Retirement  System   and  Teachers   Retirement                                                                    
System]."                                                                                                                       
                                                                                                                                
Mr.  Bader explained  that the  "Fixed Income"  is primarily                                                                    
broad income market debt.  "Domestic Equity" includes active                                                                    
and  passive  managers,  which includes  large  capital  and                                                                    
small  capital. The  "International/Global  Equity" has  two                                                                    
components:  one   is  a  merging  market,   which  includes                                                                    
countries  that  are  beginning to  merge  into  the  global                                                                    
economy,  including  China;  and the  others  are  developed                                                                    
international  markets  with  large capital.    The  missing                                                                    
component   in  the   international/global   equity  is   an                                                                    
international  market  with  small  capital.  "Real  Assets"                                                                    
refers to money  that is intended to act as  a hedge against                                                                    
inflation.  These  include   energy,  real  estate,  timber,                                                                    
farmland,  and  treasury   inflation  protected  securities.                                                                    
"Alternatives/Infrastructure"  refers  to  hedge  funds  and                                                                    
private-equity investments in startup companies.                                                                                
                                                                                                                                
Mr.  Burnett addressed  market values,  and noted  that both                                                                    
funds are  complex from  a cash-flow  basis. There  is money                                                                    
that comes  in on a  monthly basis from employers,  there is                                                                    
money  that goes  out  monthly to  retirees,  and there  are                                                                    
special appropriations  by the  legislature into  the funds.                                                                    
He emphasized  the constant cash  flow in the  accounts, and                                                                    
also  losses and  gains in  investments. The  FYTD was  12.3                                                                    
percent, the  three-year actual  was negative  1.87 percent,                                                                    
and the five-year  actual was 3.35 percent.  The forecast of                                                                    
8.25  was  an  assumed  rate, because  the  investments  are                                                                    
structured to  meet the rate. The  Teacher Retirement System                                                                    
is almost the  same investment rate as PERS, but  there is a                                                                    
slight   variance   in    returns   because   of   cash-flow                                                                    
differences.                                                                                                                    
                                                                                                                                
10:07:00 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman recalled the  8.25 return that was forecast                                                                    
in  the previous  year. Based  on the  last three  years, he                                                                    
felt that a forecast of 8.25  percent was too high. He asked                                                                    
for advice on  how to obtain 8.25 percent, since  it had not                                                                    
been achieved in the past three years.                                                                                          
                                                                                                                                
Mr. Burnett stated  that the same question was  asked in the                                                                    
last  two  meetings  of  the  ARMD.   There  was  an  asset-                                                                    
liability study  done and a  presentation by the  actuary of                                                                    
the state.  The presentation showed an  expected return base                                                                    
of around  8.4 percent.  He conceded  that the  8.25 percent                                                                    
was inconclusive,  but the board was  focused on determining                                                                    
the correct assumptions.                                                                                                        
                                                                                                                                
Co-Chair  Stedman remarked  that  lowering  the forecast  of                                                                    
8.25  percent would  have repercussions  on the  targets. He                                                                    
would  be  willing to  have  a  discussion if  the  division                                                                    
wanted to raise the forecast to 8.4 percent.                                                                                    
                                                                                                                                
10:10:29 AM                                                                                                                   
                                                                                                                                
Mr.  Burnett  clarified  that  the 8.4  percent  was  not  a                                                                    
recommendation. The board felt that  a forecast of closer to                                                                    
8 percent was more reasonable.  He specified that he did not                                                                    
believe that the presented forecast of 8.25 was too low.                                                                        
                                                                                                                                
Co-Chair Hoffman  questioned why  a forecast  under moderate                                                                    
risk  was  higher  than  a forecast  under  high  risk.  Mr.                                                                    
Burnett could  not conclude definitively the  reason for the                                                                    
difference, but  remarked that  the assets  in the  PERS and                                                                    
TRS were not liquid as the PCE.                                                                                                 
                                                                                                                                
Co-Chair Hoffman suggested the PCE  be invested in a similar                                                                    
fashion as PERS and TRS.                                                                                                        
                                                                                                                                
Co-Chair  Stedman  furthered  that  the  definitions  should                                                                    
remain consistent.  He thought that the  investments outside                                                                    
of stocks  and bonds could expect  to have an impact  on the                                                                    
evaluation.  He  suggested  an  examination  of  the  liquid                                                                    
assets be conducted, in order to determine their value.                                                                         
                                                                                                                                
Mr. Burnett agreed to provide  an explanation about the PERS                                                                    
and TRS funds, and noted that  the funds had moved away from                                                                    
leveraged investments and real estate over the last year.                                                                       
                                                                                                                                
10:14:47 AM                                                                                                                   
                                                                                                                                
Mr.  Bader  explained that  80  percent  of the  real-estate                                                                    
investments  were known  as core  real-estate, meaning  they                                                                    
are   institutional-grade  properties   with  no   leverage.                                                                    
Sections of 20 percent of  the investment portfolio for PERS                                                                    
and TRS were collective funds and had significant leverage.                                                                     
                                                                                                                                
Co-Chair  Stedman  wanted  to have  an  informal  discussion                                                                    
about  the  permanent  fund.  One  concern  was  whether  to                                                                    
refinance,   because  the   lenders  might   be  unable   to                                                                    
refinance.  He stressed  the  importance  of evaluating  the                                                                    
accuracy of  the estimates on  the market value,  because of                                                                    
the  possibility of  liquidation.  He noted  there was  less                                                                    
risk paying cash than leveraging.  Mr. Bader agreed that was                                                                    
true in the  collective funds, but remarked  that the assets                                                                    
were held  in a  separate account and  were close  to market                                                                    
value.                                                                                                                          
                                                                                                                                
Co-Chair Stedman noted that the  committee would explore the                                                                    
subject further during the permanent fund presentation.                                                                         
                                                                                                                                
10:18:23 AM                                                                                                                   
                                                                                                                                
Mr.  Burnett  discussed  Slide  8:  "Alaska  Permanent  Fund                                                                    
Corporation  Board" (APFC).  He  remarked that  most of  the                                                                    
descriptions fall  under a risk-based analysis,  so he would                                                                    
not  address the  definitions. He  pointed to  the value  in                                                                    
2007 of $38  billion, noting a drop in 2008  of $28 billion,                                                                    
and then back up to $34 billion  in 2009.  The FYTD was 14.3                                                                    
percent, the  three-year actual  was negative  1.25 percent,                                                                    
and  the five-year  actual was  3.48  percent. The  forecast                                                                    
return  was 8.28  percent, which  was  just slightly  better                                                                    
than the  PERS and TRS  forecast. He restated that  the APFC                                                                    
would  be giving  a  presentation to  the  committee, so  he                                                                    
deemed it unnecessary to explore the fund.                                                                                      
                                                                                                                                
Co-Chair  Stedman  commented  that  the  APFC  was  invested                                                                    
differently from the retirement  accounts. PERS and TRS have                                                                    
a  shorter time  horizon than  the APFC,  and have  a payout                                                                    
that must  be met for retirees.  He noted that the  APFC did                                                                    
not have a  requirement, and was based more  on market flow.                                                                    
He stressed  the importance of  profiling the  risk exposure                                                                    
for both accounts.                                                                                                              
                                                                                                                                
10:21:10 AM                                                                                                                   
                                                                                                                                
Mr. Burnett discussed Slide 10:  "FY 2010 Investment Revenue                                                                    
Forecast."  He mentioned  that the  forecast in  the Revenue                                                                    
Sources  Book was  based  on a  combination  of actuals  and                                                                    
forecasts. He  noted the actual unrestricted  earnings in FY                                                                    
09  were $82.8  million, with  a forecast  through FY  10 of                                                                    
$101.3  million, totaling  $184.1  million  for the  revenue                                                                    
source.                                                                                                                         
                                                                                                                                
Co-Chair Stedman  asked whether $182.7 million  was the gain                                                                    
for the year. Mr. Burnett  clarified that the $184.1 million                                                                    
was the  estimated unrestricted  investment earnings  for FY                                                                    
10,  in  primarily general  funds.  Of  that $184.1  million                                                                    
forecast $82.8 million been earned so far.                                                                                      
                                                                                                                                
Mr.  Burnett continued  with  restricted investments,  money                                                                    
that  stays  in  the  CBR, subfunds  of  the  general  fund,                                                                    
endowments and trusts, and the  permanent fund. The forecast                                                                    
for  FY  10 was  $1.7  billion,  but  it already  earned  $5                                                                    
billion in FY 09. He  noted that the restricted earnings had                                                                    
done  well,  but  the unrestricted  earnings  were  slightly                                                                    
below target.                                                                                                                   
                                                                                                                                
Co-Chair Stedman  remarked on the exceptional  rebound since                                                                    
April 2009. Mr. Burnett  agreed, but stressed the volatility                                                                    
in the market from day to day.                                                                                                  
                                                                                                                                
10:24:45 AM                                                                                                                   
                                                                                                                                
Co-Chair   Stedman   requested   that   staff   review   the                                                                    
presentation and some of the mentioned issues.                                                                                  
                                                                                                                                
Commissioner  Galvin offered  to answer  questions from  the                                                                    
committee.                                                                                                                      
                                                                                                                                
Co-Chair  Stedman discussed  a  future  presentation by  the                                                                    
Department of Transportation  and Public Facilities (DOT/PF)                                                                    
and the possibility of additional stimulus monies.                                                                              
                                                                                                                                
Senator Ellis  expressed frustrations about DOT/PF,  and its                                                                    
backlog of projects.  He hoped to address  the issues during                                                                    
the DOT/PF presentation.                                                                                                        
                                                                                                                                
ADJOURNMENT                                                                                                                     
                                                                                                                                
The meeting was adjourned at 10:30 AM.                                                                                          
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
State Savings Accounts Update Feb 1 2010.pdf SFIN 2/1/2010 9:00:00 AM
DOR - Savings Accounts - Budget Reserves
DOR Treasury Investment Policies.pdf SFIN 2/1/2010 9:00:00 AM
DOR - Savings Accounts - Budget Reserves
CBR Fund Prelim Results 12 31 2009.pdf SFIN 2/1/2010 9:00:00 AM
DOR - Savings Accounts - Budget Reserves
2009 06 15 DOR CIOs FY2010 Asset Alloc Rec.pdf SFIN 2/1/2010 9:00:00 AM
DOR - Savings Accounts - Budget Reserves
2009 06 15 DOR CIOs FY2010 Asset Alloc Rec.pdf SFIN 2/1/2010 9:00:00 AM
DOR 2009