Legislature(2011 - 2012)SENATE FINANCE 532
01/31/2011 09:00 AM Senate FINANCE
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Overview by Department of Revenue: | |
Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
67SENATE FINANCE COMMITTEE January 31, 2011 9:03 a.m. 9:03:02 AM CALL TO ORDER Co-Chair Stedman called the Senate Finance Committee meeting to order at 9:03 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 Lesil McGuire, Vice-Chair ALSO PRESENT Senator Cathy Giessel; Bryan Butcher, Commissioner, Department of Revenue; Jerry Burnett, Deputy Commissioner, Division of Treasury, Department of Revenue. SUMMARY ^Overview by Department of Revenue: State Savings Account and Budget Reserves 9:03:11 AM Co-Chair Stedman discussed the ongoing process of reviewing the state's fiscal and economic condition. BRYAN BUTCHER, COMMISSIONER, DEPARTMENT OF REVENUE, discussed the state's advantageous position. Alaska's financial standing was strong. He commented on Moody's recent triple-A rating, which only a dozen states nationwide earned. Co-Chair Stedman mentioned the absence of Gavel-to-Gavel during the committee meeting. Commissioner Butcher responded that rating upgrades occurred infrequently. He noted that rating agencies played a role in the most recent recession. He added that most states with a triple-A rating had held the rating for quite some time. 9:05:56 AM JERRY BURNETT, DEPUTY COMMISSIONER, DIVISION OF TREASURY, DEPARTMENT OF REVENUE, discussed the returns on state funds including the general fund, Constitutional Budget Reserve (CBR) main and subaccounts, the Power Cost Equalization fund, the public school trust fund, the PRS and TRS defined benefit funds, and the Alaska Permanent fund. 9:06:47 AM Mr. Burnett introduced Slide 3, "General Fund and other non segregated investments." He mentioned a small error in the percentage points presented in the slide. The fund was the main general investment fund for the state, with approximately 100 separate funds included. He pointed out the investment of $500 million on behalf of Alaska Housing Finance Corporation (AHFC) in the fund. Co-Chair Stedman asked the definition for short-term versus intermediate-term. Mr. Burnett responded that the short term was less than one year. Co-Chair Stedman asked whether the investment was normally classified as a money market fund. Mr. Burnett concurred and stated that the probability of loss was low. The intermediate term was a one- to five-year aggregate with duration of 2.4 years. The 2.4 year duration was a technical term related to the length of the investment term of the bonds. He mentioned that in the short run, the yields and the benchmarks were low. 9:10:08 AM Mr. Burnett stated that the short-term interest rates were very low in the market place. The rates would likely increase. When interest rates moved up, there was a loss of market value for the portfolio. He stated that yields on fixed income pools were anticipated to remain low for the several months. Co-Chair Stedman asked whether the returns against the benchmarks provided a weighted balance of the entire holdings. Mr. Burnett responded in the affirmative. 9:11:53 AM Mr. Burnett detailed Slide, "Constitutional Budget Reserve Fund (main and sub)." He noted that the main account was invested over a short period. As of the end of the prior year, the main account had approximately $5 billion. Deposits to the fund since 2008 had greatly increased the value. The increase was due to legislative deposits and tax settlements. The current period showed that the earnings were down, but the five-year actual was over 5 percent return on the fund. Co-Chair Stedman requested comparisons of the benchmarks with the short-term and intermediate-term broad market. Mr. Burnett introduced two Department of Revenue (DOR) staff: Bob Mitchell, Fixed Income Investment Officer, Division of Treasury and Pam Leary, Comptroller, Division of Treasury. 9:14:23 AM Mr. Burnett discussed the subaccount, which was invested for a five-year time horizon with an expectation of a higher yield over time. He stated that the returns for the last calendar year and the current fiscal year were better than forecasted returns. The entire amount of the loss below the benchmark came from a short period in 2008. Co-Chair Stedman requested an update on the investment. Mr. Burnett responded that in April 2008, the legislature appropriated $2.3 billion to the CBR and DOR had decided to invest approximately $4.1 million and transferred the funds into the subaccount at the end of April 2008. The total balance was approximately $4.7 billion. During the remainder of 2008 (until February 2009), the equity markets performed poorly and lead to a low balance of $3.1 billion in the entire subfund. No additional contributions come in from the legislature or settlements; the change in value since 2008 was entirely the result of investment earnings. Co-Chair Stedman discussed the management of the large savings pool outside of the permanent fund. He pointed to the initial investment in 2008 and assumed that Alaska was currently in good standing. He wondered about the potential outcome if the fund was a standalone investment. 9:18:43 AM Mr. Burnett stated that with a standalone investment, the state had recovered and earned $150-$200 million. He offered to provide details. He stated the total between the two funds as of the previous Friday of $10,064,000,000. Co-Chair Stedman asked again for a breakdown of the benchmarks for the funds. He asked about the five-year time horizon and the high-risk definition issues. Mr. Burnett replied that he understood and offered to provide further information. 9:20:09 AM Senator Thomas asked about the amount of the mentioned tax settlements. Mr. Burnett responded that the settlements were approximately one-half billion for each of the two years. Senator Thomas asked how the tax settlements were factored in. Mr. Burnett answered that the settlements simply added to the budget of the CBR. Senator Thomas wondered about the impact the settlements had on the forecast. Mr. Burnett responded that the additional money from the settlements affected only the total dollar amounts of the funds. Mr. Burnett noted that a large deposit could induce an effect due to market timing setting the base. Senator Olson stated concern regarding the losses of approximately $1.5 billion. He asked about safeguards to prevent further losses. 9:22:05 AM Co-Chair Stedman asked for expansion of DOR's internal structure to aid in the management of the funds. Mr. Burnett answered that daily returns were reported to the chief investment officer and deputy commissioner. The portfolio staff managed most of the fixed income internally. The other funds were largely managed externally. 9:23:33 AM Co-Chair Stedman noted that Callan Associates had testified that it was not involved with the CBR. He wondered whether Callan Associates had recently begun consulting on the CBR. Mr. Burnett responded that Callan Associates provided consultation services for the general fund, the CBR, and the commissioner's funds. Callan Associates had always provided quarterly reports that were reviewed by staff; Callan participated in the forecast. Callan's capital market assumptions were used and further optimized by state staff. He added that discussions were ongoing both externally and internally. Co-Chair Stedman stated that Callan Associates was used for the Alaska Retirement Management Board (ARMB) and the Permanent Fund. 9:25:03 AM Mr. Burnett added that Callan Associates was the general investment officer for the state. The capital market assumptions provided were presented to the investment staff and then moved to the commissioner on a regular basis. The ARMB funds were treated similarly. Mr. Burnett noted that the asset allocation for the CBR had not been changed significantly for many years. The decision was made to rebalance and remain with a selected asset allocation during the 2008 period. Co-Chair Stedman asked whether the meetings occurred quarterly. Mr. Burnett noted quarterly reports. Co-Chair Stedman asked whether minutes were taken at the meetings and whether the meetings followed a formal structure. Mr. Burnett answered no to both questions. 9:26:57 AM Senator Olson stated concerns about the lack of minutes, as multi-billion dollar decisions were made during the meetings. He did not wish to place blame, but wished to avoid further losses. He requested warning from the investment officers regarding possible alternatives to prevent further losses. Mr. Burnett stated that the mentioned discussions happened internally and that the chief investment officer brought the information to the commissioner. Senator Olson asked whether the warnings received the necessary action. Mr. Burnett responded in the affirmative. A decision about whether to remain in the same asset allocation was always made following notice. Co-Chair Stedman asked whether Callan Associates had agreed to the state's definition of high risk on the long-term investment of the CBR. Mr. Burnett did not believe that the commissioner would require Callan Associates to sign off on the definition. Co-Chair Stedman recommended the good policy of formal structure for the meetings, in addition to taking minutes for further review. Commissioner Butcher strived to keep the committee informed about important events or issues. 9:29:48 AM Co-Chair Stedman informed listeners that the Federal Fund and other Non-segregated Investments (GeFonsi) funds were posted monthly to the Alaska state website on the treasury home page. Mr. Burnett added that a combined report illustrating the values of the funds managed by DOR was also posted on the website following each completed accounting cycle. Co-Chair Stedman suggested that the committee discuss the question of how much cash liquidity was needed in the department to operate the state, and how much excess should be shifted off for further investment to help with future operating costs. Co-Chair Hoffman referenced the percentages on performance forecast presented and queried the anticipated balance for the CBR at the end of the fiscal year. Mr. Burnett responded that he would discuss the CBR balance later in the presentation. 9:32:24 AM Mr. Burnett discussed Slide 5, "Power Cost Equalization Fund." He explained that the fund was set up as an endowment to provide funding for the Power Cost Equalization (PCE) program. The program had a statutory payout of 7 percent of market value. The aggressive payout was invested with the assumption of 7 percent earnings. He explained that the fund had earned an average of 5 percent over the past five years, with a current balance of $352,600. Co-Chair Stedman discussed the payout ratio of 7 percent. He expressed concern regarding erosion of the principal balance of the fund. He requested future review of the payout ratio if the asset was deemed long-term. Mr. Burnett opined that 7 percent was extremely aggressive for the fund type. He agreed that a real rate of return in the 5 percent range was more achievable. Co-Chair Stedman did not want to confuse the rate of return with the payout ratio. Mr. Burnett agreed and added that the value of the fund was eroded over time if a payout ratio was used at a greater rate of return. 9:34:32 AM Senator Egan wondered why the investment was so aggressive. He suggested that the fund would be more sustainable through further review. Co-Chair Stedman noted that the payout ratio could be lowered if the PCE funds were lowered. 9:35:35 AM Mr. Burnett detailed Slide 6, "Public School Trust Fund (Principal and Income accounts)." He noted that the fund was invested differently than the PCE fund due to the payout rules. The Public School Trust Fund paid out net income (not including capital gains). The trust fund had been invested to maximize income while maintaining growth of the fund. The forecast was slightly lower with the performance for the last five years at 5 percent. The trust fund income was the net income placed in a separate fund for spending following appropriation by the legislature. 9:37:16 AM Mr. Burnett discussed Slide 7, "PERS and TRS." He noted that the two accounts were different regarding cash flow purposes. He communicated the long-term goal of 8.25 percent as the actuarial expected return used by ARMB. The goal was recently adjusted downward to 8.12 percent with the slight change in inflation assumptions. The fund had earned approximately 4 percent during the past 5 years. He pointed out that real assets had underperformed during the 2008 to 2009 period. Co-Chair Stedman pointed out that the retirement portfolio would be brought before the committee. He stated concerns that 8.25 percent was too high. He approved of the recent adjustment. He requested further information about the portfolio and communicated the need for further updates. Mr. Burnett stated that total assets equaled approximately $15 billion. Co-Chair Stedman asked for a ballpark range for the liability of both funds. Mr. Burnett responded that the last actuarial evaluation was done on June 30, 2009 and showed an unfunded liability of $9.7 billion. He stated that total liabilities were in the $25 billion range. 9:41:38 AM Co-Chair Stedman communicated that the actuarial value of the asset included historical smoothing or averaging. Both the actuarial value and the market value had to be reviewed. Mr. Burnett added that the smoothing occurred in a five-year period. Co-Chair Stedman requested information regarding the contribution of the legal settlement. Mr. Burnett added that 89 percent went into the Public Employees' Retirement System (PERS) and approximately 11 percent went into the Teachers' Retirement System (TRS) in August of 2010. The actual balance was approximately $38 billion with a forecast of 7.75 percent. Mr. Burnett discussed Slide 8, "APFC." He noted the growth of the Alaska Permanent Fund Corporation Board (AFPC) shown in the fiscal year-to-date return. The three-year actual returns were negative for the fund with a forecast of 7.75 percent. 9:43:57 AM Mr. Burnett discussed Slide 10, "FY 2011 Investment Revenue Forecast." He pointed out that the returns for the general fund were lower with GeFonsi. Short-term fixed-income was not performing well and could continue to do poorly until interest rates rose. The state was in a time of low interest rates. He explained the current state of very low short-term interest rates. When interest rates rose, then the market value of the assets held would be reduced temporarily. Short-term fixed-income securities would be reduced in value with very little return over the following several months. Mr. Burnett addressed the CBR fund, which currently had a balance of approximately $10 billion. He added that he would not be surprised if the main account performed worse than the forecast and thought the subaccount could do better. Settlement deposits since inception for the CBR had been approximately $7.1 billion. 9:47:17 AM Co-Chair Stedman requested help presenting the terms as percentages. Mr. Burnett offered to provide the requested information. Mr. Burnett clarified that the income shown as earnings for the Permanent Dividend Fund was accounting versus realized income. Co-Chair Stedman offered to update the data for the public. Mr. Burnett addressed the additional spreadsheet, "Constitutional Budget Reserve Fund." The spreadsheet illustrated the main and subaccounts. The bottom of the page provided balances for the various funds. Co-Chair Stedman asked whether the information was also provided on the state website. Mr. Burnett stated that the information was not currently available on the website, although it could be in the future. 9:50:33 AM Senator Thomas commented on the different philosophical bases behind the various investments. He opined that the settlements and lump sums placed in the account would provide helpful information. Co-Chair Stedman agreed and reiterated the request. Mr. Burnett agreed, but stated that GeFonsi had 98 different funds. Each fund had its own set of challenges, and determining which information to include provided an additional challenge. 9:53:03 AM Co-Chair Stedman stated that the committee would provide flexibility for the new commissioner due to recognition of the complexity of the department. Co-Chair Hoffman referred to the spreadsheet (where the performance forecast was 3.84 percent for the corpus and 6.96 percent for the subaccount) and asked whether the figures indicated amounts anticipated for the next calendar or fiscal year. Mr. Burnett responded that the forecasts provided were based on the capital market assumptions over five years with a definite risk of loss and probability on each fund. He added that the information was not used for the fiscal-year or calendar-year forecasts. Co-Chair Stedman discussed the requested materials. He highlighted future presentations. ADJOURNMENT The meeting was adjourned at 9:58 AM.
Document Name | Date/Time | Subjects |
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013111 DOR State Savings Accounts Update.ppt |
SFIN 1/31/2011 9:00:00 AM |
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013111 Quick Reference Sheet December 2011.pdf |
SFIN 1/31/2011 9:00:00 AM |