Legislature(2019 - 2020)SENATE FINANCE 532

01/25/2019 09:00 AM FINANCE

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Audio Topic
09:01:28 AM Start
09:03:24 AM Alaska Permanent Fund Corporation (apfc) - Overview, Mission, and Update
10:25:33 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Alaska Permanent Fund Corporation: Overview, TELECONFERENCED
Mission & Update by Angela Rodell, CEO
                  SENATE FINANCE COMMITTEE                                                                                      
                      January 25, 2019                                                                                          
                         9:01 a.m.                                                                                              
                                                                                                                                
9:01:28 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair   Stedman    called   the   Senate   Finance    Committee                                                              
meeting to order at 9:01 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Natasha von Imhof, Co-Chair                                                                                             
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Click Bishop                                                                                                            
Senator Lyman Hoffman                                                                                                           
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Mike Shower                                                                                                             
Senator Bill Wielechowski                                                                                                       
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator David Wilson                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Angela   Rodell,  Executive   Director,   Alaska  Permanent   Fund                                                              
Corporation;    Craig  Richards,   Chairman,    Alaska   Permanent                                                              
Fund  Corporation;    Senator   Shelley  Hughes;   Senator   Chris                                                              
Birch.                                                                                                                          
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
^ALASKA   PERMANENT    FUND  CORPORATION    (APFC)   -   OVERVIEW,                                                            
MISSION, and UPDATE                                                                                                           
                                                                                                                                
9:03:24 AM                                                                                                                    
                                                                                                                                
ANGELA   RODELL,  EXECUTIVE   DIRECTOR,   ALASKA  PERMANENT   FUND                                                              
CORPORATION,   discussed   her  background.   She  discussed   the                                                              
presentation,    "APFC   Alaska   Permanent   Fund   Corporation,                                                               
Senate  Finance  Committee,  January  25,  2019"  (copy on  file).                                                              
She looked at slide 2, "The Alaska Constitution":                                                                               
                                                                                                                                
      Alaska Constitution Article IX, Section 15                                                                                
      Section 15. Alaska Permanent Fund                                                                                         
      At  least  twenty-five    percent  of   all  mineral   lease                                                              
      rentals,   royalties,   royalty   sale   proceeds,   federal                                                              
      mineral  revenue  sharing  payments   and bonuses   received                                                              
      by the  state  shall  be placed  in  a permanent  fund,  the                                                              
      principal   of  which   shall   be  used   only  for   those                                                              
      income-producing    investments   specifically   designated                                                               
      by law  as eligible  for  permanent  fund  investments.  All                                                              
      income  from  the  permanent  fund  shall  be  deposited  in                                                              
     the general fund unless otherwise provided by law.                                                                         
                                                                                                                                
9:05:01 AM                                                                                                                    
                                                                                                                                
Ms. Rodell highlighted slide 3, "APFC's Vision":                                                                                
                                                                                                                                
      "To  deliver  sustained,   compelling   investment   returns                                                              
      as  the   United  States'   leading   sovereign    endowment                                                              
      manager,    benefitting     all    current     and    future                                                              
      generations of Alaskans."                                                                                                 
                                                                                                                                
 .notdef Reflects statutory language and intent as well as                                                                    
      Board and staff aspirations.                                                                                              
      .notdef Emphasizes maximizing returns in a fully sustainable                                                            
      manner.                                                                                                                   
      .notdef Underscores the intention for  the   Fund  to  be  a                                                            
      perpetual resource for the State of Alaska.                                                                               
      .notdef Embodies core values of Integrity, Stewardship, and                                                             
      Passion.                                                                                                                  
                                                                                                                                
Ms. Rodell looked at slide 4, "APFC's Strategic 5 Year                                                                          
Plan":                                                                                                                          
                                                                                                                                
      Priorities for FY 17-FY21:                                                                                                
                                                                                                                                
      .notdef Gain greater control of resource allocations.                                                                   
      .notdef Optimize APFC's operational processes   and  use  of                                                            
      financial networks and resources.                                                                                         
      .notdef Develop best-in-class     investment     management                                                             
      capabilities,   partnerships,   and   geographic   reach  to                                                              
      maximize investment returns.                                                                                              
      .notdef Enhance talent and staff across APFC.                                                                           
                                                                                                                                
      Over the  course  of  2019, the  Board  will  be working  on                                                              
      a new strategic 5 year plan.                                                                                              
                                                                                                                                
Ms. Rodell addressed slide 6, "How the Fund Works."                                                                             
                                                                                                                                
                                                                                                                                
Ms.  Rodell  looked  at  slide  7, "Assets   Under  Management  in                                                              
billions."                                                                                                                      
                                                                                                                                
Ms. Rodell addressed slide 8, "Values."                                                                                         
                                                                                                                                
9:09:55 AM                                                                                                                    
                                                                                                                                
Co-Chair   Stedman   requested    a  brief   view   of  what   the                                                              
Earnings Reserve Account (ERA) was in 2009.                                                                                     
                                                                                                                                
Ms. Rodell  replied  that  she would  provide  that information.                                                                
                                                                                                                                
Co-Chair  Stedman  stated  that  there could  be  an answer  later                                                              
in the presentation. He requested //                                                                                            
                                                                                                                                
Ms. Rodell agreed to address that question.                                                                                     
                                                                                                                                
Ms. Rodell discussed slide 9, "Principal":                                                                                      
                                                                                                                                
      .notdef The Principal is constitutionally established and                                                               
      permanently protected; it can only be used for income-                                                                    
      producing investments.                                                                                                    
                                                                                                                                
      .notdef The Principal is built through royalty deposits,                                                                
      inflation proofing, and other special appropriations.                                                                     
                                                                                                                                
Ms.  Rodell  looked  at  slide  10, "Use  of  Fund  Earnings  from                                                              
ERA Since Inception":                                                                                                           
                                                                                                                                
      .notdef Paid out of ERA = $27.8 B                                                                                       
           .notdef Dividend Transfers                                                                                         
           .notdef General Fund Appropriations                                                                                
           .notdef Alaska Capital Income Transfers                                                                            
      .notdef Transfers from ERA to Principal = $20.6 B                                                                       
           .notdef Inflation Proofing                                                                                         
           .notdef Special Appropriations                                                                                     
      .notdef Unspent Realized Earnings in ERA = $13.7 B                                                                      
                                                                                                                                
Co-Chair  von  Imhof looked  at  slide 9,  and noted  the  special                                                              
appropriation.   She  surmised  that   the legislature   had  made                                                              
conscious  decisions   to  take money  from  the  ERA  and  put it                                                              
into the principal.                                                                                                             
                                                                                                                                
CRAIG     RICHARDS,     CHAIRMAN,    ALASKA     PERMANENT     FUND                                                              
CORPORATION, gave an incorrect response.                                                                                        
                                                                                                                                
                                                                                                                                
Ms.  Rodell replied  that  in  the early  1980s,  the legislature                                                               
made  a  decision  to  make  an  appropriation   of  general  fund                                                              
money   to  the  principal.   She  furthered   that   as  the  ERA                                                              
continued   to  build  balances,  the  legislature   appropriated                                                               
money from the ERA back to the principal.                                                                                       
                                                                                                                                
Co-Chair  von  Imhof  noted  that there  was  a precedent   in the                                                              
past  that  the legislature   had decided   to move  excess  funds                                                              
from the ERA into the principal.                                                                                                
                                                                                                                                
Ms. Rodell agreed.                                                                                                              
                                                                                                                                
Co-Chair  Stedman   recalled  that  it  had  occurred  on  several                                                              
occasions.                                                                                                                      
                                                                                                                                
Senator   Micciche    wanted   to  know   the   history    of  the                                                              
dividends.                                                                                                                      
                                                                                                                                
Ms. Rodell wondered about his question.                                                                                         
                                                                                                                                
Senator  Micciche  clarified   his question.   He wanted   to know                                                              
whether  there   was  a difference   on  the  over-deposits   from                                                              
the  general   fund   into  the   principal,   and  whether   that                                                              
affected dividends in the long-term.                                                                                            
                                                                                                                                
Ms.   Rodell  agreed   to   determine   whether   that   could  be                                                              
measured, and agreed to get back to the committee.                                                                              
                                                                                                                                
Ms.  Rodell  highlighted  slide  11,  "POMV  -  SB 26,  CH  16 SLA                                                              
18":                                                                                                                            
                                                                                                                                
      Percent  of  Market  Value:  draw   of the  average   market                                                              
      value of  the  Fund for  the  first  five of  the  preceding                                                              
      six fiscal   years,  subject  to  annual  appropriation   by                                                              
      the Legislature.                                                                                                          
                                                                                                                                
      .notdef 5.25 percent - Effective July 1, 2018 (FY19)                                                                    
       .notdef FY19 5.25 percent POMV = $2.7 billion                                                                          
       .notdef FY20 5.25 percent POMV = $2.9 billion                                                                          
           .notdef FY21 5.25 percent POMV = $3.1 billion estimate                                                             
      .notdef 5.0 percent - Effective July 1, 2021 (FY22)                                                                     
                                                                                                                                
9:16:37 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman requested the definition of "POMV."                                                                            
                                                                                                                                
Ms.  Rodell   replied   that  POMV   was  percentage    of  market                                                              
value.                                                                                                                          
                                                                                                                                
Co-Chair   Stedman   remarked   that   the  dividends    would  be                                                              
subtracted   from  the $2.9  billion,   and  the remaining   would                                                              
be  discussed.  He  queried  how inflation   would  be managed  in                                                              
the concept.                                                                                                                    
                                                                                                                                
Ms.  Rodell  replied  that  inflation   was not  addressed   in SB                                                              
26,   because    there   was   still   a   requirement    for   an                                                              
appropriation from the ERA back to the principal.                                                                               
                                                                                                                                
Ms. Rodell looked at slide 13, "The Portfolio":                                                                                 
                                                                                                                                
      Public Equities                                                                                                           
      Fixed Income Plus                                                                                                         
      Private Equity and Special Opportunities                                                                                  
      Real Estate                                                                                                               
      Infrastructure, Credit, and Income Opportunities                                                                          
      Asset Allocation Strategies                                                                                               
      Absolute Return                                                                                                           
                                                                                                                                
9:24:17 AM                                                                                                                    
                                                                                                                                
Ms. Rodell highlighted slide 14, "Management of the Fund":                                                                      
                                                                                                                                
      The Board of Trustees continue to work towards an                                                                         
      optimal mix of in-house versus external management                                                                        
     capabilities based on resources and opportunities.                                                                         
                                                                                                                                
      In-House Management Allows for:                                                                                           
      .notdef Alignment of investment goals and mandates                                                                      
      .notdef Increased flexibility in timing/tactical decisions                                                              
      .notdef Lower fees with investment benefit of active                                                                    
      management                                                                                                                
                                                                                                                                
Senator  Hoffman   wondered  whether  there  was  an  increase  in                                                              
personnel as a result of the movement.                                                                                          
                                                                                                                                
Ms.  Rodell  replied  in  the  affirmative.   She  explained  that                                                              
there  was  an  addition  of  10  positions  in  the  most  recent                                                              
budget.                                                                                                                         
                                                                                                                                
Ms.   Rodell    addressed    slide    16,   "Fiscal    Year   2018                                                              
Performance."                                                                                                                   
                                                                                                                                
Co-Chair Stedman queried the fees.                                                                                              
                                                                                                                                
Ms. Rodell replied that they were net of return benchmarks.                                                                     
                                                                                                                                
Senator Micciche wondered whether the net cost was a wash,                                                                      
and whether it was beneficial.                                                                                                  
                                                                                                                                
Ms. Rodell replied that the benefit was that there were                                                                         
less fees being paid. She remarked that they were all net                                                                       
of fee returns.                                                                                                                 
                                                                                                                                
9:29:53 AM                                                                                                                    
                                                                                                                                
Ms. Rodell discussed slide 17, "Value Generated":                                                                               
                                                                                                                                
      FY 18                                                                                                                     
      Revenues: $5,671,500,000                                                                                                  
      Operating/Investment Expenses: $138,800,000                                                                               
                                                                                                                                
      Value Generated Per Day                                                                                                   
      Total Fund: $5.67 B / 251 = $22.6 M per day                                                                               
      Statutory Net Income: $6.3 B / 251 = $25.2 M per day                                                                      
                                                                                                                                
      Value  Generated  Per  Day  (based  on  251  active  trading                                                              
      days through FY18)                                                                                                        
      APFC  staff   is   actively   engaged   in   making   direct                                                              
      investments    and   overseeing    our   external    manager                                                              
      partnerships:                                                                                                             
                                                                                                                                
      .notdef APFC = 57PFT, 2PPT, 2 Summer Interns                                                                            
      .notdef 28 External Public Equities Managers                                                                            
      .notdef 5 Real Estate Advisors                                                                                          
      .notdef Private Markets Partnerships:                                                                                   
           .notdef Fund to Fund / Co-Investments / Direct                                                                     
           Investments                                                                                                          
                                                                                                                                
9:30:46 AM                                                                                                                    
                                                                                                                                
Ms.     Rodell     displayed     slide     18,     "Awards     and                                                              
Accomplishments":                                                                                                               
                                                                                                                                
      ? Nominated   for Limited   Partner  of  the Year  for  2018                                                              
      by Private Equity International                                                                                           
                                                                                                                                
      ? APFC  received  dual  nominations   for 2018  Partnership                                                               
      of the  Year   for  Institutional   Investor's  Allocators'                                                               
      Choice  Awards   and   won  the   award   for  our   Capital                                                              
      Constellation Partnership:                                                                                                
                 Private     Market      Partnership,      Capital                                                              
           Constellation - won                                                                                                  
             Public Market Partnership, Middle East Africa                                                                      
           South Asia (MEASA)                                                                                                   
           Fund with McKinley Capital - nominated                                                                               
      ? PEI's  Private  Debt Magazine   recognized  APFC  in their                                                              
      inaugural   30  Most  Influential    Investors   in  Private                                                              
      Credit                                                                                                                    
      ?   Recognized    as   North   American    Private    Equity                                                              
      Institutional                                                                                                             
      Limited  Partner   Investor   of  the   Year  for   2017  by                                                              
      Private Equity International                                                                                              
      ?  Awarded  Institutional    Investor's   Sovereign   Wealth                                                              
     Fund of the Year in Hedge Fund Investments in 2017                                                                         
                                                                                                                                
9:32:37 AM                                                                                                                    
                                                                                                                                
Senator  Hoffman  congratulated   the  Board  and  management.  He                                                              
looked  at  slide  17,  and  recalled   discussion   about  having                                                              
some   investment   managers    in  Juneau.   He   wondered   what                                                              
percentage of the positions were located in Alaska.                                                                             
                                                                                                                                
Ms.  Rodell replied  that  the  57 permanent  full-time,   2 part-                                                              
time, and 2 intern positions were all in Juneau.                                                                                
                                                                                                                                
Co-Chair   von  Imhof  remarked   that   the  accomplishments   on                                                              
slide  18  were  tremendous.   She  stressed   that  it  gave  the                                                              
Permanent  Fund  access  to global  meetings  and  conventions  to                                                              
discuss  best  practices.  She  asked for  elaboration  about  the                                                              
September meeting.                                                                                                              
                                                                                                                                
Ms.  Rodell  responded  that  the  Permanent   Fund was  a  member                                                              
of  the  International   Forum  of Sovereign   Wealth  Funds.  The                                                              
Permanent  Fund  had  been  asked  to  host  the  eleventh  annual                                                              
meeting of that group in Juneau in September.                                                                                   
                                                                                                                                
9:34:59 AM                                                                                                                    
                                                                                                                                
Mr. Richards highlighted slide 20, "Board of Trustees":                                                                         
                                                                                                                                
      As  the   fiduciaries,   the   Trustees   have  a   duty  to                                                              
      Alaskans   in  assuring    that  the   Permanent    Fund  is                                                              
      managed   and  invested   in   a  manner   consistent   with                                                              
      legislative findings: AS 37.13.020.                                                                                       
           .notdef The Fund should provide a means of conserving a                                                            
           portion   of   the   state's   revenue   from   mineral                                                              
           resources  to  benefit all  generations  of Alaskans.                                                                
           .notdef The Fund's goal should be to maintain safety of                                                            
          principal while maximizing total return.                                                                              
           .notdef The Fund should be used  as  a savings   device                                                            
           managed   to  allow  the  maximum  use  of  disposable                                                               
           income  from  the  Fund  for the  purposes  designated                                                               
           by law.                                                                                                              
                                                                                                                                
9:37:28 AM                                                                                                                    
                                                                                                                                
Mr. Richards discussed slide 21, "Alaska Investment":                                                                           
                                                                                                                                
      APFC's  statutory   responsibilities    pertaining   to  in-                                                              
      state  investments   are  set  forth  in  AS  37.13.120  (c)                                                              
      which   specifies    if    an   Alaskan    investment    has                                                              
      equivalent  risk  and  expected   return  comparable   to or                                                              
      better  than   a   similar   non-Alaskan   investment,   the                                                              
      Alaskan investment should be preferred.                                                                                   
                                                                                                                                
      In recognition of AS 37.13.120 (c), APFC's Board of                                                                       
      Trustees took two actions during their September 2018                                                                     
      Annual Meeting:                                                                                                           
           .notdef Amendment of the Alaska Investment section of                                                              
           APFC's Investment Policy and Procedures to                                                                           
           establish a target for                                                                                               
           increased Alaska investment.                                                                                         
                 .notdef As of June 30, 2018, 1.25 percent  of the                                                            
                 Fund's  portfolio,   totaling   $819.5   million,                                                              
                 was  invested   in-state   through  Alaska-based                                                               
                 external   investment    managers   and   through                                                              
                 ownership   of   APFC's   office    building   in                                                              
                 Juneau.                                                                                                        
                 .notdef The aspirational goals set forth  in  the                                                            
                 policy  amended   by  the   Board  in   September                                                              
                 2018 call  for  2 percent   of the  portfolio  to                                                              
                 be invested   in-state  by  2020,  increasing  by                                                              
                 1 percent  each  year  up  to  5 percent   of the                                                              
                 Fund  being  invested  in-state  by  2023.  (Does                                                              
                 not include in-house management by APFC).                                                                      
           .notdef Passage of Resolution 18-03 Supporting An In-                                                              
           State Emerging Manager Program.                                                                                      
                 .notdef This resolution directs the implementation                                                           
                 of an  In-State  Emerging  Manager  program  with                                                              
                 an  initial   allocation   up  to  $200   million                                                              
                 within   the   Private    Equity    and   Special                                                              
              Opportunities Asset Allocation.                                                                                   
                 .notdef The goal of the Emerging Manager Program                                                             
                 is to seed new private equity or venture                                                                       
                 capital fund managers in Alaska.                                                                               
                 .notdef APFC will work with an external manager to                                                           
                 oversee the program.                                                                                           
                 .notdef Board guidance that in-state investments                                                             
                 should meet same investment criteria and                                                                       
                 expectations as out of state investments.                                                                      
                                                                                                                                
9:41:28 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  noted  that  there was  currently  a review  of                                                              
all   the    agencies    to   streamline     costs   and    create                                                              
efficiencies.   He felt  that  there  was  some crossover   in the                                                              
energy  agencies,  such  as  Alaska  Industrial   Development  and                                                              
Export  Authority   (AIDEA).  He  noted  the  crossover  into  the                                                              
banking  arena.   He stressed   that  there  were  more  funds  in                                                              
the  state  than there  were  projects  in  the  commercial  bank.                                                              
He  did  not  like  the   looks  of  politics  in  the   Permanent                                                              
Fund.                                                                                                                           
                                                                                                                                
Mr.  Richards   responded   that   the  5  percent   was  not  the                                                              
instate   investment    initiative.    The   instate   investment                                                               
initiative   was  $200  million  of  a  $65 billion   fund,  which                                                              
was  a  third  of  a  percent.  He  stated   that  the  5  percent                                                              
aspirational   goal  was  assets  under  management   in state  by                                                              
external managers.                                                                                                              
                                                                                                                                
9:46:18 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  surmised  that  the 5  percent  was managed  by                                                              
instate  managers,  and  was not  5 percent  of  instate  invested                                                              
capital.                                                                                                                        
                                                                                                                                
Mr. Richards agreed.                                                                                                            
                                                                                                                                
Co-Chair  von  Imhof  expressed  concerns   about  competing  with                                                              
AIDEA.  She  noted   the  occasional   shortage  of  investments.                                                               
She  remarked  that there  were  private  equity  firms that  were                                                              
playing  in  the  space   currently.  She  wondered   whether  the                                                              
activity was worth the small investment.                                                                                        
                                                                                                                                
Mr.  Richards   felt  that   the  question   was  legitimate.   He                                                              
shared  that   there  were  conversations   on   the  Board  about                                                              
investing  in  the state  relative  to  the statutory  investment                                                               
guidelines.    He   shared    that    staff   had   the    general                                                              
inclination   to not  invest  in  Alaska,   because  it  sometimes                                                              
felt  political.  He  noted  the  Alaska  barbell  problem,  which                                                              
was  that  Alaska   investments   were  often  very  big  or  very                                                              
small.  He stated  that  the emerging   managers  program  used an                                                              
external   manager    because   it   relieved   the   concern   of                                                              
political  pressure,   and  the external   manager  could  examine                                                              
smaller projects.                                                                                                               
                                                                                                                                
Senator   Hoffman  noted   that  the  committee   should   realize                                                              
that  the Board  had  already  taken the  two actions.  He  looked                                                              
at  the   second  bullet   point,   and  the   $200  million.   He                                                              
queried  the  long-term  prognosis  of  how  large  it would  grow                                                              
to in the upcoming five years.                                                                                                  
                                                                                                                                
9:50:12 AM                                                                                                                    
                                                                                                                                
Mr.  Richards  replied  that  there  was  no  blueprint,  but  was                                                              
entirely  dependent   on  whether  the  program  was  successful.                                                               
He  stressed  that there  was  no way  of  knowing  the amount  in                                                              
the long-term.                                                                                                                  
                                                                                                                                
Senator   Wielechowski   appreciated   the   concerns   about  the                                                              
instate  investing.  He  often  wondered  why there  was  not more                                                              
investment   in  the  state   of  Alaska.  He  wanted   the  state                                                              
investments   taken  a step  further,   and  perhaps  tying  those                                                              
investments   to  Alaska  Hire  and  Alaska-based   companies.  He                                                              
wondered   whether  there  was  ever  a  consideration   in  tying                                                              
the investments to Alaskan companies.                                                                                           
                                                                                                                                
Mr.   Richards   replied   that  those   conversations    had  not                                                              
occurred.  He  explained  that  the  Board  gave the  staff  broad                                                              
authority   to  set  up  the  emerging  manager   program  in  the                                                              
manner  that  was  most  likely  to lead  to  returns  and  risks.                                                              
He  remarked   that  the  "flavor"   that  the  manager   used  to                                                              
apply   what  was   used   for  investing   would   be   developed                                                              
between  staff   and  the  external  manager.   He  remarked  that                                                              
there  had  not  been  an examination   of  non-economic   factors                                                              
other than encouraging instate investment.                                                                                      
                                                                                                                                
Co-Chair   von  Imhof  queried  the  threshold   of  return  under                                                              
the program.                                                                                                                    
                                                                                                                                
Mr.  Richards  replied  that  it was  not  defined  in a  specific                                                              
way.  He stated  that,  rationally,   there  would  two things  it                                                              
would   be  measured   against:   1.   the  overall   performance                                                               
expectation   of   the  Permanent   Fund   of  inflation   plus  5                                                              
percent; and 2. its private equity peers.                                                                                       
                                                                                                                                
Co-Chair   von   Imhof   understood   that   the   risk   was  not                                                              
commiserate with a fixed income portfolio.                                                                                      
                                                                                                                                
Mr. Richards agreed.                                                                                                            
                                                                                                                                
9:54:51 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman   noted  that  the  5  percent  target  for  the                                                              
management    instate   was   approximately    $3   billion,   and                                                              
correlated  with  the  equity need  in a  potential  gas  line. He                                                              
stated  that  there was  a dose  of political  skepticism   in how                                                              
things were set up in the state.                                                                                                
                                                                                                                                
Mr.  Richards  replied  that  he  had  never  had  a conversation                                                               
about using Permanent Fund money for a gas line.                                                                                
                                                                                                                                
Co-Chair Stedman felt skeptical.                                                                                                
                                                                                                                                
Mr. Richards felt that skepticism was very healthy.                                                                             
                                                                                                                                
Senator   Hoffman   recalled   Resolution   18-03  regarding   the                                                              
instate  emergency   manager   program  passed  by  the  Board  in                                                              
September.   He   queried   the   status   of  the   request   for                                                              
information (RFI) in that resolution.                                                                                           
                                                                                                                                
Ms.  Rodell  replied  that  RFI was  posted  on the  website.  She                                                              
explained  that  those   indications  of  interest  were  due  the                                                              
following   week,   and  then   there  would   be  a  process   to                                                              
determine   a  manager   to  build  a   program  and   refine  the                                                              
goals.                                                                                                                          
                                                                                                                                
Senator  Shower  asked  for confirmation   that  the guidance  for                                                              
the  fund  managers  were  examining  economic  factors  not  non-                                                              
economic factors.                                                                                                               
                                                                                                                                
Mr.  Richards  replied  in  the affirmative.   The  only  guidance                                                              
that   was  not  economic   was   the  $200   million   should  be                                                              
focused  on  instate  investment,   and the  overriding   guidance                                                              
for  that instate  investment  was  that  the returns  need  to be                                                              
competitive   and  the  risk  must  be  commensurate   with  those                                                              
returns.                                                                                                                        
                                                                                                                                
10:00:27 AM                                                                                                                   
                                                                                                                                
Mr.   Richards    displayed    slide    22,   "Contributions    to                                                              
Principal":                                                                                                                     
                                                                                                                                
     Royalty Deposits AS 37.13.010 (a) (1) and (a) (2)                                                                          
                                                                                                                                
           .notdef The constitutionally minimum required 25                                                                   
           percent of royalty proceeds.                                                                                         
           .notdef The statutorily mandated deposits of 50 percent                                                            
           for leases after 1979.                                                                                               
                                                                                                                                
      Inflation Proofing AS 37.13.145 (c)                                                                                       
                                                                                                                                
      .notdef The inflation proofing projection   is  based   upon                                                            
      estimates for deposits into the                                                                                           
      Principal  of the  Fund and  the  projected  inflation  rate                                                              
      as calculated per statue.                                                                                                 
      .notdef The Legislature appropriated FY19 inflation proofing                                                            
      estimated to be $942 million on June 30th, 2019.                                                                          
      .notdef The FY20 inflation proofing amount is  estimated  to                                                            
      be $943  million,  the  actual  amount  will  be calculated                                                               
      at the  end of  the  fiscal  year. $1.4  billion  for  FY16-                                                              
      FY18 remains unappropriated.                                                                                              
                                                                                                                                
      The   Board   of   Trustees    adopted   Resolution    17-01                                                              
      asserting   the  importance    of  inflation   proofing   to                                                              
      preserve   the   purchasing    power   of   the  Principal.                                                               
      Subsequent  Resolutions   18-01  and  18-04  reiterate  that                                                              
      the  prudent  reinvestment   of  a  portion  of  the  Fund's                                                              
      earnings  to protect   the future  value  of  the  Principal                                                              
      is   essential     to    maintaining     the    long    term                                                              
      sustainability   of  the  Fund  and  establishing   a  solid                                                              
      fiscal foundation for Alaska.                                                                                             
                                                                                                                                
Mr. Richards discussed slide 23, "Earnings Reserve                                                                              
Account":                                                                                                                       
                                                                                                                                
      The Earnings   Reserve  Account   (ERA)  is  established  in                                                              
      Alaska  Statutes   as  an  account  to  hold   the  realized                                                              
      earnings    from    the   Permanent    Fund's    investment                                                               
      portfolio;   it   does   not   have   its   own  investment                                                               
      mandate.                                                                                                                  
  .notdef The ERA is subject to legislative appropriation.                                                                    
      .notdef FY 19 Appropriations from the ERA                                                                               
      .notdef POMV $2.7 billion                                                                                               
      .notdef APFC Operations $18.1 million                                                                                   
      .notdef APFC Investment Management Fees $150.5 million                                                                  
      .notdef Dept. of Law $2.6 million                                                                                       
      .notdef Dept. of Natural Resources $5.9 million                                                                         
                                                                                                                                
Mr. Richards highlighted slide 24, "Resolution 18-04."                                                                          
                                                                                                                                
Senator  Hoffman  noted  that  the  Board  had passed  Resolution                                                               
18-04   in  October.   He  looked   at  bulled   point   3,  which                                                              
requested  legislation   for  automatic  inflation   proofing.  He                                                              
wondered  whether  the  Board had  conveyed  that  to the  current                                                              
administration.   He  wondered  where  the  Board  and management                                                               
were  at to  ensure that  the  automatic  inflation  proofing  was                                                              
implemented.                                                                                                                    
                                                                                                                                
                                                                                                                                
Mr.  Richards   replied  in  the  affirmative,   and  stated  that                                                              
there   were  conversations    with  the  Attorney   General.   He                                                              
noted that the process was ongoing.                                                                                             
                                                                                                                                
Senator  Bishop  felt  that  it was  a defined   benefit  program,                                                              
and  it required  increasing   membership  contributions   to meet                                                              
the guidelines.                                                                                                                 
                                                                                                                                
Mr. Richards agreed with that analogy.                                                                                          
                                                                                                                                
Mr. Richards discussed slide 25, "Resolution 18-04":                                                                            
                                                                                                                                
      Sustainable   Rules-   Based   Legal  Framework    For  Fund                                                              
      Transfers                                                                                                                 
                                                                                                                                
      In providing   guidance   on rules-based   withdrawals   for                                                              
      the   Fund    and    to   help    ensure    the    long-term                                                              
      sustainability  of  using  Fund  earnings  for  the  benefit                                                              
      of  all   generations   of  Alaskans,    the  Board   passed                                                              
      Resolution  18-04  at  a  special  meeting  on  October  17,                                                              
      2018.                                                                                                                     
      This  resolution   affirms  the   importance  of   formulaic                                                              
      management  of  transfers   into  and  out  of  the  ERA  to                                                              
      ensure  sustainability    and  long   term  growth   of  the                                                              
      Fund, by identifying four key principles:                                                                                 
                                                                                                                                
      Adherence  - Sustainability   - Inflation   Proofing  - Real                                                              
      Growth                                                                                                                    
                                                                                                                                
10:05:21 AM                                                                                                                   
                                                                                                                                
Mr. Richards addressed slide 26, "Resolution 18-04":                                                                            
                                                                                                                                
      Adherence:  A  rules-based   framework   includes   adhering                                                              
      to the  formulaic  calculations   provided  for  in  statute                                                              
      for transfers  into  and  out of  the Permanent  Fund,  such                                                              
      as   dividends,     royalty    deposits,    and    inflation                                                              
      proofing.   Adherence    to   the   rules   increases    the                                                              
      likelihood  that   systematic   draws  from  the   Permanent                                                              
      Fund will  be  sustainable  over  time  and  will allow  for                                                              
      more prudent   investment  of  the  Permanent   Fund due  to                                                              
      the predictability of liquidity needs.                                                                                    
                                                                                                                                
Co-Chair Stedman queried the definition of Ad Hoc.                                                                              
                                                                                                                                
                                                                                                                                
Mr.  Richards   replied   that  ad  hoc  was  a  non-rules   based                                                              
transfer.                                                                                                                       
                                                                                                                                
Mr. Richards discussed slide 27, "Resolution 18-04":                                                                            
                                                                                                                                
      Sustainability:   Any   rules-based   system   for   drawing                                                              
      from   the   Permanent    Fund   (to   support   government                                                               
      spending  and   for  dividends)   should   be  sustainable,                                                               
      meaning  the formulaic  system  for  withdrawals  should  be                                                              
      projected   to  result   in  the  Permanent   Fund   growing                                                              
      annually   by    at   least   the    rate   of   inflation.                                                               
      Sustainability     also    requires     annual     formulaic                                                              
      withdrawals  from   the  Earnings  Reserve   Account  at  an                                                              
      amount  that  the  long-term   balance  of  the  account  is                                                              
      able  to   fund.  The   Board   recommends   instituting   a                                                              
      process  that  would   require  periodic   review  of  these                                                              
      assumptions   as  market   conditions   change   so  that  a                                                              
      timely   reduction    to   the   annual    draw   could   be                                                              
      effectuated,   if necessary,   to  maintain   the  long-term                                                              
      sustainability of the Earnings Reserve Account.                                                                           
                                                                                                                                
10:10:41 AM                                                                                                                   
                                                                                                                                
Co-Chair   Stedman  asked  for  an  explanation   of  the  ad  hoc                                                              
draw  and  the  limit   of $2.9   billion.  He  wondered   whether                                                              
there  should  not  be a  draw  of more  than  $2.9  billion  from                                                              
the Permanent Fund.                                                                                                             
                                                                                                                                
Mr.  Richards  replied  that  the  Board  was  not  provided  that                                                              
specific   of  guidance.   He  stated  that   the  sustainability                                                               
rule  in  combination   with  the ad  hoc  rule,  it  was  advised                                                              
that  the  legislature   should   not  take  more  than  what  was                                                              
sustainable  allowing   for inflation  under  best  practices.  He                                                              
furthered    that   it   was   also   advised    that   when   the                                                              
legislature   took,   it  should   do  so   consistent   with  the                                                              
rules-based system.                                                                                                             
                                                                                                                                
Co-Chair  Stedman  noted  that  there  was  a limit  $2.9  billion                                                              
that  could  be  withdrawn  from  the  Permanent   Fund  to  pay a                                                              
dividend and pay for part of the deficit.                                                                                       
                                                                                                                                
Mr.  Richards  replied  that  it  was conceptually   correct,  but                                                              
that  number  could be  adjusted.  He stressed  that  was  not the                                                              
level  of  granularity  in  the  Board.  The  Board  noted  that a                                                              
larger number would not be sustainable.                                                                                         
                                                                                                                                
Co-Chair  Stedman  remarked   that SB  26  was 5.25  percent,  and                                                              
the five-year lookback was $2.9 billion.                                                                                        
                                                                                                                                
Mr. Richards agreed.                                                                                                            
                                                                                                                                
Co-Chair  Stedman  stated  that  the  5.25  was within  reason  of                                                              
the  expectation.   He  stressed  that  a  large  deficit  with  a                                                              
dividend    requirement    required   a   cognizance    with   the                                                              
Permanent Fund.                                                                                                                 
                                                                                                                                
Mr. Richards agreed.                                                                                                            
                                                                                                                                
Co-Chair   von   Imhof   remarked   that   Callan   had   provided                                                              
percentages,   and felt  that  they  were  well above  the  hurdle                                                              
rate.  She  noted  that  many  people  were  doing  the  modeling.                                                              
She  felt  that  there  were  ways  to  test  the  percentages  to                                                              
see the overall long-term effects.                                                                                              
                                                                                                                                
10:15:33 AM                                                                                                                   
                                                                                                                                
Mr. Richards agreed.                                                                                                            
                                                                                                                                
Co-Chair  Stedman   asked  that  straight  speak   was important,                                                               
and  reiterated   that  the  point   was  to  not  go  above  $2.9                                                              
billion.                                                                                                                        
                                                                                                                                
Senator  Hoffman  looked  at the  automatic  inflation   proofing,                                                              
and  wondered  whether  the Board  felt  that it  should  come out                                                              
of the 5.25 percent.                                                                                                            
                                                                                                                                
Mr.   Richards   replied    that   it  worked   differently.    He                                                              
explained  that  the  5.25  percent  is  what  could  come  out of                                                              
the  total  aggregated  value  of  the  fund.  He  furthered  that                                                              
inflation   proofing   was  not  a  transfer   out  of  the  fund,                                                              
rather it was a transfer between the ERA and the corpus.                                                                        
                                                                                                                                
Senator Hoffman stated that it was referred to the POMV.                                                                        
                                                                                                                                
Mr. Richards agreed.                                                                                                            
                                                                                                                                
Mr. Richards highlighted slide 28, "Resolution 18-04":                                                                          
                                                                                                                                
      Automatic  Inflation  Proofing:   The  Board  believes  that                                                              
      the   inflation-proofing     transfer   should    become   a                                                              
      guaranteed  annual   event  rather   than  a  discretionary                                                               
      transfer  that  is subject   to appropriation.   To  achieve                                                              
      this  goal,  the  Board  supports  passage   of legislation                                                               
      that would  define  net income  to  require  realized  gains                                                              
      that  are  accumulated   throughout   the  fiscal   year  be                                                              
      used  to   offset   the   impact   of   inflation    on  the                                                              
      principal   of  the   fund  with   the   remainder   of  net                                                              
      realized  gains   being  accounted   for  in  the   Earnings                                                              
      Reserve Account.                                                                                                          
                                                                                                                                
Senator    Bishop   queried    the   percentage    of    inflation                                                              
proofing,   if   the  ERA   and  the   corpus   were  inside   the                                                              
constitution as one fund.                                                                                                       
                                                                                                                                
Mr. Bishop replied that it would be zero.                                                                                       
                                                                                                                                
Senator  Micciche   noted  that there  was  a  draw  limit  in the                                                              
original  SB  26  that  would  have  reduced  the  draw  on  years                                                              
when  there  was other  state  funding.  He  wondered  whether  it                                                              
was possible to provide the committee with a "wish list."                                                                       
                                                                                                                                
10:20:25 AM                                                                                                                   
                                                                                                                                
Mr. Richards looked at slide 29, "Resolution 18-04":                                                                            
                                                                                                                                
      Promote  Real Growth  When  Possible:  While  providing  for                                                              
      a sustainable   draw  by preserving   the purchasing   power                                                              
      of the  fund   and  ensuring  a  durable  Earnings   Reserve                                                              
      Account  is  a  primary  goal  of  the  Board,  recognizing                                                               
      and executing   on opportunities   to  grow the  real  value                                                              
      of the  fund  is  also  important.   Real  growth  will  not                                                              
      only result  in  more income  and  thus higher  sustainable                                                               
      draws  in  the   future,   it  is  necessary   to   preserve                                                              
      intergenerational      wealth    as     Alaska     continues                                                              
      extraction  of  its finite   natural  resources.  Thus,  the                                                              
      Board  supports  thoughtful  strategies   to grow  the  fund                                                              
      on a real, and not just nominal, basis.                                                                                   
                                                                                                                                
Senator   Olson  remarked   that  there  was  concern   about  the                                                              
governor   making  additional   draw  to  the  ERA,  and  wondered                                                              
how  that   might  affect   the  POMV   draw.  He  also   wondered                                                              
whether   there   was  a   difference   between   the  Board   and                                                              
administration.   He  stated  that he  could  receive  the  answer                                                              
at a later date.                                                                                                                
                                                                                                                                
Co-Chair  Stedman  requested  that  the  answer be  provided  at a                                                              
later date.                                                                                                                     
                                                                                                                                
Ms.  Rodell  stated  that  the  principal   balance  in  2009  was                                                              
$29.5  billion;   the  ERA  had   a  $420  million  balance;   the                                                              
total  fund  combined   at  that  time  was  $29.9   billion.  She                                                              
stated   that   a   5  percent   POMV   draw   would   require   a                                                              
calculation.   She  stated   that  the  2010  principal   was  $32                                                              
billion.                                                                                                                        
                                                                                                                                
Co-Chair  Stedman  stressed   that there  was  a  curiosity  about                                                              
when  the 5  percent  draw would  get  into the  constitutionally                                                               
protected corpus.                                                                                                               
                                                                                                                                
Ms.  Rodell  agreed,  and  noted  that  a straight   5 percent  on                                                              
the  $29.9 billion  would  result  in a  $1.5 billion,  but  there                                                              
was only $420 million in the ERA in 2009.                                                                                       
                                                                                                                                
Co-Chair  Stedman   asked  that there  be  a  back test  on  those                                                              
numbers.                                                                                                                        
                                                                                                                                
ADJOURNMENT                                                                                                                   
10:25:33 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:25 a.m.                                                                                         
                                                                                                                                
                                                                                                                                

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012519 APFC SFC Presentation.pdf SFIN 1/25/2019 9:00:00 AM
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012519 APFC Resolution 18-01.pdf SFIN 1/25/2019 9:00:00 AM
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013019 APFC Follow up to SFIN 012519.pdf SFIN 1/25/2019 9:00:00 AM
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