Legislature(2019 - 2020)SENATE FINANCE 532

02/28/2019 09:00 AM FINANCE

Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.

Download Mp3. <- Right click and save file as
Download Video part 1. <- Right click and save file as

Audio Topic
09:01:58 AM Start
09:05:00 AM Presentation: Investment Funds Update, Cash Flow Deficiency Plan
10:48:36 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Investment Funds Update & Cash Flow Deficiency TELECONFERENCED
Plan by Bruce Tangeman, Commissioner of Revenue
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  SENATE FINANCE COMMITTEE                                                                                      
                      February 28, 2019                                                                                         
                          9:01 a.m.                                                                                             
                                                                                                                                
9:01:58 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 Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Mike Shower                                                                                                             
Senator Bill Wielechowski                                                                                                       
Senator David Wilson                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Lyman Hoffman                                                                                                           
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Senator   Cathy  Giessel;   Senator   Mia  Costello;   Bruce                                                                    
Tangeman,  Commissioner,  Department  of  Revenue;  Michelle                                                                    
Prebula,  State Investment  Officer, Department  of Revenue;                                                                    
Bob  Mitchell,  Chief   Investment  Officer,  Department  of                                                                    
Revenue.                                                                                                                        
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
PRESENTATION: INVESTMENT FUNDS  UPDATE, CASH FLOW DEFICIENCY                                                                    
PLAN                                                                                                                            
                                                                                                                                
Co-Chair Stedman noted that the  committee would continue an                                                                    
earlier discussion on  the cash flow and  investments of the                                                                    
state.  He  had  wanted   presentations  pertaining  to  the                                                                    
overall budget  and had heard  introductory comments  on the                                                                    
state's cash position. After hearing  more about the budget,                                                                    
the cash deficiencies of the state were becoming clearer.                                                                       
                                                                                                                                
Co-Chair  Stedman continued  his  remarks and  spoke to  the                                                                    
balance in  the Constitutional Budget Reserve  (CBR) and the                                                                    
Statutory Budget Reserve (SBR).  He thought it appeared that                                                                    
the  state was  getting down  to its  minimum comfort  level                                                                    
with regard to savings.  The presentation would give further                                                                    
detail on  the state's  cash positions and  investment funds                                                                    
and would  opine the minimums  that should be left  as shock                                                                    
absorbers  for the  budget. He  mentioned contingency  funds                                                                    
for state emergencies and unplanned events.                                                                                     
                                                                                                                                
^PRESENTATION:   INVESTMENT   FUNDS    UPDATE,   CASH   FLOW                                                                  
DEFICIENCY PLAN                                                                                                               
                                                                                                                                
9:05:00 AM                                                                                                                    
                                                                                                                                
BRUCE   TANGEMAN,  COMMISSIONER,   DEPARTMENT  OF   REVENUE,                                                                    
introduced himself.  He recalled that Director  Pam O'Leary,                                                                    
Director,  Treasury  Division,  Department  of  Revenue  had                                                                    
reviewed  a presentation  earlier  in the  month. There  had                                                                    
been many comments,  questions, and requests as  a result of                                                                    
the presentation. He introduced his staff.                                                                                      
                                                                                                                                
9:07:39 AM                                                                                                                    
                                                                                                                                
MICHELLE  PREBULA, STATE  INVESTMENT OFFICER,  DEPARTMENT OF                                                                    
REVENUE,  discussed her  work  experience.  She had  started                                                                    
with the state  in 1993, working with  the Legislative Audit                                                                    
Division, where  she earned her Certified  Public Accountant                                                                    
certificate before  working as the internal  auditor for the                                                                    
Department  of  Labor  and Workforce  Development.  She  had                                                                    
taken the  position of cash  manager for the state  in 1998,                                                                    
where she  worked for 20  years before transitioning  to her                                                                    
current  position  the previous  July.  She  had degrees  in                                                                    
economics and  accounting, as well  as a master's  degree in                                                                    
business  administration.  She  relayed   that  she  was  an                                                                    
accredited ACH professional, which  meant she had experience                                                                    
in electronic  fund transfers; and had  a certified treasury                                                                    
professional designation.                                                                                                       
                                                                                                                                
Ms.  Prebula discussed  the  presentation  "State of  Alaska                                                                    
Discussion of State Cash Flows," (copy on file).                                                                                
                                                                                                                                
Ms.  Prebula   turned  to  slide  2,   "Daily  General  Fund                                                                    
Sufficiency  Balance  Calculation,"   which  showed  a  flow                                                                    
chart. She  discussed the  definition of  "cash" as  cash in                                                                    
the bank  less payments  outstanding, warrants that  had not                                                                    
cleared, electronic fund transfers  that had left the state,                                                                    
and  less cash  receipts in  suspense. She  stated that  the                                                                    
vast majority of revenue came  into the treasury through the                                                                    
General  Fund (GF).  She  qualified that  at  the point  the                                                                    
funds came  in, it was not  known if the funds  would remain                                                                    
GF  money  or  not,  and   the  funds  were  not  considered                                                                    
available to be spent until the determination was made.                                                                         
                                                                                                                                
Ms. Prebula  reviewed slide 3, "Cash  vs. Accrual Accounting                                                                    
Periods":                                                                                                                       
                                                                                                                                
     FY19 Cash Accounting Period                                                                                                
     July 1, 2018  June 30, 2019                                                                                                
                                                                                                                                
     FY20 Begins                                                                                                                
     July 1, 2019                                                                                                               
                                                                                                                                
     FY19 Accrual Accounting Period                                                                                             
     July 1, 2018  August 31, 2019                                                                                              
                                                                                                                                
Ms. Prebula thought the slide  showed the difference between                                                                    
cash accounting  and accrual accounting. She  thought it was                                                                    
an important  distinction to know when  discussing cash flow                                                                    
that two  months of every  year (July and August)  the state                                                                    
expended  funds both  on behalf  of the  prior year  and the                                                                    
current year.                                                                                                                   
                                                                                                                                
9:10:48 AM                                                                                                                    
                                                                                                                                
Ms.  Prebula   spoke  to  slide   4,  "Seasonal   Cash  Flow                                                                    
Fluctuations":                                                                                                                  
         Summer  Peak season for construction projects                                                                       
          and seasonal workers.                                                                                                 
         Re-appropriation (July & August):                                                                                   
         Finishing prior FY expenditures + current FY                                                                        
          expenditures.                                                                                                         
         Allocating funds in or out of GF per new                                                                            
          legislation.                                                                                                          
         July  Debt service payments.                                                                                        
      June  Annual oil & gas property tax revenue.                                                                           
                                                                                                                                
Ms. Prebula informed that there  had been a request for more                                                                    
information regarding the  nature of flows. The  state had a                                                                    
very seasonal  flow to  its cash.  There was  a lot  of fund                                                                    
transfers  early  in the  year  for  debt servicing,  school                                                                    
district funding, and payment  retirement funds. The bulk of                                                                    
expenditures was early  in the year, but there was  a lag in                                                                    
revenues. The majority  of revenues came at the  end of each                                                                    
month, or  quarterly. The  biggest revenue  day of  the year                                                                    
was June  30, when the  state received oil and  gas property                                                                    
tax revenues.                                                                                                                   
                                                                                                                                
Mr. Prebula  continued to  discuss slide  4. She  noted that                                                                    
the state  had specific monthly  trends, when flows  in were                                                                    
allocated and  payroll went out.  She discussed  weekly cash                                                                    
flows  and referenced  a  previous  question about  Medicaid                                                                    
payments, which  caused a large  outflow once per  week. She                                                                    
qualified that  generally in-flows  and out-flows  varied by                                                                    
department.                                                                                                                     
                                                                                                                                
9:13:17 AM                                                                                                                    
                                                                                                                                
Ms. Prebula referenced slide  5, "Cash Deficiency Memorandum                                                                    
of Understanding":                                                                                                              
                                                                                                                                
        o Original MOU signed 1994 by DOR, DOA, OMB & LAW.                                                                      
        o Updated December 1, 2017.                                                                                             
        o Targets $400 million dollar minimum threshold in                                                                      
          the GF.                                                                                                               
        o Outlines    procedures    for   addressing    cash                                                                    
          deficiencies:                                                                                                         
         square4 Develop monthly cash projections.                                                                              
             square4 Monitor daily general fund cash balances.                                                                  
             square4 Transfer from SBR,  CBR   &    ERA   as                                                                    
               appropriated.                                                                                                    
             square4 Perform temporary interfund borrowing.                                                                     
             square4 Borrow from general fund sub funds.                                                                        
             square4 Seek legislative action through governor.                                                                  
             square4 Prioritize disbursements,      restrict                                                                    
               expenditures.                                                                                                    
                                                                                                                                
Ms. Prebula stated  that there was an agreement  of what was                                                                    
done during times of cash deficiency.                                                                                           
                                                                                                                                
Co-Chair   Stedman  asked   about  the   bullet  referencing                                                                    
transfers.  He  asked  if  the   order  of  accounts  listed                                                                    
depicted the order of execution if a transfer was made.                                                                         
                                                                                                                                
Ms.  Prebula stated  that generally  the order  of execution                                                                    
was whatever  had been appropriated. She  recalled generally                                                                    
only one account at a time had been appropriated.                                                                               
                                                                                                                                
9:15:38 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  asked about statutory authority  to access                                                                    
the SBR  or CBR. He  recalled that the  legislature normally                                                                    
gave  the  treasury  access  to  one  of  the  accounts  for                                                                    
budgetary purposes  if the state  missed on the  revenue and                                                                    
expense relationship  at the end  of the year. He  wanted to                                                                    
make clear  the point that  a simple majority vote  was easy                                                                    
compared to  a three-quarter vote  needed to access  the CBR                                                                    
or  the Earnings  Reserve Account  (ERA).  He was  concerned                                                                    
that if the state started  relying on the ERA and diminished                                                                    
or depleted the CBR or SBR.                                                                                                     
                                                                                                                                
Commissioner    Tangeman   addressed    Co-Chair   Stedman's                                                                    
question,   and   noted   that   DOR   followed   what   the                                                                    
appropriation bills allowed  for the state to  do. The order                                                                    
of  use  was  the  order   that  the  executive  branch  had                                                                    
authority to access.                                                                                                            
                                                                                                                                
Co-Chair Stedman  asked if the  department could  access the                                                                    
CBR  for  a  cash  deficiency if  the  legislature  did  not                                                                    
produce a three-quarters vote in the budgetary process.                                                                         
                                                                                                                                
Commissioner Tangeman  stated that  the question  might need                                                                    
to be addressed by the  Department of Law (LAW), because the                                                                    
memorandum gave  authority to  borrow against  accounts, but                                                                    
he was not sure about  not having an authorization through a                                                                    
CBR vote.                                                                                                                       
                                                                                                                                
9:18:44 AM                                                                                                                    
                                                                                                                                
Senator  Micciche pondered  the impetus  for the  signing of                                                                    
the Memorandum of  Agreement in 1994. He  saw that transfers                                                                    
were  only appropriate  as appropriated.  He asked  if there                                                                    
had  been a  cash flow  emergency after  appropriations from                                                                    
the legislature were too tight.                                                                                                 
                                                                                                                                
Ms.  Prebula stated  she was  not  much of  an alarmist  and                                                                    
would  not refer  to  anything as  a  "cash emergency,"  but                                                                    
there had  been times the  state had  been low on  cash. She                                                                    
referenced FY 99, the first  year that legislature put a cap                                                                    
of $700 million on the  borrowing from the CBR. She recalled                                                                    
that there  had been  a drop  in oil  prices, the  state had                                                                    
spent the money quickly, and  there was a subsequent special                                                                    
session in which the legislature voted to increase the cap.                                                                     
                                                                                                                                
Senator  Micciche   was  interested   in  the   topic  being                                                                    
discussed. He  recalled that  Co-Chair Stedman  had remarked                                                                    
that   the  budgeting   process  provided   some  level   of                                                                    
stability. He commented on the  volatility of oil prices. He                                                                    
was curious  how the  department would  manage if  the state                                                                    
was appropriated tightly and there was a drop in oil price.                                                                     
                                                                                                                                
Co-Chair Stedman  added that there was  separate language in                                                                    
the  budget for  borrowing  versus a  three-quarter vote  to                                                                    
extract funds to balance the budget.                                                                                            
                                                                                                                                
Commissioner  Tangeman thought  with the  percent of  market                                                                    
value  (POMV)  draw  of  the  ERA being  in  place,  it  was                                                                    
possible to absorb  minor changes in oil  price. He pondered                                                                    
the different oil  price levels that could  be considered an                                                                    
emergency. He questioned a drop of  $20 in the price of oil.                                                                    
He  discussed the  timing of  action taken  to react  to big                                                                    
changes in oil price.                                                                                                           
                                                                                                                                
9:22:21 AM                                                                                                                    
                                                                                                                                
Co-Chair   von   Imhof   asked  about   the   monthly   cash                                                                    
projections, and asked about the  amount of flexibility with                                                                    
the  Department of  Education and  Early Development  (DEED)                                                                    
and  the Department  of Health  and Social  Services (DHSS).                                                                    
She wondered  if the funds  were paid out  in a lump  sum or                                                                    
otherwise.  She  recalled  a letter  that  referenced  'slow                                                                    
paying' of Medicaid payments and  asked how it could be used                                                                    
to manage cash flow.                                                                                                            
                                                                                                                                
Commissioner Tangeman thought  Co-Chair von Imhof's question                                                                    
was  policy  related. He  relayed  that  the department  was                                                                    
instructed to  pay out  as required  by the  departments and                                                                    
thought Co-Chair  von Imhof's question about  slow-pay was a                                                                    
policy call.                                                                                                                    
                                                                                                                                
Ms.  Prebula stated  that the  department used  to make  the                                                                    
full school  funding appropriation  at the beginning  of the                                                                    
year; however,  with increased tightening control  over cash                                                                    
it  had  been  reduced   to  four  quarterly  payments.  She                                                                    
addressed Medicaid  and Medicare  and stated that  DOR tried                                                                    
to   encourage  Department   of   Administration  (DOA)   to                                                                    
continually stay on  top of reports in  order to continually                                                                    
bill  the federal  government. She  added that  DOR had  not                                                                    
made any recommendations with regard to payment.                                                                                
                                                                                                                                
Co-Chair  von  Imhof  thought  it  was  important  that  Ms.                                                                    
Prebula  had  an  ACH  credential,  and  thought  electronic                                                                    
transfers were  a way  to get  federal payments  faster. She                                                                    
hoped requests  for payments  were sent  electronically. She                                                                    
asked if  Ms. Prebula  did nightly sweeps  of cash  going in                                                                    
and out to earn some type of interest.                                                                                          
                                                                                                                                
Ms. Prebula deferred the question to Commissioner Tangeman.                                                                     
                                                                                                                                
Commissioner  Tangeman thought  the question  would be  best                                                                    
addressed by the state's chief investment officer.                                                                              
                                                                                                                                
Senator  Wielechowski  asked  how oil  severance  taxes  and                                                                    
royalties were paid.                                                                                                            
                                                                                                                                
Commissioner Tangeman stated  that the taxes were  paid on a                                                                    
monthly basis.                                                                                                                  
                                                                                                                                
9:25:39 AM                                                                                                                    
                                                                                                                                
Ms.  Prebula looked  at slide  6, "General  Fund Sufficiency                                                                    
July  1, 2018    December  31,  2018," which  showed a  line                                                                    
graph depicting  a monthly cash flow  projection. She stated                                                                    
that the  projection was the  biggest tool  for anticipating                                                                    
the cash needs  of the state. The  department considered the                                                                    
cash  flows  of  the  previous  year,  and  adjusted  bigger                                                                    
payments,  fund transfers,  and  borrowings. The  department                                                                    
wasn't  able to  forecast for  the year  until the  month of                                                                    
May.   The department considered  the projection on  a daily                                                                    
basis  and  made  adjustments monthly.  She  cautioned  that                                                                    
things diverged within the month,  and the projection was an                                                                    
estimate.                                                                                                                       
                                                                                                                                
Ms.  Prebula  pointed out  the  large  inflows and  outflows                                                                    
shown  in the  box  atop  the line  graph  on  slide 6.  She                                                                    
explained that six-month increments  were the most effective                                                                    
for looking at completed transfers.                                                                                             
                                                                                                                                
Co-Chair von Imhof  was curious about what  bank the state's                                                                    
cash was in.                                                                                                                    
                                                                                                                                
Ms. Prebula informed that there  was a conglomeration of the                                                                    
available state funds, which were in five different banks.                                                                      
                                                                                                                                
Co-Chair von  Imhof asked for the  names of a couple  of the                                                                    
banks.                                                                                                                          
                                                                                                                                
Ms. Prebula specified that the  state's primary custody bank                                                                    
with  the  bulk of  investments  was  State Street  Bank  in                                                                    
Boston, Massachusetts. Primary  depository activity was done                                                                    
within  the state.  She noticed  that ACH  payroll payments,                                                                    
retiree payroll, and vendor payments  were done through U.S.                                                                    
Bank. There  were also  deposits to  First National  Bank of                                                                    
Alaska. She mentioned Key Bank and Wells Fargo.                                                                                 
                                                                                                                                
Co-Chair Stedman  explained that the chart  showed transfers                                                                    
from the ERA to the  General Fund, including dividend monies                                                                    
to  be paid  out,  and  other monies  used  in the  previous                                                                    
year's budget. He wanted to  clarify that the funds were not                                                                    
used for  general expenditures outside  of the  5.25 percent                                                                    
POMV draw.                                                                                                                      
                                                                                                                                
Commissioner  Tangeman  answered   in  the  affirmative.  He                                                                    
pointed out  that the first green  line in the box  showed a                                                                    
CBR transfer. It  had been agreed that leaving  the funds in                                                                    
the ERA as  long as possible to earn the  highest return was                                                                    
in the best interest of the  state. The decision had been to                                                                    
draw the CBR  down first (which was earning  a lower return)                                                                    
and   then  engage   in  a   cash-call  process   which  was                                                                    
choreographed   between  the   department  and   the  Alaska                                                                    
Permanent Fund  Corporation (APFC). In October  and December                                                                    
there  had been  cash-calls to  the ERA,  in the  amounts of                                                                    
$350 million and $250 million.                                                                                                  
                                                                                                                                
9:30:42 AM                                                                                                                    
                                                                                                                                
Ms.  Prebula explained  slide 7,  "General Fund  Sufficiency                                                                    
January 1, 2019   June 30,  2019," which showed a line graph                                                                    
depicting a  balance projection for  the second part  of the                                                                    
fiscal year shown on the previous slide.                                                                                        
                                                                                                                                
Senator Wielechowski asked about  a $982 million transfer to                                                                    
the Permanent  Fund Dividend Fund  on September 11,  2018 as                                                                    
shown on  slide 6. He asked  if there was a  reason that the                                                                    
funds  were transferred  three  weeks  before the  dividends                                                                    
were paid  out. He  estimated that there  was a  few hundred                                                                    
thousand dollars in interest that had been missed out on.                                                                       
                                                                                                                                
Ms.  Prebula was  not  involved in  the  transfer. In  prior                                                                    
years, the funds  were transferred when the  books were done                                                                    
at APFC. She couldn't speak to the timing for 2018.                                                                             
                                                                                                                                
Commissioner  Tangeman stated  that he  would look  into the                                                                    
matter.                                                                                                                         
                                                                                                                                
Ms. Prebula displayed slide 8, "Takeaways":                                                                                     
                                                                                                                                
         Cash flow forecasting is always wrong.                                                                              
         Even if the State budget is balanced, borrowing                                                                     
          for cash flow deficits will occur.                                                                                    
         Budget deficit borrowing may occur if forecasted                                                                    
          assumptions are wrong.                                                                                                
         How much is borrowed depends on the actual                                                                          
          amounts and timing of revenues and expenses.                                                                          
                                                                                                                                
Ms.  Prebula emphasized  that cash  forecasting was  an art,                                                                    
and the direction and magnitude of changes was unknown.                                                                         
                                                                                                                                
9:33:11 AM                                                                                                                    
                                                                                                                                
Ms.  Prebula discussed  slide 9,  "General Fund  Sufficiency                                                                    
July 1,  2019    June 30, 2020  With Projected  Cash Outflow                                                                    
Reduction of $1.6B/year," which  showed a line graph showing                                                                    
a depiction  of cash  outflow and what  might happen  with a                                                                    
proposed  reduction   in  outflows  of  $1.6   billion.  She                                                                    
explained that the  need for cash would depend  on what sort                                                                    
of fund  transfers were appropriated, and  what other things                                                                    
occurred.                                                                                                                       
                                                                                                                                
Commissioner Tangeman  thought the slide put  something into                                                                    
perspective.  He thought  it was  important  to discuss  the                                                                    
appropriate size  of the  CBR. He thought  the graph  gave a                                                                    
little  bit of  a glimpse  into  where the  state should  be                                                                    
looking. He pointed  out an almost $800 million  drop in the                                                                    
initial part of  the graph. He noted  that many expenditures                                                                    
for the fiscal year occurred in the first part of July.                                                                         
Throughout the year it was  possible to see other drops, and                                                                    
he estimated  that about $1.4  billion was reflected  on the                                                                    
graph. He opined that the state  was at a level it needed to                                                                    
be at for  the CBR. He thought a balance  of $1.7 billion or                                                                    
$1.8 billion provided a needed cushion.                                                                                         
                                                                                                                                
Senator Bishop asked to revisit  slide 6. He asked about the                                                                    
ERA draw, which was $1.6  billion, out of an authorized $2.7                                                                    
billion; and  a remaining balance of  $1.1 billion available                                                                    
to draw.                                                                                                                        
                                                                                                                                
Commissioner Tangeman answered in the affirmative.                                                                              
                                                                                                                                
Senator  Bishop considered  that if  revenues rebounded  and                                                                    
there was $1 billion in surplus  - and wondered if the state                                                                    
would not need to draw the $1.1 billion from the ERA.                                                                           
                                                                                                                                
Commissioner Tangeman  thought Senator  Bishop posed  a good                                                                    
question,  and that  oil prices  were  slightly higher  than                                                                    
forecast.  He  thought  the forecast  $700  million  deficit                                                                    
would be closer to $250 million.  The plan was to still draw                                                                    
the ERA down  as anticipated, and the funds  would remain in                                                                    
the General Fund.                                                                                                               
                                                                                                                                
Co-Chair  Stedman  summarized  that  the state  was  at  its                                                                    
minimum comfort level in the  CBR.  He thought the committee                                                                    
needed  to  take  the  matter   under  consideration  as  it                                                                    
pondered shock-absorber  mechanisms in the budget  and other                                                                    
budgetary issues.                                                                                                               
                                                                                                                                
Commissioner Tangeman agreed.                                                                                                   
                                                                                                                                
9:37:07 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:38:02 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
BOB  MITCHELL,  CHIEF   INVESTMENT  OFFICER,  DEPARTMENT  OF                                                                    
REVENUE, discussed his experience.  He referenced a February                                                                    
5,  2019 presentation  on investments  by Treasury  Division                                                                    
Director Pamela  Leary; and stated  there had been  a number                                                                    
of performance questions  that had come up  in committee. He                                                                    
hoped to  provide additional  information on  the questions.                                                                    
He had worked  with the treasury division  for twenty years.                                                                    
He had  worked in  the fixed income  team, including  as the                                                                    
senior portfolio manager  for 13 years. He  was named deputy                                                                    
chief    investment   officer    (CIO),    and   had    made                                                                    
recommendations to the CIO relating  to asset allocation and                                                                    
risk management. He was hired as CIO in May 2017.                                                                               
                                                                                                                                
Mr. Mitchell  discussed his  educational background.  He had                                                                    
received  a Bachelor's  degree in  Economics and  a Master's                                                                    
degree  in Business  Administration from  the University  of                                                                    
Alaska  Fairbanks. He  had  attained the  right  to use  the                                                                    
charter financial analyst designation.                                                                                          
                                                                                                                                
9:40:49 AM                                                                                                                    
                                                                                                                                
Mr.  Mitchell discussed  the presentation  "State of  Alaska                                                                    
Performance Comparison," (copy on file).                                                                                        
                                                                                                                                
Mr. Mitchell  turned to  slide 2,  "Investment Performance,"                                                                    
which  showed a  table.  There had  been questions  centered                                                                    
around   apparent  differences   in   returns  among   state                                                                    
portfolios. He recalled that the  committee had questions in                                                                    
a    previous    meeting    about    the    Public    School                                                                    
Trust  Fund   (PSTF).  He  informed  that   there  had  been                                                                    
references  to differences  in  return expectations  between                                                                    
the state  funds and  the retirement  funds, which  he would                                                                    
address.   He  noted   there  was   a  request   to  compare                                                                    
performance  of  the  state   retirement  systems  with  the                                                                    
performance of the Permanent Fund.                                                                                              
                                                                                                                                
Mr. Mitchell  continued to  address slide  2. He  noted that                                                                    
state  funds had  investments that  were in  publicly traded                                                                    
securities;  and as  a result,  the performance  information                                                                    
was available  fairly quickly. He considered  the portfolios                                                                    
in  the  retirement system  and  Permanent  Fund, which  had                                                                    
significant parts  invested in non-liquid assets;  more time                                                                    
was required  to get performance information.  When Director                                                                    
Leary  had   made  a   presentation,  there   was  different                                                                    
performance information.  The slide  attempted to  break out                                                                    
the performance for specific time periods.                                                                                      
                                                                                                                                
Mr. Mitchell continued  to discuss slide 2.  There were four                                                                    
tables  on  the  slide.  The  top  two  tables  covered  the                                                                    
December 31 time period. He  had made the determination that                                                                    
there  was a  more appropriate  "high-risk" designation  for                                                                    
the Alaska  Retirement Management  (ARM) Board Fund  and the                                                                    
Permanent  Fund  rather   than  the  "moderate"  designation                                                                    
reported by Director Leary. Mr.  Mitchell clarified that the                                                                    
determinations were his own.                                                                                                    
                                                                                                                                
Mr.  Mitchell   addressed  the  error  on   slide  2,  which                                                                    
pertained  to the  FY 19  Equity Target  column for  the ARM                                                                    
Board for private and public equities.                                                                                          
                                                                                                                                
9:44:19 AM                                                                                                                    
                                                                                                                                
Mr.  Mitchell  continued to  address  slide  2, noting  that                                                                    
there  was  no  performance  available  for  the  retirement                                                                    
systems for the  December 31, 2018 period.  He discussed the                                                                    
'Equity  Target' column,  in which  one  could observe  that                                                                    
both  the  Permanent Fund  and  the  retirement systems  had                                                                    
significant  equity  allocations,  as  well  as  significant                                                                    
alternative investments.  The numbers did not  fully reflect                                                                    
the  risk profile  of the  portfolios. To  the right  of the                                                                    
equity  numbers, he  pointed out  the 10-year  return target                                                                    
and  projected standard  deviation. The  ARM board  expected                                                                    
return for an  over 10-year horizon was 6.6  percent, with a                                                                    
long-term  objective of  7.38 percent.  The  reason for  the                                                                    
difference was  due to  increased returns  expectations over                                                                    
time.  He discussed  sources of  information. He  thought it                                                                    
was  important to  be cognizant  of the  time horizon  being                                                                    
considered when discussing expected returns.                                                                                    
                                                                                                                                
Mr.  Mitchell stated  that the  existing allocation  for the                                                                    
ARM  board had  7.4  percent expected  return,  but over  10                                                                    
years was 6.6 percent. He hoped  it was possible to see that                                                                    
expected  returns were  somewhat consistent.  He noted  that                                                                    
the information on  the Permanent Fund was  sourced from the                                                                    
APFC website.                                                                                                                   
                                                                                                                                
9:46:56 AM                                                                                                                    
                                                                                                                                
Mr.  Mitchell addressed  state funds  on slide  2. He  noted                                                                    
that  the  asset  allocation  of  PSTF  had  changed  fairly                                                                    
significantly over  the previous  five years. He  thought it                                                                    
was  useful   to  consider  the  five-year   average  equity                                                                    
allocation in  order to understand  the risk profile  of the                                                                    
portfolio  over time.  He discussed  average return  targets                                                                    
for  the  PSTF;  which  was 53  percent  for  the  five-year                                                                    
average and  was currently in  the high 60s. The  reason for                                                                    
the  difference was  two-fold. He  detailed  changes to  the                                                                    
asset  allocation  that  started   December  1,  2019  which                                                                    
reflected new spending methodology for the PSTF.                                                                                
                                                                                                                                
Mr.  Mitchell continued  discussing  the  difference in  the                                                                    
return targets  for the PSTF. There  was a change to  a more                                                                    
risk-seeking  portfolio, which  had  a substantially  higher                                                                    
equity  allocation. He  discussed  the  management of  asset                                                                    
allocation. He  discussed inflation-proofing and  noted that                                                                    
a 3  percent cushion had  been used. Over the  previous five                                                                    
or more years, the expected  return had a declining pattern.                                                                    
To achieve  the expectation  of PSTF's purchasing  power, it                                                                    
was necessary to increasingly ramp  up the equity allocation                                                                    
in  the fund.  Conceptually  if the  return expectation  was                                                                    
lower, it required more risk  in the portfolio to maintain a                                                                    
minimum threshold of purchasing power.                                                                                          
                                                                                                                                
Mr. Mitchell  discussed equity  allocations by  fiscal year.                                                                    
He noted that the equity  allocation was about 42 percent in                                                                    
FY 14, which increased to  50 percent the following year and                                                                    
hovered in  the mid-50s for  the subsequent three  years. He                                                                    
referenced HB  213 [legislation passed in  2018 that created                                                                    
an  education  endowment  fund and  dividend  raffle  fund],                                                                    
after which  the asset allocation  was changed.  He detailed                                                                    
declines in the domestic equity market.                                                                                         
                                                                                                                                
9:51:21 AM                                                                                                                    
                                                                                                                                
Mr.  Mitchell continued  to  discuss  equity allocations  as                                                                    
shown on  slide 2. He  discussed the low performance  of the                                                                    
PSTF  and  pointed  out   that  substantially  lower  equity                                                                    
allocation.  He   compared  the  PSTF  to   the  Power  Cost                                                                    
Equalization  (PCE)   Fund  and  expected  that   the  asset                                                                    
allocation and  performance of the  two funds would  be more                                                                    
similar in the future.                                                                                                          
                                                                                                                                
Mr. Mitchell  discussed the low one-year  performance of the                                                                    
PSTF. He  noted that during  the same period,  the Permanent                                                                    
Fund had a substantially  better performance during the same                                                                    
period.  He  commented that  risk  was  rewarded over  time,                                                                    
either in the  public or private markets.  He expected funds                                                                    
like the  Permanent Fund and  the retirement  systems (which                                                                    
had illiquid investments) would show some impact.                                                                               
                                                                                                                                
9:54:04 AM                                                                                                                    
                                                                                                                                
Mr. Mitchell  continued to  discuss slide  2. He  noted that                                                                    
shorter term  performance could be  harder to  interpret and                                                                    
encouraged  members  to  think about  long-term  performance                                                                    
from  five-year numbers  or longer.  He  commented on  state                                                                    
funds,  which  unlike  the  Permanent  Fund  and  retirement                                                                    
systems,  were  not  permitted  to  invest  in  unregistered                                                                    
securities.  State funds  could not  be invested  in private                                                                    
investments,  which was  a primary  reason  for state  funds                                                                    
being invested in stocks and bonds.                                                                                             
                                                                                                                                
Mr. Mitchell noted that he  provided the information to show                                                                    
the  impact of  different quarters,  but also  because there                                                                    
had  been  a  request  to compare  returns  of  the  pension                                                                    
systems, state funds,  and the Permanent Fund.  He noted the                                                                    
similarity in  performance of the  funds. He did  not expect                                                                    
all five-year  periods to equal  out but reiterated  that it                                                                    
was important to focus on "the long game."                                                                                      
                                                                                                                                
Co-Chair von Imhof  appreciated slide 2, and  thought it was                                                                    
a "dashboard"  that would be helpful  to continue reviewing.                                                                    
She pointed  out the difference  between the  performance of                                                                    
the  funds  in  different  quarters. She  commented  on  the                                                                    
volatility amongst  the funds. She pondered  another quarter                                                                    
of poor  returns and  considered the  impact on  the state's                                                                    
daily cash  flow. She suggested  that when the CBR  was low,                                                                    
and if  the ERA was  transferred, the state would  have less                                                                    
of a collective  cushion to address medium  returns if there                                                                    
was  a  prolonged  market  recession.  She  thought  it  was                                                                    
important  and fiscally  prudent  to maintain  a cushion  to                                                                    
monitor  the  state's cash  flow.  She  hoped members  would                                                                    
recognize the importance of volatility.                                                                                         
                                                                                                                                
9:58:40 AM                                                                                                                    
                                                                                                                                
Senator  Micciche  thought  it   seemed  that  the  PCE  was                                                                    
disproportionately  adversely affected  above the  Permanent                                                                    
Fund and the Alaska  Retirement Management Board allocation.                                                                    
With  the   expectation  of   upcoming  lower   returns,  he                                                                    
questioned if the asset allocation was over-exposed.                                                                            
                                                                                                                                
Mr. Mitchell thought it was  necessary to take risk in order                                                                    
to   generate  returns   over   time.   He  considered   the                                                                    
requirements of funds within the  state system and mentioned                                                                    
taking the  least amount of  risk to achieve  the objective.                                                                    
The  objective for  the PCE  was a  5 percent  return, which                                                                    
required a  meaningful allocation to the  equity market. The                                                                    
fund had a long time-horizon,  so the portfolio could handle                                                                    
lower  market periods.  In the  long term,  it was  expected                                                                    
that the equity market would  provide higher returns, but it                                                                    
was necessary to absorb short-term  losses. He did not think                                                                    
the state  should take more  risk than necessary  to achieve                                                                    
objectives.  He  believed the  maximum  amount  of risk  the                                                                    
state could take  was roughly 70 - 30. The  PCE had a higher                                                                    
allocation  to equities  five years  previously, and  return                                                                    
expectations were going down.                                                                                                   
                                                                                                                                
Mr.  Mitchell   continued  to  address   Senator  Micciche's                                                                    
question.  The expected  returns  shown on  slide  2 were  a                                                                    
function of  the capital market assumptions  provided by the                                                                    
state's general consultant, Callan  and Associates, and were                                                                    
updated   annually.  There   were  revised   capital  market                                                                    
assumptions  that  would be  used  for  the upcoming  fiscal                                                                    
year. The  early indications were  that the  ten-year return                                                                    
expectations in  the capital market assumptions  were higher                                                                    
than the  previous year.  There was  a declining  trend that                                                                    
was  flat  and  then  rose.  He  discussed  how  Callan  and                                                                    
Associates   generated   the    assumptions.   He   expected                                                                    
marginally higher returns.                                                                                                      
                                                                                                                                
10:02:58 AM                                                                                                                   
                                                                                                                                
Co-Chair  Stedman  asked  Mr. Mitchell  to  discuss  capital                                                                    
market assumptions in greater detail.                                                                                           
                                                                                                                                
Mr.  Mitchell stated  that  assumptions  were required  when                                                                    
formulating  expected returns,  such as  performance of  the                                                                    
bond  market and  stock market.  Volatility  of returns  was                                                                    
considered.  Fixed income  tended to  have less  volatility,                                                                    
while  there was  more  volatility on  the  equity side.  He                                                                    
summarized  that in  the context  of  retirement systems  or                                                                    
other  asset classes,  it  was best  to  first consider  the                                                                    
return and time horizon.                                                                                                        
                                                                                                                                
Mr.  Mitchell discussed  volatility of  returns and  to what                                                                    
extent  did  investments  move   up  or  down  together.  He                                                                    
mentioned diversification.  Capital market  assumptions were                                                                    
used to do  math to determine what  allocation would achieve                                                                    
the best outcome with a minimum amount of certainty.                                                                            
                                                                                                                                
Co-Chair Stedman asked about "basis points."                                                                                    
                                                                                                                                
Mr. Mitchell stated that in  fixed income, every basis point                                                                    
mattered, and was 1 one-hundredth of a percent.                                                                                 
                                                                                                                                
10:06:20 AM                                                                                                                   
                                                                                                                                
Senator Micciche appreciated Mr.  Mitchell's answer, but did                                                                    
not hear  an explanation of the  inconsistency in investment                                                                    
logic  between the  PCE endowment,  the Permanent  Fund, and                                                                    
the ARM Board investments.                                                                                                      
                                                                                                                                
Mr. Mitchell characterized the funds  as having similar risk                                                                    
tolerances.   The  funds   were  all   long-term,  and   the                                                                    
proportion of the  funds going out were  relatively low. The                                                                    
three  funds had  fairly  aggressive  return targets,  which                                                                    
required aggressive  risk in  the portfolios.  The Permanent                                                                    
Fund and  the retirement systems  had the ability  to invest                                                                    
in  illiquid assets,  a  tool which  was  not available  for                                                                    
state  funds.  The  funds  with  illiquid  assets  were  not                                                                    
affected as quickly by drawdowns in the market.                                                                                 
                                                                                                                                
Senator Wielechowski  wanted to understand the  PSTF and PCE                                                                    
equity targets. He  wondered how it was possible  to have 5-                                                                    
year  equity targets  of  53  percent for  the  PSTF and  70                                                                    
percent for  the PCE  endowment, yet  with the  same 10-year                                                                    
projected return and projected standard deviation.                                                                              
                                                                                                                                
Mr. Mitchell  stated that one amount  reflected looking back                                                                    
and   one  reflected   looking  forward.   There  had   been                                                                    
substantial changes  for the asset allocation  for the PSTF,                                                                    
primarily as  a result  to changes to  the POMV  payout from                                                                    
the Permanent Fund.  The previous five years the  PSTF had a                                                                    
lower equity allocation (reflected  in the 53 percent versus                                                                    
the 70 percent for the  PCE); but looking forward, the funds                                                                    
had substantially the same asset  allocation and same return                                                                    
target.                                                                                                                         
                                                                                                                                
Senator Wielechowski discussed the  equity target of the PCE                                                                    
and  the Permanent  Fund. He  thought  it seemed  that a  50                                                                    
percent equity target was not a very high risk.                                                                                 
                                                                                                                                
Mr.  Mitchell commented  that if  the other  50 percent  was                                                                    
invested  in bonds,  then the  fund had  a relatively  lower                                                                    
risk allocation than  the fund with 70  percent in equities.                                                                    
The  Permanent  Fund  and  retirement  portfolios  both  had                                                                    
significant  allocations  to  things such  as  private  real                                                                    
estate and hedge funds. He  thought it was harder to discern                                                                    
how equity-like  some of the investments  were. He discussed                                                                    
aspects  and risk  profiles of  real estate  investments. He                                                                    
commented  that   focusing  on  the  equity   portion  of  a                                                                    
portfolio  that had  illiquid  investments  might not  fully                                                                    
appreciate the risk being brought to the portfolio.                                                                             
                                                                                                                                
Mr.  Mitchell  continued addressing  Senator  Wielechowski's                                                                    
question.  He  stated that  in  the  Treasury Division,  the                                                                    
thought  of  high  risk included  a  significant  chance  of                                                                    
seeing a negative return in a  given year. He thought it was                                                                    
appropriate  to   consider  the   Permanent  Fund   and  the                                                                    
retirement  systems  as  having  a meaningful  chance  of  a                                                                    
negative  return. The  Permanent  Fund did  show a  negative                                                                    
return for a one-year period.                                                                                                   
                                                                                                                                
10:11:50 AM                                                                                                                   
                                                                                                                                
Senator  Shower asked  how to  receive the  data on  slide 2                                                                    
more frequently.                                                                                                                
                                                                                                                                
Mr.  Mitchell stated  that  the  department produced  return                                                                    
information  for state  funds on  a monthly  basis, and  the                                                                    
information was located on  the Treasury Division's website.                                                                    
There  was quarterly  information on  the retirement  system                                                                    
also available on the website.                                                                                                  
                                                                                                                                
Co-Chair  Stedman recognized  the work  of DOR  and the  ARM                                                                    
board as functioning as two  different offices. He looked at                                                                    
the projected  standard deviation  numbers of  the Permanent                                                                    
Fund  and the  ARM Board  Non-participant Directed  Fund. He                                                                    
did  not  think the  numbers  correlated  when there  was  a                                                                    
significant change in risk and  barely a change in projected                                                                    
return.   He  thought   it   would  be   nice   to  have   a                                                                    
representative  from  the  ARM  Board  as  well  as  DOR  in                                                                    
committee to discuss the funds.                                                                                                 
                                                                                                                                
Mr.  Mitchell   stated  that  with  the   exception  of  the                                                                    
Permanent  Fund, the  underlying capital  market assumptions                                                                    
were very similar  for the retirement system  and the state.                                                                    
He  continued  that  for  the   retirement  system  and  the                                                                    
Permanent Fund,  the department relied  less on  the generic                                                                    
Callan  and  Associates  capital market  assumptions,  which                                                                    
were   suitable  for   state  funds.   He  cited   differing                                                                    
definitions  of asset  classes  and noted  that  it was  not                                                                    
uncommon to  enter into conversation with  Callan about what                                                                    
were  appropriate assumptions.  Ultimately  Callan made  the                                                                    
determination,  but  to  some   extent  the  capital  market                                                                    
assumptions  for the  Permanent Fund  and retirement  system                                                                    
were influenced  by the discussions. He  believed that (with                                                                    
respect   to   private   equity)  the   standard   deviation                                                                    
expectation  employed by  the  ARM  Board was  significantly                                                                    
higher than  it was  for the Permanent  Fund, which  was why                                                                    
there were differences in the assumed standard deviation.                                                                       
                                                                                                                                
10:15:12 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman  noticed that  the ARM  board always  had a                                                                    
higher   standard   of   deviation  and   higher   projected                                                                    
volatility than  the Permanent Fund. He  considered that the                                                                    
Permanent Fund  was in perpetuity,  and the  Defined Benefit                                                                    
Plan might last  another 30 years. He  thought the Permanent                                                                    
Fund  (being in  perpetuity)  would have  a higher  standard                                                                    
deviation expectation  versus something  that was  finite in                                                                    
nature.                                                                                                                         
                                                                                                                                
Mr.  Mitchell  thought to  some  degree  the difference  was                                                                    
embedded  in  slight  differences   in  the  capital  market                                                                    
assumptions  that were  employed. He  thought the  source of                                                                    
the  difference  was  the need  to  provide  capital  market                                                                    
assumptions   that  were   reflective   of  the   underlying                                                                    
investments in  each of the portfolios.  He believed private                                                                    
equity   had  consistently   been  higher   than  the   risk                                                                    
assumption employed by  the Permanent Fund. He  was happy to                                                                    
provide a comparison for further information.                                                                                   
                                                                                                                                
Mr. Mitchell  thought Co-Chair Stedman was  correct to point                                                                    
out that  the Defined Benefit Retirement  System was finite,                                                                    
and  new employees  were entering  the Defined  Contribution                                                                    
Plan. Legacy  defined benefit employees would  remain in the                                                                    
Defined Benefit  Plan, which  would extend  the life  of the                                                                    
liabilities that would need to be  paid. He thought it was a                                                                    
significant consideration that would  enter into the ability                                                                    
to take  risk in the portfolio,  but he did not  believe the                                                                    
point had  been reached  yet. To supplement,  DOR frequently                                                                    
engaged  in  an  asset  liability  study,  and  was  in  one                                                                    
currently. He expected  at the April 2019  board meeting the                                                                    
ARM  board   would  receive  the   study  from   Callan  and                                                                    
Associates.  One of  the key  elements of  the study  was to                                                                    
what  extent  did  the shortened  time  horizon  impact  the                                                                    
ability  to take  risk  and to  give  liquidity in  illiquid                                                                    
assets.                                                                                                                         
                                                                                                                                
10:18:50 AM                                                                                                                   
                                                                                                                                
Co-Chair von Imhof thought  the projected standard deviation                                                                    
was  important  to  consider. She  asked  if  the  projected                                                                    
standard deviation  described volatility or the  extreme ups                                                                    
and downs. She  opined that the Permanent Fund,  even with a                                                                    
POMV, was correctly  invested. She wanted to  point out that                                                                    
it was imperative to keep  the ERA somewhat protected so the                                                                    
state could  weather high volatilities.  She noted  that the                                                                    
Permanent  Fund  had  not been  inflation-proofed  in  three                                                                    
years  and thought  there was  associated risk.  She thought                                                                    
that  there  was a  balance  needed  to inflation-proof  the                                                                    
corpus  and  keep  the  ERA   intact.  She  appreciated  the                                                                    
comparison with  the ERA and  the CBR,  which was more  of a                                                                    
daily cash flow.                                                                                                                
                                                                                                                                
Commissioner Tangeman  stated that  there was  an inflation-                                                                    
proofing  appropriation  just short  of  $1  billion in  the                                                                    
current budget submitted by the governor.                                                                                       
                                                                                                                                
Senator Wielechowski  asked if SB 26  [legislation passed in                                                                    
2018 relating  to the  Permanent Fund and  the ERA]  and the                                                                    
requirement  for  billions  of  dollars in  funds  from  the                                                                    
Permanent Fund  be available from  the ERA would  impact the                                                                    
risk tolerance and return targets from the Permanent Fund.                                                                      
                                                                                                                                
Commissioner Tangeman thought the  bill would help stabilize                                                                    
the   investment  strategy   around   the  Permanent   Fund,                                                                    
considering the  fact that  the exposure  to the  entire ERA                                                                    
was laid out up until  the previous year. He thought putting                                                                    
in a  structured draw  around a  certain portion  would give                                                                    
stability.  He recalled  the previous  year  there had  been                                                                    
discussions  with big  swings around  accessing the  CBR. He                                                                    
thought  the Permanent  Fund had  to stay  liquid since  the                                                                    
appropriation structure coming from  the legislature was not                                                                    
known.  He  thought the  fact  that  there was  a  structure                                                                    
around a  good portion of  the ERA helped stabilize  the ERA                                                                    
itself and  helped stabilize the Permanent  Fund's assets in                                                                    
the  market  to  earn  a  higher  return  on  the  remaining                                                                    
balances.                                                                                                                       
                                                                                                                                
10:22:44 AM                                                                                                                   
                                                                                                                                
Co-Chair  von  Imhof   appreciated  Commissioner  Tangeman's                                                                    
remarks  about how  a  disciplined  structured draw  somehow                                                                    
insulated or  protected the  ERA. She  pointed out  that the                                                                    
Senate was  hearing two  bills proposed  by the  governor to                                                                    
take  additional   transfers  from   the  ERA   outside  the                                                                    
structured  draw  in  order  to   pay  back  dividends.  She                                                                    
recounted  that Office  of  Management  and Budget  Director                                                                    
Donna Arduin had also stated for  the record that it was the                                                                    
administration's interpretation that  transfers from the ERA                                                                    
at  any   given  point   were  within   the  realm   of  the                                                                    
administration,   and   the   funds   were   available   for                                                                    
expenditure.   She  emphasized that  there was  a structured                                                                    
draw  in  place  that  was  a  disciplined  and  sustainable                                                                    
approach.                                                                                                                       
                                                                                                                                
Co-Chair  Stedman  commented  that the  committee  was  very                                                                    
protective  of  the Permanent  Fund.  He  recounted that  in                                                                    
previous  years  when the  legislature  had  dealt with  the                                                                    
issue  of  unfunded  pension,  the  state  owed  roughly  $6                                                                    
billion. He thought the legislature  would struggle over the                                                                    
next  years  to pay  down  a  current  $6 billion  debt  for                                                                    
unfunded  pension   obligations.  He  commented   on  rising                                                                    
interest  rates.  He  asked   about  duration  matching  the                                                                    
state's liability  and assets.  He recognized that  a decade                                                                    
previously the equity  infusion was out of reach  due to the                                                                    
state's  financial  position  at  the time.  He  pondered  a                                                                    
mechanism  to  fix  part  or all  of  the  state's  unfunded                                                                    
liability.                                                                                                                      
                                                                                                                                
10:26:59 AM                                                                                                                   
                                                                                                                                
Mr. Mitchell stated he could  conceptually speak to Co-Chair                                                                    
Stedman's  question. He  thought a  significant part  of the                                                                    
process  of the  retirement system  was estimating  what was                                                                    
due and  when it  was due.  He continued  that DOA  hired an                                                                    
actuary, and DOR hired another  actuary to check the actuary                                                                    
and  make sure  the assumptions  were acceptable.  He stated                                                                    
that the  result of the  analysis was an expectation  of how                                                                    
much cash  was required  to make  the benefit  payments each                                                                    
month.  He  considered  that  there was  a  fair  amount  of                                                                    
investment risk  to gain a  return. He thought  one strategy                                                                    
for  addressing the  mismatch was  to purchase  high quality                                                                    
bonds. He  thought it was  possible to build a  portfolio of                                                                    
bonds  to  the  extent  the  bonds  were  available  in  the                                                                    
maturity  range   the  state  wanted.  He   thought  it  was                                                                    
theoretically possible to build  a portfolio that would have                                                                    
a  cash flow  profile that  matched expectations  of benefit                                                                    
payments when due.                                                                                                              
                                                                                                                                
Mr.  Mitchell   continued  to  address   Co-Chair  Stedman's                                                                    
question.  He   stated  there  were  two   issues  with  the                                                                    
portfolio  he described.  He qualified  that  bonds did  not                                                                    
yield as much  as stocks. In the short  term, the volatility                                                                    
was  significant and  there  was  uncertainty. He  discussed                                                                    
selling  assets  for  assets that  matched  cash  flows.  If                                                                    
return assumptions  were lowered (for bond  portfolios), the                                                                    
state's  funded situation  would deteriorate.  There was  an                                                                    
embedded  return assumption  with the  state's assets;  when                                                                    
lowered, there would be a magnified impact.                                                                                     
                                                                                                                                
Mr.  Mitchell   continued  to  address   Co-Chair  Stedman's                                                                    
question. To  the degree that actuarial  assumptions did not                                                                    
reflect  reality,   the  state  could  end   up  building  a                                                                    
portfolio of bonds  that did not have the  cash flow profile                                                                    
that it ultimately  needed. He thought the  bigger issue was                                                                    
that when  the expected  return of the  asset went  down, it                                                                    
required the state to pay more into the system.                                                                                 
                                                                                                                                
10:31:57 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman  mused that when volatility  decreased, one                                                                    
neutralized the  volatility, which took an  upfront cost. If                                                                    
the state had the cash and tried  to do it year by year over                                                                    
the same  amortization schedule,  it would not  be possible.                                                                    
It would take an  up-front appropriation to match volatility                                                                    
of liabilities  against assets. He  thought it  was possible                                                                    
with partial pieces of the portfolio.                                                                                           
                                                                                                                                
Co-Chair Stedman  had asked  Mr. Mitchell's  predecessor why                                                                    
the portfolio had not been  duration-matched. He thought the                                                                    
issue had been burning in  the background over the years the                                                                    
state had been trying to pay the liability off.                                                                                 
                                                                                                                                
Mr.  Mitchell thought  that duration  matching would  remove                                                                    
some  uncertainty  about  what  the payments  would  be.  He                                                                    
relayed  that  the  department   would  take  up  the  issue                                                                    
internally,  and would  work with  Callan and  Associates to                                                                    
explore the issues  as part of the asset  liability study it                                                                    
was engaged in.                                                                                                                 
                                                                                                                                
Co-Chair Stedman  thought volatility  could be  removed from                                                                    
the table with strategies.                                                                                                      
                                                                                                                                
10:34:26 AM                                                                                                                   
                                                                                                                                
Senator Olson  considered slide  2 and  asked why  there was                                                                    
not  a comparison  between international  investments versus                                                                    
domestic  investments.  He  thought   that  there  had  been                                                                    
concern  that  there  were  countries  that  were  allegedly                                                                    
involved  in activities  the state  found offensive  such as                                                                    
terrorism.                                                                                                                      
                                                                                                                                
Mr.  Mitchell  stated  that international  equities  were  a                                                                    
significant  component of  state funds  as well  as the  ARM                                                                    
Board funds and  the Permanent Fund. The  previous ten years                                                                    
had   been  remarkable   in  that   domestic  equities   had                                                                    
significantly   outperformed   international  equities.   He                                                                    
stated that DOR was  guardedly optimistic about the relative                                                                    
performance   of   international  equities   over   domestic                                                                    
equities going forward.                                                                                                         
                                                                                                                                
Mr. Mitchell addressed  diversification and social concerns.                                                                    
To  the  degree  that  it was  possible  to  diversify  into                                                                    
international  equities,  he  thought it  lowered  the  risk                                                                    
profile. He relayed that the  state's interests were for the                                                                    
financial best interest of the  funds; and on the retirement                                                                    
side, the fiduciary duty was  to the financial best interest                                                                    
of the  participants. He explained  that to the  extent that                                                                    
there  were social  concerns  (which came  up  from time  to                                                                    
time), the  department was  guided by the  rule that  it was                                                                    
looking  out for  the  sole economic  best  interest of  the                                                                    
participants.  Absent   a  compelling  reason,   the  agency                                                                    
preferred to diversify rather  than to restrict investments.                                                                    
He  restated  that  absent any  statutory  restrictions  for                                                                    
investing, the preference was to diversify the portfolio.                                                                       
                                                                                                                                
10:37:09 AM                                                                                                                   
                                                                                                                                
Mr.  Mitchell reviewed  slide 3,  "Investment Fund  Snapshot                                                                    
12/31/2018,"  which showed  several  data  tables that  were                                                                    
primarily  for informational  reasons.  He highlighted  that                                                                    
the annual presentations to the  committee from the Treasury                                                                    
Division had evolved  over time. The slide was  to provide a                                                                    
comprehensive  look at  the funds  managed in  the division.                                                                    
The 5 funds  that had been the focus of  the presentation by                                                                    
the director's  presentation comprised  about 80  percent of                                                                    
the total  assets managed by  the division, while  the slide                                                                    
was a complete list.                                                                                                            
                                                                                                                                
Senator Wielechowski  commented on  the longest bull  run in                                                                    
history. He asked  if Mr. Mitchell had heard  that there was                                                                    
a  forthcoming  recession  and   if  he  was  changing  risk                                                                    
tolerance  or  event horizons  to  prepare  for a  potential                                                                    
market crash.                                                                                                                   
                                                                                                                                
Mr.  Mitchell thought  it was  possible to  see a  recession                                                                    
coming, but he  tried to resist the temptation  to desire to                                                                    
tactically change the  portfolio and tried to  stay with the                                                                    
long-term asset allocation. He  thought chances of achieving                                                                    
the   long-term  return   was  higher   if  discipline   was                                                                    
maintained in terms  of asset allocation.  He  could see the                                                                    
impacts of  forward-looking views  in Callan  and Associates                                                                    
capital  market  assumptions.  He  mentioned  the  declining                                                                    
trend of  expected returns.  The goal  of DOR  was to  set a                                                                    
strategic  asset allocation  and  rebalance  towards to  the                                                                    
strategic allocation with in-flows and retirement payments.                                                                     
                                                                                                                                
10:41:00 AM                                                                                                                   
                                                                                                                                
Senator Shower thought  it was important to  protect the ERA                                                                    
and the Permanent  Fund. He thought a  structured draw added                                                                    
stability was  important, and an adequate  stream of revenue                                                                    
from the  POMV draw. He  asked about the equitable  split of                                                                    
the earnings between  the people and the  government. He was                                                                    
curious about Commissioner Tangeman's  thoughts and he would                                                                    
agree the items were important.                                                                                                 
                                                                                                                                
Commissioner  Tangeman agreed  that Senator  Shower's points                                                                    
were  important and  thought that  it was  reflected in  the                                                                    
administration's  budget.  He thought  the  state  was in  a                                                                    
position  that  was  much  better  than  most  state's  even                                                                    
thought it  was experiencing  a struggle. He  thought Alaska                                                                    
had a  very healthy Permanent  Fund, had good laws  in place                                                                    
to inflation-proof  the fund, and  had accessibility  to the                                                                    
ERA.   He  thought   it  was   fortunate  that   there  were                                                                    
protections.  He had  found that  during discussions  of the                                                                    
POMV  that  it  was  a  wise  move  of  the  legislature  to                                                                    
bifurcate the issues of protecting  and accessing the funds.                                                                    
He referenced  the state's credit rating  and thought rating                                                                    
agencies recognized  the healthy Permanent Fund.  He thought                                                                    
the urgency and  importance of getting a  structure in place                                                                    
had been more important than the split.                                                                                         
                                                                                                                                
Commissioner  Tangeman  thought  the  Permanent  Fund  could                                                                    
provide  adequate revenue.  He mentioned  optimism from  the                                                                    
oil  sector  and  good  investments.  He  discussed  a  flat                                                                    
production curve and  a fairly stable price.  He thought the                                                                    
POMV was a structured  dependable revenue stream. He thought                                                                    
the state was as stable as it could be.                                                                                         
                                                                                                                                
10:45:36 AM                                                                                                                   
                                                                                                                                
Co-Chair  von Imhof  referenced the  commissioner's comments                                                                    
about a healthy  Permanent Fund and stability;  and asked if                                                                    
he would say the state was in a fiscal crisis.                                                                                  
                                                                                                                                
Commissioner  Tangeman  stated  that  the  state  was  in  a                                                                    
revenue  stream crisis.  He thought  the state  had depleted                                                                    
its  accessible shock  absorbers and  opined that  the state                                                                    
could not sustain the budgets  it had enjoyed for some time.                                                                    
He thought revenues did not match expenditures.                                                                                 
                                                                                                                                
Co-Chair von Imhof asked if  the state had a revenue crisis,                                                                    
the  commissioner was  suggesting the  state should  look at                                                                    
new taxes.                                                                                                                      
                                                                                                                                
Commissioner Tangeman relayed  that he was on  the record as                                                                    
saying that a  tax would be in place  someday. He personally                                                                    
thought a tax could be pushed  off for some time; because he                                                                    
thought the  state was in  a position to  match expenditures                                                                    
with revenue.                                                                                                                   
                                                                                                                                
Co-Chair Stedman  thought the conversation was  drifting off                                                                    
topic. He  anticipated that the  commissioner would  be back                                                                    
in committee when it considered  the updated Revenue Sources                                                                    
Book  and  spring forecast  presentation  in  the middle  of                                                                    
March. He was  optimistic that the legislature  would make a                                                                    
forward step but was not sure  it would reach a final budget                                                                    
solution.  He thought  the state  would still  be struggling                                                                    
with the same issues in  one year. He thanked the testifiers                                                                    
and DOR. He discussed the agenda for the following day.                                                                         
                                                                                                                                
ADJOURNMENT                                                                                                                   
10:48:36 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:48 a.m.                                                                                         

Document Name Date/Time Subjects
022819 Final and Signed Cash Borrowing MOU 2017.pdf SFIN 2/28/2019 9:00:00 AM
Investment Funds/Cash Flow
022819 Performance Comparison_20190228_Draft.pdf SFIN 2/28/2019 9:00:00 AM
Investment Funds/Cash Flow
022819 Cash Flow presentation_Senate Finance_20190228_Draft.pdf SFIN 2/28/2019 9:00:00 AM
Investment Funds/Cash Flow
022819 Investment Presentation_Updates_20190228_Draft.pdf SFIN 2/28/2019 9:00:00 AM
Investment Funds/Cash Flow