Legislature(2009 - 2010)SENATE FINANCE 532
02/01/2010 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Overview by Department of Revenue of State Savings Accounts and Budget Reserves. | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
February 1, 2010
9:06 a.m.
9:06: 46 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:06 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Johnny Ellis
Senator Dennis Egan
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
Senator Charlie Huggins, Vice-Chair
ALSO PRESENT
Senator Joe Paskvan; Pat Galvin, Commissioner, Department
of Revenue; Jerry Burnett, Deputy Commissioner, Division of
Treasury, Department of Revenue; Gary Bader, Chief
Investment Officer, Treasury Division, Department of
Revenue.
SUMMARY
^Overview by Department of Revenue of state savings
accounts and budget reserves.
9:10:02 AM
PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, introduced
his colleagues. He explained that Mr. Burnett would provide
the committee with an overview of the department's various
savings accounts, with himself and Mr. Bader available to
answer questions.
JERRY BURNETT, DEPUTY COMMISSIONER, DIVISION OF TREASURY,
DEPARTMENT OF REVENUE provided a PowerPoint presentation:
"An Update on the State's Savings Accounts" and discussed
Slide 3: "General fund and other non-segregated funds." He
stated that as of December 31, 2010, the account was worth
$6 billion. He explained that the general fund was where
tax money is held until it is used to make payments. He
pointed out that approximately $1 billion was in a type one
Memorandum of Understanding (MOU) account. The type one
account includes various funds. Some are available to spend
and others are not. The funds retain their earnings at the
end of the year. Another $2 billion of the $6 billion was
in a type two MOU account, which includes various accounts
where the earnings remain in the general fund. The
unrestricted general fund begins each year at zero, so the
balance of $3 billion was from the current year; the money
was appropriated in previous years but had yet to be spent.
9:14:40 AM
Co-Chair Stedman asked for explanation of the reverse
sweep. Mr. Burnett replied that since 1993, there have been
borrowings from the Constitutional Budget Reserve (CBR) to
balance the budget. Over time, approximately $5 billion
was borrowed. At the end of each fiscal year, all unused
money that is not appropriated from the general fund is
moved into the CBR by operation of the constitution. Each
year in either the operating or capital budget, there is a
provision that appropriates the money that was
automatically paid from the general fund into the CBR back
into subfunds of the general fund. Following a legislative
appropriation to repay working capital funds the previous
year, the unrestricted general fund would have a zero
balance, but the fund's balance was restored with a debt to
the CBR of about $401 million.
9:17:29 AM
Co-Chair Stedman agreed there must be a sweep to zero and
then a reversal of the sweep to meet the technical
requirements to operate the state; the structures will
change with the eventual payoff of the CBR. He requested
definitions of the terms illustrated in the pie chart on
Slide 3.
9:19:30 AM
GARY BADER, CHIEF INVESTMENT OFFICER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, explained that the depicted short-
term fixed income is depicted cash of thirteen months or
less, and the intermediate term is depicted as one to three
years.
Co-Chair Stedman clarified that the term "money market
account" would be a better way to describe the accounts for
the public.
Mr. Burnett noted the market value over the past three
years, specifically remarking on the good tax collection in
2008. The year-to-date (YTD) earnings in the "Returns"
section refers to the calendar year of 2009, and the fiscal
year-to-date (FYTD) earnings are from July 1 to December 31
of 2009. He thought the funds had done well relative to
bench marks and expectations.
Co-Chair Stedman noticed the substantial spread between the
benchmarks of the general fund, and requested the numbers
be explored further.
9:22:04 AM
Co-Chair Hoffman wondered how the forecast of 3.6 percent
was determined, because the FYTD was only 1.6 percent. Mr.
Burnett responded that the FYTD was only six months, but
when doubled it was 3.2 percent, a little below the
forecast of 3.6 percent.
9:23:04 AM
Co-Chair Stedman noted that Alaska was reclassifying $700
million in other state funds to general funds, and queried
the impact on managing the investment. Mr. Burnett stated
that Alaska will continue to invest funds in the same
manner.
Mr. Burnett continued with Slide 4: "Constitutional Budget
Reserve Fund." He mentioned that the subaccount is actually
larger than the main account. He explained that the main
account refers to available money invested in intermediate
term, short term, and broad market securities with moderate
risk. Most of the growth from 2007 to 2009 occurred because
of appropriations and settlements in the range of $5.6
million and some from the sweep of the last fiscal year.
Co-Chair Stedman requested definitions of each of the
division's titles in the pie chart, specifically "Broad
Market." Mr. Bader explained that the broad market refers
to what was previously known as the Lehman Aggregate fixed
income benchmark, and is now known as the Barclays
Aggregate. The composition of the aggregate is generally
mortgages, treasury bills, corporate bonds, and other
asset-backed securities. The corporate bond's composition
changes as the market changes, but the aggregate is the
benchmark. The intermediate term refers to a Merrill Lynch
1-3 Government Index and the short-term fixed income refers
to money market or cash.
Co-Chair Stedman asked whether the broad market was
actively managed or indexed. Mr. Bader responded that it
was actively managed.
9:26:35 AM
Mr. Burnett furthered that about $16 billion of fixed
income is actively managed by the Treasury Division.
Co-Chair Stedman asked what was specifically actively
managed and indexed. He realized the presentation was
generic and would include more detail later, but remarked
that the worst market in years was not reflected in the
presentation.
Senator Thomas wondered whether the yield was only
interest. Mr. Bader explained that the returns represented
interest earnings plus losses or gains from market
movement.
Senator Thomas queried the benchmarks. Mr. Bader answered
that the benchmarks for the broad market were the Barclays
Aggregate, the intermediate term was the Merrill Lynch 1-3
Government Index, and the cash was the 90-day Treasury
Bill.
9:28:34 AM
Mr. Burnett pointed out that the [2009] YTD actual was 4.23
percent, the FYTD actual was 2.46 percent, the three-year
actual was 5.56 percent, and the five-year actual was 4.81
percent. An exception was for the three-year actual, which
did not outperform the benchmarks. Based on capital
assumptions and benchmarks, the forecast of 4.18 percent
was higher than the FYTD of 2.46 percent.
Co-Chair Stedman asked whether Mr. Burnett had the one year
actual with him. Mr. Burnett offered to get the
information.
Mr. Burnett continued that the other part of the CBR was
treated as an investment fund, and was created by the
legislature in 1998. At that time, the legislature was
considering borrowing money, and wanted to be sure the
investments were earning a higher rate than what was being
borrowed. The decision came out of the Senate Finance
Committee. The subaccount lost 25 percent in the first year
and had $400 million, but it did rebound a bit. The fixed
income was the same as the broad market in the main
account. It has international equities, which is a Europe,
Far East, and Asia (EFA) index fund.
Mr. Bader continued that the international equities are EFA
index, but are also 80 percent active. The EFA is
considered both indexed and actively managed.
9:31:21 AM
Co-Chair Stedman observed that the EFA was basically a
80/20 split. Mr. Bader agreed.
Mr. Bader pointed out that the Domestic Equity is based on
the Russell 3000 Index. The Russell 3000 Index is an index
of approximately 3000 domestic companies with the highest
market value. Russell looks at the companies and creates an
index based on them.
Mr. Burnett continued that the Russell 3000 Index is a much
broader index than the Dow Jones Industrial Average (DJI)
or Standard & Poor's 500 (SP 500). He remarked that the
Russell 3000 index mirrors the domestic economy more
closely than the DJI or SP 500.
Co-Chair Stedman pointed out that the DJI represents
industrial stocks and the SP 500 represents the 500 largest
stocks, so the Russell 3000 Index is merely broadening out
to the 3000 largest stocks.
Co-Chair Hoffman asked whether the forecast included the
fiscal year. Mr. Burnett replied that it was the forecast
for the asset allocation, and is based annually on the
capital market.
Co-Chair Hoffman wondered whether the general fund forecast
was for the fiscal year or the calendar year. Mr. Burnett
specified that it was for the fiscal year.
Co-Chair Hoffman revisited the general fund (Slide 3) and
pointed out that the FYTD was 1.6 percent, but the forecast
was 3.6 percent. The forecast results from doubling the
FYTD and factoring in a 0.4 percent growth. He then queried
a discrepancy in the CBR subfund returns, specifically the
FYTD of 16.61 percent with a forecast of only 7.87 percent.
9:34:08 AM
Mr. Bader explained that the high-risk funds were
predominantly stocks, which have far greater returns, but
also suffer from greater volatility.
Co-Chair Hoffman wondered whether the stock markets would
lose funds, because the forecast was so much lower than
that FYTD. Mr. Burnett explained that the forecast was as
expected at the beginning of the fiscal year, so the FYTD
has done better than what was forecast.
Co-Chair Stedman added that the broad market had a
substantial rebound above what was expected.
Co-Chair Hoffman assumed that the forecast was for the next
six months, and noted that the forecast should have been
updated. Mr. Burnett explained that his presentation would
later highlight forecast incomes for the Revenue Sources
Book, which would update the actuals using the 7.87 percent
earnings rate as the forecast.
Co-Chair Hoffman clarified that the forecast was obsolete.
Mr. Burnett conceded.
Co-Chair Stedman explained that historical data and
assumptions are used when projecting a return in a volatile
equity market. There is variance with the forecast, so it
is difficult to forecast the equity market in advance. He
suggested exploring how benchmarks are created.
9:38:55 AM
Mr. Bader stated that projected earnings assumptions for
each of the asset classes were presented to the Treasury
Division and the Alaska Retirement Management Board (ARMD).
Results were put into an optimizer that looked at
combinations of risk and return, which could be used as a
central tendency forecast.
9:40:25 AM
Co-Chair Stedman requested a ten-year return actual,
because the last ten years were historically low for
rolling ten-year averages. He suggested a focus on range of
outputs and dollars based on allocations, rather than the
broad distribution of the 7.87 percent forecast of the
high-risk investments. He anticipated a presentation of all
the major accounts at once, including the $35 billion
permanent fund, the $15 billion retirement accounts, and
the savings accounts. He clarified that he is not
interested in going into the retirement accounts, but he
stressed the importance of understanding how all of the
accounts in the state are managed. He projected that the
permanent fund will need some serious attention after a few
decades, because the oil and gas basins will mature and dry
out.
Co-Chair Stedman queried the definition of "moderately long
investment horizon." The year before, the account had been
referred to as "moderately long savings account." Mr.
Burnett reported that both referred to the same thing
9:44:06 AM
Co-Chair Stedman thought an evolution may occur, because
there had been some internal discussion among committee
members as to whether the state should hedge with oil
prices. There had also been discussion that the large cash
reserves were the hedging mechanism. He suggested that the
taxes are structured to capture spikes, so the revenue was
held to protect against implosions in price. He pointed out
that there were peripheral influences, and the finance
committee needed to reassure the administration of the
committee's direction.
Senator Olson addressed the subfund of the CBR and
requested explanation of the difference between the market
values from 2007 and 2008, because it jumped over 650
percent in just one year. Mr. Burnett explained that the
appropriation of $2.3 billion for the CBR was put into the
subfund and transferred to the main account. In FY 08 and
FY 09, the legislature appropriated approximately $5
billion to the CBR. The difference was an addition of $4.1
million and investment losses.
Co-Chair Stedman recommended the committee have a policy
discussion regarding how the money should be spent. He
stated that the committee may want to restructure the
allocation.
Senator Olson wondered whether Co-Chair Stedman wanted a
more conservative approach.
9:48:03 AM
Co-Chair Stedman explained that he would like a discussion
among committee members, but he anticipated that the group
would decide on a more conservative structure for the
savings account.
Mr. Burnett continued with Slide 5: "Power Cost
Equalization Fund." The Power Cost Equalization Fund (PCE)
is an endowment fund for paying power cost equalization.
The fund has a 7 percent annual payout, 20 percent
international equity, 37 percent fixed income, and 43
percent domestic equity. The fixed income refers to the
broad market and the domestic equity refers to the Russell
3000 Index.
Co-Chair Stedman surmised that the allocation was 63
percent equity and 37 percent income and was similar to the
subaccount of the CBR. Mr. Burnett agreed.
Co-Chair Stedman asked how far behind the CBR was from the
initial investment. Mr. Burnett reported that it was
currently behind by about $300 million.
Co-Chair Stedman queried the numbers at the beginning of
January, in order to have numbers align. Mr. Burnett
explained that the CBR was about $200 million behind,
stating that it was approximately the same as June 2008.
Co-Chair Stedman asked whether the allocation was
intentional. Mr. Burnett explained that the allocation was
set to achieve the return necessary to pay out 7 percent
per year. On an efficient frontier with specific assets,
there will be similar asset allocations.
Co-Chair Stedman queried the time horizon of the PCE. Mr.
Burnett stated that the horizon was long term with no end
to the PCE endowment fund, likening it to the permanent
fund.
9:51:41 AM
Co-Chair Hoffman pointed out that the CBR has two classes:
moderate and high risk. He wondered where the direction
came to invest all the PCE on high risk. Mr. Burnett noted
the statute that sets up the endowment fund requires a 7
percent annual payout, so it is invested assuming a 7
percent return.
Co-Chair Hoffman requested they focus on a more moderate
investment scheme. Mr. Burnett noted that 37 percent of the
PCE is invested in fixed-income securities and broad index.
Co-Chair Hoffman surmised that a high-risk investment will
only bring in 7 percent. Mr. Burnett explained that based
on the asset mix and the capital assumptions, the central
tendency over time would be to achieve the forecast
earnings of about 7 percent. Furthermore, the higher the
rate of return that one tries to achieve, the higher
probability of a loss in any given period.
Co-Chair Hoffman requested the ten-year actual.
Co-Chair Stedman considered the 7 percent return
unsustainable, because common payouts are closer to 4
percent. He worried that the ten-year actual would be less
than 7 percent, because the five-year actual was only 3.55
percent. He reiterated the importance of a policy
discussion about the potential erosion of the PCE
purchasing power and actual value.
9:55:58 AM
Co-Chair Stedman discussed the portfolio as a long-term
time horizon in perpetuity, which is different from the
five-year time horizon of the CBR. He suggested the
committee look at the difference later.
Mr. Burnett pointed out that the YTD return was 21.64
percent, the FYTD return was 15.77 percent, the five-year
actual was 3.71 percent, and the three-year actual was
zero. Most of the money went into the account about three
years prior.
Co-Chair Stedman reiterated that there was an equity
infusion, and suggested it be measured by weighing the cash
flow based on time. Mr. Burnett indicated that the timing
was not the best.
Co-Chair Stedman mentioned the equity infusion to the
courts accounts. He understood good and bad timing.
9:58:12 AM
Mr. Burnett addressed Slide 6: "Public School Trust Fund."
The income account is 100 percent fixed income, because
that was where the money was spent from on an annual basis.
The principle account is moderate risk, with 43 percent
domestic equity, and 57 percent fixed income. He explained
that the fund lost money, but has regained it. The YTD
returns were 17.64 percent, the FYTD were 12.28 percent,
the three-year actuals were 1.38 percent, and the five-year
actuals were 3.59 percent, with a forecast of 6.95 percent.
Co-Chair Stedman requested an inflation column be included
in a revised chart. He stressed the importance of observing
the benchmarks, purchasing power, and performance. Mr.
Burnett agreed and explained that the income fund is a
cash-only account.
Co-Chair Stedman inquired about the pay out for the income
account. Mr. Bader responded that the interest earnings and
dividend earnings go into the income account, which is
available for appropriation by the legislature.
Co-Chair Stedman asked how the losses are allocated. Mr.
Bader replied that the capital gains and losses are
retained in the principle fund.
10:01:12 AM
Mr. Burnett discussed Slide 7: "PERS & TRS [Public
Employees' Retirement System and Teachers Retirement
System]."
Mr. Bader explained that the "Fixed Income" is primarily
broad income market debt. "Domestic Equity" includes active
and passive managers, which includes large capital and
small capital. The "International/Global Equity" has two
components: one is a merging market, which includes
countries that are beginning to merge into the global
economy, including China; and the others are developed
international markets with large capital. The missing
component in the international/global equity is an
international market with small capital. "Real Assets"
refers to money that is intended to act as a hedge against
inflation. These include energy, real estate, timber,
farmland, and treasury inflation protected securities.
"Alternatives/Infrastructure" refers to hedge funds and
private-equity investments in startup companies.
Mr. Burnett addressed market values, and noted that both
funds are complex from a cash-flow basis. There is money
that comes in on a monthly basis from employers, there is
money that goes out monthly to retirees, and there are
special appropriations by the legislature into the funds.
He emphasized the constant cash flow in the accounts, and
also losses and gains in investments. The FYTD was 12.3
percent, the three-year actual was negative 1.87 percent,
and the five-year actual was 3.35 percent. The forecast of
8.25 was an assumed rate, because the investments are
structured to meet the rate. The Teacher Retirement System
is almost the same investment rate as PERS, but there is a
slight variance in returns because of cash-flow
differences.
10:07:00 AM
Co-Chair Stedman recalled the 8.25 return that was forecast
in the previous year. Based on the last three years, he
felt that a forecast of 8.25 percent was too high. He asked
for advice on how to obtain 8.25 percent, since it had not
been achieved in the past three years.
Mr. Burnett stated that the same question was asked in the
last two meetings of the ARMD. There was an asset-
liability study done and a presentation by the actuary of
the state. The presentation showed an expected return base
of around 8.4 percent. He conceded that the 8.25 percent
was inconclusive, but the board was focused on determining
the correct assumptions.
Co-Chair Stedman remarked that lowering the forecast of
8.25 percent would have repercussions on the targets. He
would be willing to have a discussion if the division
wanted to raise the forecast to 8.4 percent.
10:10:29 AM
Mr. Burnett clarified that the 8.4 percent was not a
recommendation. The board felt that a forecast of closer to
8 percent was more reasonable. He specified that he did not
believe that the presented forecast of 8.25 was too low.
Co-Chair Hoffman questioned why a forecast under moderate
risk was higher than a forecast under high risk. Mr.
Burnett could not conclude definitively the reason for the
difference, but remarked that the assets in the PERS and
TRS were not liquid as the PCE.
Co-Chair Hoffman suggested the PCE be invested in a similar
fashion as PERS and TRS.
Co-Chair Stedman furthered that the definitions should
remain consistent. He thought that the investments outside
of stocks and bonds could expect to have an impact on the
evaluation. He suggested an examination of the liquid
assets be conducted, in order to determine their value.
Mr. Burnett agreed to provide an explanation about the PERS
and TRS funds, and noted that the funds had moved away from
leveraged investments and real estate over the last year.
10:14:47 AM
Mr. Bader explained that 80 percent of the real-estate
investments were known as core real-estate, meaning they
are institutional-grade properties with no leverage.
Sections of 20 percent of the investment portfolio for PERS
and TRS were collective funds and had significant leverage.
Co-Chair Stedman wanted to have an informal discussion
about the permanent fund. One concern was whether to
refinance, because the lenders might be unable to
refinance. He stressed the importance of evaluating the
accuracy of the estimates on the market value, because of
the possibility of liquidation. He noted there was less
risk paying cash than leveraging. Mr. Bader agreed that was
true in the collective funds, but remarked that the assets
were held in a separate account and were close to market
value.
Co-Chair Stedman noted that the committee would explore the
subject further during the permanent fund presentation.
10:18:23 AM
Mr. Burnett discussed Slide 8: "Alaska Permanent Fund
Corporation Board" (APFC). He remarked that most of the
descriptions fall under a risk-based analysis, so he would
not address the definitions. He pointed to the value in
2007 of $38 billion, noting a drop in 2008 of $28 billion,
and then back up to $34 billion in 2009. The FYTD was 14.3
percent, the three-year actual was negative 1.25 percent,
and the five-year actual was 3.48 percent. The forecast
return was 8.28 percent, which was just slightly better
than the PERS and TRS forecast. He restated that the APFC
would be giving a presentation to the committee, so he
deemed it unnecessary to explore the fund.
Co-Chair Stedman commented that the APFC was invested
differently from the retirement accounts. PERS and TRS have
a shorter time horizon than the APFC, and have a payout
that must be met for retirees. He noted that the APFC did
not have a requirement, and was based more on market flow.
He stressed the importance of profiling the risk exposure
for both accounts.
10:21:10 AM
Mr. Burnett discussed Slide 10: "FY 2010 Investment Revenue
Forecast." He mentioned that the forecast in the Revenue
Sources Book was based on a combination of actuals and
forecasts. He noted the actual unrestricted earnings in FY
09 were $82.8 million, with a forecast through FY 10 of
$101.3 million, totaling $184.1 million for the revenue
source.
Co-Chair Stedman asked whether $182.7 million was the gain
for the year. Mr. Burnett clarified that the $184.1 million
was the estimated unrestricted investment earnings for FY
10, in primarily general funds. Of that $184.1 million
forecast $82.8 million been earned so far.
Mr. Burnett continued with restricted investments, money
that stays in the CBR, subfunds of the general fund,
endowments and trusts, and the permanent fund. The forecast
for FY 10 was $1.7 billion, but it already earned $5
billion in FY 09. He noted that the restricted earnings had
done well, but the unrestricted earnings were slightly
below target.
Co-Chair Stedman remarked on the exceptional rebound since
April 2009. Mr. Burnett agreed, but stressed the volatility
in the market from day to day.
10:24:45 AM
Co-Chair Stedman requested that staff review the
presentation and some of the mentioned issues.
Commissioner Galvin offered to answer questions from the
committee.
Co-Chair Stedman discussed a future presentation by the
Department of Transportation and Public Facilities (DOT/PF)
and the possibility of additional stimulus monies.
Senator Ellis expressed frustrations about DOT/PF, and its
backlog of projects. He hoped to address the issues during
the DOT/PF presentation.
ADJOURNMENT
The meeting was adjourned at 10:30 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| State Savings Accounts Update Feb 1 2010.pdf |
SFIN 2/1/2010 9:00:00 AM |
DOR - Savings Accounts - Budget Reserves |
| DOR Treasury Investment Policies.pdf |
SFIN 2/1/2010 9:00:00 AM |
DOR - Savings Accounts - Budget Reserves |
| CBR Fund Prelim Results 12 31 2009.pdf |
SFIN 2/1/2010 9:00:00 AM |
DOR - Savings Accounts - Budget Reserves |
| 2009 06 15 DOR CIOs FY2010 Asset Alloc Rec.pdf |
SFIN 2/1/2010 9:00:00 AM |
DOR - Savings Accounts - Budget Reserves |
| 2009 06 15 DOR CIOs FY2010 Asset Alloc Rec.pdf |
SFIN 2/1/2010 9:00:00 AM |
DOR 2009 |