Legislature(2017 - 2018)Anch LIO
11/01/2017 01:30 PM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Ceo Angela Rodell, Alaska Permanent Fund Corporation | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
FOURTH SPECIAL SESSION
November 1, 2017
1:35 p.m.
[Note: The meeting was held in Anchorage, Alaska at the
Anchorage Legislative Information Office.]
1:35:27 PM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 1:35 p.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Anna MacKinnon, Co-Chair
Senator Click Bishop, Vice-Chair
Senator Gary Stevens
Senator Peter Micciche (via teleconference)
Senator Donny Olson
Senator Natasha von Imhof
MEMBERS ABSENT
None
ALSO PRESENT
Angela Rodell, Executive Director, Alaska Permanent Fund
Corporation; Senator Cathy Giessel; Representative Chris
Birch; Representative Matt Claman; Senator Mike Dunleavy.
SUMMARY
^PRESENTATION: CEO ANGELA RODELL, ALASKA PERMANENT FUND
CORPORATION
1:37:02 PM
ANGELA RODELL, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, presented the PowerPoint, "Alaska Permanent
Fund" (copy on file).
Ms. Rodell looked at slide 2, "The Alaska Constitution":
Over four decades ago, in 1976, Alaskans in an
historic vote amended the Constitution of the State of
Alaska by a margin of 75,588 to 38,518 and created the
Alaska Permanent Fund.
Alaska Constitution Article IX, Section 15
Section 15. Alaska Permanent Fund
At least twenty-five percent of all mineral lease
rentals, royalties, royalty sale proceeds, federal
mineral revenue sharing payments and bonuses received
by the state shall be placed in a permanent fund, the
principal of which shall be used only for those
income-producing investments specifically designated
by law as eligible for permanent fund investments. All
income from the permanent fund shall be deposited in
the general fund unless otherwise provided by law.
Ms. Rodell looked at slide 4, "The Fund - Two Accounts":
Principal
Established
Alaska Constitution -Article IX, Section 15
Permanent -Not Available for Appropriations
Contributions
Mineral Royalties -constitutionally mandated
Inflation Proofing -subject to appropriation
Special Appropriations
Earnings Reserve Account (ERA)
Established
Alaska Statutes 37.13.145 (a)
Available for Appropriation
Contributions
Net Investment Earnings -AS 37.13.140
Includes: lease payments, stock dividends,
bond interest, private dividends, and net
realized gains.
Co-Chair MacKinnon wondered whether the asset allocations
were invested in the same manner in the ERA as they were in
the corpus. Ms. Rodell replied that the funds were managed
as if it were one fund, so there was the same exact asset
allocation.
Ms. Rodell looked at slide 5, "Invested as One Fund":
Alaska Permanent Fund Corporation
Investment and Management of the Fund
One Target Asset Allocation
Stocks, Bonds, Real Estate, Alternatives
Pro Rata Shares of Each Investment
Principal
ERA
1:42:34 PM
Vice-Chair Bishop queried the methodology for the split
percentage. Ms. Rodell replied that it was based on how
much was currently in the principal, versus how much was in
the ERA. She explained that the ownership of investment
would be owned solely by the principal if the ERA was
reduced to zero
Senator von Imhof queried the reason for the separation of
the funds. Ms. Rodell replied that spending of the
principal was not allowed. She furthered that all money in
the principal must be held in perpetuity. She stressed that
combining them would be difficult to ascertain that which
belonged to the principal and what was available for
spending.
Ms. Rodell displayed slide 6, "Principal and ERA":
Asset
Principal: Cost Basis, Unrealized Gains
ERA: Cost Basis, Unrealized Gains
Sale
Cost Basis Returned: Principal and ERA
Net Realized Gains: ERA
Principal
Reinvestment
ERA
Reinvestment
Available for Appropriation
Senator von Imhof felt that there should be a conversation
about the recommendation from 10 years prior to combine the
accounts, and how that might affect the tracking of the
principal and the mechanism required to change the
constitution. She also wondered how the POMV would affect
that possible change.
1:47:10 PM
Senator Stevens noted that Article 15 said that the income
from the permanent fund should be deposited in the general
fund, and he wondered how it dealt with the ERA. Ms. Rodell
replied with slide 2. She deferred to the Department of Law
to explain a court ruling rationale. She stated that the
ruling gave permission to the legislature to create the ERA
as a receptacle, rather than directing all the income into
the general fund.
Ms. Rodell continued to discuss slide 6. She remarked that
the principal had its cost basis for investment and the ERA
had its cost basis.
Co-Chair McKinnon felt that it may be difficult to keep
track of all the dollars. She wondered whether there was a
previous bill or proposal to change the accounting of the
principal and the ERA. Ms. Rodell replied that there were
various versions of the percentage of market value (POMV)
bills, there was the idea of statutory net income
calculation to determine what should be included in the
calculation. She stressed that it was not a generally
acceptable accounting practice, rather it was a statutory
principal to comply with the constitutional language. She
moved to slide 7, which showed that the statutory net
income was defined in AS 37.13.140.
1:51:56 PM
Senator Micciche noted that the net realized gains would
move into the ERA, and the cost basis would return to the
principal. He wondered how losses were handled in the fund,
and whether it would be considered a loss in perpetuity.
Ms. Rodell replied that, in the past, the cost basis was
returned to the principal. She furthered that net losses
and net gains were combined, but an overall loss was
deducted from the ERA. She remarked that the one year that
had a net loss in the ERA was after the crisis in 2007 and
2008. She explained that, historically, the fund had been
fortunate in that the net gains had mostly offset the net
losses occurring in the same year.
Co-Chair MacKinnon shared that she was on the House Finance
Committee in 2007 and 2008, and there was some
consternation that the state was almost unable to pay the
dividend based on the interpretation of the loss.
1:56:12 PM
Ms. Rodell addressed slide 7, "Statutory Net Income AS
37.13.140":
• Pursuant to state law (AS 37.13.140), at the end of
each fiscal year APFC calculates and reports on the
net realized gains accounted for during the fiscal
year.
• These net realized gains and investment income are
the funds in the ERA that are subject to appropriation
by a simple majority of the Alaska Legislature. • Net
realized gains = realized gains accumulated during the
fiscal year (-) minus realized losses accounted for
during the year.
• Unrealized gains earned by Principal are part of
Principal, only until realized at which time they are
transferred to the ERA.
Ms. Rodell highlighted slide 8, "Assets Under Management."
The slide outlined the 78 percent and 22 percent break
between the principal and the ERA. She noted that the first
quarter of FY 18, the assets under management had continued
to grow in the ERA. She noted that the principal was not
growing as fast as the ERA.
Co-Chair MacKinnon wondered whether there was a percentage
of cash that was held in the asset allocation. Ms. Rodell
replied in the affirmative. She explained that the target
asset allocation included a 2 percent for cash. She stated
that the corporation held roughly $1 billion in cash every
day for its investment activity, capital calls,
settlements, and operations.
Co-Chair MacKinnon asked whether the 2 percent was added to
the $1 billion. Ms. Rodell responded that the target was 2
percent. The $1 billion was within the 2 percent. She
stated that 2 percent of $62 billion was roughly $1.2
billion. The goal was to not fall below $1 billion. She
furthered that there was also flexibility for management,
to not be forced to sell assets.
2:00:22 PM
Co-Chair MacKinnon recalled that there was a reduction to
the permanent fund dividend (PFD) two years prior. The
legislature had brought forward a reduction of a dividend.
She remarked that the permanent fund board was statutorily
required pay two dividends at the full level. She wondered
whether the cash was invested or held as liquid assets in
cash. Ms. Rodell replied that, in 2016, the corporation was
building up the nearly $1.5 billion cash transfer over the
roughly $1 billion in cash holding. She stated that
reducing the dividend forced the corporation to take the
difference and deployed it back into the asset classes
cash. The money stayed invested in the permanent fund.
Co-Chair MacKinnon remarked that there was a recent article
in the Juneau Empire that asserted that the legislature's
lack of rules for the permanent fund had cost Alaskans
money. Ms. Rodell understood the concern. She stated that
there was a plan for a cash draw that was based in statute.
She remarked that there were conversations in the board
about liquidity, and directions to staff to work on a
program to manage liquidity to a more effective return.
2:05:49 PM
Co-Chair MacKinnon stressed that the point of the meeting
was to understand the issues about the various aspects of
the permanent fund.
Senator von Imhof wondered how the permanent fund would
change to prepare for the $2.5 billion draw, should there
be passage of SB 26. Ms. Rodell replied that there would be
discussions with Department of Revenue (DOR) Treasury
Division cash management about what was needed for the
transfers. She stated that the cash management program
understood the resources for managing cash. She furthered
that the permanent fund would then point their liquidity to
those agreed upon dates.
Senator von Imhof assumed that it would be easier for the
permanent fund to manage their assets with a stable
mechanism, such as a POMV, to look back at the market value
for five years to predict the management of cash. Ms.
Rodell responded that treasuries also cannot make a solid
plan, because they manage cash based on the expectation of
the other entitled revenues.
2:10:38 PM
Vice-Chair Bishop felt that the sooner the knowledge was
known, the sooner one could maximize the opportunity costs.
Ms. Rodell replied that it would minimize opportunity costs
and maximize profit.
Co-Chair MacKinnon recalled that there was a conversation
the prior day about DOR using $2 billion in the
constitutional budget reserve (CBR) as a bridge for the
payments coming in over time that were due to the state
that may not arrive at the start of each fiscal year. She
remarked that there may be lower returns, because it was
desired that the money in the CBR be in liquid form. She
remarked that there was a hope of continuity that there
would be at least $2 billion as "bridge money." She felt
that the permanent fund should have ample opportunity to
respond to any legislative policy. She wondered whether
that there was communication for cash management, because
the issue was "very contentious." Ms. Rodell agreed. She
stated that the conversations were ongoing. She remarked
that, because the ERA was not used for anything other than
dividends, it maintained the same asset allocation as the
fund.
2:15:17 PM
Co-Chair MacKinnon remarked that she had conversations
about "lost opportunity for the state." She expressed
frustration about losing three years of opportunity. She
remarked that the Senate passed a bill, which would have
created a framework. She stressed that there was not
agreement about the framework, so the state was losing
opportunities. She stressed that there needed to be an
examination of using the ERA. She remarked that it was not
easy to simply cut $2 billion from the budget. She stressed
that most of the budget items had statutory substance that
required payments. Ms. Rodell replied that the board wanted
to have a structured plan.
2:20:49 PM
Ms. Rodell looked at slide 9, "Unrealized Gains in
billions." She stated that there was $39.9 billion in the
principal in perpetuity, which was the nominal dollar
amount of the royalty revenue that the fund was entitled to
under the constitution; and inflation proofing and other
deposits. She stated that the amount only changed with
additional deposits into the principal of the fund. She
stressed that there was no inflation adjustment to the
number.
Ms. Rodell highlighted slide 10, "Fund Balance FY 18 Q1 and
FYE 17." She stated that she included the financial
statements, because there was good information in financial
statements. She announced that APFC posted its financial
statements monthly. She stated that there was a tremendous
amount of transparency into the activity of the fund. She
stated that the slide showed the financial statements of
the first quarter of FY 18 as compared to FY 17. She noted
that assets continued to grow from total assets of $60.5
billion to over $62.3 billion in just three months. She
noted that the assets were in cash and other types in
investments.
2:25:59 PM
Senator Micciche noted that the realized earnings and the
unrealized appreciation on invested assets reflected the
ERA balance. Ms. Rodell agreed.
Senator Micciche stressed that the committee would never
"endanger" the principal. He surmised that, by law,
whatever structure that was adopted could not interfere
with the balance of the principal. Ms. Rodell replied that
there was no way to interfere with the corpus of the fund,
because it was constitutionally protected.
Senator Micciche wondered what would occur, should there be
a consolidation on a loss in the corpus with an
appropriation from the ERA. He felt that was the only way
to potentially impact the value of the corpus. Ms. Rodell
replied in the affirmative.
Ms. Rodell highlighted slide 11, "Changes to Fund Balance."
She stated that the slide was the statement of revenues,
expenditures, and changes. The page showed the activity
that led to the increase in the ERA the unrealized gain in
principal. She noted the PFD transferred out $716.3
million. The PFD was funded in two payments in August and
September.
Vice-Chair Bishop wondered whether the two PFD payment
method would be a "true up" on the last payment to "catch"
some sudden eligible people. Ms. Rodell stated that the
first payment was to help pay for the operations budget.
Co-Chair Hoffman asked whether the state paid any amount to
defend the lawsuit. Ms. Rodell assumed that Co-Chair
Hoffman was referring to the lawsuit in the Supreme Court
regarding the appropriation. She agreed to provide further
information.
2:32:33 PM
AT EASE
2:32:46 PM
RECONVENED
2:33:16 PM
Ms. Rodell addressed slide 13, "Board of Trustees":
As the fiduciaries, the Trustees have a duty to
Alaskans in assuring that the Fund is managed and
invested in a manner consistent with legislative
findings: AS 37.13.020
•The Permanent Fund should provide a means of
conserving revenue from mineral resources to
benefit all generations of Alaskans.
•The Permanent Fund's goal should be to maintain
safety of principal while maximizing total
return.
•The Fund should be used as a savings device
managed to allow the maximum use of disposable
income from the Fund for the purposes designated
by law.
Ms. Rodell addressed slide 14, "Investment Oversight":
Board of Trustees
As Fiduciaries of the Fund, Full Authority to
Make Investment Decisions.
•Provide Authority to Invest Within Set Bands
•Approve Target Asset Allocation
•Adopt Investment Policy
Chief Executive Officer
Assures Strategies Adopted by the Board are
Successfully Implemented
Chief Investment Officer
Makes Strategic and Tactical Allocations to Allow
the Fund to Grow in Value
Portfolio Managers
Responsible for the Investment and Performance of
Each Asset Class
2:35:20 PM
Co-Chair Hoffman queried a list of the board members, their
terms, and how often they met. Ms. Rodell agreed to follow
up in writing. She stated that the board was comprised of
six trustees: four were members of the public, who must
have experience in business or finance; and two were
members of the governor's cabinet, with one as the
commissioner of DOR and one of the governor's choosing. The
four public member terms were four-year terms that expired
annually.
Ms. Rodell looked at slide 15, "The Portfolio." She noted
that it was a diversified allocation, which was designed to
have a mix of risk and reward. The portfolio was designed
for a longer-term investment horizon of ten years plus, and
balanced the potential need for liquidity with
nonliquidity.
Co-Chair Hoffman queried a breakdown of what was invested
internationally. Ms. Rodell agreed to provide that
information.
Co-Chair MacKinnon wondered how the fund was invested
"across the globe." Ms. Rodell stated that she had some of
that information, but not in detail. She recalled that the
$26 billion public equities were in global and
international equities.
2:42:12 PM
Co-Chair MacKinnon addressed slide 17, "Fixed Income Plus
$11.7 B":
Director of Fixed Income Plus
Oversees Internal Team (4)
Leads the daily trading activity and determines
allocation between various fixed income products.
Looks at how much to hold in corporate bonds vs
treasuries or listed infrastructure.
Management
Internally Managed -$7.7 B
Externally Managed -$4.0 B
Bonds, REITs, Listed Infrastructure
Liquid -Income
Investment Grade Bonds
High Yield Bonds
Emerging Market Debt
Real Estate Investment Trusts (REITS)
Listed Infrastructure
Co-Chair MacKinnon highlighted slide 18, " Private Equity
and Special Growth $7.0 B":
Director of Private Equity
Oversees Internal Team (2) and Portfolio
Investments
Evaluates investment opportunities
Concentrates on exceptional themes and talented
Managers
Management
Fund Managers -External
Co-Investments -Internal
Direct Investments -Internal
Board approved Direct and Co-Investing in 2013
Private Holdings
Illiquid -Growth
Venture Capital
Buyouts
Ms. Rodell looked at slide 19, "Infrastructure, Private
Credit and Income Opportunities $3.2 B":
Director of Private Income
Oversees Internal Team (1) and Portfolio
Investments
Aims to provide a high level of income and
limited volatility
Manages a broad range of assets providing current
income
Management
Fund Managers -External
Co-Investments -Internal
Direct Investments -Internal
Board approved Direct and Co-Investing in 2013
Public and Private Holdings
Illiquid -Income
Infrastructure: Energy, Transportation, Water,
Timber
Private Credit: Mezzanine Lending, Distressed
Credit
Income Opportunities: High End Rentals
2:45:13 PM
Ms. Ryder highlighted slide 20, "Absolute Return $2.2 B":
Director of Private Income
Oversees Internal Team (1) and Hedge Fund
Managers
Selectively chooses funds
Ensures diversification based on geographies,
securities, and strategies
Management
Fund of Funds -External
Co-Investments -Internal
Direct Investments -Internal
Moving towards fully direct approach -based on
the Board's approval of Staff's recommendation in
May 2016
Hedge Fund Portfolios
Illiquid -Growth
Strategies: Global, Macro, Commodities, Event
Driven
Senator Stevens queried the definition of "Mezzanine
Lending." Ms. Rodell replied that most people were familiar
with "senior lending." She used an example of a mortgage.
She stated that mezzanine lending occurred with a series of
revenues.
Senator von Imhof remarked that the mezzanine debt was
sometimes the second person paid, but there was more money
upon payment.
2:49:51 PM
Ms. Rodell addressed slide 21, "Real Estate $5.6 B":
Director of Real Estate
Oversees Internal Team (3) and External Advisors
Targets a mix of investment styles, ownership
structures, property life cycles and property
types.
Focus on steady cash flow and preservation of
capital
Management
Portfolio is managed by APFC's Team and 5
External Advisors.
Advisors provide property management services
Real Estate Holdings
Illiquid -Income
56 properties -US and Europe
Residential, Retail, Industrial, Office Buildings
Build to Core
Ms. Rodell highlighted slide 22, "Asset Allocation and Risk
$4.5 B":
Director of Risk and Asset Allocation
Oversees Internal Team (1) and External Managers
Manages Cash and Over Arching Mandate
Monitors Risk Factors: Markets, Liquidity,
Concentration, Inflation
Management
External CIO Program
Currency Overlay Liquidity Management
Strategies
Partnering with Best In Class Firms
Amount of cash held is determined by investment
goal, time horizon and risk tolerance
Vice-Chair Bishop wondered whether the corporation was
buying and selling dollars. Ms. Rodell replied in the
negative. She explained there was a currency manager in
London, who looked at the portfolio and APFC's exposure to
the Euro. That manager was running dollar currency futures
for the APFC.
Co-Chair MacKinnon wondered whether APFC was purchasing
gold, silver, or other minerals. Ms. Rodell replied in the
negative. She stated that APFC did not tend to buy direct
commodities.
2:53:52 PM
Ms. Rodell addressed slide 24, "Fiscal Year 2017
Performance." She stated that FY 17 was a good year for the
fund. She remarked that it was most important to focus on
the longer-term performance, and whether the strategies
could "bear fruit."
Vice-Chair Bishop felt that the slide reflected what was
averaging for inflation. Ms. Rodell replied that the three-
year calculation for inflation was 0.92 percent. She stated
that, since inception, the inflation was around 2.5
percent.
2:58:07 PM
Ms. Rodell looked at slide 25, "Asset Class Performance."
She noted the "drivers" of generating the $7 billion in
additional new value over FY 17. She noted that normally
international, global, and domestic were "up" over the same
period.
Vice-Chair Bishop asked for more information about the
types of infrastructure. Ms. Rodell replied that
infrastructure was contracted income. She stated that it
was a long-term contract with defined income. The
infrastructure was large structural assets. She stated that
most of the opportunities were over weighted in
infrastructure. She stated that the United States offered
fewer opportunities for infrastructure, because of the
regulatory environment.
Senator von Imhof wondered whether there was a
consideration to invest in a toll road in Alaska. Ms.
Rodell replied that the Alaska statutes were very clear
that the Permanent Fund should and can invest in Alaska
when that investment returns were at least better than what
was received outside of Alaska.
Ms. Rodell continued to address slide 25. She remarked that
the private credit line item was reflected, and the reason
that APFC was in the asset class.
3:04:11 PM
Ms. Rodell addressed slide 26, "Callan's Capital Markets
Forecast." She stressed that past performance was not an
indication of future performance. She remarked that, each
year, Callan prepared a capital markets forecast for all
its clients.
Ms. Rodell looked at slide 28, "APFC Quarterly Investment
Management Fees." She stated that APFC was continually
trying to improve its level of transparency.
Senator von Imhof wondered how APFC could invest in the
state, and how to make the state more attractive for
infrastructure investment.
3:12:18 PM
Senator Stevens wondered whether Callan was hired for
general reasons or specifically for Alaska. Ms. Rodell
replied that APFC had used Callan for more than 25 years,
and focused on many different organizations.
Co-Chair MacKinnon stressed that the legislature would be
conservative in its approach to the permanent fund and its
expectations.
Co-Chair MacKinnon discussed the week's schedule.
ADJOURNMENT
3:18:03 PM
The meeting was adjourned at 3:18 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 110117 APFC SFC Presentation .pdf |
SFIN 11/1/2017 1:30:00 PM |
AHFC |