Legislature(2023 - 2024)SENATE FINANCE 532
04/14/2023 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB41 | |
| Earnings Reserve Account | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 41 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
April 14, 2023
9:05 a.m.
9:05:01 AM
CALL TO ORDER
Senator Bishop called the Senate Finance Committee meeting
to order at 9:05 a.m.
MEMBERS PRESENT
Senator Donny Olson, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Jesse Kiehl
Senator Kelly Merrick
Senator David Wilson
MEMBERS ABSENT
Senator Lyman Hoffman, Co-Chair
ALSO PRESENT
Senator Cathy Giessel; Tim Grussendorf, Staff, Senator
Lyman Hoffman; Deven Mitchell, Executive Director, Alaska
Permanent Fund Corporation; Marcus Frampton, Chief
Investment Officer, Alaska Permanent Fund Corporation.
SUMMARY
SB 41 APPROP: CAPITAL/SUPPLEMENTAL
SB 41 was HEARD and HELD in committee for further
consideration.
EARNINGS RESERVE ACCOUNT
SENATE BILL NO. 41
"An Act making appropriations, including capital
appropriations and other appropriations; making
supplemental appropriations; making appropriations to
capitalize funds; and providing for an effective
date."
9:06:02 AM
Senator Kiehl MOVED to ADOPT the committee substitute for
SB 41, Work Draft 33-GS1348\S (Dunmire, 4\13\23).
Senator Bishop OBJECTED for discussion.
9:06:24 AM
TIM GRUSSENDORF, STAFF, SENATOR LYMAN HOFFMAN, explained
the committee substitute. He stated that the committee
substitute would be referred to as "CS One." He stated that
the bill combined the capital and supplemental budgets. He
shared that it was a "bare bones" capital budgets with all
the discretionary and capital appropriations removed from
the original. He stated that it set the base budget of
federal and matching funds; and other funds only. He stated
that the categories included Village Safe Water; Alaska
Housing Finance Corporation (AHFC) programs; the Airport
Improvement program; and the Department of Transportation
and Public Facilities (DOT/PF) program. He noted that on
page 27, there was the total of the base budget. He
remarked that the budget was $177.881 million.
Co-Chair Olson wondered whether there was a copy of the
reappropriation list in the packet.
Mr. Grussendorf replied in the affirmative.
Co-Chair Stedman surmised that the match money was included
for federal highways and airports.
Mr. Grussendorf replied in the affirmative.
Senator Bishop REMOVED the OBJECTION. There being NO
OBJECTION, it was so ordered.
9:10:49 AM
Co-Chair Stedman noted that there had been a concentration
in years past on major maintenance. He wondered about the
major maintenance in the current version.
Mr. Grussendorf replied that the committee would make the
determination on maintenance.
SB 41 was HEARD and HELD in committee for further
consideration.
Senator Bishop HANDED the GAVEL to Co-Chair Stedman.
9:12:13 AM
AT EASE
9:13:37 AM
RECONVENED
^EARNINGS RESERVE ACCOUNT
9:15:02 AM
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, introduced himself. He discussed the
presentation, "Senate Finance Committee, Portfolio Gains -
Realized and Unrealized, April 14, 2023" (copy on file). He
discussed slide 2, "Alaska Constitution Article IX, Section
15":
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.
Intergenerational
Since its establishment, every Alaskan has forgone
some present-day support to benefit future
generations.
Mr. Mitchell addressed slide 3. He noted that the way that
money became available to expend under the Permanent Fund
umbrella was the focal point of the presentation.
Mr. Mitchell pointed to slide 4. He remarked that the slide
showed the unrealized gains within the component.
9:21:39 AM
Mr. Mitchell looked at slide 5, "Inflation Proofing":
Per AS 37.13.145 (c)
FY23 Inflation-Proofing Calculation
The monthly index value, CPI, is averaged for the
current and prior calendar year
o CY2021 = 811.7
o CY2022 = 876.7
The percent change from the previous year is the
inflation percent used for the calculation
o 8.0 percent for CY2021 to CY2022
The percentage is then applied to the permanent
Principal deposits (royalties, inflation proofing,
special appropriations), not including unrealized
gains.
As of February 28, 2023
FY23 YTD Principal deposits = $52,095,180,000
Statutory Inflation Rate = x 8.00 percent
FY23 YTD Inflation Proofing = $4,167,614,000
Given the two-account structure of the Fund, all
realized earnings flow to the Earnings Reserve
Account.
The Principal of the Fund is grown from
• Royalty Deposits $19.0 billion
• Inflation Proofing $18.0 billion
• Special Appropriations $15.1 billion
An annual appropriation from the ERA to the Principal
sufficient to offset the effects of inflation as
enshrined in statute is essential to protect
intergenerational purchasing power.
The FY23 inflation-proofing appropriation will
transfer at the end of the fiscal year based on
deposits into the Principal and the statutory
inflation rate.
Mr. Mitchell looked at slide 6, "Earnings Reserve Account
(ERA)":
Deposits Statutory Net Income
• Cash Inflows: stock dividends, bond interest, real
estate leases, annually $1.8 billion
• Realized Capital Gains/Losses: net income generated
by the sale of investments Annually market-driven
Withdrawals -
• Maintain Principal Purchasing Power
Inflation Proofing
• Real Growth of Principal
Special Appropriations
• Annual Draws
Government Services and the PFD
• Amerada Hess Earnings
Alaska Capital Income Account
9:25:04 AM
Mr. Mitchell highlighted slide 7, "Statutory Net Income":
Comprised of receipts from interest on fixed income,
real estate rentals, stock dividends, and all realized
gains and losses on the sales of invested assets, less
AK Capital Income Fund committed amounts and operating
expenses.
Mr. Mitchell pointed to slide 8, "Constitutionalize Annual
Fund Draw":
Board Resolutions 03-05, 04-09
Supporting a constitutional amendment to limit the
annual Fund payout to not more than a 5 percent POMV
averaged over a period of 5 years.
Implementation of a constitutional POMV spending limit
for the Fund has the accompanying benefit of assuring
permanent inflation-proofing of the Fund.
Mr. Mitchell addressed slide 9. He noted that the slide was
a simplification of the process of moving from two accounts
to one account.
9:27:49 AM
MARCUS FRAMPTON, CHIEF INVESTMENT OFFICER, ALASKA PERMANENT
FUND CORPORATION, looked at slide 11, "Summary":
• There are high unrealized balances in the portfolio,
but an unusually high percentage are in less liquid
private markets.
• Private distributions are down 52 percent year over
year, introducing statutory net income uncertainty.
• Baseline statutory net income (SNI) is the only
amount one can "take to the bank" on short-term
horizon (or long-term, assuming a flat market with
limited private exits).
• Callan's forecast of $5 billion per year of SNI is
predicated on a return to a world where equities
return at least 6 7 percent per annum.
• APFC does not manage towards SNI as a key metric,
nor do unrealized gains factor into any investment
decisions; therefore, we share these purely as
observations.
9:31:15 AM
Mr. Frampton discussed slide 12, "Current Unrealized Gains
by Asset Class." He noted that the stock portfolio had $2.6
billion of gains, with a 35 percent turnover per year. He
stated that anticipating a zero percent flat stock market
would generate about $700 to $800 million of gains out of
the stock portfolio in the upcoming twelve months. He
stated that fixed income showed a $1 billion loss as a
result of the increased interest rates.
Co-Chair Olson asked for more information about the
negative $1 billion in fixed income.
Mr. Frampton replied that the fixed income portfolio had a
duration of approximately six or seven years. He stated
that increased rates caused the lower interest bonds to be
worth approximately $1 billion less than they were in years
prior.
9:35:08 AM
Co-Chair Olson surmised that the plan was to wait it out in
the market for interest rates to decrease.
Mr. Frampton replied that the strategy was not to "wait it
out", but the fixed income team would be managing that
portfolio against the benchmark.
Co-Chair Olson wondered how the investment strategy might
be adjusting based on current various market impacts.
Mr. Frampton replied that there was current caution,
because market indicators showed a good possibility of
heading into a recession.
Co-Chair Olson wondered whether a new Federal Reserve
chairman would alter the assumption that there would be a
recession.
Mr. Frampton replied that the current chairman was very
aggressive about raising rates with the rhetoric to get
inflation under control, but the market "does not always
listen." He stated that the current chairman was as focused
on a tight monetary position as any of his peers.
Co-Chair Stedman queried a rough total of the nonliquid
assets within the $11 billion.
Mr. Frampton responded that it was approximately 85 percent
nonliquid and 15 percent stocks and bonds.
Co-Chair Stedman surmised that it was approximately $1.8
billion in liquidity.
Mr. Frampton agreed.
Co-Chair Stedman wondered whether that was "tight" on the
liquidity portion.
Mr. Mitchell replied that the portfolio was not managed for
liquidity, but was managed based on maximum returns. He
stated that it was a function of the current market that
resulted in decreased liquidity.
9:40:36 AM
Co-Chair Stedman stressed that there should be an focus on
the Earnings Reserve Account (ERA) liquidity in case there
was a need to use those funds.
Mr. Frampton stressed that the fund had substantial
liquidity and the investment in the ERA. He highlighted
that the location of the unrealized gains was largely in
private equities, but the fund at over $80 billion could be
liquidated by half if needed.
Co-Chair Stedman stressed that the principle of the fund
would not be spent, or even an overdraw of 5 percent of the
ERA. He wanted to understand the constraints dealing with
the ERA.
Mr. Frampton pointed to slide 13, "Realized Gains: Drivers
by Asset Class":
• Public Equity .notdef Trading activities
• Fixed Income .notdef Trading activities
• Real Estate .notdef Property dispositions (irregular)
• Private Equity .notdef Manager exit activity
• Private Income .notdef Manager exit activity
• Absolute Return .notdef Redemptions from managers
9:45:08 AM
Senator Bishop wondered where the gold exchange be located
within the fund.
Mr. Frampton stated that there were some gold holdings in
the cash account and the absolute return investment area.
Mr. Frampton addressed slide 14, "Statutory Net Income by
Fiscal Year: 1986 - 2022." He outlined each portion of the
graph, and noted some correlation between investment
returns and the statutory net income.
Co-Chair Stedman surmised that the statutory net income led
to increased calculation on the statutory Permanent Fund
Dividend (PFD).
Mr. Mitchell agreed.
Co-Chair Stedman stated that it was the "driver" of the
statutory PFD.
Mr. Mitchell replied in the affirmative.
Co-Chair Stedman concluded that the likelihood of the
statutory PFD calculation had a higher probability of
decreasing than increasing.
Mr. Mitchell replied that the current fiscal years'
anticipated statutory net income was $2 billion.
Co-Chair Stedman queried the number needed for next year's
anticipated dividend.
Mr. Mitchell replied that there was a midpoint anticipation
of $2.86 billion.
9:51:40 AM
Mr. Frampton looked at slide 15, "Unrealized Gains by Asset
Class (2012 Present)." He stated that the number was
currently high, but was overall low.
Mr. Frampton pointed to slide 16, "Realized Gains by Asset
Class (2012 Present)." He detailed the specific lines on
the slide.
Co-Chair Stedman asked about the expectation of a 7 percent
return, and then using that return of $5 billion in
portfolio profits. He noted that FY 21 was an anomaly, but
felt that $5 billion was too high.
9:54:57 AM
Mr. Frampton addressed slide 17, "How Available Unrealized
Gains Were Realized":
• Portfolio Turnover Rate = Statutory Net Income from
Trading / Unrealized Gains Available for Statutory Net
Income
How Available Unrealized Gains Were Realized
• Historical average when cumulative unrealized gains
are less than 7 percent of the Fund is 60 percent
(only occurred in Fiscal Years '08,'09, and '10)
• Historical average when cumulative unrealized gains
are greater than 7 percent of the Fund is 22 percent
Mr. Frampton discussed slide 18, "Private Markets -
Realized Gains Have Slowed." He stated the private markets
had seen a sudden decrease.
Mr. Frampton addressed slide 19, "Baseline Statutory Net
Income." He noted that the slide showed the baseline
statutory net income number over time.
10:00:02 AM
Co-Chair Stedman wondered whether the slide showed the data
used to determine the baseline net income.
Mr. Frampton replied in the affirmative.
Co-Chair Stedman recalled to slide 16 and the realized
gains of $4.6 billion per year, and felt that there would
be that number required to determine a 50/50 dividend. He
surmised that there was reasonable uncertainty about
getting that number.
Mr. Mitchell stated that the long-term might see an
aversion to the mean, but the cycles showed the fund
exceeding the target, and sometimes did not exceed the
target. He felt that sometimes there were moments of less
income.
Co-Chair Stedman felt that the direction and magnitude was
needed for policy calls.
Senator Bishop wondered whether there had been an
investment strategy change since the percent of market
value (POMV) draw as put into statute.
Mr. Mitchell replied in the negative.
Senator Bishop inferred that putting the PFD into the
constitution would not result in changing investment
strategies.
10:05:46 AM
Mr. Mitchell agreed.
Mr. Frampton displayed slide 20, "Conclusions":
• Baseline SNI ($991 million for FY 2023 to date
through February or $1,486 million annualized) is
recurring in nature and reliable.
• The realized gains portion of SNI is less reliable,
not entirely under APFC's control, and subject to
market vagaries.
• SNI is further exposed to additional declines in
equity markets.
• 86 percent of current unrealized gains sit in
illiquid asset classes these gains are either
difficult to harvest or outside our control.
Co-Chair Stedman wanted to discuss inflation proofing. He
wondered whether there would be a problem with inflation
proofing, and felt that it would not be included in the
budget and the concerns with the ERA. He asked that the
board be notified about the issue.
Mr. Mitchell agreed.
10:11:27 AM
Senator Merrick asked about the downside to
constitutionalizing the POMV, and combining the ERA and
corpus.
Mr. Mitchell replied that he did not see any downside.
Co-Chair Stedman stated that the legislature had the
capability to do a partial combination.
Mr. Mitchell agreed that inflation proofing was a top
priority, and hoped that there could be intent language if
there was no money included for that in the current budget.
10:15:11 AM
Co-Chair Stedman asked about the resolution to the state
program.
Mr. Mitchell replied that there were some concerns about
the small board that could have conflicts. He stated that
there were some concerns about the use of the investment.
10:17:06 AM
AT EASE
10:17:49 AM
RECONVENED
10:17:55 AM
Co-Chair Stedman discussed committee business and the
schedule for the following week.
ADJOURNMENT
10:19:18 AM
The meeting was adjourned at 10:19 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 041423 APFC Senate Finance Committee.pdf |
SFIN 4/14/2023 9:00:00 AM |
|
| SB 41 work draft version S.pdf |
SFIN 4/14/2023 9:00:00 AM |
SB 41 |
| SB 41 SFINCS1 AgencySummary.pdf |
SFIN 4/14/2023 9:00:00 AM |
SB 41 |
| SB 41 SFINSCS1 ProjectDetailByAgency.pdf |
SFIN 4/14/2023 9:00:00 AM |
SB 41 |