Legislature(2015 - 2016)HOUSE FINANCE 519
03/30/2015 01:30 PM House 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.
| Audio | Topic |
|---|---|
| Start | |
| SB64 | |
| HB86 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 64 | TELECONFERENCED | |
| += | HB 68 | TELECONFERENCED | |
| + | HB 86 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 86
"An Act relating to investment of the power cost
equalization endowment fund; and providing for an
effective date."
3:18:04 PM
PAM LEARY, DIRECTOR, TREASURY DIVISION, DEPARTMENT OF
REVENUE, provided a PowerPoint presentation titled "State
of Alaska Department of Revenue HB 86 PCE Endowment Fund
Investment" (copy on file). She relayed her intent to
discuss the fund history and the bill. She turned to slide
2 and communicated that the fund's purpose was to fund the
Power Cost Equalization and Rural Electric Capitalization
Fund, which helped to reduce the cost of energy in areas
with high electrical costs. The fund also covered the costs
associated with its management. She continued that 7
percent of the monthly average market value of the fund for
the previous three fiscal years may be appropriated. She
relayed that the fund had been created in 2000 with an
appropriation of $100 million from the Constitutional
Budget Reserve (CBR). In 2002 the Power Cost Equalization
Fund (PCE) received $89.6 million from proceeds of the sale
of the four dam pool hydroelectric project; it had received
two subsequent appropriations of $182.7 million in 2007 and
$400 million in 2012. The fund balance at the end of
February 2015 was $986 million.
Ms. Leary discussed the bill's purpose on slide 3. She
explained that the bill would remove the stated nominal
return target of at least 7 percent of the statute. The
bill would allow the commissioner of the Department of
Revenue (DOR) to invest the fund in a manner that would
meet the fund's objectives by providing flexibility as it
related to the rate and the risk associated with certain
types of investments. She explained that the bill was
important because it would enable the DOR commissioner to
invest in less risky investments, when appropriate, that
would continue to meet the financial needs of the program.
She relayed that the bill had a zero fiscal note.
3:20:56 PM
JERRY BURNETT, DEPUTY COMMISSIONER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, highlighted that one of the
fundamentals of asset management was to seek the highest
rate of return with appropriate risk levels. He drew
attention to the 2015 capital market expectations for
return and risk from Callan Associates (slide 4). He noted
that Callan Associates was the financial advisor to the
Alaska Retirement Management Board and to the Alaska
Permanent Fund Corporation (APFC). He pointed to the
arithmetic and geometric return and standard deviation
(projected risk). He remarked that the geometric return was
less than the arithmetic return. He highlighted the 19
percent standard deviation for the broad domestic equity
category, meaning that two-thirds of the time returns were
expected to be within 19 percent of the 9.15 percent
arithmetic return (-10 to 29). He explained that the
arithmetic return over time was used to calculate the
geometric average (some years would be well below the
arithmetic average, while some years would be well above).
He noted that the [10-year] geometric return for broad
domestic equity was 7.6 percent. He remarked that 7.6
percent was one of the highest returns on the chart;
emerging market equities had a return of 7.9 percent, but
with a 28 percent standard deviation).
Mr. Burnett discussed that when constructing a portfolio to
achieve a 7 percent return (given the 2015 capital
markets), nearly 90 percent of assets should be equities.
He explained that based on a 19 percent standard deviation,
a -10 percent return would occur in one out of six years.
He discussed that equity markets had been positive for six
years in a row; therefore, it was fairly likely that
negative returns would occur sometime in the next several
years. He relayed that DOR did not feel comfortable
building or recommending a portfolio that was 90 percent
equities because it was currently beyond the risk
tolerance. He elaborated that in 2002 a portfolio achieving
an 8 or 9 percent return could have been constructed with
similar risk as at present. He noted that it varied from
year to year. He communicated that inserting 7 percent in
statute could create a situation where the department was
managing to a risk that was beyond what was reasonable for
the markets. He stated that APFC had an expected rate of
return of approximately 6.17 percent in the current year.
The department wanted to have the ability to manage
appropriate risk while achieving the highest rate of return
within the risk tolerance rather than to a fixed number. He
noted that the Treasury Division managed over 40 unique
asset allocations; the Power Cost Equalization Fund was the
only major fund that had a specific target return
identified in statute.
3:24:59 PM
Representative Edgmon asked why a lower number was not
identified. Mr. Burnett did not believe a lower number
should be identified. For example, if the target return was
5 percent, the asset allocation may be less risky than what
was responsible over time. He relayed that no number would
be durable; what may be good at present may be very bad at
another time. He noted that in 1982, money market rates had
been at 10 or 11 percent and mortgage bonds could be
purchased with 18 percent interest rates. He explained that
a portfolio constructed for that time may be very
different. He reiterated that it was not possible to set a
durable number that made sense in the long-term.
Representative Edgmon asked for verification that it would
be at the discretion of DOR and its fund managers to manage
the target year after year. He surmised that the target may
be 6 percent in some years and 5 percent in others. He
wondered why the department had not elected to pick a
target that was more commensurate with the state's other
long-term endowments such as the CBR.
Mr. Burnett answered that DOR would look at an asset
allocation that was durable and would set the expected rate
of return off of a reasonable risk asset allocation rather
than looking at setting an allocation to a specific target
number. Management factored in that the fund needed a
certain amount of income annually; there was a payout rule
that was 7 percent of the prior three years' monthly
rolling average balance. The fund was managed to meet its
intent, but the asset allocation was not set to a hard
number.
Representative Edgmon asked what assurance he would have as
a rural legislator that the fund was being managed for the
long-term. Mr. Burnett answered that the returns were
available for review. Additionally, the DOR commissioner
and staff were available to discuss the strategy and
returns. He noted that the legislature had annual hearings
on fund performance. He explained that other funds did not
have target returns identified in statute. He cited the
CBR, the Alaska Permanent Fund, and the Higher Education
Fund as examples. He explained that the flexibility
provided more assurance in an environment like the present
that the commissioner would not try to set to a 7 percent
level, which may result in lost money the following year.
3:28:45 PM
Representative Edgmon stated that the PCE endowment fund
was large enough that if managed in a conservative manner
it should be able to satisfy the annual outlay of PCE costs
(approximately $42 million to $45 million). He wondered
what return the fund would target. He noted that the fund
was close to $1 billion and small number of 4 or 5 percent
was needed. He surmised that management would want to stick
to a target rate over time. He wanted to ensure that money
managers would not have free reign to ride the market and
make more risky investments when they were not needed.
Mr. Burnett replied that each of the funds managed by DOR
had a purpose including expected payout, duration and
other. The department set new asset allocations annually on
July 1 based on capital market expectations; the allocation
did not necessarily change every year. Department staff
analyzed risk and program needs on a full-time basis. He
noted that under the legislation the commissioner would
manage the fund to meet the needs of the PCE program.
Representative Edgmon surmised that the probability was
that the department would be managing the fund for a rate
below 7 percent. Mr. Burnett replied that it was most
likely that the fund would be managed for a rate below 7
percent in 2015. He could not predict the target rate for
2016.
Representative Guttenberg asked how the objectives for the
PCE fund were defined. He wondered about the definition and
objective of the Rural Electric and Capitalization Fund. He
believed the objectives may be different or in conflict if
the 7 percent target was removed from statute. He was
concerned about what the state was "letting out of the
box."
Mr. Burnett responded that determining asset allocations
was based on the legal purpose of each of the funds. He
explained that the PCE fund's purpose was to equalize the
power cost per kilowatt hour, making grants and power cost
equalization available to eligible electric utilities. He
relayed that a payout rule of 7 percent of previous years
was currently in statute. He communicated that the PCE fund
had earned about 20 percent in 2014 and an average of 14
percent over the past five years; since inception it had
earned just over 6 percent. He explained that the
department would look at the fund's specific purpose just
like it did for each of the other funds it managed. He
added that there was nothing unique about the fund and its
purpose that created a different look. The department
considered the fund's legal requirements, its purpose, its
timeframe, and other.
3:33:59 PM
Ms. Leary added that 7 percent had been the target;
however, having the target identified in statute had
resulted in a return of -13.87 percent in 2009. The return
had been negative 4 years out of 15; it had also been as
high as 21.8 percent with the same target. She elaborated
that a target may come to fruition, but may not. She
clarified that capital market expectations were only
expectations based on known economic factors; there
generally tended to be a 10-year expectation.
Representative Guttenberg asked if the department's
responsibility would fit inside the successes of the
permanent fund. He wondered how the end result would differ
if the department had moved its management into the
permanent fund portfolio.
Mr. Burnett replied that the permanent fund had some unique
assets that the Treasury Division would not consider
holding due to their illiquidity. He explained that because
the PCE fund was non-dedicated it had to be available and
liquid at some level at all times. He stated that DOR would
not make the recommendation, but if the legislature chose
to change the purpose of the fund [the portfolio could
invest in illiquid assets]. He furthered that the permanent
fund was a constitutionally dedicated fund and held assets
that could not provide money for 5 to 10 years (e.g.
private equity or long-term real estate investments), which
would never be considered for a state-managed fund.
Additionally, the permanent fund may hold assets that
Treasury was not allowed to hold under Securities Exchange
Commission rules.
Co-Chair Thompson asked committee members to be cognizant
of the time and relayed that the bill would be heard again
at a later date.
Vice-Chair Saddler wondered if the bill had been prompted
by the desire to revert to more a prudent investment rule,
the declining revenue stream required by lower energy
prices, or by fear of the coming market correction. Mr.
Burnett answered that there had been no consideration of
the declining need for a revenue stream. The decision had
been based on a prudent investment rule and the
unwillingness to take on risks beyond what were prudent.
Vice-Chair Saddler stated that when the AKLNG gasline
project came to fruition 25 percent of its royalties would
be dedicated towards the energy needs of rural Alaskans off
the Railbelt. He asked if the bill would allow the PCE
endowment fund management to adjust to the reality of a new
funding source with the same purpose.
Mr. Burnett answered that if the money went into the fund
it would allow for changes. He elaborated that the purpose
of the fund, the realities of the marketplace, and the
fiscal realities of the state were all taken into
consideration by the department.
3:38:00 PM
Representative Edgmon clarified that it was 20 percent of
the royalty revenues [that would be dedicated to rural
Alaska energy needs when the AKLNG project came to
fruition].
Representative Munoz asked if the fund was managed in-house
or by outside managers. Mr. Burnett replied that the fixed
income component was managed internally; the rest was
managed by external managers.
Representative Munoz asked if the management fees were
typical. Mr. Burnett agreed. Representative Munoz asked
about 14 percent earnings from the previous year. Mr.
Burnett clarified that the earnings had been 20.7 percent
the previous year and averaged 14.5 percent over the past
five years. He added that the fund had grown quite rapidly
over the past several years.
Representative Munoz asked for the growth in dollars. Ms.
Leary replied that earnings had been $171 million in 2014.
Representative Munoz spoke to a payout of roughly $45
million to communities. She wondered if the balance of the
earnings was deposited directly into the fund or for other
purposes as well. Mr. Burnett answered that the earnings
that were not used for fund management or the PCE program
remained in the fund.
Representative Gattis asked why the PCE fund had not
originally been set up like the other state-managed funds.
Mr. Burnett answered that he did not recall the discussion
on the original language related to the fund's investment
purposes. He relayed that the fund had been implemented in
2002. He was not certain that any changes had been made to
the fund's investment since inception. He relayed that it
was not the first year DOR had requested the change; the
department had identified the issue as problematic in
previous administrations as well.
Representative Gattis asked if it was the first time a bill
had been presented. Mr. Burnett replied in the negative.
Representative Gattis surmised that a bill had failed in
the past and the department was giving it another attempt.
Mr. Burnett replied in the affirmative. He thanked the
committee for hearing the bill.
Ms. Leary informed the committee that DOR had a great
website that included significant information about the PCE
fund and other funds managed by the Treasury Division.
Additionally, the website included cash management and all
aspects of the division.
HB 86 was HEARD and HELD in committee for further
consideration.
Co-Chair Thompson discussed the agenda for the following
day.
Vice-Chair Saddler informed committee members that the
Department of Health and Social Services budget
subcommittee would hear a Medicaid 101 presentation the
following morning.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 68 CS WorkDraft I version.pdf |
HFIN 3/30/2015 1:30:00 PM |
HB 68 |
| SB 64 Legal Opinion Retro Date.pdf |
HFIN 3/30/2015 1:30:00 PM |
SB 64 |
| SB 64 EDC- Sectional Analysis.pdf |
HFIN 3/30/2015 1:30:00 PM |
SB 64 |
| SB 64 - Sponsor Statement.pdf |
HFIN 3/30/2015 1:30:00 PM |
SB 64 |
| SB 64 - Explanation of Changes.pdf |
HFIN 3/30/2015 1:30:00 PM |
SB 64 |
| HB86 Sponsor Statement.pdf |
HFIN 3/30/2015 1:30:00 PM |
HB 86 |
| HB86 PCE presentation March 30 2015.pdf |
HFIN 3/30/2015 1:30:00 PM |
HB 86 |
| SB 64 Amendment 1 Gara.pdf |
HFIN 3/30/2015 1:30:00 PM |
SB 64 |
| SB 64 Amendment #2 Kawasaki.pdf |
HFIN 3/30/2015 1:30:00 PM |
SB 64 |
| SB 64 Support Material - MultiYearAllocationTotals.pdf |
HFIN 3/30/2015 1:30:00 PM |
SB 64 |
| SB 64 Support Material - State Debt Liability.pdf |
HFIN 3/30/2015 1:30:00 PM |
SB 64 |