Legislature(2015 - 2016)SENATE FINANCE 532
03/26/2015 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB34 | |
| SJR2 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 34 | TELECONFERENCED | |
| + | SJR 2 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE BILL NO. 34
"An Act relating to investment of the power cost
equalization endowment fund; and providing for an
effective date."
9:04:57 AM
PAMELA LEARY, DIRECTOR, TREASURY DIVISION, DEPARTMENT OF
REVENUE, began the presentation "State of Alaska,
Department of Revenue, SB 34 PCE Endowment Fund
Investment," (copy on file). Ms. Leary presented Slide 2:
Fund Purpose:
· To fund the Power Cost Equalization & Rural
Electric Capitalization Fund and to reimburse the
costs associated with managing the fund.
· 7% of the monthly average market value of the
fund for the previous 3 fiscal years may be
appropriated.
Fund History:
· 2000-Power Cost Equalization Endowment Fund
established from Constitutional Budget Reserve
Appropriation of $100 million
· 2002-PCE receives $89.6 million from proceeds of
the sale of the four dam pool hydroelectric
project.
· 2007-Additional appropriation of $182.7 million
· 2012-Additional appropriation of $400 million
· February 28, 2015 balance: $986.27 million
9:06:50 AM
Ms. Leary addressed Slide 3:
SB34
· Removes the stated nominal return target of at least
7% from the statute.
· Allows the commissioner of revenue to invest the
fund in a manner that can meets the objectives of
the fund.
· Why? It allows the commissioner of revenue to invest
in less risky investments, when appropriate, that
will still meet the financial needs of the program.
· Zero Fiscal Note
9:07:30 AM
GARY BADER, CHIEF INVESTMENT OFFICER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, commented that it was fundamental to
investment management to seek the highest rate of return
commiserate with the appropriate amount of risk. He said
that current statute directed the commissioner of revenue
to attain a 7 percent rate of return, without regard to the
amount of risk that would be undertaken. He drew the
committee's attention to Slide 4, "2015 Capital Market
Expectations - Return and Risk." He stated that most
prepared assumptions were similar; the statistics
represented Callan Associates' projections of the returns
and standard deviations of many of the most popular asset
classes for the 10 year period ending 2024. He relayed that
the left hand column on the slide reflected various asset
classes, with broad domestic equity shown at the top of the
page. He elaborated that broad domestic equity represented
United States stocks. He moved to the column labeled, "1-
year Arithmetic", which represented the average of one-year
investment returns Callan might expect the asset class to
earn over the next ten years. He spoke to the column
labeled, "Projected Risk/Standard Deviation." He shared
that standard deviation was a measure of volatility of the
investment returns, roughly two-thirds of the time an
investment return would be plus or minus one standard
deviation of the arithmetic return. He directed committee
attention to the column labeled, "10-year Geometric", which
represented the compounded annual rate of return that
Callan projected an asset class would return over the next
10 years. He pointed out that the greater the standard
deviation, the further the 10-year geometric return grew
from the arithmetic return; the higher the standard
deviation, the more difference in the compounded return.
9:10:21 AM
Mr. Bader gave an example of how the investment return
scenario might work. He asserted that volatility and the
amount of risk were important factors for achieving a long-
term rate of return. He relayed that if the projections
held for the Power Cost Equalization (PCE) of a ten year
rate of return, nearly all of the PCE investment would need
to be broad equities; approximately 88 percent under
statute. He related that domestic equities had been in a
bull market for 6 years, interest rates were low and
expected to increase mid-year. He added that as interest
rates rose, the value of fixed income investments fell. He
thought that the 7 percent return would have been a
reasonable expectation 15 years ago, when a 10-year
Treasury bond was earning 6 percent; now the 10-year
Treasury bond was earning 2 percent. He relayed that when
interest rates went up, bond values fell, and it was
unlikely that the stock market would continue to rise for
another six years. He concluded that passage of the
legislation would allow the commissioner of revenue to
attempt to meet the goals of the PCE program while managing
risk.
9:12:19 AM
Vice-Chair Micciche asked whether any of Alaska's other
investment funds had a statutory requirement for return.
Ms. Leary replied that this was the only separately managed
investment that had a target return.
9:12:51 AM
Vice-Chair Micciche thought that the situation was "laced
with unintended consequences."
Co-Chair MacKinnon clarified that the bill proposed to
remove the 7 percent expected return to a nominal rate in
order to have a more conservative investment strategy on
the PCE fund. She said that the 7 percent had been
established because people wanted to grow the fund as
quickly as possible in order for rural communities to
receive greater dividends. She opined that the recent
volatility displayed by the stock market had prompted the
desire to secure the risk alternatively.
9:14:26 AM
Ms. Leary shared that the presentation could be found on
the Treasury Division website:
http://treasury.dor.alaska.gov/
9:14:52 AM
Senator Hoffman recalled that the same topic had been
discussed in committee the previous year and he had
requested that the target be reduced from 7 to 5 percent.
He understood as markets rose and fell there could be times
when the fund earned in excess of the payout, which had
been the case for several years, but that did not mean that
in the future there would be draws from the fund that would
be larger than the rate of return, and overtime they would
level out, which was why he supported the lower interest
rate. He felt that there had been substantial increases in
the fund and that during those times there was always a
temptation to draw from and utilize those funds for other
purposes, but to remember that there would be times when
the earnings would be less than the draw.
9:16:55 AM
Co-Chair MacKinnon extrapolated that the 7 percent rate of
return was tied to what could be drawn from the fund. She
noted that as the administration was trying to create a
more conservative approach by limiting the amount that
could be withdrawn from the fund. She felt that this could
create unintended consequence for the legislature because
it would limit the amount that could be withdrawn.
Mr. Bader believed that the statute allowed the average of
7 percent monthly return over a three year period. He said
that there would be times when a commissioner could set an
asset allocation that would target an earnings rate of less
than 7 percent. He added that there could also be times
when the commissioner might try to have a rate of return
that was greater than 7 percent.
Co-Chair MacKinnon understood that with the passage of the
bill, up to 7 percent could still be withdrawn from the
fund.
Ms. Leary added that over the life of the fund the rate of
return that it had earned was 6 percent.
9:19:00 AM
Vice-Chair Micciche asked where the language was in the
bill that changed the amount that could be drawn.
Co-Chair MacKinnon clarified that the amount that could be
drawn would not be affected by the legislation.
9:19:40 AM
Co-Chair MacKinnon expressed concern that the
administration was proposing no percentage rate. She
wondered why the nominal return had been considered rather
than a reduction in the percentage rate.
Mr. Bader expected that a recommendation would be taken to
the commissioner that would be based upon achieving a real
rate of return, one earned before consideration of
inflation, which would be in the 4 to 5 percent rage.
9:21:20 AM
Senator Hoffman commented that a minimum rate of return
should be set, with flexibility for the department to make
the ultimate decision.
9:22:08 AM
Vice-Chair Micciche believed that requiring a rate of
return would be micromanaging and was out of the
legislatures per view. He said he would rather define an
acceptable level of risk and not an acceptable level of
return.
9:23:05 AM
Senator Bishop asked whether it would be prudent to have
the ability to manage the fund so it met the outcome at the
end of the year with the corpus of the fund intact.
Ms. Leary stated that the question was considered during
the asset allocation process.
9:24:11 AM
Co-Chair MacKinnon opened public testimony.
9:24:39 AM
Co-Chair MacKinnon closed public testimony.
SB 34 was HEARD and HELD in committee for further
consideration.
9:24:57 AM
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB34 PCE presentation March 26 2015.pdf |
SFIN 3/26/2015 9:00:00 AM |
SB 34 |
| SB34 Sponsor Statement.pdf |
SFIN 3/26/2015 9:00:00 AM |
SB 34 |
| SJR 2 Letter of Support-Juneau Chamber of Commerce.pdf |
SFIN 3/26/2015 9:00:00 AM |
SJR 2 |
| SJR 2 Letter of Support-University of Alaska.pdf |
SFIN 3/26/2015 9:00:00 AM |
SJR 2 |
| SJR 2 Sectional Analysis.pdf |
SFIN 3/26/2015 9:00:00 AM |
SJR 2 |
| SJR 2 Sponsor Statement.pdf |
SFIN 3/26/2015 9:00:00 AM |
SJR 2 |