Legislature(2001 - 2002)

02/15/2001 08:40 AM House FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                   HOUSE FINANCE COMMITTEE                                                                                      
                      February 15, 2001                                                                                         
                           8:40 AM                                                                                              
                                                                                                                                
TAPE HFC 01 - 27, Side A                                                                                                        
TAPE HFC 01 - 27, Side B                                                                                                        
TAPE HFC 01 - 28, Side A                                                                                                        
TAPE HFC 01 - 28, Side B                                                                                                        
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Mulder  called the House  Finance Committee meeting                                                                    
to order at 8:40 AM.                                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Eldon Mulder, Co-Chair                                                                                           
Representative Bill Williams, Co-Chair                                                                                          
Representative Con Bunde, Vice-Chair                                                                                            
Representative Eric Croft                                                                                                       
Representative John Davies                                                                                                      
Representative Richard Foster                                                                                                   
Representative John Harris                                                                                                      
Representative Bill Hudson                                                                                                      
Representative Ken Lancaster                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Whitaker                                                                                                         
Representative Moses                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Representative Sharon Cissna; Clarke Gruening, Chair, Alaska                                                                    
Permanent Fund Corporation  (APFC) Board of Trustees; Wilson                                                                    
Condon,   Commissioner,  Department   of   Revenue;  Michael                                                                    
O'Leary,  Executive   Vice  President,   Callan  Associates,                                                                    
Chicago; Robert Storer, Executive Director, Alaska Permanent                                                                    
Fund  Corporation, Department  of  Revenue;  Chris Phillips,                                                                    
Chief Financial Officer,  Alaska Permanent Fund Corporation,                                                                    
Department  of   Revenue;  Terry   Brown,  Chief  Investment                                                                    
Officer,  Alaska Permanent  Fund Corporation,  Department of                                                                    
Revenue;  Jim  Kelly,  Research  & Liaison  Officer,  Alaska                                                                    
Permanent  Fund  Corporation,  Department  of  Revenue;  Bob                                                                    
Bartholomew, Administrative  Officer, Alaska  Permanent Fund                                                                    
Corporation,  Department  of  Revenue;  Allan  Moore,  Chief                                                                    
Investment  Officer,   Alaska  Permanent  Fund  Corporation;                                                                    
Robert  Maynard, Chief  Investment Office,  Public Employees                                                                    
Investment  System  of   Idaho,  Permanent  Fund  Investment                                                                    
Advisor;  Jerrold   Mitchell,  Retired  Partner,  Wellington                                                                    
Management Company, Permanent Fund Investment Advisor; Allan                                                                    
Bufferd, Treasurer,  Massachusetts Institute  of Technology,                                                                    
Permanent Fund Investment Advisor.                                                                                              
                                                                                                                                
 GENERAL SUBJECT(S):                                                                                                          
                                                                                                                                
                                                                                                                                
       ALASKA PERMANENT FUND CORPORATION PRESENTATION:                                                                        
                 2001 CAPITAL MARKETS OUTLOOK                                                                                 
                                                                                                                                
The following overview was taken in log note format.  Tapes                                                                     
and handouts will be on file with the House Finance                                                                             
Committee through the 22nd Legislative Session, contact 465-                                                                    
2156. After the 22nd Legislative Session they will be                                                                           
available through the Legislative Library at 465-3808.                                                                          
                                                                                                                              
                                                                                                                                
                                                                                                                                
 LOG SPEAKER                DISCUSSION                                                                                      
                                                                                                                              
      TAPE HFC 00 - 28                                                                                                        
      SIDE A                                                                                                                  
 000 Co-Chair Mulder        Opened the meeting, noting that there                                                               
                            would be a presentation provided by the                                                             
                            Alaska Permanent Fund Corporation and                                                               
                            board members regarding the 2001 Capital                                                            
                            Market Outlook.                                                                                   
 068 CLARKE GRUENING,       Introduced members of his cabinet, the                                                              
      CHAIR, APFC BOARD OF executive director, Bob Storer and the                                                               
      TRUSTEES, ALASKA      presenters for the discussion, Michael                                                              
      PERMANENT FUND        O'Leary, Allan Moore, Chris Phillips,                                                               
      CORPORATION           Allan Bufferd, Robert Maynard, & Jerrold                                                            
                            Mitchell.                                                                                         
 166 ROBERT STORER,         Commented on the intent of the meeting                                                              
      EXECUTIVE DIRECTOR, and the caliber of the staff that would                                                               
      ALASKA PERMANENT      be testifying before the Committee.  He                                                             
      FUND CORPORATION,     pointed out that this year, three special                                                           
      DEPARTMENT OF         advisors had been added.  Robert Maynard,                                                           
      REVENUE               Jerrold Mitchell and Allan Bufferd.  He                                                             
                            emphasized the amount of experience                                                                 
                            having them on the Board would bring to                                                             
                            the State of Alaska.                                                                              
 315 MICHAEL O'LEARY,       Referenced the handout-Capital Markets                                                              
      EXECUTIVE VICE        Outlook 2001.  [Copy on File].  He stated                                                           
      PRESIDENT, CALLAN     that he would provide an overview of the                                                            
      ASSOCIATES, INC.,                                                                                                         
                               · Long term capital market history                                                               
      CHICAGO                                                                                                                   
                                 including stocks, bonds and 60/40                                                              
                                 combination with systematic                                                                    
                                 spending;                                                                                      
                               · Economic setting;                                                                              
                               · Recent market performance; and                                                                 
                               · Callan's 5-year projections.                                                                 
 453 Mr. O'Leary            Addressed the "real rate of return" as                                                              
                            indicated in the handout.  He pointed out                                                           
                            that the data on the bond returns is not                                                            
                            as thorough as the data on the stock                                                                
                            returns.  He provided some hypothetical                                                           
                            scenarios of combination spending/cost                                                              
                            returns.                                                                                          
609 Mr. O'Leary             Commented that type of analysis could be                                                            
                            done by anyone and indicates a real base.                                                           
                            There could be higher equity exposures.                                                           
647 Mr. O'Leary             Spoke to the current economic environment                                                           
                            occurring nationally.  He emphasized that                                                           
                            the changes have been dramatic in the                                                               
                            market.                                                                                           
679 Co-Chair Mulder         Inquired if Mr. O'Leary anticipated that                                                            
                            the charts would continue to look like                                                              
                            the one on Page 3.  He believed that it                                                             
                            could not keep up with inflation.                                                                 
709 Mr. O'Leary             Explained that the chart included an                                                                
                            inflation adjustment rather than just a                                                             
                            fixed number. In 1930, there was a                                                                  
                            deflation.  All the variations are                                                                  
                            captured within the graph.  In a period                                                             
                            of deflation, bonds are the best                                                                    
                            performing asset to own.  In a period of                                                            
                            inflation, stocks are a good place to put                                                           
                            the assets.  During a period of                                                                     
                            acceleration, there is no place to hide.                                                          
845 Representative          Inquired how far back do the trusts go                                                              
      Hudson                back to.                                                                                          
897 Mr. O'Leary             Replied that the bond market continues to                                                           
                            change, however, the characteristics are                                                            
                            more reliable these days than they were                                                             
                            in previous years.                                                                                
940 Vice-Chair Bunde        Suggested that plotting the life of the                                                             
                            permanent fund would provide better                                                                 
                            information.                                                                                      
963 Mr. O'Leary             He explained that these numbers are                                                                 
                            correct.  From 1991-2000, the S&P 500                                                               
                            return amounted to 12%.  He emphasized                                                              
                            that 12% was an extraordinary amount of                                                             
                            return.  He noted that his tendency was                                                             
                            to average all years, providing a                                                                   
                            reasonable long-term projection.  He                                                                
                            added that 6%, 7%, or 8% would be a                                                                 
                            reasonable long-term expectation for                                                                
                            moving forward.                                                                                   
1077 Mr. O'Leary            Interjected that:                                                                                   
                              · Consumers are scared;                                                                           
                              · The stock market is down;                                                                       
                              · The savings rate has fallen from 8%                                                             
                                 to -1%;                                                                                        
                              · Consumer debt has risen from 76% to                                                             
                                 94% of disposable income;                                                                      
                              · Energy prices are up;                                                                           
                              · The trade gap is hitting records;                                                             
                               · Investment is slipping; and                                                                    
                               · Some manufacturing is already in                                                               
                                 recession.                                                                                   
 1175 Mr. O'Leary           Referenced the fall-off, which is                                                                   
                            happened quickly  in the second half of                                                             
                            2000.                                                                                             
 1195 Mr. O'Leary           He noted that the savings rate has gone                                                             
                            declined, however,  consumer wealth has                                                             
                            increased.  Consumer  spending and debt                                                             
                            has risen, and that consumer wealth is in                                                           
                            better shape.  He recommended that it is                                                            
                            important to keep on eye on the stock                                                               
                            market as it is in decline.                                                                       
 1269 Vice-Chair Bunde      Commented that what we have is "paper"                                                              
                            wealth.                                                                                           
 1285 Mr. O'Leary           Suggested that the balance sheets still                                                             
                            show a lot of unrealized gains and that                                                             
                            home prices have not softened.  There is                                                            
                            a lot of equity  build up in that area,                                                             
                            which is a significant  portion of many                                                             
                            consumers' wealth.                                                                                
 1326 Representative        Commented that the credit industry is not                                                           
      Hudson                screening their debtors.                                                                          
 1364 Mr. O'Leary           Added that the credit debt is growing                                                               
                            from those from 18-30 years old.                                                                  
 1385 Representative        Asked the definition of savings.                                                                  
      Davies                                                                                                                    
 1393 Mr. O'Leary           Advised that retirement is generally not                                                            
                            included in that number.  He offered to                                                             
                            forward that information to Committee                                                               
                            members, as he was uncomfortable                                                                    
                            "guessing".                                                                                       
 1418 Mr. Storer            Mentioned the reinvesting of profits and                                                            
                            the cash flow implications  on savings.                                                           
 1435 Mr. O'Leary           Noted the inflation, which should                                                                   
                            decelerate as the  economy softens.  He                                                             
                            referenced Page 11 of the handout,                                                                  
                            illustrating the movement of the Consumer                                                           
                            Price Index (CPI) over the past five                                                                
                            years.                                                                                            
 1489 Mr. O'Leary           Core CPI eliminates the more volatile                                                               
                            inflation such  as food and energy.  He                                                             
                            acknowledged that health care costs have                                                            
                            risen as have housing costs.                                                                      
 1521 Mr. O'Leary           Referenced Page 12, which indicates oil                                                             
                            prices, which are still low in real                                                                 
                            terms.  He commented that the price peak                                                            
                            might already be behind us.                                                                       
 1553 Mr. O'Leary           Page 13 - the Federal government should                                                             
                            "loosen" quickly; the question is "when".                                                         
 1571 Mr. O'Leary           Page 14 - Capital markets are confronting                                                           
                            the law of gravity.  Smaller cap stocks                                                           
                            did better than the large ones.  The                                                                
                            NASDAQ declined a lot.  It was a good                                                               
                            year for bonds.                                                                                   
1649 Mr. O'Leary            Page 15 - Listed the returns by the                                                                 
                            price/earnings ratio decile.  The table                                                             
                            demonstrates how radically the world                                                                
                            changed in 2000.                                                                                  
1692 Mr. O'Leary            Summarized the capital market projection                                                            
                            process.                                                                                          
1707 Representative Croft  Referenced page 15 - The middle column,                                                              
                            1998-1999 annualized %.                                                                           
1719 Mr. O'Leary            Explained that column represents the                                                                
                            extraordinary growth in the past two                                                                
                            years.  There was a huge inversion.  A                                                              
                            value-oriented manager would suggest that                                                           
                            substantiated long-term value in stocks.                                                            
                            He acknowledged that there is a                                                                     
                            "craziness" going on in the market place.                                                           
                            The average stock did not do nearly as                                                              
                            well as it did in the past.                                                                       
1825 Co-Chair Mulder        Made comments on the need to be                                                                     
                            conservative when dealing with the stock                                                            
                            market.                                                                                           
1843 Mr. O'Leary            Referenced Page 17 & 18 graphs.  He spoke                                                           
                            to the importance of examining stock                                                                
                            fundamentals.  The P/E ratios hit                                                                   
                            astounding heights, being inconsistent                                                              
                            with long-term interest rates.  At the                                                              
                            beginning of 2000, the projections were                                                             
                            very conservation; however, by the end of                                                           
                            the year, were overly optimistic.                                                                 
1920 Mr. O'Leary            Commented that all projections are                                                                  
                            strategic projections.  By not plotting a                                                           
                            particular rate of return, makes for                                                                
                            looking at the range of possibilities.                                                            
1945 Mr. O'Leary            He noted that they would be able to shift                                                           
                            the long-range average around by                                                                    
                            determining where the State rests in the                                                            
                            long-range market at this time.                                                                   
1982 Representative Croft  Noticed the disconnect between                                                                       
                            price/earnings in the turnover time.                                                              
1993 Mr. O'Leary            Agreed.  Some of the best investment                                                                
                            returns are achieved in companies long                                                              
                            before they have earnings, and then they                                                            
                            make a quantum jump in earnings.  Many                                                              
                            large funds are currently investing in                                                              
                            venture capital ideas. He advised that                                                              
                            could be a prudent investment.                                                                    
2053 Representative Croft  Referenced Page 19 and the re-connect to                                                             
                            their underlying value.                                                                           
2069 Mr. O'Leary            Clarified that the average stock is                                                                 
                            historically selling at price value right                                                         
                            now.  He questioned if the future outlook                                                           
                            was sufficient  and superior to warrant                                                             
                            the high price earnings ratio.                                                                    
 2108 Representative Croft  Asked if that could be two different                                                                
                            markets.                                                                                          
 2118 Mr. O'Leary           Replied that could be high price.                                                                 
 2146 Mr. O'Leary           Referenced Page 18 - A graph representing                                                           
                            the dividend yield around the stock                                                                 
                            average.  He noted that corporate                                                                   
                            behavior has changed  and companies are                                                             
                            buying back shares to increase dividends.                                                           
                            Big companies have  a higher P/E ratio.                                                           
 2205 Mr. O'Leary           Page 19 - A graph which looks at the                                                                
                            earnings yield  on the S&P 500 and then                                                             
                            forecasts the rate of yield of future                                                               
                            returns.  There  could be a 3% increase                                                             
                            before inflation.  He did not know if                                                               
                            that could be a good projection                                                                     
                            technique.                                                                                        
 2257 Mr. O'Leary           He pointed out that there had been                                                                  
                            recommendations to add inflation                                                                    
                            possibilities to that number.                                                                     
                                                                                                                              
      TAPE HFC 01 - 27,                                                                                                       
      Side B                                                                                                                  
 000 Mr. O'Leary            Page 20 - Provides an outlined graph of                                                             
                            the domestic fixed income.  The graph                                                               
                            indicates the Lehman  Aggregate Index 5                                                             
                            year return versus  the lagged yield to                                                             
                            maturity.  The five-year forecast is                                                                
                            developed from that information.                                                                  
 085 Mr. O'Leary            Page 21 - Indicates the 2001 Capital                                                                
                            Market Projections, breaking it down by                                                             
                            equities, fixed income, other income                                                                
                            sources and the inflation inclusion.  He                                                            
                            noted that the bond estimates declined,                                                             
                            whereas the stock estimates remained the                                                            
                            same.  That resulted from the decline                                                               
                            last year.                                                                                        
 205 Co-Chair Mulder        Asked if it could be expected that the                                                              
                            difference from last year and next year                                                             
                            would be the same.                                                                                
 223 Mr. O'Leary            Thought so.  He believed that there would                                                           
                            be more confidence in the equity market.                                                          
 278 Mr. O'Leary            Noted that equities are less expensive                                                              
                            than they were than last year.                                                                    
 385 Mr. O'Leary            Mentioned that the forecasters are                                                                  
                            predicting a "range of return" including                                                            
                            standard deviations.  Last years result                                                             
                            was within the expected range.                                                                    
 442 Representative Croft  Asked about "shape".                                                                               
 458 Mr. O'Leary            Replied that would be a risk adjustment                                                             
                            measure.  He commented on the risk free                                                           
                            rate divided by the actual risk, thus                                                               
                            providing the base.  Mr. O'Leary noted                                                              
                            that the sharp ratio becomes greater as                                                             
                            one invests in more volatile assets.                                                              
530 Mr. O'Leary             Page 22 - Spoke to the risks on the                                                                 
                            horizon.                                                                                            
                              · Energy shortage worsens and forces                                                              
                                 large-scale lay-offs.                                                                          
                              · Consumers have difficult paying for                                                             
                                 past extravagance.                                                                             
                              · The dollar falls sharply as capital                                                             
                                 inflows shrink.                                                                                
                              · Long-term interest rates rise with                                                              
                                 the passage of large tax cuts.                                                               
546 Mr. O'Leary             Page 23 - Equities constrained to 60% and                                                           
                            the current limit by statute, which is                                                              
                            55%, & with a 5% basket clause.  The risk                                                           
                            level is 10.6%.  The annual return is                                                               
                            projected to be 8.2%.  He claimed that                                                              
                            the odds were significantly greater that                                                            
                            there would be two good years in                                                                    
                            succession.  Mr. O'Leary commented that                                                             
                            things tend to move more toward the                                                                 
                            middle.                                                                                           
654 Mr. O'Leary             Page 25 - Lists the range of returns over                                                           
                            a 1-year period.                                                                                  
687 Mr. O'Leary             Page 26 - Indicates the range of returns                                                            
                            over a 5-year period with the annual rate                                                           
                            of return.                                                                                        
712 Mr. O'Leary             Reiterated the target mix and the annual                                                            
                            rates of returns to be expected.  Mr.                                                               
                            O'Leary noted the importance of the rate                                                            
                            of consistency.                                                                                   
774 Representative Croft  Asked about the expected "basket" rate of                                                             
                            return.                                                                                           
791 Mr. O'Leary             Commented that the "basket" is not being                                                            
                            used at this time.  There exists a band                                                             
                            around it up to 56%, -1% of the basket.                                                             
                            He noted that the Board was investigating                                                           
                            "private equity" to help with the basket                                                            
                            equability.  There was a decision not to                                                            
                            proceed at this time.                                                                             
851 Mr. Gruening            Spoke to the idea of "holding the course"                                                           
                            of action and the longer term expected                                                              
                            investments.  He noted that idea had not                                                            
                            yet been abandoned.  He added that the                                                              
                            State pension funds have ventured into                                                              
                            that area with success.                                                                           
895 Mr. Storer              Pointed out that the basket clause would                                                            
                            give the ability to invest in very                                                                  
                            sophisticated options.                                                                            
925 Mr. Storer              Invited his investment officers to the                                                            
                            table to speak.                                                                                   
 967 ALLAN MOORE, CHIEF     Spoke about data previously introduced.                                                             
      INVESTMENT OFFICIER, He commented on the fund asset allocation                                                            
      ALASKA PERMANENT      and the outlook for stocks, bonds and                                                               
      FUND CORPORATION      real estate (in the handout) - Page 1.                                                            
 1059 Mr. Moore             Referenced Page 1.                                                                                
 1119 Vice-Chair Bunde      Noted the dividend distribution and asked                                                           
                            the source.                                                                                       
 1146 Mr. Moore             Advised that the policy was to keep all                                                             
                            funds actively invested.  He commented                                                              
                            that interest costs could be a market                                                               
                            calculation and that specifically would                                                             
                            depend on what the market is doing at                                                               
                            that time.  He elaborated on that                                                                   
                           information.                                                                                       
 1293 Vice-Chair Bunde      Pointed out that whatever is happens,                                                               
                            there potentially could be a cost of                                                                
                            earnings.                                                                                         
 1309 Mr. Storer            Unless there is some unforeseen market                                                              
                            force, there would be maintained                                                                    
                            exposure.  He noted that his team works                                                             
                            closely with Department of Revenue for                                                              
                            guaranteeing a higher earning class.                                                              
 1348 Vice-Chair Bunde      Asked if earnings would be reduced, when                                                            
                            that was disbursed.                                                                               
 1364 Mr. Storer            Agreed that there are some irresponsible                                                            
                            times.  He stressed that the two                                                                    
                            organization work closely together.                                                               
 1390 Vice-Chair Bunde      Suggested that the annual reports should                                                            
                            include other investment options.                                                                 
 1414 Representative        Expounded on the possibility of splitting                                                           
      Hudson                the dividend in half.                                                                             
 1452 Mr. Storer            Commented that theoretically, the longer                                                            
                            it is held the more it will make.                                                                 
 1475 JIM KELLY, RESEARCH Interjected that if the fund is making $7                                                             
      & LIAISON OFFICIER, million dollars a year, the dividend                                                                  
      ALASKA PERMANENT      would be as that.  He addressed the daily                                                           
      FUND CORPORATION,     cost for transferring the funds.                                                                  
      DEPARTMENT OF                                                                                                             
      REVENUE                                                                                                                   
 1515 Mr. Moore             Page 2 - Spoke to the equity portfolio                                                              
                            distribution.  He pointed out that it was                                                           
                            broken down by domestic active,                                                                     
                            international passive,  domestic passive,                                                           
                            and international  active.  International                                                           
                            performance last  year was the worst that                                                           
                            it has been in the last 20 years.                                                                 
 1581 Mr. Moore             Page 3 - Capitalization size - dividing                                                             
                            all stocks by the size of the company.                                                              
                            Large cap, mid cap, small cap all produce                                                           
                            differently.  The policy mix intends to                                                             
                            have 80% in large cap funds and 18% in                                                            
                            the smaller cap.                                                                                  
1639 Mr. Moore              Last year, the smaller cap indexes                                                                  
                            produced more.  He emphasized that                                                                  
                            segment of the market is more volatile                                                              
                            now and less efficient.  The results will                                                           
                            be more extreme.                                                                                  
1686 Co-Chair Mulder        Believed that was inconsistent with the                                                             
                            market portfolio.                                                                                 
1697 Mr. Storer             Noted that they like to rebalance as                                                                
                            little as possible.  He pointed out that                                                            
                            the fund is rebalanced in September.  The                                                           
                            graph indicates a "snap shot" from                                                                  
                                       st                                                                                       
                           December 31.                                                                                       
1723 Mr. Moore              Page 4 - The international equities.  61%                                                           
                            in the active passive, 11% in the                                                                   
                            emerging markets, and 28% in the passive                                                            
                            managed.  Mr. Moore indicated that the                                                              
                            emerging markets are countries such as                                                              
                            Mexico, Korea, and Taiwan.                                                                        
1771 Mr. Moore              Page 5 - Graphs equities by country                                                               
1785 Mr. Moore              Page 6 - APFC versus MSCI world index.                                                              
                            He noted that Alaska has 65% in the U.S.                                                            
                            market and 45% in other markets.                                                                  
1847 Mr. Moore              Page 1 - [Same handout] Moving to new                                                               
                            bond benchmarks graph, which indicates                                                              
                            treasuries, agencies, corporate, and                                                                
                            mortgage-backed.  The two colors                                                                    
                            highlight the government/credit and the                                                             
                            aggregate market.                                                                                 
1936 Mr. Moore              Page 2 - The graph demonstrates the                                                                 
                            Movement to new bond benchmarks and                                                                 
                            further diversification.  He pointed out                                                            
                            how it avoids concentration with too much                                                           
                            in corporate debt.                                                                                
1969 Mr. Moore              Page 3 provides a sketch of where the                                                               
                            APFD has real estate holdings throughout                                                            
                            the country.  He reminded members that                                                              
                            real estate values change more slowly                                                               
                            than the other holdings.                                                                          
2002 Mr. Moore              Pointed out the number of retail,                                                                   
                            residential, office and industrial spaces                                                           
                            included in the real estate holdings                                                                
                            graph.  He noted that they make up 60% of                                                           
                            the real estate holdings portfolio.                                                               
2060 CHRIS PHILLIPS,        Provided an overview of where the fund is                                                           
      CHIEF FINANCIAL       at present time.  Ms. Phillips provides                                                             
      OFFICIER, ALASKA      members a financial outlook for the fund                                                            
      PERMANENT FUND        and the expected growth and income.  She                                                            
      CORPORATION,          referenced Page 2 [same handout] - The                                                              
      DEPARTMENT OF         Permanent Fund market value graph,                                                                  
      REVENUE               indicating the market value of the fund,                                                            
                            which currently amounts to $26.2 billion                                                          
                            dollars.                                                                                          
 2103 Co-Chair Mulder       Asked if that was considered part of the                                                            
                           General Fund.                                                                                      
 2109 Mr. Storer            Replied that it was, unless otherwise                                                               
                            indicated by law.                                                                                 
 2118 Mr. Gruening          Interjected that the fund does include                                                              
                            the earnings reserve.  He reiterated that                                                           
                            it was available to appropriate the                                                                 
                            earnings reserve.                                                                                 
 2138 Co-Chair Mulder       Pointed out the confusion that exists in                                                            
                            the public eye regarding the                                                                        
                            appropriation of the Alaska Permanent                                                               
                            Fund.                                                                                             
 2144 Representative        Asked of the $6 billion dollars, was the                                                            
      Hudson                large part to be used for the inflation                                                             
                            proofing of the corpus.  He thought that                                                            
                            the difference would be the inflated                                                                
                            value.  He interjected that this is not                                                             
                            real money.                                                                                       
                                                                                                                              
      TAPE HFC 01 - 28,                                                                                                       
      Side A                                                                                                                  
 000 Ms. Phillips           Page 3 - the Permanent Fund principal                                                               
                            earnings with the fund principal as                                                                 
                            protected by the Alaska Constitution and                                                            
                            that which the Legislature may not spend.                                                         
 092 Ms. Phillips           Page 4 - Referenced the Permanent Fund                                                              
                            income as provided by lay, all income                                                               
                            from the fund's investments deposited                                                               
                            into the Earnings Reserve Account in the                                                            
                            permanent fund.  The graph also indicates                                                           
                            that which is retained there until                                                                  
                            appropriated by the legislature.                                                                  
 130 Ms. Phillips           Page 5 - Graphs the Permanent Fund                                                                  
                            projections - indicating the principle                                                              
                            dedicated, the income earnings &                                                                    
                            statutory, realized and unrealized                                                                  
                            income.                                                                                           
 234 Vice-Chair Bunde       Asked about the dividends.                                                                        
 262 Ms. Phillips           Explained that would be the dividends                                                               
                            transferred to the Department of Revenue.                                                         
 282 Ms. Phillips           Added that the Department projects the                                                              
                            balance to be about $21 million dollars.                                                          
 301  Ms. Phillips          Discussed net income. She noted that the                                                            
                            level was below its historic level. Total                                                           
                            return of $1.6 billion net income. She                                                              
                            noted that the dividend was $9 million                                                              
                           dollars less.                                                                                      
 408 Vice-Chair Bunde       Projected that the dividend would be                                                                
                            lower for one of the first times in a                                                               
                            while.                                                                                            
 429 Mr. Storer             Noted that it had declined slightly in                                                              
                            the 1980's.                                                                                       
466 Co-Chair Mulder         Advised that it had been over projected                                                             
                            last year.                                                                                        
301  Ms. Phillips           Review Page 5. She stated that the                                                                  
                            estimates were based on 8 and 1/4 percent                                                           
                            interest.                                                                                         
589 Ms. Phillips            Page 6 - Indicates the volatility                                                                   
                            estimates and the range of market value.                                                            
                            She pointed out that 50% of the time; the                                                           
                            expectations would be $27.7 and $34.5                                                               
                            billion dollars.                                                                                  
707 Ms. Phillips            Page 10 - She noted that the per capita                                                             
                            dividend from FY01 - FY06 would be                                                                  
                            between $2,850 and $1,560 dollars. She                                                              
                            advised that the chart was based on the                                                             
                            forecast from June 30, 2000.  Given the                                                             
                            current year projection, the dividend                                                               
                            would be at the lower quartile.                                                                   
821 Co-Chair Mulder         Agreed that it appeared that the 2001                                                               
                            dividend would be lower than last year.                                                             
                            He suggested that was the result of the                                                             
                            markets not producing.                                                                            
854 Ms. Phillips            Concluded that the Department of                                                                    
                            Revenue's financial statements are                                                                  
                            accessible on the Division's website.                                                             
896 ROBERT MAYNARD,         Stated that the number one strength of                                                              
      CHIEF INVESTMENT      the Permanent Fund is the Board of                                                                  
      OFFICE, PUBLIC        Trustees. These are long-term policies                                                              
      EMPLOYEES INVESTMENT made by "bright" people. He acknowledged                                                             
      SYSTEM, IDAHO,        that there are a few problems, which need                                                           
      PERMANENT FUND        to be faced. He noted that the business                                                             
     INVESTMENT ADVISOR    is not to pick the best stocks, but                                                                
                            rather to met obligations. Mr. Maynard                                                              
                            stressed that the investment strategies                                                             
                          are different.                                                                                      
1212 Mr. Maynard            Advised that the accumulations phase of                                                             
                            the Permanent Fund is over.  Now is the                                                             
                            time to make choices in investing that                                                              
                            fund.                                                                                             
1254 Vice-Chair Bunde       Understood that the mission of the fund                                                             
                            was to provide the maximum sustained                                                                
                            yield.  He asked what made falls into                                                               
                            that formula for disbursement.                                                                    
1286 Mr. Maynard            Countered that if more was needed, there                                                            
                            should be more investment in stocks.  If                                                            
                            it were shorter in, then the fund would                                                             
                            invest more in bonds.  At this time,                                                                
                            there is not a goal that must be reached.                                                           
                            To double the fund in 10 years, the fund                                                            
                            would need to make 10% per year.                                                                  
1343 Vice-Chair Bunde       Thought that could inhibit the                                                                      
                            corporation.                                                                                      
1357 Co-Chair Mulder        Addressed the clarity of focus.  He asked                                                         
                            the time frame which could negatively                                                               
                            impact the Permanent Fund.                                                                        
 1379 Mr. Maynard           Stressed that clear guidance from the                                                               
                            Legislature is needed.  He added that to                                                            
                            date, it has been inconsistent.  He                                                                 
                            stated that the  issue had been devalued                                                            
                            to the Board, which makes it much more                                                              
                            difficult.                                                                                        
 1412 Representative        questioned the distribution on the market                                                           
      Hudson                value and then splitting the average of                                                             
                            the earnings for government and then some                                                           
                            for dividends.  He asked if that was                                                                
                            possible.                                                                                         
 1450 Mr. Maynard           Noted the clear spending rule.  He added                                                            
                            that the distribution was difficult to                                                              
                            understand.  The realized and unrealized                                                            
                            gains are no longer being used, but                                                                 
                            rather funds are poured back into the                                                               
                            pool.  He reiterated that the system                                                                
                            makes little sense.   It is not that the                                                            
                            percentage of market value does not make                                                            
                            a sense.  The payout rule is NOT                                                                    
                            transparent, however, it is confusing.                                                              
                            He spoke to the  sort of things that the                                                            
                            fund could do.                                                                                    
 1529  Mr. Maynard          Commented that the Legislature needs to                                                             
                            face the issue of giving more direction.                                                            
                            He stressed that it is important to                                                                 
                            continually look  at that issue in order                                                            
                            to create more  clarity.  He agreed that                                                            
                            the pride that Alaskan's take in the                                                                
                            Permanent Fund  is well placed; however,                                                            
                            he warned that  if the respect were lost                                                            
                            even once, it would never come back.  He                                                            
                            reiterated that it should not be taken                                                              
                           for granted.                                                                                       
 1603 JERROLD MITCHELL,     Commented that he had reviewed the                                                                  
      RETIRED PARTNER,      assumptions and financial outlook.  Like                                                            
      WELLINGTON            all assumptions, he noted that they are                                                             
      MANAGEMENT COMPANY, not sure prospects.  Investment                                                                       
      PERMANENT FUND        management is an art and science.  He                                                               
      INVESTMENT ADVISOR  noted that the process of the Permanent                                                               
                            Fund is a sound  process.  He encouraged                                                            
                            that the Fund's investment will become                                                              
                            better over the next few years.  He noted                                                           
                            that his role would  be see if the ideas                                                            
                            are implemented, that they are translated                                                           
                            into action.  He noted that it was the                                                              
                            execution and planning that made the                                                                
                            difference.  He suggested that the                                                                  
                            Permanent Fund's plans could be                                                                     
                            implemented with support.  He added that                                                            
                            the payout rates are a good idea and have                                                         
                            been adopted in all endowment funds                                                                 
                            providing a greater measure of security                                                             
                            and predictability.                                                                               
1761 ALLAN BUFFERD,         Requested that the Legislature have                                                                 
      TREASURER,            patience.  Investment policy is                                                                     
      MASSACHUSETTS         formulated with multi-level understanding                                                           
      INSTITUTE OF          of investment strengths.  Issues that                                                               
      TECHNOLOGY,           cannot be tolerated within the system                                                               
      PERMANENT FUND        would be that the dividend could go down                                                            
      INVESTMENT ADVISOR    from year to year.  If the distribution                                                             
                            were made available, there would need to                                                            
                            be a new treasurer.  A policy mandate is                                                            
                            that the fund does not decrease.  He                                                                
                            stated that would relate in part to the                                                             
                            Consumer Price Index (CPI) discussion.                                                              
                            The purchasing power of the capital must                                                            
                            be protected.  He asked the appropriate                                                             
                            inflation index number that could be                                                                
                            used.                                                                                             
1884 Mr. Bufferd            Noted that labor costs rise at a quicker                                                            
                            rate than the CPR.  He suggested that                                                               
                            protection of the purchasing power of the                                                           
                            Permanent Fund needs examination.  Also,                                                            
                            he emphasized the need for definition of                                                            
                            the liability strength.  Mr. Bufferd                                                                
                            stated that there is a constraint by                                                                
                            eliminating equity exposure of the fund,                                                            
                            which is not a flexible construct.  He                                                              
                            stressed that a reward cannot be achieved                                                           
                            without risk.  Mr. Bufferd listed the key                                                           
                            liabilities.                                                                                      
1965 Co-Chair Mulder        Asked if the constraints placed by the                                                              
                            Legislature have been preventing greater                                                            
                            returns.                                                                                          
1991 Mr. Bufferd            Replied that in the context of                                                                      
                            understanding of the objectives, the                                                                
                            policy is too constrained.  He noted that                                                           
                            if the liability issue were a short-term                                                            
                            issue, then the fund, even if it had                                                                
                            flexibility, could not do so because of                                                             
                            the short-term risk.  He hesitated to                                                               
                            take the view that it would be the proper                                                           
                            allocation outcome for the fund.  The                                                               
                            sequence must start with the liability.                                                           
2080 Mr. Bufferd            Questioned how are the distributions made                                                           
                            from the endowment.  He acknowledged that                                                           
                            it is handled by making the payouts on a                                                            
                            smoothing formula, while keeping the                                                                
                            accounting with those numbers.  He noted                                                            
                            that payouts were made on the averaging                                                             
                            measure used by the MIT value.  He                                                                  
                            recommended that it would help to make                                                              
                            the payout over a 36-month period.  Mr.                                                           
                            Bufferd suggested that would dampen the                                                             
                            market volatility.                                                                                
 2143 Mr. Bufferd           Commented on the liability definition,                                                              
                            the opening up of boundaries, and                                                                   
                            smoothing the payout formula.                                                                     
 2168 Representative        Asked about the percent of market value                                                             
      Davies                payout.                                                                                           
 2195 Mr. Bufferd           Responded that the analogy of how money                                                             
                            comes into the Permanent Fund is clearly                                                            
                            different from how it comes to MIT.  He                                                             
                            noted that there are three sources of                                                               
                            revenue, the first being tuition.                                                                 
                                                                                                                              
      TAPE HFC 01 - 28,                                                                                                       
      Side B                                                                                                                  
 018 Mr. Bufferd            Make comments on the MIT operation                                                                  
                            procedures.                                                                                       
 066 Mr. Bufferd            Referenced gifts and earnings on the                                                                
                            assets and defined an objective with                                                                
                            those funds. He pointed out that there                                                              
                            has been few times in history with a                                                                
                            strong decapitalization.                                                                          
 199 Co-Chair Mulder        He asked if the 5% had been driven by                                                               
                            development and/or gifts so to continue                                                             
                            that performance.                                                                                 
 232 Mr. Bufferd            Explained that the 5% came from a study                                                             
                            done by the Ford Foundation.  He                                                                    
                            commented that the long-term track of the                                                           
                            real return from financial assets was on                                                            
                            the order of 5%, however, some suggest                                                              
                            that it is around 6.5%.                                                                           
 317 Mr. Maynard            Commented on the system that he used.                                                               
                            The 5% real should have at least 70% in                                                             
                            equities.  He stated that there are                                                                 
                            artificial constraints placed on the                                                                
                            market, which could prohibit the 5% real.                                                           
                            He noted that no successful market timers                                                           
                            could be used.                                                                                    
 416 Vice-Chair Bunde       Voiced caution with the key liabilities.                                                            
                            He stated that the PFD is "found" money                                                             
                            and that there are no key liabilities in                                                            
                            the publics mind.                                                                                 
 479 Mr. Maynard            Interjected that liability does not                                                                 
                            always mean State money.                                                                          
 501 Vice-Chair Bunde       Did not believe that the Legislature                                                                
                            would want that.  At some time, those                                                               
                            funds will need to pay the expenses of                                                              
                            State government.                                                                                 
 526 Mr. Bufferd            Reiterated that their roles were as                                                                 
                            investment advisers.                                                                              
 542 Mr. Maynard            Understand that idea and requested that                                                             
                            the Legislature seriously consider the                                                              
                            key issues proposed.  He emphasized that                                                          
                            there is a "serious hole" in the heart of                                                           
                            the long-term liability of the Permanent                                                            
                            Fund.  He concurred that the fund has                                                               
                            been lucky so far.                                                                                
591 Vice-Chair Bunde        Interjected that the more successful that                                                           
                            the Fund is, the less flexibility that                                                              
                            the public will allow.                                                                            
615 Representative          Stated that the key is to think in                                                                  
      Davies                establishing the liabilities, and people                                                            
                            of Alaska agree that this has been an                                                               
                            accumulation phase.  The Legislature is                                                             
                            now in the transition phase trying to                                                               
                            determine how to benefit the future.  He                                                            
                            acknowledged that it is now being                                                                   
                            determined "how that should look" and the                                                           
                            timing with that.                                                                                 
698 Mr. Bufferd             Recommended that one approach would be to                                                           
                            address the benefit received by                                                                     
                            individual residents and define the core                                                            
                            liability.  To have it grow, an important                                                           
                            liability would be to have it fixed.                                                                
                            Define the context of long-term realistic                                                           
                            investment objectives.  He commented that                                                           
                            the losses are about consumption.  He                                                               
                            stressed the need to define the target,                                                             
                            minus the liability and then formulate                                                              
                            the policy in that context.  He                                                                     
                            acknowledged that idea was simplistic.                                                            
843 Co-Chair Mulder         Spoke to integrating the constraints on                                                             
                            the management team, noting that,                                                                   
                            however, it does allow for political                                                                
                            protection.  He reminded members that                                                               
                            initially, there were potential danger                                                              
                            when the Board was formed.                                                                        
917 Co-Chair Mulder         Made comments on protection of the                                                                  
                            national security interests with the                                                                
                            Chinese entering into the stock market.                                                             
                            He noted that the push was to protect our                                                           
                            national defense and asked how difficult                                                            
                            it would be.                                                                                      
984 Mr. Maynard             Replied that it could be very difficult                                                             
                            if the intend was to be very thorough and                                                           
                            that source restrictions could be                                                                   
                            limited.                                                                                          
1028 Co-Chair Mulder        Referenced the peer pressure on the                                                                 
                            required restrictions.                                                                            
1041 Mr. Bufferd            Commented that when there are concerns                                                              
                            like these, it is difficult in terms of                                                             
                            analyzing.  He noted that It was clear                                                              
                            about the opportunity established.  He                                                              
                            pointed out that at 1/3 of the S&P 500,                                                             
                            the opportunity set was created.                                                                  
1149 Co-Chair Mulder        Understood the balance, however, wanted                                                           
                            to protect the earnings.                                                                          
 1169 Mr. Moore             Addressed managing roles for that                                                                   
                            concern.                                                                                          
 1190 Mr. Storer            Agreed that there are groups like that                                                              
                            and that it would not be a quick fix.                                                             
 1207 Co-Chair Mulder       Advised that he was attempting to develop                                                           
                            legislation to address this concern.  He                                                            
                            noted that he wanted it to be an                                                                    
                            effective tool for the Fund managers.                                                             
 1239 Co-Chair Mulder       Lamented that the entire Legislature was                                                            
                            not hearing the comment made at today's                                                             
                            meeting.  He voiced his gratitude for the                                                           
                            time and energy given by the presenters.                                                          
 1269 Representative        Interjected that there are many                                                                     
      Davies                legislators and staff that were watching                                                            
                            the presentation through the "camera".                                                              
                            He echoed his appreciation for the work                                                             
                            of the presenters.                                                                                
 1300 Mr. Storer            Voice his appreciation for the time and                                                             
                            opportunity to present to the House                                                                 
                            Finance Committee.                                                                                
 1313 Co-Chair Mulder       ADJOURNMENT                                                                                       
                                                                                                                                
                            The meeting was adjourned at  11:15 a.m.                                                          
                                                                                                                                

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