Legislature(2021 - 2022)ADAMS 519

01/24/2022 01:30 PM House FINANCE

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02:49:41 PM Start
02:50:39 PM Presentation: Permanent Fund Performance Measures and Impact of Ad Hoc Draws by Callan and Associates
04:27:45 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Delayed to 2:45 P.M. --
+ Presentation: Permanent Fund Performance TELECONFERENCED
Measures and Impact of Ad Hoc Draws by
Greg Allen, Chief Executive Officer, Chief
Research Officer, Callan & Associates
                  HOUSE FINANCE COMMITTEE                                                                                       
                     January 24, 2022                                                                                           
                         2:49 p.m.                                                                                              
2:49:41 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Merrick called the House Finance Committee meeting                                                                     
to order at 2:49 p.m.                                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Neal Foster, Co-Chair                                                                                            
Representative Kelly Merrick, Co-Chair                                                                                          
Representative Dan Ortiz, Vice-Chair                                                                                            
Representative Ben Carpenter                                                                                                    
Representative Bryce Edgmon                                                                                                     
Representative DeLena Johnson                                                                                                   
Representative Andy Josephson                                                                                                   
Representative Bart LeBon                                                                                                       
Representative Sara Rasmussen (via teleconference)                                                                              
Representative Adam Wool                                                                                                        
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Greg Allen, Chief Executive Officer, Chief Research                                                                             
Officer, Callan and Associates.                                                                                                 
PRESENT VIA TELECONFERENCE                                                                                                    
Steve Center, Senior Vice President, Callan and Associates                                                                      
PRESENTATION: PERMANENT FUND PERFORMANCE MEASURES AND                                                                           
IMPACT OF AD HOC DRAWS BY CALLAN AND ASSOCIATES                                                                                 
Co-Chair Merrick reviewed the agenda for the meeting.                                                                           
^PRESENTATION: PERMANENT FUND PERFORMANCE MEASURES AND                                                                        
IMPACT OF AD HOC DRAWS BY CALLAN AND ASSOCIATES                                                                               
2:50:39 PM                                                                                                                    
GREG   ALLEN,  CHIEF   EXECUTIVE  OFFICER,   CHIEF  RESEARCH                                                                    
OFFICER,  CALLAN AND  ASSOCIATES, introduced  the PowerPoint                                                                    
Presentation:  "Permanent   Fund  Performance   Review,  and                                                                    
Simulation Model  Results." He relayed he  had been modeling                                                                    
the  Alaska Permanent  Fund  since the  late  1990s. He  was                                                                    
asked to analyze effects from an  ad hoc draw on the Earning                                                                    
Reserve  Account (ERA)  and its  effects on  the percent  of                                                                    
market value (POMV) rule. He  would first give a performance                                                                    
review. He began  with slide 3 titled   Broad Capital Market                                                                    
Performance." He  indicated that the bar  charts represented                                                                    
returns for various asset classes  over certain time periods                                                                    
ending on September  30, 2021. He drew attention  to the one                                                                    
year  bar  depicting  small capital  equity  returns  at  47                                                                    
percent, large  capital equity at  30 percent,  and non-U.S.                                                                    
Equity at 24.4  percent. He highlighted the  strength of the                                                                    
equity markets for the year.  He pointed to the 16.6 percent                                                                    
return over 10 years that reflected exceptional returns.                                                                        
2:53:22 PM                                                                                                                    
Vice-Chair Ortiz asked  for Mr. Allen to  explain large caps                                                                    
versus small  caps. Mr. Allen  replied that large  caps were                                                                    
the  largest  businesses  like  Apple,  Facebook,  IBM,  and                                                                    
ExxonMobil.  He  added  that small  caps  were  domestically                                                                    
focused firms worth a market cap of $3 billion.                                                                                 
Co-Chair  Merrick  indicated that  Representative  Rasmussen                                                                    
joined the meeting via teleconference.                                                                                          
Mr.  Allen moved  to slide  4 titled   Global Equity  Market                                                                    
Performance.  He  reported that  the U.S. equity  market had                                                                    
dominated  market  performance,  but global  investment  was                                                                    
important  in the  long run.  The difference  between global                                                                    
and domestic markets was "striking" over the last 10 years.                                                                     
2:54:58 PM                                                                                                                    
Mr. Allen moved  to slide 5 titled  "Market Environment   He                                                                    
pointed  to the  fourth row  from  the bottom  of the  table                                                                    
reflecting  the  private equity  index  and  noted that  the                                                                    
return was the  highest assets class in the  one year period                                                                    
ending  on  September 30,  2021,  at  58.8 percent  and  had                                                                    
proven to be a very  successful investment for the fund over                                                                    
a number of years.                                                                                                              
2:55:50 PM                                                                                                                    
Mr. Allen  turned to slide  6 titled "Callan  Periodic Table                                                                    
of  Investment  Returns."  He relayed  that  the  chart  was                                                                    
included to  show that the  same asset class was  not always                                                                    
the best performer year after  year. He highlighted the U.S.                                                                    
Large Cap Equity and noted that  it remained in the top half                                                                    
of  the chart  for over  10 years.  The Permanent  Fund (PF)                                                                    
returns were represented in white  and hovered in the middle                                                                    
because  it owned  all the  types  of asset  classes on  the                                                                    
Co-Chair    Merrick   indicated    the   Co-Chair    Foster,                                                                    
Representative  Edgmon, and  Representative Wool  joined the                                                                    
Mr.  Allen  turned  to  slide  7  titled  "APFC  Total  Fund                                                                    
Cumulative  Returns." He  communicated  that  the bar  graph                                                                    
showed   the   return   of   the   Alaska   Permanent   Fund                                                                    
Corporation's portfolio  in blue. The green  bar represented                                                                    
its performance  benchmark, and the  brown bar  depicted its                                                                    
objective of CPI  plus 5 percent. He detailed  that the fund                                                                    
was up  26.6 percent for  the year;  the CPI plus  5 percent                                                                    
was  10.9 percent.  The current  year's  gains could  easily                                                                    
support  a 5  percent POMV  draw. Mr.  Allen indicated  that                                                                    
slide 8,  also titled "APFC Total  Fund Cumulative Returns,                                                                     
showed  a longer  period of  returns. He  reported that  the                                                                    
Permanent Fund exceeded  all benchmarks at 8  percent for 20                                                                    
years and  the performance  was remarkable,  especially over                                                                    
the last 3 years.                                                                                                               
2:58:24 PM                                                                                                                    
Mr. Allen  moved to slide  9 titled "APFC Total  Fund versus                                                                    
Callan   Large   Public   Fund  Databasedisplaying       the                                                                    
annualized return  rankings relative to large  public funds.                                                                    
He pointed  to the gray  area that represented  returns from                                                                    
the tenth  to ninetieth  percentile. The permanent  fund was                                                                    
represented by  a blue  dot that  showed the  PF in  the top                                                                    
fourth percentile  for the current year,  twelfth percentile                                                                    
for 5 years, and thirty-eighth  percentile for 20 years. The                                                                    
permanent fund outperformed  62 percent of the  funds in the                                                                    
Mr.  Allen  highlighted Slide  11  titled   APFC Total  Fund                                                                    
versus Callan  Large Endowment Database." He  indicated that                                                                    
the large endowments all had  assets over $1 billion. The PF                                                                    
ranked  in  the middle  versus  the  top because  endowments                                                                    
typically invested in private  equity. He commented that the                                                                    
PF had  been  firing on  all cylinders" and  performing well                                                                    
except  for the  real estate  fund  that was  in repair.  He                                                                    
offered  that Callan  worked with  very large  funds and  he                                                                    
considered the PF performance outstanding.                                                                                      
3:00:54 PM                                                                                                                    
Mr. Allen  discuss Slide 11  titled "APFC Total  Fund versus                                                                    
Callan   Large   Public   Fund  Database"   portraying   the                                                                    
annualized risk  rankings using the standard  deviation; the                                                                    
fund's  risk  relative  to  peer  funds.  He  remarked  that                                                                    
efficient portfolios had  high returns and low  risk. The PF                                                                    
relative  to large  public funds  had high  returns and  low                                                                    
risk and was ranked in the middle compared to endowments.                                                                       
3:01:33 PM                                                                                                                    
Representative  Edgmon   asked  Mr.  Allen  to   repeat  the                                                                    
information regarding  endowments. Mr. Allen  responded that                                                                    
he  was comparing  large pension  funds  to endowments  like                                                                    
Yale or  Harvard. He  explained that  endowments' investment                                                                    
strategy  was  to  heavily invest  in  private  equity.  The                                                                    
public  funds  had  been  slow  to  adopt  practices  around                                                                    
private  equity. The  PF invested  in private  equity fairly                                                                    
early, roughly 18 years ago.  Private equity was a long term                                                                    
investment  strategy rather  than  a  short term  investment                                                                    
that looked like a "J"  curve. Private equities were the top                                                                    
performing assets in the prior  year. He elucidated that the                                                                    
PF had morphed into an  endowment fund. An endowment created                                                                    
sustainable resources  into the future, and  the PF invested                                                                    
like  an endowment,  which was  why its  performance was  so                                                                    
notable.  Representative Edgmon  used a  sports metaphor  to                                                                    
describe the  incredible market returns over  the last year.                                                                    
He wondered  if the  year was  unusual. Mr.  Allen responded                                                                    
that since 2008 investments  had risen, which benefitted the                                                                    
private  equity markets  and therefore,  the PF.  He offered                                                                    
that  in general,  Callan believed  in investing  in private                                                                    
equity; it  was the highest  asset class over the  long run.                                                                    
However,  he also  advocated  for  investment diversity.  He                                                                    
remarked  that the  last  12  years yielded  "extraordinary"                                                                    
investments and he did not expect the market to crash.                                                                          
3:05:27 PM                                                                                                                    
Vice-Chair Ortiz  asked Mr. Allen  to explain what  it meant                                                                    
to be invested  in private equity. Mr.  Allen responded that                                                                    
private equity  investors invested  capital in a  company or                                                                    
startup that  was not  publicly listed or  traded and  was a                                                                    
form  of venture  capital. He  elaborated  that the  private                                                                    
investors were  betting on long-term  growth of  the company                                                                    
that  would ultimately  be publicly  traded, which  was very                                                                    
lucrative. They  were investing in risky  companies but were                                                                    
also  diversifying investments.  The  advantage for  private                                                                    
equity  investors was  "private  ownership,"  which was  not                                                                    
subject to the same regulations  as public companies and did                                                                    
not involve  shareholders. It  required patience  because it                                                                    
was  impossible to  get money  out of  a private  investment                                                                    
before it paid off.                                                                                                             
3:07:53 PM                                                                                                                    
Representative LeBon  appreciate the information  on private                                                                    
equity.  He   commented  that  the  Alaska   Permanent  Fund                                                                    
Corporation  (APFC)  was  proactive  in  its  investing.  He                                                                    
believed that  it was  necessary to  have talented  staff to                                                                    
make good  investment decisions. He  asked if Mr.  Allen had                                                                    
an  opinion  of  the  investors   at  the  APFC.  Mr.  Allen                                                                    
responded in the  affirmative and voiced that  he was amazed                                                                    
at the  ability of APFC  to have developed the  stable staff                                                                    
they had,  which was challenging  with job  competition from                                                                    
the  east  and  west   coasts.  The  largest  challenge  was                                                                    
competition  from higher  wages  in the  private sector.  He                                                                    
highly regarded the APFC's investment staff.                                                                                    
3:10:26 PM                                                                                                                    
Representative  LeBon asked  if APFC  offered a  competitive                                                                    
bonus program  in comparison to others.  Mr. Allen responded                                                                    
that it was  better than bonuses paid at  the average public                                                                    
fund that typically did not  pay bonuses. He offered that in                                                                    
some ways  it was a  reward just  working for the  PF. There                                                                    
was a certain amount of  prestige working at APFC, which was                                                                    
attractive  in   itself.  He  noted   that  working   for  a                                                                    
successful $80  billion sovereign  wealth fund was  a unique                                                                    
3:12:05 PM                                                                                                                    
Representative Wool asked about  the risk rankings. He asked                                                                    
if  the trade-off  for private  equity investments  was more                                                                    
risk.  Mr. Allen  replied that  although private  equity was                                                                    
riskier  because  it was  not  publicly  traded it  was  not                                                                    
priced  daily like  stocks.  Therefore,  private equity  was                                                                    
less  risky  when   measured  against  standard  deviations.                                                                    
Therefore, the  PF ranked high  in earnings and low  in risk                                                                    
because  of its  private  equity assets.  He indicated  that                                                                    
private  equity   reported  every   quarter,  which   had  a                                                                    
smoothing  effect  on  earnings; if  everything  went  down,                                                                    
private  equity  would  decrease   more,  but  it  was  more                                                                    
disguised. He noted  that the PF "drifted  into an endowment                                                                    
model"  and was  ahead of  other large  public funds  in its                                                                    
investing strategy.  The public funds were  doing better but                                                                    
were probably 8 years behind the APFC.                                                                                          
3:14:58 PM                                                                                                                    
Representative  Edgmon  noted  the POMV  structure  and  the                                                                    
current  draw  rate  of  5  percent.  He  asked  how  Alaska                                                                    
compared to  other wealth funds and  their percentage draws,                                                                    
which he  heard was  lower at  3 percent  and 4  percent. He                                                                    
wondered how the draw effected  earnings and returns as well                                                                    
as risk.  Mr. Allen  replied that  the lower  the percentage                                                                    
draw  meant  the  PF  could  take less  risk  and  meets  it                                                                    
objective. He explained that there  was short-term and long-                                                                    
term risk.  Callan calculated  that the  5 percent  draw was                                                                    
more  like  a 4.6  percent  draw  due  to high  returns.  He                                                                    
believed that the current  percentage was likely sustainable                                                                    
over the  long run, with enough  to cover the 5  percent and                                                                    
inflation. Endowments only withdraw  the necessary amount in                                                                    
order  to  preserve  the  purchasing   power  for  the  next                                                                    
generation and the amount had  to be adjusted for inflation.                                                                    
The fund needed to grow by  4.6 percent and 2.25 percent for                                                                    
inflation, which  put it  in the middle  of the  risk range.                                                                    
He exemplified that if the  board needed to take some equity                                                                    
off the table  and put more into bonds,  then the percentage                                                                    
of  the draw  would need  to decrease.  He indicated  that a                                                                    
typical  endowment took  a 4.5  percent to  5 percent  draw,                                                                    
which was  universally considered sustainable.  He expressed                                                                    
concern regarding the legacy  of the constitutional language                                                                    
creating the ERA. He voiced that  it was outdated and a POMV                                                                    
was a  better way because  if the ERA  ran out of  money the                                                                    
state could reach  a zero draw. He argued  that the language                                                                    
was in conflict with the  POMV, and he would further discuss                                                                    
the issue during the presentation.                                                                                              
3:19:43 PM                                                                                                                    
Representative  Edgmon  requested  that the  presenter  slow                                                                    
down his explanations to better follow the information.                                                                         
3:20:05 PM                                                                                                                    
Mr.  Allen  moved  to  slide  14  titled  "Simulation  Model                                                                    
Results.  He related that Callan built  a model of the PF in                                                                    
the   late  1990's   that  generated   a   whole  range   of                                                                    
probabilities. He  recalled times when there  were proposals                                                                    
to withdraw  all the money out  of the ERA each  year, which                                                                    
was the  impetus for  the model. He  outlined that  he would                                                                    
review  Accounting Concepts  and  History  and the  Spending                                                                    
Rule and  Appropriation History of  the fund. He  would then                                                                    
discuss modeling scenarios  with ad hoc draws  and the range                                                                    
of outcomes.                                                                                                                    
3:22:00 PM                                                                                                                    
Representative Johnson  asked Mr.  Allen to provide  more of                                                                    
his personal  history and  background. Mr.  Allen reiterated                                                                    
that Callan was a consultant to  the PF. He relayed that the                                                                    
APFC board expected Callan to  comment on the performance of                                                                    
the  fund.  Callan also  helped  the  APFC to  find  outside                                                                    
investment managers  when needed. In addition,  they advised                                                                    
the  board on  asset  allocations and  modeling. Callan  had                                                                    
worked for the APFC board for over 30 years.                                                                                    
Representative   Wool  asked   if  Callan   had  consultants                                                                    
singularly assigned  to the APFC.  Mr. Allen replied  in the                                                                    
3:25:20 PM                                                                                                                    
Mr. Allen  moved to  slide 15  titled "Statutory  Net Income                                                                    
(Realized Return):                                                                                                              
     Statutory Net Income  (SNI) in each year is  the sum of                                                                    
     total income  (dividends, coupon payments,  real estate                                                                    
     income,  etc.),  plus   realized  capital  gains  minus                                                                    
     realized capital losses.                                                                                                   
     Gains are realized when assets are sold for an amount                                                                      
     above their purchase price (cost basis).                                                                                   
    Gains realization events include annual turnover in                                                                         
     equity   and   bond   accounts,   rebalancing   related                                                                    
     turnover,  sales to  fund distributions,  distributions                                                                    
     from private market investments, etc.                                                                                      
Mr. Allen indicated that another  component that turned into                                                                    
SNI was  realized gains. The  fund had never in  its history                                                                    
had as much  unrealized gains. He reported that  SNI fed the                                                                    
Representative LeBon  spoke of  the importance  of inflation                                                                    
proofing the  principle to maintain  the PF's  future value.                                                                    
Mr. Allen  concurred with Representative  LeBon's statement.                                                                    
He thought  inflation proofing  was critical  to maintaining                                                                    
the purchasing power of the fund.                                                                                               
3:28:18 PM                                                                                                                    
Mr.  Allen  discussed  Slide  16  titled  "Earnings  Reserve                                                                    
     Beginning Realized  ERA $11.5B  + Statutory  Net Income                                                                    
     $7.9B     Appropriations  to Principal     Distribution                                                                    
     $3.1B  =   Ending  Realized  ERA  $16.3B   +  Pro  Rata                                                                    
   Unrealized Gains $4.8B = Ending ERA Balance $21.2B =                                                                         
     Earnings Reserve  Account is equal to  total cumulative                                                                    
     Statutory  Net Income  minus total  cumulative spending                                                                    
     minus  total  cumulative  appropriations  to  Principal                                                                    
   plus a pro-rata share of unrealized gains or losses.                                                                         
     ERA receives  a pro-rata  share of unrealized  gains or                                                                    
     losses based  on the  size of the  ERA relative  to the                                                                    
     size of Principal.                                                                                                         
     ERA receives 100% of SNI if SNI is positive.                                                                               
     ERA receives pro-rata share of SNI if SNI is negative.                                                                     
Mr. Allen  summarized that the  ERA and principle  split the                                                                    
market value  of the  fund. He reviewed  the formula  on the                                                                    
slide that determined  the ERA balance and  offered that the                                                                    
ERA could easily pay the POMV draw in the current year.                                                                         
3:29:45 PM                                                                                                                    
Mr.  Allen examined  Slide 17  titled  Historical  Statutory                                                                    
Net Income  Last Ten Years:                                                                                                     
     Statutory Net  Income has been  positive in all  of the                                                                    
     last ten years.                                                                                                            
     "Normal" years have been in the $3 - $4 billion range.                                                                     
     2018  and  2021   experienced  outsized  Statutory  Net                                                                    
     Income due to:                                                                                                             
               Strong equity markets;                                                                                           
               High unrealized gains balances;                                                                                  
               Increased rebalancing activity                                                                                   
               resulting in Equity sales;                                                                                       
               Private markets transactions.                                                                                    
Mr. Allen reported that in 2021 the PF had large, realized                                                                      
income gains of $8 billion.                                                                                                     
3:30:35 PM                                                                                                                    
Mr. Allen moved to slide 18 titled "Historical Earnings                                                                         
Reserve Account  Last Ten Years:"                                                                                               
     With  healthy  Statutory  Net  income  levels  Earnings                                                                    
    Reserve balance has grown consistently since 2012.                                                                          
     As  ERA balance  grows proportion  of unrealized  gains                                                                    
     allocated to ERA increases.                                                                                                
     In  2020   $4  billion  of  ERA   was  appropriated  to                                                                    
     Principal.  This had  the knock-on  effect of  reducing                                                                    
     the percent of unrealized gains allocated to ERA.                                                                          
     Unrealized ERA as percent of  total at an historic high                                                                    
     at the end of 2021.                                                                                                        
Mr. Allen  pointed to  2012 and noted  that the  ERA balance                                                                    
was only  2.2 billion when the  state did not have  the POMV                                                                    
and only  paid out  the dividend formula,  which was  a much                                                                    
smaller draw.                                                                                                                   
3:31:27 PM                                                                                                                    
Mr. Allen continued to Slide 19 titled "Historical                                                                              
Principal Account Balance _ Last Ten Years.                                                                                     
     The Principal  Account balance has grown  steadily over                                                                    
     time as a result of  oil revenue and inflation proofing                                                                    
     $4 billion appropriation to  Principal in 2020. Another                                                                    
     one scheduled in 2022.                                                                                                     
     The unrealized portion  as a percentage of  total is at                                                                    
     its highest point in the last ten years.                                                                                   
     The  unrealized   portion  of  Principal   causes  some                                                                    
     asymmetrical volatility  in the principal  balance over                                                                    
     time,  as  Principal  absorbs  entire  unrealized  loss                                                                    
3:31:48 PM                                                                                                                    
Mr. Allen turned to Slide 20 titled "Historical Ending                                                                          
Market Value  Last Ten Years:"                                                                                                  
   Market value has grown steadily over last ten years.                                                                         
     Slight  drop  in  FY  2020   as  markets  hadn't  fully                                                                    
     recovered in June.                                                                                                         
     Extraordinary   increase  in   FY   2021  with   market                                                                    
     APFC Public  and Private Equity  portfolios contributed                                                                    
     significantly to this growth in 2021.                                                                                      
Mr. Allen highlighted the incredible gain in market value                                                                       
between 2020 and 2021 [$65.3 billion to 81.9 billion].                                                                          
3:32:15 PM                                                                                                                    
Mr. Allen moved to the Monte Carlo Simulation on slide 21                                                                       
titled "                                                                                                                        
     Stochastic modelling assumes  median market outcomes in                                                                    
     each year.                                                                                                                 
     Results  are generally  intuitive, and  the models  are                                                                    
     easier to build.                                                                                                           
     No  need  to consider  "corner  cases"  or things  that                                                                    
     happen at the limits.                                                                                                      
     Lend   themselves  to   graphical  representations   of                                                                    
     variables over time.                                                                                                       
     Simulation  modelling  assumes  a  range  of  potential                                                                    
     market outcomes in each year.                                                                                              
     Captures the impact of volatility.                                                                                         
     Requires  you to  consider things  that  happen at  the                                                                    
     limits (negative  SNI, zero ERA, net  unrealized losses                                                                    
     (cost basis below market value), etc.).                                                                                    
     Results  are  less  intuitive  and  more  difficult  to                                                                    
     represent graphically over time.                                                                                           
     Assigns  probabilities to  various  ranges of  outcomes                                                                    
    for variables of interest (versus point estimates).                                                                         
     Requires   multi-dimensional  assumptions   for  market                                                                    
     variables  (return,  standard  deviation,  correlation,                                                                    
     auto-correlation, etc.).                                                                                                   
Mr.  Allen explained  that  Callan  created 2,000  scenarios                                                                    
based  on varying  assumptions for  stocks, bonds,  interest                                                                    
rates, inflation, currencies, etc.                                                                                              
3:33:01 PM                                                                                                                    
Representative Josephson  thought the presentation  was very                                                                    
helpful. He  referred to slide  18 regarding  the historical                                                                    
ERA earnings reporting  roughly $21 billion in  2021. The PF                                                                    
reported  that the  ERA  total was  $15.7  billion with  the                                                                    
uncommitted  amount   at  $8.9   billion  (POMV   draw  plus                                                                    
unrealized gains).  He wondered  what the real  balance was.                                                                    
Mr. Allen  was unsure of  the exact amount. The  ERA balance                                                                    
was  reported  on  the  last  day of  the  fiscal  year.  He                                                                    
elaborated that  since the  first day  of FY  22 on  July 1,                                                                    
2021, the  balance was  the $21.2  billion minus  $4 billion                                                                    
that was  withdrawn at the end  of the fiscal year.  He knew                                                                    
that  since  July  1,  2021,   there  had  been  significant                                                                    
realized gains  and would  likely be  larger than  the prior                                                                    
estimate. Representative  Josephson noted having  heard that                                                                    
the  account  balance  should  reflect  3  times  the  draw.                                                                    
Therefore,  the $8.9  billion number  looked comfortable  to                                                                    
him.  He noted  the legislator  from Sitka  having suggested                                                                    
moving $8 billion  into the principle of the  fund. He asked                                                                    
for comment.  Mr. Allen  advised that  the  more in  the ERA                                                                    
the  better." He  conveyed that  the ERA  was an  artificial                                                                    
concept and  irrelevant since moving  to the  POMV endowment                                                                    
model.     He    recommended     that    the     legislature                                                                    
constitutionalize the  spending rule  and eliminate  the ERA                                                                    
and the concept of principle.  He stressed the importance of                                                                    
constitutionalizing   the  POMV   formula,   and  the   POMV                                                                    
percentage. He  understood that the legislature  could spend                                                                    
as  much as  it wanted  out of  the ERA  and contended  that                                                                    
having  unstable spending  was  a  distraction"  for the  PF                                                                    
managers.  He maintained  that most  endowments  only had  a                                                                    
spending rule, and  the withdraw amount was  known and could                                                                    
not  be violated.  He elaborated  that  currently, the  more                                                                    
money in the  ERA the better because it did  not "get in the                                                                    
way  of  the  spending  rule.  However,  he  cautioned  that                                                                    
withdrawing to  principle from the  ERA as a way  to curtail                                                                    
spending was  risky, especially in  years markets  were down                                                                    
significantly; the  ERA balance would become  negligible. He                                                                    
suggested that  an ERA 4 times  the draw was better,  but it                                                                    
only worked  under the  discipline not  to overspend  and to                                                                    
follow the  rules. He emphasized  maintaining the  5 percent                                                                    
spending  rule because  an extra  draw of  $2 billion  or $3                                                                    
billion  hurts the  value  of the  fund  and "was  basically                                                                    
taking money from the future  and giving it to the present."                                                                    
He  opined  that  implementing a  spending  rule  simplified                                                                    
3:39:00 PM                                                                                                                    
Representative  Josephson asked  what he  meant by  the word                                                                    
"distraction."  Mr. Allen  replied that  the uncertainty  of                                                                    
not knowing  how much a draw  would be made it  difficult to                                                                    
manage the fund effectively.                                                                                                    
Representative Rasmussen  spoke of political  realities. She                                                                    
asked if there  was a way to quantify the  benefit of a one-                                                                    
time extra  draw from  the ERA. Mr.  Allen thought  that the                                                                    
modeling  would  answer  her  question.  He  requested  that                                                                    
Representative     Rasmussen    clarify     her    question.                                                                    
Representative Rasmussen wanted  to know if there  was a way                                                                    
to quantify  a benefit if  the PF was consolidated  into one                                                                    
account. She  thought that  a one-time  overdraw might  be a                                                                    
political   concession   to  win   constitutionalizing   the                                                                    
spending  rule  to ensure  an  overdraw  would never  happen                                                                    
again. Mr. Allen deemed that  the benefit would take some of                                                                    
the worst  case scenarios  off the  table. He  would further                                                                    
answer when he got to  more relevant slides and thought they                                                                    
would clarify the benefits of  eliminating the ERA construct                                                                    
and maintaining only the POMV model.                                                                                            
3:42:44 PM                                                                                                                    
Mr. Allen  relayed that the  next slide showed  the scenario                                                                    
reflecting the  annual return year-after-year.  He discussed                                                                    
Slide 22 titled "Projected Returns (No Volatility)":                                                                            
     This  results  in   unrealistically  smooth  paths  for                                                                    
     financial variables (EMV, ERA, Principal, etc.).                                                                           
     Does  not reflect  the  impact  of year-to-year  market                                                                    
     volatility on financial variables of interest.                                                                             
     Monte Carlo simulation introduces volatility.                                                                              
Mr. Allen commented  that the PF never had  the same returns                                                                    
for two  years in a  row and  the model was  unrealistic. He                                                                    
briefly  portrayed Slide  23 titled  "Projected ERA  Balance                                                                    
(No Volatility)":                                                                                                               
     ERA  Balance expected  to grow  in early  years due  to                                                                    
     Statutory Net  Income being  amplified by  current high                                                                    
     unrealized gains balances.                                                                                                 
     ERA balance  stabilizes in  2024 once  unrealized gains                                                                    
     After  2024 median  projected  draw  and Statutory  Net                                                                    
     Income  are similar  in  size  resulting in  relatively                                                                    
     flat ERA.                                                                                                                  
Mr. Allen turned to next  scenario showing the first example                                                                    
of  bad returns  with volatility  (Trial 178).  He described                                                                    
the  scenario on  Slide 24  titled  "Simulated Returns  with                                                                    
Volatility  95 Percentile Tail Risk Scenario                                                                                    
     Bad  outcomes  for  the   ERA  balance  generally  have                                                                    
     multiple low or  negative return years in a  row and do                                                                    
     not necessarily contain a "really bad" year                                                                                
     Large negative single years  (like 2008) feel terrible,                                                                    
     but  the ERA  is generally  robust to  those events  as                                                                    
     long as here is a recovery soon after.                                                                                     
     In  this   hypothetical  scenario  ("Trial   178")  the                                                                    
     current ERA  holds up pretty  well until 2027  in spite                                                                    
     of persistent negative returns in 23-26.                                                                                   
Mr.  Allen  explained that  in  2022  the PF  experienced  7                                                                    
percent  growth but  in 2023  to  2026 experienced  negative                                                                    
growth  from -7  percent to  -10  percent. In  2027, the  PF                                                                    
experienced very  slight growth  but experienced  a negative                                                                    
18 percent  in 2028.  He stressed that  a bad  case scenario                                                                    
for  the  PF was  multiple  negative  years and  really  low                                                                    
returning years. He turned to  the next slide that portrayed                                                                    
the consequences on the SNI.                                                                                                    
Mr. Allen moved to slide  25 titled "Simulated Statutory Net                                                                    
Income  with   Volatility      95th  Percentile   Tail  Risk                                                                    
     High  SNI in  2022  due to  positive  total return  and                                                                    
     current high unrealized gains.                                                                                             
     Negative  returns  in  2023-2025 (combined  with  gains                                                                    
     realization  from  rebalancing  and  draws)  wipes  out                                                                    
     current  unrealized   gains  resulting   in  unrealized                                                                    
     losses at total portfolio level.                                                                                           
     Turnover  then results  in net  realized losses  in 26,                                                                    
     27, 28 and 29.                                                                                                             
     ERA  balance is  small  relative to  principal, so  ERA                                                                    
     gets  a   small  proportion  of  net   realized  losses                                                                    
     (negative SNI) in 26, 27, and 28.                                                                                          
Mr. Allen moved to slide  26 titled "Simulated Statutory Net                                                                    
Income  with   Volatility      95th  Percentile   Tail  Risk                                                                    
     2022  return slightly  above median  resulting in  2022                                                                    
     ERA being  slightly above result on  previous slide (so                                                                    
     far so good).                                                                                                              
     Declining SNI  (due to  gains realization  and negative                                                                    
     returns) combined  with cumulative effect of  POMV draw                                                                    
     erodes ERA balance until it is exhausted in 2028.                                                                          
     ERA balance remains at zero in  2029 due to zero SNI in                                                                    
     that year.                                                                                                                 
     Slight positive SNI in 2030 bumps ERA up to about                                                                          
     $700 million in 2030.                                                                                                      
Mr. Allen voiced  that a zero ERA meant that  there would be                                                                    
no POMV  payout and  illustrated the  problem with  the ERA;                                                                    
the balance could  be depleted and could limit  the POMV. He                                                                    
pointed out  that the  scenario began  with the  largest ERA                                                                    

Document Name Date/Time Subjects
Callan.APFC.House.Senate.Fin.Com.Discussion.pdf HFIN 1/24/2022 1:30:00 PM
HFIN - Callan presentation