Legislature(2001 - 2002)
02/15/2001 08:40 AM House FIN
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ 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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