Legislature(2015 - 2016)HOUSE FINANCE 519
02/16/2015 01:30 PM House FINANCE
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| Audio | Topic |
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| Start | |
| Overview: Alaska Permanent Fund Corporation | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
February 16, 2015
1:33 p.m.
1:33:24 PM
CALL TO ORDER
Co-Chair Thompson called the House Finance Committee
meeting to order at 1:33 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Mike Burns, Executive Director, Alaska Permanent Fund
Corporation, Department of Revenue; Laura Achee, Director
of Communications and Administration, Alaska Permanent Fund
Corporation, Department of Revenue.
SUMMARY
^OVERVIEW: ALASKA PERMANENT FUND CORPORATION
1:34:22 PM
MIKE BURNS, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION (APFC), DEPARTMENT OF REVENUE, provided a
PowerPoint presentation titled "Alaska Permanent Fund"
dated February 16, 2015 (copy on file). He began on slide 2
titled "Renewable Resource." The slide showed the balance
of the fund and deposits and dividends to date. Total
balance at present was $52.5 billion. He turned to slide 3
and discussed FY 14 performance. He detailed that the fund
was slightly behind its benchmark; its total return was
15.5 percent and the benchmark return was 15.7 percent. He
relayed that the fund was currently less aggressive than
many of its peers; it had less exposure to the equity
market. He believed it continued to be a time to trim money
from the equity market. The corporation's net income was
$6.8 billion in FY 14. He communicated that fund
performance had been slightly below some of the
corporation's benchmarks. He continued to discuss fund
performance on slide 4. The slide included a bar chart that
compared the permanent fund performance with its benchmark
and the median public fund data. He noted that APFC was
working to find comparable benchmarks; the corporation was
structured similar to sovereign wealth funds around the
world. He relayed that AFPC and the U.S. Treasury were the
U.S. representatives to an international group.
1:38:22 PM
Mr. Burns discussed principal and the earnings reserve on a
pie chart on slide 5. There was an assigned earnings
reserve of $7.8 billion (shown in dark yellow); a small
light yellow section represented the unrealized gains
portion of the earnings reserve. He noted that the
Department of Law required APFC to break the earnings
reserve up into the two sections; the fund was mostly
principal at present (shown in blue). He moved to a pie
chart on slide 6 showing the fund's target asset
allocation. He detailed that in the 1980s the fund had been
invested entirely in bonds. Subsequently the legislature
had given APFC the authority to invest in stocks and real
estate. He shared that in 2005 when the legislature had
authorized the trustees to invest in anything prudent it
had opened doors for the corporation. One of the advantages
was that the strategy enabled the fund to take a long
investment look; it allowed the fund to play to its
strengths. He moved to slide 7 titled "The Effect of
Diversification." The earnings line was represented in
yellow. He stated that diversification was the only true
free lunch.
1:41:12 PM
Co-Chair Thompson noted that Representative Gattis joined
the meeting.
Mr. Burns discussed fund advantages on slide 8 including
its size and time horizon. The fund's size allowed it to
access investments and any manager in the world. He
detailed that APFC had worked hard to develop its
reputation as a good partner. The fund was also large
enough to be in the forefront of working to bring down some
of the management fees. He noted that costs had been
brought down, but were still expensive. He addressed fund
challenges on slide 9. One challenge for recruitment and
retention was the state's lengthy distance from financial
centers. He detailed that related to retention employees
had generally self-selected into the lifestyle in Alaska;
however, it continued to be difficult to recruit to Alaska.
He addressed the challenge of flexibility and communicated
that new resources frequently arrived long after they were
needed due to a lengthy budget process. He elaborated that
opportunities could present themselves but the budget
process could take too long to access the opportunity. The
small staff limited strength and created gaps during travel
and vacancies. He remarked that anything that could be
managed in-house was between six and ten times cheaper;
however, investment expertise was needed in order to get
desired returns. He noted that the legislature had
authorized APFC to hire a trader in international fixed
income and a finance person; the two positions accounted
for a $300,000 budget increment. He believed the positions
had saved close to $1.5 million.
LAURA ACHEE, DIRECTOR OF COMMUNICATIONS AND ADMINISTRATION,
ALASKA PERMANENT FUND CORPORATION, DEPARTMENT OF REVENUE,
clarified that the savings had been closer to $1 million.
Mr. Burns continued that the savings could be made by
hiring in-house if it fit within the legislature's budget.
1:46:57 PM
Mr. Burns addressed the fund's stock portfolio chart on
slide 10. The stock portfolio totaled $20.4 billion as of
June 30, 2014. The chart showed the portfolio by country or
region, by mandate (U.S., global, non-U.S), and by
management (active, passive, quasi-passive). He elaborated
that the most expensive funds to manage were active,
whereas quasi-passive were cheaper and passive funds were
the cheapest. He detailed that a true passively managed
fund was invested to mimic an index fund such as the S&P
500. He explained that if a stock in the fund went up, more
of that stock was purchased; it was momentum driven and
could lead to buying high. Quasi-passive could be
structured in many ways (e.g. set up by sales growth,
margins, or both); it was much more fundamentally oriented
and tended to be more of a value index, which provided the
portfolio with balance.
Vice-Chair Saddler asked for verification that the three
circles on the chart were independent from the other.
Mr. Burns agreed. He continued to address the slide. He
detailed that the portfolio had been lighter in stocks over
the past 18 months. He stated that in the prior fiscal year
the U.S. stock portfolio had been up 27 percent, the non-
U.S. portfolio had been up 20 percent, and the global
portfolio had been up 25 percent. He noted that being
slightly under allocated to stocks did not help fund
returns. He believed a correction would be made to the fund
allocation. He shared that the fund had been successful at
picking the low day at the bottom of the market in 2009. He
detailed that APFC had been more successful at getting in
when markets were down than at getting out when markets
were up. He continued that it had been obvious the
corporation needed to put money back into the low market;
it believed strongly in "reversion to the mean." He noted
that currently it was more difficult; almost everything in
the portfolio was working very well at present, which was
the time to begin moving investments to different areas. He
stated that everything outside of the portfolio was
expensive; the challenge was to determine where to put
money at present. The fund was buying real estate in Europe
for the first time including two shopping centers and
other, which was different for APFC.
1:53:41 PM
Representative Edgmon asked how the global price of oil had
influenced the fund's investments in the energy sector. Mr.
Burns replied that the low oil prices had been bad for the
state, but good for the markets. He remarked that an
investor's job was to "run into the fire." He did not
believe energy would continue to be in the doldrums. He
stated that APFC had a much longer time horizon to make
investment decisions than the legislature. He communicated
that APFC was taking a hard look at various energy
investments. He elaborated that that the corporation had a
fair amount of energy investment exposure at present. Some
of the deals that had been made 1.5 years back took time to
deploy the money. He stated that money that had been
deployed would probably not do well; most of the money had
not yet been deployed and investment opportunities were
looking attractive. He added that APFC was looking to
invest more money into similar deals; investment would go
to active partnerships and not just to more companies like
ExxonMobil and Chevron.
Mr. Burns discussed the fund's top five stocks including
Apple, Microsoft, ExxonMobil, Hewlett-Packard, and JPMorgan
Chase on slide 11 [investments on the slide ranged from $95
million to $195 million]. He noted that the corporation had
some large investment positions in public companies that
were much larger than the investments shown on slide 11,
which was a new strategy. He addressed the bond portfolio
on slide 12, which was currently the most challenging
component of the overall portfolio. He relayed that rates
were incredibly low at present and it was not desirable to
"reach out for yield"; therefore, they tried to locate
yield in other ways. He explained that bonds were owned for
reasons outside of yield, such as in the event of a crisis
(i.e. deflation or disinflation). He moved on to discuss
bond portfolio management on slide 13. The bond portfolio
was $12 billion on June 30, 2014. He detailed that
externally managed investments included high yield,
mezzanine financing, public/private debt, emerging markets,
and other. The corporation managed high-grade corporate
bonds, U.S. issued bonds, Treasury Inflation-Protected
Securities (TIPS), and sovereign debt of developed nations
and some emerging markets.
1:58:08 PM
Mr. Burns addressed a map illustrating the fund's U.S. real
estate investment locations on slide 14. He noted that each
dot on the map did not necessarily denote one investment;
there were multiple ownerships in some of the locations.
For example, one of the dots on the chart in Texas
represented six properties. He pointed to two single-unit
residential and retail investments in Chicago.
Vice-Chair Saddler referred to the map and asked if the
office building in Southeast Alaska represented the fund's
headquarters. Mr. Burns replied in the affirmative.
Mr. Burns continued on slide 15 titled "Real Estate." He
stated that in addition to working to invest money
overseas, the fund was working to expand its industrial
investments. He believed that accessing industrial
investments in the U.S. would become easier; however, in
the past 10 years manufacturing had largely gone overseas,
which had limited the fund's exposure to the allocation.
The fund was working to locate intermodal investments near
ports with good rail and trucking connections. He addressed
the Tyson's Corner Center investment on slide 16. The fund
had owned the investment for a minimum of 20 years.
Ms. Achee added that the investment had been purchased in
1985 with a 14 percent ownership.
Mr. Burns elaborated that the fund was currently a 50
percent owner of the investment. He noted that during a
brief transition in ownership the fund had owned 100
percent of the property. He detailed that there was new
development on the property; there was a metro nearby that
connected to downtown. He explained that the apartment
building on the left of the picture included 420 units that
should begin leasing in April. The middle building was a
550,000 square-foot office building that was currently 80
percent leased. A 325-room hotel was shown on the right. He
elaborated that the buildings were all clustered around the
main entrance of a shopping center plaza. Tyson's
encompassed approximately 2.2 million square-feet of retail
space; the development was worth approximately $600
million. He shared that all three of the buildings had been
built simultaneously, which had been challenging. The fund
was very pleased with the investment. He stated that it
would be a "live, work, play environment."
2:03:21 PM
Mr. Burns spoke to the Simpson Housing LLLP investment on
slide 17. He detailed that APFC and the State of Michigan
retirement system were each 48 percent owners; management
owned the remaining 4 percent. Simpson Housing had
approximately 20,000 apartment units nationwide. He noted
that the majority of the housing units owned by APFC near
Dallas, Texas were Simpson units. He elaborated that the
company built and managed the properties. He added that
APFC sold its properties if the time was right. He
communicated that the company operated the properties very
well. The fund's share was valued at $992 million.
Vice-Chair Saddler asked what an LLLP was. Mr. Burns
answered that he would get back to the committee.
Representative Pruitt replied that LLLP stood for limited
liability limited partnership.
Mr. Burns continued show slides of the Simpson Housing
investment on slides 18 and 19. He relayed that when the
fund had bought into the deal 7 or 8 years earlier, the
average age of the portfolio was about 17 years; currently
the average age was 11 years. He stated that the portfolio
had grown and had been updated and he believed it was as
good as any apartment portfolio in the U.S. He addressed
American Homes 4 Rent on slide 20. The fund had recognized
an opportunity to purchase and rent single-family homes in
the foreclosure market, which could help offset what the
fund was not getting out of its fixed income portfolio. He
stated that it would have been easy for five or six
individuals to invest in numerous foreclosures; however, it
was hard to determine the investment on a large scale. He
discussed that a founder of a public storage company was
interested in the same idea and had invested his personal
money. Subsequently, APFC had invested in a partnership
with the company and had a 24 percent interest. He
elaborated that the partnership had purchased foreclosures
that had ultimately been consolidated into a private real
estate investment trust, which had gone public in June
2013. Currently the investment held almost 26,000 houses in
16 states. He relayed that the public company was worth
approximately $750 million. He believed the opportunity was
very attractive.
2:09:17 PM
Mr. Burns continued to discuss American Homes 4 Rent on
slide 20. The fund had been one of the early investors in
the market, which had served APFC well. He elaborated that
when institutional money decided to invest, the foreclosure
market became very active. He explained that any of the
investments APFC had made in the market became more
attractive than subsequent investments. The fund was not
currently as actively acquiring the investments as it had
been. The partnership had purchased homes for $120,000 that
had once been $500,000; at the time of purchase about one-
third of the renters had been former owners. He thought
some former owners may purchase the homes back. He
addressed the CityCentre II, III, and IV investments on
slide 21. The office and retail investments were located in
the energy corridor of Houston, Texas. He noted that
construction of a CityCentre V was currently on hold due to
reduced energy markets. The fund was currently looking at
the possibility of purchasing a medical property in the
Houston area. He pointed to the Parc Huron apartment
investment on slide 22. The fund had purchased the new
building in Chicago, Illinois within the past couple of
years. He relayed that it had been initially been built as
a condominium complex; the units had high quality features.
He remarked that the investment had done well for the fund
as apartments and would provide an added bonus if it
transitioned back to condominiums.
2:12:41 PM
Mr. Burns discussed the Shops at North Bridge located in
Illinois (slide 23); the investment had the same partner as
the Tyson's Corner investment. The investment encompassed
eight or nine blocks on Michigan Avenue; Nordstrom was the
lead tenant. The partnership had recently purchased a block
next to the property; it hoped to expand the center and
provide underground parking. Additionally, there was the
potential for some residential above.
Mr. Burns looked at non-U.S. real estate investments on
slide 24. He pointed to a shopping center in Warrington,
United Kingdom, and in Alicante, Spain. He relayed that
APFC was looking at additional potential investments in
Spain, Portugal, and Warsaw, Poland.
He discussed real estate management on slide 25. He
addressed a bar graph and relayed that in 1998 the fund's
$1.2 billion real estate portfolio had been managed by the
same number of people as the current $5.9 billion
portfolio. He detailed that the fund's ownership structure
had changed dramatically over time and it was currently the
owner of most of the investments. He elaborated that the
portfolio's complexity and investments were significantly
larger. He addressed absolute return (hedge funds) on slide
26 that operated primarily as a risk reducer; APFC was
looking to make some changes to the program, most likely
within the coming year. The fund currently had 270 hedge
fund managers, which he believed needed to be trimmed back.
He relayed that the three gate keepers were fund to funds,
which conducted hiring and firing. He explained that there
were too many managers for APFC to receive any fee breaks
or to have real insight into what the managers were doing.
2:16:36 PM
Mr. Burns discussed infrastructure holdings on slide 27;
APFC had invested in the asset class for the past five or
six years. Infrastructure investments were either owned or
regulated by government. The investments had high barriers
to entry and often governments looked to sell the
investments to raise money for other purposes. Investments
included energy, transportation, ports, airports,
pipelines, water and waste management, and other. He
detailed that the investment did not provide a high yield,
but acted as a solid base for a portfolio (similar to real
estate).
Representative Gara noted that hedge funds hedged against
the market. He wondered why it had taken so long to
determine that 270 managers were too many. Mr. Burns
answered that when APFC expanded its allocation to hedge
funds approximately 10 years earlier, the trustees had
wanted enough small investments to reduce the risk exposure
(if one of the investments did poorly it was only $18
million compared to a much larger amount). He stated that
if there was an absolute return exchange traded fund or
index, APFC's investment would have been it. He relayed
that with the high number of investments the fund received
the market average. He believed the 270 figure he had cited
earlier may be high.
Representative Gara made a remark about a publicly traded
real estate investment trust.
Mr. Burns continued on slide 28 titled "Savings from 3
Deals/Year." The slide addressed savings that would occur
if additional staff were hired to work on infrastructure
deals and private equity. The fund had not taken advantage
of its right to co-investment until the past couple of
years because it had lacked the staff to do so. He
elaborated on the strategy. He explained that in the event
that a project was over the cost threshold specified in an
infrastructure investment partnership the partners could
choose to co-invest in order to invest more money. He
stated that the opportunity could be attractive and there
were no fees on co-investment, which meant fees were cut in
half. He pointed to slide 32 that showed private assets,
one year: 60 deals had been screened, 12 were reviewed, and
6 closed. He explained that significant time went into the
consideration to co-investments and direct investments. The
budget included a line item for third-party fiduciary
services; APFC could review a potential investment and then
ask for an additional opinion from a third-party. He noted
that some institutional investors went only with the third-
party advice, but APFC chose to do the due diligence as
well.
2:24:21 PM
Mr. Burns addressed private equity on slide 29. The fund's
primary investments were in the U.S. (67 percent). He
relayed that APFC liked private equity; it was one of the
reasons its public equity was on the lower end compared to
others. He noted that the expected return was higher, but
the payoff term was longer. He detailed that investments
could include buyouts, spinouts, or other. He provided
examples of private equity investments. He reiterated that
the strategy offered the co-investment opportunity.
Mr. Burns addressed special opportunities that provided an
opportunity to earn additional yield or to reduce risk
(slide 30). The opportunities included direct investments
in private companies, direct investments in specialized
funds, and multi-asset mandates. Historically, APFC had
used the strategy for risk reduction opportunities, but it
was looking to make changes. For example, American Homes 4
Rent had been a special opportunity initially (the
investment had moved under the fund's real estate
portfolio). He communicated that approximately 15 months
earlier APFC had begun discussions with the Hutchinson
Cancer Center and Children's Memorial Hospital in Seattle
and the Memorial Sloan Kettering Cancer Center in New York.
The discussions involved the potential creation of a cancer
research company that APFC would invest in. He detailed
that the company (Juno Therapeutics) had gone public in
December 2014; APFC had invested approximately $130 million
and had about 25 million shares. The investment had been
very attractive and was currently trading at about $40 per
share; it was currently worth over $1 billion to APFC. He
stated that 99 percent of the special opportunity deals did
not come together. He stressed that the clinical results
coming out of the company were stunning. He encouraged
members to look the company up online.
2:30:07 PM
Mr. Burns addressed direct fund investments on slide 31. He
noted that the ability to invest directly provided a cost
reduction; fees were 1.5 percent and 20 percent of the
profit in direct investment over a five-year period. Under
the terms of a direct investment APFC could potentially pay
the fee on a portion of an investment and receive a break
on fees for the remaining portion (e.g. it could pay fees
on $500 million and pay no fees the remaining $500
million). He added that APFC could potentially receive a
portion of the total revenue share out of the partnership
under the direct investment structure. The right number of
staff was important to APFC's ability to structure things
differently and to take pieces of deals.
Mr. Burns pointed to the complexity of APFC's financial
networks on slide 33. He noted the importance of financial
networks. The corporation was separate from the state. He
stressed that accuracy and security were essential. He
pointed to the Alaska Permanent Fund Dividend (PFD)
calculation on slides 34 and 35. He explained that 2009 had
fallen out of the calculation, which accounted for the
increase in the dividend. He highlighted that 2014 had been
a good year for statutory net income [$3.5 billion]. He
projected that the dividend would be flat for several
years. He addressed oil prices and the dividend on slide
36. He detailed that changes in oil prices did find their
way into the dividend formula, albeit very slowly. The
slide showed that oil royalties were not included in the
dividend calculation.
Representative Wilson asked if the PFD calculation was
statutory or regulatory. Mr. Burns replied that the
calculation was statutory. He elaborated that the royalty
requirement of at least 25 percent and the concept of
principal were required by the Alaska Constitution as
opposed to by statute.
Co-Chair Thompson believed that in the late 1980s or early
1990s statute had changed the 25 percent requirement to 50
percent. He wondered if the change was still in place or if
the number had been reduced back to 25 percent. Ms. Achee
replied that the statutes were still active. She detailed
that the 50 percent only applied to royalties on certain
oil fields; the net effect was a receipt of approximately
30 percent. She added that legislation to reduce the number
back to 25 percent had passed about six years earlier;
however, the bill had sunset and the statutes were now back
in effect.
2:35:06 PM
Representative Edgmon remarked that the state was currently
looking at a huge deficit. He pointed to the past five
years of the PFD calculation on page 34. He asked what
revenue would be available for other sources if a mean for
the five-year period was determined and inflation proofing
was not factored in.
Ms. Achee replied that the mean was $2.5 billion.
Mr. Burns elaborated that slide 34 showed statutory net
income, which was different than net income. He detailed
that the dividend's accounting net income for 2014 was $6.9
billion, which included unrealized gains. Statutory net
income only included realized gains and losses and realized
capital gains and losses.
Representative Edgmon asked about an earnings reserve. He
asked about setting aside the statutory obligations for the
earnings reserve and the inflation proofing requirement. He
understood that earnings performance fluctuated on an
annual basis. He noted that 2014 had been a good year for
the fund. He asked for verification that the corpus of the
fund was $45 billion.
Ms. Achee responded in the affirmative.
Representative Edgmon pointed to $7.8 billion in the
earnings reserve. He asked what portion of the figure was
required to go towards the PFD and inflation proofing. Mr.
Burns replied that under an assumption that the dividend
was flat going into the future.
Ms. Achee interjected that the total dividend in FY 14 had
been $1.25 billion. She believed inflation proofing was
currently about $800 million.
Mr. Burns noted that the rate of inflation was determined
at the end of December, but it was applied to the fund at
the end of the fiscal year. He did not have the figure on
hand.
Ms. Achee believed inflation proofing had been running
about $800 million in the past several years.
Mr. Burns surmised that the figure may be $2 billion.
Representative Edgmon asked for clarification that $2
billion was [an estimate] of the fund's statutory
obligations. Mr. Burns replied that the figure was probably
close.
Representative Edgmon asked what a normal earnings year
looked like for the fund. He thought the portfolio was
impressive and well-diversified.
2:39:39 PM
Mr. Burns replied that the long-term goal for fund earnings
was 5 percent real (after inflation). He expounded that the
target was currently a little heftier than most pension
funds; APFC was not worried about it because it was not
driving a lot of behavior. He stated that it would be
different if APFC was a pension fund and the legislature
was trying to determine how much to appropriate into the
pension based on the 5 percent target.
Representative Edgmon asked for verification that the fund
was invested with the goal of long-term returns and
performance that was not reactive to events or particular
cycle. Mr. Burns agreed that it was the plan.
Representative Edgmon noted that APFC was able to inflation
proof the fund, maintain the dividend for a population of
641,000 and generate money beyond the requirements. He
asked for verification that the APFC board would manage the
portfolio in a different way, for different outcomes if
some of the additional funds were used for other purposes.
Mr. Burns replied that it would depend on the percent
specified if it was for an ongoing program. He detailed
that the fund had good liquidity within the fund, but its
greatest strength was the ability to investment in long-
term. The attributes were quite different; currently he
wanted more long-term investment. He did not believe
dedicating a portion for appropriation to the general fund
would change the fund strategy dramatically. He discussed
the inception of the fund when it had been invested 100
percent in bonds. He believed inflation proofing was one of
the smartest decisions the corporation could have made. He
believed there was a discussion to be had about whether the
fund was inflation proofing by asset allocation with its
current asset allocation and asset mix. He questioned
whether purely investing in real estate, equities, and
other items that should grow with the market was in essence
inflation proofing. He believed the question was worth
thinking about.
2:44:00 PM
Representative Wilson pointed to slide 5 and asked what
"assigned earnings reserve" meant. Mr. Burns replied that
it referred to the earnings reserve; there had been a name
change.
Representative Wilson believed that when the permanent fund
had been implemented it had been designed to take into
account that oil began decreasing in volume as soon as it
was developed. She wondered if it had been the original
intent for a portion of the fund to be used for general
funds in the event that oil went down or ceased. Mr. Burns
answered that the ballot proposition that had created the
fund had talked about a rainy day account, but it was
vague. The ultimate use of the fund had never been entirely
determined at its creation. He stated that there was still
history to be made regarding the fund's role in a fiscal
crisis. There was not a clear road map; the map would be
determined by the legislature.
Ms. Achee added that the constitutional language directed
that all earnings of the fund go to the general fund. The
legislature had changed the requirement in the early 1980s.
She elaborated that it was in the scope of the legislature
to decide whether or not to appropriate the earnings or to
reverse the statutory language.
Representative Wilson referenced the system in Norway. She
referred to the pie chart on slide 5 and assumed that the
light yellow portion represented the PFD; whereas, the dark
yellow portion represented the portion that would have
continued to go into the general fund if the law had not
been changed [in the early 1980s]. She wondered what the
next year would look like if the money began going into the
general fund.
Ms. Achee replied that there were too many variables to
provide a "lookback." She stated that APFC could take a
look at how taking the $7.8 billion out of the fund would
impact the fund in the coming year; the impact would be
significant.
Representative Wilson believed the information would be
helpful.
2:49:15 PM
Representative Gara believed the biggest reason for the
earnings reserve was to have sufficient funds for the
dividend and for inflation proofing. Mr. Burns agreed that
the earnings reserve was used for those items. He did not
know if it was specifically the designed purpose.
Representative Gara noted that at present the earnings
reserve looked large; however in 2008 and 2009 it had been
so small that there had been discussions about potentially
needing to use general funds to help pay the dividend. He
asked for verification that sometimes the reserve looked
too big and other times it looked too small. Mr. Burns
agreed.
Representative Gara referred to Mr. Burns' statement that
APFC was bracing for a correction in the stock market. He
surmised that the earnings reserve would begin to shrink if
a stock market correction occurred.
Ms. Achee agreed that the reserve would begin to shrink if
a stock market correction occurred and net losses began to
be realized. Mr. Burns concurred.
Representative Munoz asked if half of 5 percent of the
value of the fund would go to the dividend under the
percent of market value theory. She asked for
clarification.
Ms. Achee replied that the board's proposal was to go to an
average of 5 percent over the market value of several
years. She expounded that how the 5 percent would be
decided was beyond APFC's scope; it would be for the
legislature to decide.
Representative Munoz asked about the 5 percent figure. Ms.
Achee explained that it would be 5 percent of the average
value over five years.
Mr. Burns elaborated that 5 percent may not currently be
the appropriate number as it would have been in past years.
He explained that interest rates were much lower than in
the past; therefore, 5 percent may be an aggressive number.
He stated that the figure would not drive APFC's behavior;
however, if it did, the amount would require careful
consideration.
Representative Munoz asked if 5 percent would be
approximately $2 billion at present. Mr. Burns replied that
it would be $2.5 billion.
Representative Munoz asked for verification that the amount
would cover the PFD and inflation proofing at present. Ms.
Achee answered that under a percent of market value
proposal by the APFC board, inflation proofing would be
eliminated because it would be inherent in the fund's asset
mix.
Representative Munoz believed the figure would be
approximately equal to the amount currently dedicated to
inflation proofing. Mr. Burns replied in the affirmative.
Vice-Chair Saddler stated that there had been various past
proposals to make the PFD a constitutional mandate. There
was a current proposal as well. He asked if APFC or the
board had an opinion on the matter.
2:53:00 PM
Mr. Burns replied that the board had never taken a position
on the issue; its role was to make the investments as
prudently as possible. He thought the question would
require answers from many players beginning with rating
agencies. He elaborated that the rating agencies gave the
State of Alaska substantial credit for the permanent fund.
He did not know how the agencies would view the fund if it
was constitutionally dedicated to the sole purpose of
paying dividends. He believed the ratings may not be as
favorable. He added that under the current structure the
permanent fund could do a lot to help the state if needed.
He did not know if the topic was appropriate for the board.
Vice-Chair Saddler wondered which other parties the
legislature may want to discuss the issue with. He believed
the idea [of a constitutional mandate] was poor.
Mr. Burns replied that he would need to think about it; the
rating agencies had come to mind first. He reiterated that
rating agencies may not view the permanent fund as
favorably if it had one sole constitutionally mandated
purpose of paying dividends.
Co-Chair Thompson discussed the schedule for the following
day.
ADJOURNMENT
2:56:05 PM
The meeting was adjourned at 2:56 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 201502_APFC_HouseFinance.pdf |
HFIN 2/16/2015 1:30:00 PM |
PFC Overview HFIN |