Legislature(2021 - 2022)ADAMS 519
02/23/2021 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: the Alaska Permanent Fund | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
February 23, 2021
1:32 p.m.
1:32:56 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:32 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
Representative Steve Thompson
Representative Adam Wool
MEMBERS ABSENT
None
ALSO PRESENT
Angela Angela Rodell, Executive Director, Alaska Permanent
Fund Corporation.
SUMMARY
PRESENTATION: THE ALASKA PERMANENT FUND
Co-Chair Foster reviewed the agenda for the day. The
committee would be hearing from the Alaska Permanent Fund
Corporation (APFC). He asked members to hold their
questions until the middle and end of the presentation.
Self-conscious
^PRESENTATION: THE ALASKA PERMANENT FUND
1:34:22 PM
ANGELA RODELL, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, introduced the PowerPoint Presentation: "The
Alaska Permanent Fund." She looked to the state's roots on
slide 2. In 1969 the debate began when Alaska received $900
million in a Prudhoe lease sale. All of the money was
spent. At the time, Alaska was a young state, and much of
the money was needed for various infrastructure around the
state. She provided some context. The state budget was $173
million. She was not sure the debate began in 1969. She
suspected it began 100 to 200 years earlier, as Alaska had
a history of boom and bust cycles. Alaska had received
large chunks of money periodically or had assets such as
fish, oil, and furs. She did not think the debate was new.
Ms. Rodell discussed the Alaska Constitution on slide 3. In
1976 Alaskans voted 75,588 to 38,518 in favor of amending
Alaska's constitution. She noted that the constitutional
amendment was very simple and straight forward. It required
that the state saved a minimum of 25 percent of all of the
state's mineral lease rentals, royalties, sale proceeds,
revenue sharing payments, and bonuses. The only thing the
state could do with the money was to invest it as
designated by law in eligible investments. All income from
the Permanent Fund (PF) was required to be deposited into
the general fund. There were no provisions about how much
would be spent, where the money would go, or what programs
the money would be used to support. The spending parameters
were left very flexible. She thought it was interesting to
note there was overwhelming support for saving something
for future generations at a time when the state had great
needs. She indicated there had been debate and dissent
regarding the issue due to the state having tremendous
needs. She thought it was very difficult at times for
everyone to look at the long-term rather than the
short-term.
1:37:32 PM
Ms. Rodell provided some information about the corporation
and its mission on slide 4. Four years after the PF was
approved by voters, APFC was created through SB 116 in
1980. In the prior year, APFC celebrated 40 years in
existence. The corporation's mission was set forth in
statute. It was to manage and invest the assets of the PF
and other funds designated by law. The corporation simply
invested money rather than spending it or investing in
other programs. The Alaska Permanent Fund accounts included
the principal and the earnings reserve account (ERA). The
corporation also managed the Alaska Capital Income Fund
which was funded with the settlement of Amerada Hess. The
corporation also managed money on behalf of the Alaska
Mental Health Trust Authority.
Ms. Rodell moved to slide 5: "Board of Trustees." The
Corporation was governed by a six-member, governor-
appointed board of trustees. As fiduciaries, they had a
duty Alaskans in assuring that the fund was managed and
invested in a manner consistent with the trust findings.
The legislative findings constituted the trust the
corporation had with the State of Alaska. First, the fund
should provide a means of conserving a portion of the
state's revenue to benefit all generations of Alaskans.
Second, the fund's goal should be to maintain safety of the
principal while maximizing the total return. Third, the
fund should be used as a savings devise to allow the
maximum use of disposable income from the fund for the
purposes designated by law.
Ms. Rodell continued to the topic of investment management
on slide 6. She reported that the corporation had statutory
and constitutional mandates. The principal provided a
permanent savings, and the ERA held the investment income
for appropriation. There were prudent rules in place
governing savings, spending, and the growth of the fund.
The corporation's stewardship was quasi-independent which
was intentional. The Alaska Permanent Fund Corporation was
under the administrative umbrella of the Department of
Revenue (DOR) but a stand-alone agency. The corporation had
a long-term horizon with prudent diversification,
accountability to the board and Alaskans, and a need for
managing its own resources wisely. A robust, healthy PF was
important to all generations of Alaskans.
1:40:09 PM
Ms. Rodell turned to slide 7 and indicated her presentation
was designed around some key questions she received on a
regular basis. She reviewed the list of questions on the
slide:
• How much do we make?
• How do we invest?
• How does Principal grow?
• How does the ERA grow?
• How much can we draw?
Ms. Rodell moved to the first question of how much the
corporation made by discussing Monthly Reporting on
slide 9. One of the things the corporation did internally
was monthly reporting. Accountability and transparency had
driven APFC from the beginning. The corporation prepared
financial and performance reports monthly to ensure
point-of-time accuracy of data and compliance with policies
such as the corporation's investment policies and state and
federal laws. The Corporation's finance staff reconciled
the values of the principal and the ERA at the close of
every month. She thought it was important to recognize that
the fund had more than 700 individual investment accounts.
Each represented anywhere from one private investment to
hundreds of public equity holdings. There was a
considerable amount of work done to complete the
reconciliations balancing out each of the accounts at the
end of every month.
Ms. Rodell reviewed the values of the principal and the ERA
on slide 10. The slide showed the fund values as of January
31, 2021 compared to 5 years prior on June 30, 2016. The
slide was included to show how the fund had grown and the
areas in which it had not grown. She highlighted that the
contributions of principal just 5 years prior totaled $39.4
billion. The amount had grown to $46.8 billion through the
contributions and appropriations such as the $4 billion
special appropriation made in FY 20. It was also in the
form of inflation-proofing. She emphasized the importance
of inflation-proofing to ensure the health of the fund. The
principal had unrealized gains of $11 billion, much of
which was due to the stock market activity over the
previous 6 months. In the ERA the state had uncommitted
realized earnings of $7.7 billion in 2016 which had grown
to $9 billion. There was also $2.8 billion in unrealized
gains, and the corporation had already set aside $3.1
billion for the FY 22 percent of market value (POMV) draw
in anticipation of an appropriation. The calculation was
based on a time period that had already been closed out.
The corporation knew, to-the-penny, what the calculation
yielded and allowed the corporation to set the amount aside
in its financial statements.
1:43:34 PM
Ms. Rodell turned to slide 11: "Sources of Change in Value:
FY 20 to FY 21 To Date January 31, 2021." She pointed out
that when looking at the changes to-date over the 7 months
since July 1, the fund ended FY 20 at $65.3 billion. In a
7-month period the fund had gained an extraordinary $10.3
billion in investment revenues. Royalties of $143.9 million
had been deposited into the principal fund. She thought the
figures demonstrated the importance of investment revenue
compared to royalties.
Ms. Rodell continued that the POMV draw for FY 21 was
$3.091 billion leaving a fund value of $72.7 billion.
Statutory net income was determined by subtracting the
unrealized gains and the amount allocated to the Alaska
Capital Income Fund from the net investment revenues of
$10.3 billion. The result was a statutory net income to the
ERA of $3.675 billion year-to-date. It was more than was
added in 2020 and 2019.
Ms. Rodell detailed the corporation's financial statements
on slide 12. The corporation issued monthly financial
statements that reconciled the values. She pointed to the
balance sheet which was on APFC's website. The balance
sheet total assets equaled $76.4 billion. She reminded
members that the total equaled the assets under management
at the current point-in-time. The corporation also had
accounts payable of $2.6974 - mostly trades that had not
settled. Income distributable to the State of Alaska in the
amount of $1.91 billion could be found under liabilities.
It represented the balance of the $3.91 POMV draw left to
distribute in FY 21. Over the following 5 months the amount
would go to zero.
Ms. Rodell suggested looking at the non-spendable portion
to know the actual fund balance. The total non-spendable
amount was $57.7 billion in the principal account. she
pointed to the committed general fund appropriation of
$3.069 billion for FY 22. She also highlighted the total
assigned amount of $11.826 billion for a total of $72.6
billion in fund balances - the true fund balance tied to
the numbers she had discussed earlier.
1:46:44 PM
Ms. Rodell discussed slide 13 which showed the front page
of the 6-page monthly performance report. It provided
1-month, 3-month, and 5-year performances. The report
showed the total fund and categories such as international
equity, global equity, and domestic equity under public
equity. The other pages of the report showed the
performance of each of the managers in the different
categories.
Ms. Rodell relayed that when looking at APFC's performance
as of January 31, 2021 the FY 20 total fund was 2.01
percent. The corporation managed to beat its passive
benchmark that came in at 1.28 percent and slightly
underperformed its performance benchmark of 2.05 percent.
The passive index benchmark was similar to investing in a
passive stock index, a passive bond index, some treasury
inflation-proof securities, and some real estate investment
trust rates. The corporation beat its passive benchmark
without any active management of the fund.
Ms. Rodell continued that the chart showed the value added
by the active management of the fund. The performance
benchmark was expected of all of the managers, and their
benchmarks achieved 2.05 percent. In FY 21 to-date the
corporation was well ahead of the prior year. On a total
fund basis, the corporation was at 15.8 percent versus a
passive index of 17.8 percent. The increase was largely due
to the corporation's under-allocation (the corporation only
had an allocation of 40 percent to public stocks). The
passive index had a much higher allocation to the stock
market. The performance benchmark came in at 15.35 percent
which the corporation was beating. Long-term, the fund had
done very well over the years.
1:49:20 PM
Ms. Rodell addressed the question of how the corporation
invested turning to slide 16: "Fund Total Value and Returns
in millions." She reported that it had changed
substantially over the years. Initially, APFC was permitted
an investment list that only included fixed income
securities such as treasury bonds. Over the years, the
investment list expanded to include U.S. stocks, direct
real estate in the U.S., and international bond and stock
markets. In 2005, the legislature removed the list of
allowable investments giving the trustees full authority to
invest under a prudent investor rule. Trustees made
investment decisions through a series of regulations,
investment policies, and guidelines.
Ms. Rodell continued that over the years the fund had
benefited. In 2005, before the financial crisis, the fund
had reached an all-time high. Since the recovery of the
financial crisis 11 years prior, the fund had skyrocketed
in value. She emphasized the volatility of returns. She
pointed to the light blue line which highlighted her point.
However, overall, there was a steady state of positive
returns within the band of zero to 15 percent over the
period. She noted the long-term time horizon APFC used to
invest. She dismissed concerns about the ups and downs of
the market on a daily, monthly, or even annual basis.
Ms. Rodell looked at the pie charts referencing asset
allocations on slide 17. She noted the diversity of
investments in comparison to the early years of the fund.
The FY 21 target allocation included stocks, bonds, private
equity, absolute return (hedge funds), private income, and
an allocation to cash. There had been a tremendous growth
in the asset allocation and the sophistication of the fund
over time.
Ms. Rodell reviewed the FY 21 projections as of January 31,
2021 on slide 18. She reported that each year the
corporation projected the fund's returns and growth. The
only adjustments the corporation made monthly to the
history and projections was to recognize royalty as it came
in. However, APFC did not adjust returns based on actuals.
The midyear return forecast for FY 21 was 6.48 percent. The
corporation assumed inflation would be 2.25 percent with a
real return of 4.23 percent. The range around the returns
was a low of -2.4 percent to a high of 11.6 percent.
Presently, the fund was well above the high forecast of
11.64 percent real return. The statutory return was very
different and had a much narrower band of outcomes. It was
based on investment decisions being made versus being tied
to market activity. The statutory return was the receipt of
cash which was not necessarily tied to market activity. She
reported there was not a negative statutory return because
the fund was still receiving positive cash from real estate
and bond interest payments.
1:53:20 PM
Ms. Rodell continued to slide 19: "History and
Projections." She noted how small the numbers were and
relayed that the chart could be found on the website where
it was easier to read. She indicated the slide showed the
historical and forecasted growth of the fund. It also
showed the calculations for the POMV distribution and the
statutory dividend transfer for FY 21 and FY 22.
Ms. Rodell pointed to the boxes in the lower right-hand
side of the slide showing the exact years (pulling from
different years). The dividend calculation was based on
statutory net income. Whereas, the POMV calculation was
based on market values.
Ms. Rodell detailed slide 20: "Callan's Long-Term Capital
Market Projections." She reported that when the board was
doing asset allocations it took Callan's long-term capital
market projections into account. She relayed that last week
at the board of trustees meeting Callan presented their
calendar year 2021 capital market projections and their
10-year forecast as adjusted. She thought there were two
very important outcomes for FY 22 through FY 31 as the
corporation adjusted its projections going into July 1.
First, there was an expectation of slow growth even though
current global markets were very robust coming out of the
pandemic. The growth rate would not be sustainable over the
following 10 years. The other interesting outcome was the
recognition that inflation was not expected to increase or
enter into hyper-inflation. Callan reduced the inflation
assumption from 2.25 percent to 2 percent. The total fund
projection based on the asset allocation was 6.2 percent.
Minus inflation, she anticipated a real return of 4.2
percent over the next 10 years. She paused for questions.
1:56:32 PM
Representative LeBon brought up inflation over the past 20
years. In 2000 the value of the fund in nominal terms would
have been $72 billion. He wondered if the fund had kept up
with inflation over the previous 20 years.
Ms. Rodell responded that the corporation had kept pace
with inflation if looking at the total 45-year period. She
thought it was due to a couple of key factors. She returned
to slide 14. She pointed out that the long-term objective
was CPI plus 5 percent. The Alaska Permanent Fund
Corporation had data going back 37 years rather than 45
years. The Consumer Price Index plus 5 percent resulted in
a benchmark of 7.59 percent. Yet, the corporation generated
a return of 8.91 percent over the same period demonstrating
that the fund more than kept up with inflation. She
indicated that if 5 percent was subtracted from 7.59
percent it would indicate an inflation rate of about 2.59
percent over 37 years. The corporation had kept up on a
10-year basis, a 5-year basis, and a 3-year basis. She
thought it was difficult to look at just a 1-year basis, as
CPI plus 5 percent was a much longer time horizon.
Representative Wool referred to slide 20. He asked if a
5 percent POMV draw with a yield of 4.2 percent should be
of concern. Ms. Rodell responded that if the forecast was
accurate, the fund would contract rather than expand.
2:00:08 PM
Vice-Chair Ortiz noted the previous 5-year rule. he
suggested that the state would be drawing less than 5
percent. He wondered how much less than 5 percent the state
was drawing.
Ms. Rodell thought the answer was in a later slide. She
skipped ahead to slide 30 which showed the calculation of
the effective rate based on what she was seeing currently
for FY 23 and FY 24. She further explained that as the fund
grew, the effective rate became smaller. What could be seen
on the chart between FY 21 and FY 22 was that the fund only
experienced 2 percent growth in FY 20. In the same year,
the legislature took out a draw of 5.25 percent. She added
that even though the effective rate for FY 20 was 4.52
percent, it was still well in excess. She thought it
created a smoothing effect for withdraws.
Vice-Chair Ortiz referred to slide 17 regarding asset
allocations. He asked the meaning of "absolute return" in
relation to an asset allocation.
Ms. Rodell relayed that absolute return had to do with the
corporation's hedge fund allocation. She explained that
they were trying to replicate a similar total fund return
that was not correlated to APFC's asset allocation or to
the market. She thought it was like a counterweight. She
suggested that if the fund had exposure in an absolute
return portfolio and the overall market was down, the fund
could expect to make money. If the overall market was up,
the fund would not likely bring in much of a return.
Absolute return was included as a diversification benefit.
Vice-Chair Ortiz asked for further information about
private income as it related to asset allocation. Ms.
Rodell explained that private income was a slice of debt
that was available to invest in that did not come to the
corporation through bond markets. Bond markets were public
debt. For example, large corporations would issue corporate
debt which were the corporate bonds APFC would invest in.
Banks might lend to small businesses. However, generally,
there was a middle category of corporations that were too
small, or their credit was too unusual to invest in the
public market, but too large for a single bank to lend to
them. Private income provided an opportunity to invest in
companies through debt structures that was not available in
trades in an open market.
2:04:01 PM
Representative Rasmussen recalled that the legislature had
done significant inflation proofing in 2019. She asked what
impact it had when the legislature exceeded the current
levels of inflation. She expressed concerns about possibly
not meeting inflation levels in the future.
Ms. Rodell responded that in 2019 the legislature passed an
FY 20 budget that called for the transfer of $4 billion
from the ERA to the principal. The corporation could not
make the transfer until June 30, 2020. The corporation had
to do everything else first based on how the budget was
written. The original budget that passed had a
significantly higher number of more than $9 billion and
included legislative intent language that outlined the
legislature's intent to cover inflation-proofing for the
following 8 years with the appropriation. When the
legislation was transferred to the governor for enactment,
he reduced the amount to $4 billion. However, the intent
language was left unchanged. The intent language really
applied to 4 of the years. At the time, the amount was an
estimate. The corporation calculated inflation in a
calendar year based on the amount in the principal account.
Therefore, the ERA was not included. The number of years
would be reduced.
Representative Rasmussen clarified that in FY 20 the money
was not actually transferred until the beginning of FY 21.
Ms. Rodell responded that it was done on June 30th and was
the last thing done on that day. Representative Rasmussen
further clarified that in theory, the legislature should
have inflation-proofed through FY 24.
2:07:24 PM
Representative Josephson referred to page 10. He thought
the governor had proposed a dividend payment of $4900 per
Alaskan that would cover the portion of the formula not
paid in FY 21 and the FY 22 dividend. He estimated that
with approximately 650,000 recipients the total cost of the
payment would be about $3 billion. He believed the money
would have to be paid from the uncommitted realized
earnings of the ERA. He asked if he was correct. Ms. Rodell
responded that he was correct.
Representative Josephson speculated that the $9 billion was
actually $5.9 billion because the legislature would need
$3.1 for FY 22. He asked if he was correct. Ms. Rodell
responded, "That is incorrect." She explained that the
$3.1 billion was already set aside. The earnings reserve
account had a total balance of $14.9 billion as of
January 31, 2021. The corporation had set aside the
$3.1 billion for the FY 22 POMV draw. The governor's
proposal was to take the dividend payments for FY 22 and a
supplemental payment for FY 21 out of what was $9 billion.
Representative Josephson asked Ms. Rodell to comment why
the payment might be problematic. He asked how FY 23 would
be affected.
Ms. Rodell commented that Representative Josephson asked an
important question. The difficulty was not the dollar
amount. Part of the challenge for the corporation was
having a set of prudent spending rules. The trustees had
made numerous resolutions advocating for a set of prudent
spending rules that would enable planning. Currently, the
corporation was in a positive situation with a very robust
market that was generating significant income for the fund.
It was representative of the boom and bust cycle Alaska had
lived off of for years. A negative situation would be
drawing down the account while it was not earning as much
and reducing the market value draw every year in
perpetuity.
Ms. Rodell referred to slide 30 which showed all of the
draws on one page. She estimated the draws for FY 23 and
FY 24 to be $3.2 billion and $3.3 billion assuming
everything stayed the same and without ad hoc draws. She
indicated that extra draws would draw down potential
revenue in the future. She advised that the legislature
needed to start thinking about how to replace revenues or
reduce spending in the long-term. For the first time in
Alaska's history, the legislature had a known revenue
number going into budget discussions. She recalled sitting
before the legislature when she was the commissioner of the
Department of Revenue discussing the revenue forecast and
the sheer volatility around production and price. It was up
to the legislature to weigh the consequences of spending.
There was nothing in APFC's mission about spending, only
about investing.
2:13:32 PM
Representative Edgmon referred to slide 17. He asked Ms.
Rodell talk the committee through what allocations would be
targeted if the legislature were to follow through with the
governor's FY 22 budget request requiring a double draw (he
referred to SB 26, legislation establishing a POMV passed
in 2018). She would be asked to go beyond the planned
withdraws for the year. He wondered what it would look
like.
Ms. Rodell responded that stocks and bonds made up about 60
percent of the asset allocations and were highly liquid
along with cash. Stocks and bonds could be turned into cash
within approximately 3 days. The balance of the allocation
was liquid in different ways. She indicated cash could be
generated from real estate, but it might take 6 months to a
year to do so. Absolute return typically had a 30-day
liquidity requirement. The corporation had worked with the
Division of Treasury within the Department of Revenue for 3
years regarding the POMV transfer, determining DOR's cash
needs, and how to withdraw money. The percent of market
value amount never moved over to DOR as a lump sum on
July 1st.
Ms. Rodell reported that the corporation generated roughly
$1.5 billion to $2 billion in regular cash. It had a steady
flow of income consisting of rental payments, dividend
payments, and interest coupons. Therefore, the corporation
did not have to liquidate huge sums. If the governor's
proposal were to pass, there would be a large payment of
about $1.6 billion or $1.9 billion that would be made prior
to June 30th. The corporation would be working with the
Treasury Division to determine what would need to be
liquidated. She suggested the corporation would have to
sell stocks and bonds.
Ms. Rodell further explained that the corporation would be
looking at what was coming due and for new investment
opportunities, and it would hold cash back. The reason the
corporation had a 2 percent allocation of cash was that it
needed cash to run its investment business. In the fall,
the corporation would do the same thing. She relayed that
the dynamics were different if the corporation had to sell
in an up market with significant returns versus having to
sell in a down market and experiencing losses. Money could
flow into the ERA but required an appropriation to flow out
of the fund.
2:18:28 PM
Representative Edgmon did not see any calculations for a
10-year horizon. He suggested it was the corporation's
responsibility to provide a trend analysis showing the
impact of unplanned draws. He asked where he would find a
model. Ms. Rodell replied that the Legislative Finance
Division (LFD) had done significant modeling and could make
assumptions about all of the other parts of the budget
including revenue and spending expectations. The
corporation did not have any control over the amounts
invested under its purview.
Representative Edgmon wondered that if he wanted such an
analysis whether he could contact her to request one. Ms.
Rodell responded that she would ask him to contact Alexi
Painter at LFD to do the modeling.
Representative Edgmon recalled presenting a similar line of
questioning in 2015 or 2016. He thought it was interesting
that the fiduciary duty to present a picture rested with
the legislature's finance division rather than with APFC,
the entity charged with investing and communicating with
the public about what the future might hold for the fund.
Ms. Rodell clarified that APFC's fiduciary duty was to
invest and manage the funds entrusted to the corporation.
The corporation did not have a duty with regard to spending
the money or a say in how it was spent. The Alaska
Permanent Fund Corporation was providing the best
information it could in terms of return expectations and
its duty for asset allocation. She indicated that what
might be in the best interest of the fund in terms of an
investment, might not be in the best interest of the state
and visa versa. For example, it might be in the best
interest of the fund to stay fully invested. However, it
might be in the best interest of the state to withdraw the
money. It was not the duty of the board of trustees to make
such a decision - which was the reason the corporation only
provided information about how it expected the fund to
grow, all things being equal.
Representative Edgmon still had the same question several
years later about who was obligated to provide the
information he was looking for. He supposed it was the
obligation of the legislature. He claimed that as a policy
maker he did not have access to the team APFC had to
provide analytical quantitative data. He thought the
legislature was on the cusp of making significant decisions
that might affect the state long-term. He believed that the
general public had a mixed understanding because they had
not seen an analysis.
Ms. Rodell relayed that in 2016 when the POMV was under
debate the board looked at a 5 percent draw. There was
significant discussion whether 5 percent was the right
percentage. The legislature passed a bill signed by the
governor that stepped down the percentage over 3 years. The
trustees engaged in trustee paper 9 which looked at lessons
learned with other sovereign wealth funds, prudent spending
rules, and applying a 4X rule (keeping 4 times the draw
amount in the ERA) as a cushion for market volatility. All
of the things she mentioned remained in place currently.
Ms. Rodell commented on presenting information. The Alaska
Permanent Fund Corporation had worked closely with LFD in
the interest of having a common model with the same
assumptions used by everyone. The corporation also ensured
that LFD's model reflected APFC's forecast and other
factors such as spending and other revenue measures. The
corporation continued to work closely with LFD to avoid
having competing models which was the reason she was
encouraging people to go to LFD for modeling.
2:25:57 PM
Representative Wool referred to slide 20 which showed a net
growth of 4.2 percent over the following 10 years. He
wondered if the growth rate was consistent with the
5 percent draw assessment from a few years prior. He asked
if there was cause for concern.
Ms. Rodell responded that the slide highlighted the value
of a POMV draw that was set up to smooth things out. There
would be periods of time where more money would be taken
out and would not keep pace and vice versa. She relayed
that the reason the presentation showed the 37 years of
data was to demonstrate the long-term time horizon. She
indicated that 5 percent worked and was a known and
supported number. She suggested that 5 percent was a
disciplined steady draw.
Representative Wool noted people talking about the infinite
life of the Permanent Fund as opposed to Alaska's finite
supply of oil. He hoped that the draw would be such that
the Permanent Fund would be infinite and grow with time. He
noted the governor's plan would draw roughly 10 percent in
the current year. He asked whether the corporation would
have to adjust its investments if the legislature were to
exceed the 5 percent draw.
Ms. Rodell thought it would be interesting to see whether
the board would want to make any changes. She relayed there
were some concerns with an additional appropriation the
size the governor was proposing accompanied by a market
draw down. She recalled that in March 2020 the fund lost
nearly 30 percent of its value in 30 days bringing the fund
balance down to $60 billion. The market snapped back.
However, if the fiscal year closed at $60 billion on
March 31, 2020 rather than June 30, 2020, the fund would
have a very different value included in the POMV
calculation. She stressed the importance of recognizing
where the fund was on June 30th versus on other days.
Ms. Rodell continued that if there was a market draw down
and the draw was the amount suggested by the governor, the
corporation would have to take a hard look at where the
fund was in the private markets. Private markets were
illiquid and required pacing and modeling of the fund. The
corporation would have to look at the asset classes and
consider adjustments. She referred to slide 20 which showed
that private equity was what was generating the 8 percent
forecasted return. If the corporation had to take funds out
of the illiquid class, there could be a negative return
effect. Investing was forecasting, and there was never
certainty in forecasting.
2:32:14 PM
Representative Rasmussen thought it was important to
recognize that APFC was not responsible for making policy
decisions. Trying to gather the information from the best
sources was important. She agreed that LFD was probably the
appropriate source for legislators to go to for an overall
economic picture. She referred to slide 14. She suggested
that a sudden withdraw of $3 billion, when the fund had a
potential 15 percent return on investment, would have a
major long-term impact. She did not want the legislature to
rob future generations. She had a 5-year-old and a
2-year-old, and their future in Alaska was very important
to her. She brought up the example of a retired couple with
a limited income having to make an adjustment to their
investment strategy if their furnace were to go out. She
wondered what the effects would be if the corporation did
not capitalize on a 15 percent return on $3 billion for the
following year.
Ms. Rodell was unclear of the representative's question.
She pointed to the performance of the fund in FY 20 of
2.01 percent. The return in FY 21 to-date was 15.2 percent
which showed the volatility of the market in the
short-term. The 5-year return was 10.4 percent and the
10-year return was 8.4 percent. The reality was that if the
legislature had to appropriate the money, it had the
ability to do so. The money that was drawn from the fund
would not earn a return. She was not sure what the right
number was for each legislator. She believed LFD had done a
tremendous job of building in numbers and being able to
adjust them. The Legislative Finance Division used Callan's
6.75 percent long-term assumption included which was the
same assumption APFC would use. She emphasized the
importance of having the information and thought LFD could
provide it.
2:36:43 PM
Representative Josephson referred to slide 10 in
combination with slide 30. He suggested that if the
governor had not vetoed the other $5 billion that the
legislature requested be placed in the corpus, the earnings
would have grown. He thought the governor's motivation was
that the legislature would spend the funding. He asked Ms.
Rodell how she would respond to someone remarking that the
governor's draw for dividends was less than what the
legislature proposed to put into the corpus. He wondered
how she would explain the difference.
Ms. Rodell referred to slide 10. There would be $5 billion
less in the ERA - $4 billion rather than $9 billion in dark
blue. There would be $51.8 billion in the principal of the
fund in dark blue. She also noted that the unrealized gains
would be reapportioned because they were assigned on a
pro-rata basis based on the denominator. The unrealized
gains would be about $1.4 billion rather than $2.8 billion.
Ms. Rodell continued that in response to Representative
Josephson's philosophical question about how it was
different, she explained that the $3.1 billion in the POMV
was an investment in Alaska. It paid for the state's public
safety, teachers, and all the things that made Alaska a
robust state. The Alaska Permanent Fund Corporation was
covering 70 percent of the state's budget, generating more
revenue for the state budget than any single oil and gas
company at the height of the oil boom. She emphasized that
not one company on a stand-alone basis produced the level
of revenue the legislature was asking APFC to generate
currently. She indicated that in terms of moving money into
the corpus, any money moved would spin off money for all
the things the state needed - the key difference.
2:40:26 PM
Vice-Chair Ortiz referred to investment management on
slide 6. He pointed to APFC stewardship and the first
bullet: quasi-independent. He asked how the corporation was
a quasi-independent organization. He asked Ms. Rodell to
clarify the term.
Ms. Rodell replied that APFC had significant responsibility
assigned to it - managing and investing assets. The
corporation was independent in that it decided how to
manage and invest assets - whether to invest in stock "A",
bond "B", or private equity "C." The Alaska Permanent Fund
Corporation was independent of political influence, and the
board set the framework for making decisions. The
legislature did not.
Ms. Rodell continued that the corporation was quasi in that
she would be before the legislature. She would discuss the
budget and the resources needed to make decisions, but that
was where the independence stopped.
Ms. Rodell would try to get through the balance of the
slides before taking questions. She addressed the question
of how the Permanent Fund principal grew beginning on slide
22: "Principal." She explained that the principal was the
constitutionally established part of the fund. It only grew
through three mechanisms: royalty contributions, special
appropriations, and inflation-proofing. She emphasized that
it did not grow through market value or market activity of
any kind, rather, it required action of savings to make the
principle grow. The principle could only be used for
income-producing investments.
Ms. Rodell turned to slide 23: "Principal Contributions:
Inception through January 31, 2021." She explained that
over the years through January 31, 2021 the corporation had
experienced $17.7 billion in royalty deposits. There was a
constitutional minimum requirement of 25 percent and a
statutorily mandated deposit of 50 percent for leases
entered into after 1970. The corporation had also received
over $18 billion in inflation-proofing. Inflation-proofing
was based on deposits into the principal of the fund and
the inflation rate calculated per statute. Over the years,
the corporation also had $11 billion in special
appropriations which included transfers from the general
fund in the amount of $2.7 billion and from the ERA in the
amount of $8.3 billion. She reported that the $4 billion
discussed earlier was part of the $8.3 billion.
Ms. Rodell explained how the ERA grew beginning on
slide 25. The earnings reserve account was established in
statute as a separate account to hold investment income.
She thought of it as a receptacle for collecting
everything. The funding had to be invested in investments
authorized under the same statute that authorized
investments for the principal of the account. It grew
through the receipt of statutory net income and was
available for legislative appropriation.
Ms. Rodell continued to the flow chart on slide 26:
"Renewable Resource." Money moved through the system
beginning with the corporation receiving contributions that
were constitutionally protected. The contributions were put
into income-producing investments with associated
unrealized gains and losses. The investments were then
sold. All of the gain was moved into the ERA and invested
side-by-side with the principal which also generated
income. The corporation took out money for APFC operations
and investment expenses, inflation-proofing, special
appropriations, the POMV transfer for state government, and
dividends.
2:45:03 PM
Ms. Rodell reviewed the statutory net income of the ERA. In
looking at the previous 20 years of the total return versus
statutory net income, the chart highlighted how statutory
net income was not necessarily tied to total return. Over
the years, the fund had high returns, negative returns, and
returns in between. In the study the statutory net income
crept up, drew down, then crept up again. The great
financial crisis occurred in 2019, a year in which the fund
experienced significant loses. In 2018, the corporation
sold a major asset at a huge gain causing a spike in
statutory net income even though returns were not very high
that year.
Ms. Rodell explained that in a high market like it was
presently, and with a target asset allocation, part of the
discipline was rebalancing. The corporation did not have
mandatory rebalancing. It rebalanced as it saw certain
limits and marks being reached. Some of the corporation's
rebalancing was instinctive and some was quantitative.
Anytime APFC rebalanced and sold stocks, it generated gains
into statutory net income. She indicated it was the reason
the chart showed a statutory net income of $3.6 billion in
the current year. The corporation had been extremely
disciplined in holding the line on its exposure to stocks.
As they ran up and became a larger piece, APFC trimmed it
down. Such activity had the effect of generating
significant income.
Ms. Rodell explored the question of how much could be
drawn. She turned to slide 29: "Fund and ERA
Appropriations." The slide provided a sense of the
proposals the legislature had been discussing. For FY 21 an
operating budget for APFC of $17.6 million was enacted.
There was also an asset allocation for investment
management fees of $129.4 million and a POMV draw of just
over $3 billion. The corporation had received
constitutional royalties of $276 million. The statutory
royalties were an additional $67.9 million. There was no
inflation-proofing appropriated for FY 21. She continued
that $30 million went to the capital income fund, and there
were various distributions to the Department of Law, the
Department of Natural Resources, and the Department of
Revenue for the administration and collection of royalties.
Ms. Rodell continued that the governor had proposed to
support APFC operating investment management, either
through supplements to the FY 21 budget or through the
FY 22 proposal. The corporation also had a supplemental
request for $50 million in additional investment management
fees given the current high earnings rate. The governor had
also proposed the POMV draw of $3.069 billion and the
additional Permanent Fund Dividend (PFD) payments for FY 21
and FY 22. She noted the royalty expectations forecasted by
the Department of Revenue, the additional money to the
Alaska Capital Income Fund, and the requests to the various
agencies in support of APFC. She had mentioned everything
touching the ERA currently and everything that was going
out of the ERA.
Ms. Rodell detailed the state's POMV on slide 30. She
explained the POMV was based on actual market value rather
than realized income. The percent of market value was
predictable and based on the average market value of the
fund for the first 5 of the preceding 6 fiscal years. In
FY 19 the POMV was a 5.25 percent draw which was set for
3 years with a step down to 5 percent in FY 22. The slide
showed the approximate effective rates making the
assumptions about the fund balance at the end of each year.
She noted the effective rate was growing. In other words,
the draw amount was growing slightly faster than the fund
itself.
2:50:29 PM
Ms. Rodell reviewed the trustee's Resolution 18-04 on
slide 31. She indicated that the sustainability of the fund
required annual formulaic withdraws from the ERA at an
amount that the long-term balance of the account was able
to fund. The board had long supported the POMV concept,
including a constitutional amendment that would ensure that
no more than a sustainable amount was taken from the annual
earnings of the Permanent Fund. The resolution dated back
21 years to 2000. She added that adherence, sustainability,
inflation-proofing, and real growth were the measures by
which the corporation could keep the fund going for the
long-term.
Ms. Rodell examined the contributions of the ERA to the
state's unrestricted general fund (UGF) on slide 32. The
Permanent Fund was the primary source of UGF revenue. She
pointed out that for FY 21 the UGF revenue was expected to
be $4.4 billion of which the POMV was $3.1 billion (not
open for estimation) equaling 70 percent of the state's
revenue. In FY 22 the POMV draw was expected to be
72 percent of UGF revenue.
Ms. Rodell continued to slide 33: "ERA Monthly Values since
POMV." She relayed that the ERA had stayed steady in terms
of monthly values since the POMV draw. She thought it
highlighted the discipline around spending and the
agreement with the Treasury Division about how to manage
through various periods. She noted that the market
volatility that occurred month-over-month did not
significantly impact the ERA. The impact on the ERA was
driven by activity other than market driven activity. The
chart showed the balances going up, the draws occurring,
and the account building up again in a cycle.
Ms. Rodell addressed the graph on slide 34 which provided a
20-year look back of the total return versus the ERA
balance. The slide highlighted the non-correlation between
the ERA and market volatility. The earnings reserve account
balance started to grow significantly and had grown in
recent years substantially. Historically there was a
practice of sweeping the monies left over after paying
dividends in other months. It was only in recent years that
there had been a significant build-up in the ERA balance.
Ms. Rodell advanced to slide 35: "Use of Fund Earnings
since inception through January 31, 2021." She noted the
coincidence of the amount on the slide being near the value
of the fund. She thought the slide highlighted the amount
of economic activity and the importance of the fund to the
State of Alaska since its inception. The corporation had
paid out $33.8 billion through POMV distributions, dividend
appropriations, and the Capital Income Fund. She summarized
that $33.8 billion had been generated and pushed into
Alaska's economy. The corporation had also saved $26.3
billion because inflation-proofing and special
appropriations came from other activities. She mentioned
the unappropriated $12.1 billion that was still in the
account. She thought it was an amazing story of what had
been accomplished over the previous 45 years and something
Alaskans should be proud of.
2:55:06 PM
Ms. Rodell spoke about the evolving role of APFC on
slide 37. In the past the corporation had not been required
to manage to a liability. The corporation took a very
long-term time horizon. A portion of the statutory net
income was used to make a payment. She thought everyone was
trying to determine the role of APFC and the fund going
forward in terms of how much the short-term would way on
APFC's long-term thinking. She mentioned that the trustees
had recently published its trustee paper, volume 9. She
recommended legislators take a look at it. It looked at
sovereign wealth funds including success stories, failures,
and the reason for failures. The trustees came away with 5
lessons on successful funds. They included mission clarity,
the importance of rules, the successful enforcement of
saving rules, designing a POMV spending rule, and reforming
the ERA.
Ms. Rodell continued to slide 38: "Revenue Generation." She
concluded her presentation. She relayed that presently,
more than ever the state was dependent on APFC's effective
management and investment of the fund. She continued that
the POMV draw currently supported 70 percent of Alaska's
UGF budget. The corporation's stewardship fulfilled two
roles. First, it protected the principal for the benefit of
future generations, and it provided a predictable revenue
stream for the state budget. She was happy to answer any
questions.
Representative Wool wondered if 5 percent was a common draw
percentage for a sovereign wealth fund. Ms. Rodell noted
the board had supported a 5 percent draw for about 20
years. Originally when the board looked at university
endowments rather than sovereign wealth fund they
gravitated to 5 percent. It was difficult to know the
answer to his question because not all sovereign wealth
funds were transparent. She thought there was a tendency
for sovereign wealth funds to reduce the percentage in
light of lower growth expectations or to create a floor and
ceiling percentage in order to preserve the fund. A steady
revenue growth picture was very important.
Representative Wool referred to slide 35 and the figure of
$38 billion. He highlighted the $22 billion dividend
appropriation. He wondered if she know how much the fund
would be worth if dividends had not been paid. Ms. Rodell
could not provide the number, as the asset allocation had
changed significantly over the years.
Representative Wool asked if Ms. Rodell had a recommended
POMV balance. Currently the amount was $12 billion; $3
billion for the draw and $9 billion in the ERA. Ms. Rodell
indicated that 5 percent was a comfortable number.
3:01:41 PM
Representative LeBon recalled in the news that the board of
trustees had gone on record supporting a consolidation of
the principal and the ERA into one endowment fund. He asked
if the information was correct. Ms. Rodell confirmed that
the board had recommended a consolidation of the two funds.
Representative LeBon provided a hypothetical scenario in
which the corporation purchased a property and later sold
it for a profit. He asked whether the original investment
amount would be returned to the principal and whether the
gain would go into the earnings reserve. He wondered if his
summary of the process was accurate. Ms. Rodell responded,
"That is correct."
Representative LeBon asked if there was a provision that
would allow the fund to take a 10 percent inflation rate
over the investment period and place it into the principal.
Ms. Rodell indicated it would require an appropriation by
the legislature. Representative LeBon clarified that the
legislature would have to make the appropriation. Ms.
Rodell responded affirmatively.
Representative LeBon asked whether overdrawing the
5 percent POMV draw would create volatility in the
corporation's asset mix, the planning, and how the
corporation managed investments, particularly unplanned
draws. Ms. Rodell responded in the affirmative.
Vice-Chair Ortiz referred to slide 37 regarding lesson 5.
He asked Ms. Rodell to clarify her meaning of reforming the
ERA. He asked if it meant consolidating the fund into one.
Ms. Rodell responded affirmatively. She noted the
importance of recognizing that the ERA was a standalone
receptacle of earnings that was currently doing other
things. She contended that by harmonizing the principal and
the ERA there would be a much cleaner discussion about what
was happening with the fund.
Vice-Chair Ortiz wondered if other funds had been managed
in a similar way where the principal and the earnings were
combined into one fund. Ms. Rodell thought there was a
number of lessons that could be found in the trustee paper
that talked about confusing the mission. She conveyed that
when there was a confusion of missions accompanied by a
series of unscheduled draws there would be less funding
available. She noted the New Mexico Heritage Fund had
experienced some issues over the years because of overdraws
or not saving enough. She emphasized that both savings and
spending created a robust healthy fund.
3:06:14 PM
Representative Josephson suggested that to make lesson 5
meaningful a resolution would have to go to the voters. If
there were dividends in the future, they would be impacted.
Currently, the corpus was not spendable. He thought what
was being proposed represented every significant issue.
Ms. Rodell thought what Alaska had done in creating the
fund was extraordinary. She did not include the votes of
the House and the Senate on the slide before the issue went
to the vote of the people. She noted that it was also
extraordinary how there was nothing defining how the money
would be spent. Rather, it was to be saved and used for
future generations. It was simple.
Representative Carpenter had a question about royalty
payments and a constitutionally required 25 percent payment
since 1979. He wondered if the legislature had made the 25
percent payments into the corpus as directed in the
constitution and in statute since 2016.
Ms. Rodell replied that APFC had made every payment under
the constitution. She believed that in FY 16, FY 17, and
FY 18 the appropriation for the statutorily required
payment was not made. The payment resumed in FY 21 and was
included in the governor's FY 22 budget. There was a gap
for 3 or 4 years. She would have to double check the exact
years and get back to the committee.
3:09:26 PM
Representative Edgmon agreed with the remarkableness of the
history and management of the fund. He thought Alaska was
the only state that funded the majority of its government
services with an endowment. The other states with
endowments had smaller funds which played a much smaller
role in funding state government. He also noted that Alaska
was the only sovereign wealth fund in the world that paid a
PFD. The combination of the fund being a source for
government funding and an annual outlay to citizens made
Alaska extremely unique. He queried if there was a need to
open an office in Anchorage.
Ms. Rodell indicated her staff had been working from home
since March 2020. It had opened many people's eyes about
having a flexible schedule. The traditional work schedule
was not a good fit with the work of the corporation. She
indicated if there were folks who wanted to live in
Anchorage and work from home, she would consider it on a
case-by-case basis.
Representative Thompson complimented Ms. Rodell's team of
investors. He asked if they were paid a competitive salary
and whether they offered bonuses. Ms. Rodell responded that
the board had adopted an incentive compensation policy. The
corporation had never paid it out due to appropriations.
Payment of the bonuses was included in the governor's
budget that he had put forward. It was in APFC's personal
services request in the budget. The corporation had a study
done in 2017 that showed that the corporation was at about
30 percent of median, well below the bottom quartile of
pay.
3:14:31 PM
Representative Rasmussen thanked Ms. Rodell and her team
for all of their efforts.
Representative LeBon was around to vote for the Alaska
Permanent Fund in 1976. At the time there was significant
pressure, as oil had not passed through the pipeline.
Voters were asked to have some vision. He indicated that
the vote numbers were 75,000 to 38,000. He thought that
part of the vision was based on a sense of urgency. He
reported that the estimated life of Prudhoe Bay in 1976 was
about 25 years. The purpose of the fund was to substitute a
finite resource for an infinite resource. The success of
the Permanent Fund was outstanding. He was proud of
Alaskans who had had a vision in 1976. He was one of them
by voting in favor of the fund.
Representative Wool acknowledged the finite life span of
oil and the infinite quality of the Permanent Fund. He
wondered if Ms. Rodell felt confident that the fund was
truly an infinite asset. He asked if she would be concerned
if the legislature were to break the sovereign wealth fund
rule of limiting the draw to 5 percent.
Ms. Rodell was confident that the same vision that existed
in Alaskans in 1976 existed in legislators and Alaskans
presently. She did have some concerns. She came to Alaska
in 2011. It was her tenth year in front of the House
Finance Committee and her sixth legislative session. When
she came before the committee as the deputy commissioner of
the Department of Revenue the state had a significant
amount of money. She had watched the same debate for
10 years. She worried that if the legislature did not
follow a POMV spending rule, the flood gates would open.
Ms. Rodell agreed people were hurting due to the pandemic.
She also wondered what the legislature was creating for the
future. She wondered what people wanted Alaska to look like
in 25 years. The Coronavirus Aid, Relief, and Economic
Security (CARES) Act money would not last long. She sat on
the Juneau Airport Board and discussed having CARES Act
money through 2024 to help keep the airport going. It was
not owned or operated by the State of Alaska. Yet, the
airport had a $3 million deficit in the current year. She
wondered what would happen to a community such as Juneau if
the airport was forced to close. She thought people should
be looking at what was available for FY 23, FY 24, or
FY 25. It was a difficult place to be in because it would
require saying no sometimes. She did not envy legislators.
Co-Chair Foster reviewed the agenda for the following day.
ADJOURNMENT
3:20:55 PM
The meeting was adjourned at 3:20 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| APFC Presentation HFIN 022330.pdf |
HFIN 2/23/2021 1:30:00 PM |
|
| APFC Follow up HFIN 0223 - 030121.pdf |
HFIN 2/23/2021 1:30:00 PM |