Legislature(2021 - 2022)ADAMS 519
01/31/2022 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Savings Account/budget Reserves/investment Funds | |
| 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
January 31, 2022
1:38 p.m.
1:38:20 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:38 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Kelly Merrick, Co-Chair (via teleconference)
Representative Dan Ortiz, Vice-Chair
Representative Ben Carpenter
Representative Bryce Edgmon
Representative DeLena Johnson
Representative Bart LeBon
Representative Sara Rasmussen (via teleconference)
Representative Steve Thompson
Representative Adam Wool
MEMBERS ABSENT
Representative Andy Josephson
ALSO PRESENT
Brian Fechter, Deputy Commissioner, Department of Revenue;
Pam Leary, Director, Treasury Division, Department of
Revenue.
SUMMARY
PRESENTATION: SAVINGS ACCOUNT/BUDGET RESERVES/INVESTMENT
FUNDS
Co-Chair Foster reviewed the meeting agenda.
^PRESENTATION: SAVINGS ACCOUNT/BUDGET RESERVES/INVESTMENT
FUNDS
1:39:53 PM
BRIAN FECHTER, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
introduced himself.
PAM LEARY, DIRECTOR, TREASURY DIVISION, DEPARTMENT OF
REVENUE, provided a PowerPoint presentation titled "Update
on Investment Funds and Cash Flows," dated January 31,
2022. She began on slide 3 with an update on state
investment funds. She planned to discuss historical asset
balances of state funds and pension funds. Additionally,
the presentation addressed key investment statistics. She
noted the funds were all managed at the Treasury.
1:41:27 PM
Ms. Leary moved to slide 4 and reviewed a chart showing the
Constitutional Budget Reserve Fund (CBRFF) and historical
invested assets since inception in 1990. The blue section
of the chart reflected the main fund, and the yellow
section reflected the sub-fund. She noted the sub-fund had
been created in 2000, but substantially funded in 2008 with
a $4.1 billion deposit. The CBRFF had been used to fund
temporary cashflow expenses as well as budget revenue
shortfalls. She detailed that $960 million from the fund
had been used in 2021 to help with a revenue shortfall. She
highlighted appropriations from the fund were required to
be repaid. As of the FY 20 year end financial statements,
the fund was owed $12.8 billion. She relayed there was no
time period for the repayment and no interest accrued to
the fund.
1:42:51 PM
Ms. Leary advanced to slide 5 showing key investment
statistics. Currently the CBRFF target asset allocation was
funded to 100 percent cash equivalents (i.e., money
markets, treasury bills, etcetera). The fund had a very
short investment horizon, meaning the Department of Revenue
(DOR) anticipated funds could be used within a very short
time period. As of December 31, 2021, the market value was
nearly $1.1 billion. She noted the slide showed the fund's
market value history for the past five years. As of the end
of December, the rolling one-year return was 0.09 percent
and the short-term projected return for the year was 0.05
percent.
Representative Edgmon stated it was his understanding that
the CBRF was the state's checking account. He detailed that
money flowed in and out of the account monthly to deal with
needs around the state.
Ms. Leary clarified that the General Fund acted as the
state's the checking account and the CBRF was the savings
fund. She explained that money had been transferred from
the CBRF to the General Fund in the past five years to make
the state's payments. She noted that the CBRF was sometimes
referred to as the "rainy day" fund.
Representative Edgmon believed that in the past the CBRF
had been used as a source to fund the state's needs for
cash flow purposes. He remarked he had been at the House
Finance Committee table when the discussions had taken
place. He stated that no one could answer how much money
should be in the account to provide certainty funds were
available in the event of a drop in oil prices or other. He
highlighted appropriating funds from the CBRF required a
three-quarter vote by the legislature. He remarked that DOR
did not need the legislature's approval to use funds in the
short-term on a monthly basis. He stated that a frequently
asked question was how much money should be in the CBRF. He
wondered if an $800 million balance was sufficient as a
safeguard if the Higher Education Investment Fund was lost.
He wondered whether the balance should be higher in case
oil prices fell.
1:46:54 PM
Mr. Fechter replied that DOR was comfortable with a balance
of about $1 billion for cash flow. He relayed the
department considered the amount to be sufficient to
weather two years of oil price volatility. He noted there
would be additional detail later in the presentation. The
presentation would address revenue anticipation borrowing
and other mechanisms to assist the state if it was not
possible to maintain a $1 billion minimum CBRF balance.
Vice-Chair Ortiz asked if the December 31, 2021, CBRF
balance of approximately $1.1 billion reflected the sweep
balance.
Ms. Leary answered in the negative, the amount reflected
cash balance only. She elaborated that the June 30
sweepable fund transfer had not yet been done on a cash
basis. The department was awaiting guidance from the
state's annual financial report coming out in February to
help identify where funds should be moving and in what
amounts.
1:48:49 PM
Ms. Leary addressed Power Cost Equalization (PCE)
historical invested assets on slide 6. She detailed that
the PCE Endowment Fund had been funded in 2000, 2007, and
2012. The purpose of the fund was to provide stable
financing for affordable levels of electric utility costs
in otherwise high-cost service areas of the state. She
relayed that the target allocation had moved from 7 percent
to 5 percent, which coincided with a change to a 5 percent
percent of market value (POMV) appropriation for the fund.
She detailed that if prior year earnings exceeded the
target, 70 percent of the difference could be spent on
related identified programs, including community assistance
programs, renewable energy grants, and bulk fuel revolving
loan funds. She noted the amount could not exceed $55
million annually. The amount had been $1.15 billion at the
end of June 30.
Ms. Leary discussed PCE Fund investment statistics on slide
7. She detailed that the fund was longer-term [than the
CBRF] with an intermediate investment horizon. The fund was
targeted with a higher risk return with a 56 percent
equity/44 percent bond asset allocation. As of the end of
December, the market value was about $1.1 billion and one
year return was 7.12 percent. The projected 10-year return
was 5 percent.
1:51:13 PM
Ms. Leary advanced to slide 8 and discussed the Alaska
Higher Education Investment Fund. The fund had been created
in 2012 with a capitalization of $400 million. She detailed
that the fund was to be swept as of June 30 and DOR was
awaiting guidance. She elaborated that the fund was still
invested as it had been previously. Once DOR received
guidance, it would determine how the funds could move over
to the CBRF.
Ms. Leary moved to slide 9 showing investment statistics
for the Higher Education Investment Fund. She detailed that
the fund was invested for a high risk return with a long
investment horizon (despite any forthcoming changes to the
fund). As of the end of December, the fund balance was $422
million, the one-year return was 12.55 percent, and the
projected 10-year return was 5.62 percent.
Representative Wool asked for the withdrawal rate on the
Higher Education Investment Fund. He asked if there was a
set formula. He observed the fund had been capitalized with
$400 million in 2012 and the current balance was $422
million. He asked how much of the earnings were taken
annually.
Ms. Leary believed the allowable appropriation amount was
up to 7 percent annually. She estimated the annual
withdrawal amount to be in the $30 million to $40 million
range.
Mr. Fechter added that the amount varied but tended to be
$30 million to $40 million per year.
Representative Wool asked if the spend was based on need by
the given number of students. He observed that the
projected 10-year return was 5.62 percent, while the
appropriation amount could be up to 7 percent. He wondered
whether it depended on how many students applied and
qualified. He added that he certainly wanted the funds to
go out.
1:54:19 PM
Mr. Fechter answered that over the years there had been a
number of discussions about the long-term sustainability of
the withdrawal rate. He relayed the money was only spent if
there were enough seats in the Washington, Wyoming, Alaska,
Montana, and Idaho (WWAMI) program and students qualifying
for the [performance] scholarship. He explained that any
unspent funds at the end of a year would lapse back into
the Higher Education Investment Fund. He elaborated that
the Office of Management and Budget (OMB) and the
Legislative Finance Division (LFD) were monitoring the
situation on an ongoing basis to ensure the fund was not
drawn beyond its long-term earning capability.
Representative Thompson remarked that 10 additional
students were being added to the WWAMI program. He asked if
it would have a substantial impact on the draw from the
fund.
Mr. Fechter responded that because many of the sweepable
funds had been swept, the governor had replaced the
spending items with unrestricted general funds (UGF) in his
proposed budget. He explained that it would not be an
additional draw from the Higher Education Investment Fund
because in theory it had already swept. The administration
viewed the situation as positive for some of the students
because there was a cost benefit between General Fund and
Higher Education Investment Fund funding of the programs.
He expounded that because the fund was designated general
fund (DGF) it did not receive the level of scrutiny that a
UGF appropriation would. On the other hand, funding through
DGF made it susceptible to the three-quarter reverse sweep.
The department believed funding the program with UGF
provided a bit of certainty to students relying on the
scholarships.
Representative Thompson referenced a pending lawsuit. He
provided a scenario where the lawsuit reversed the sweep of
the funds back into the Higher Education Investment Fund.
He asked if it was necessary to add language to the budget
stating that the funding source would be reversed if the
lawsuit were to occur.
Mr. Fechter answered the question was purely mechanical and
related to the budget structure, which was at the will of
the legislature.
1:57:11 PM
Representative Edgmon thought it was an excellent point in
terms of a contingency measure because the outcome of the
court case was not yet known. He asked for verification
that the funds would remain in the CBRF if the lawsuit
determined the Higher Education Investment Fund was swept.
Ms. Leary replied affirmatively.
Representative Edgmon remarked that the program had started
in 2013, but he did not believe the Higher Education
Investment Fund had been considered sweepable in its first
six to eight years. He asked if his understanding was
accurate.
Mr. Fechter replied that he would have to look into the
question. He noted there had been a number of iterations
across multiple administrations about what the legal
analysis of the moment deemed sweepable or not sweepable.
Representative Edgmon believed his previous statement was
accurate. He stated that the Dunleavy administration had
determined the fund to be sweepable, but it had not been
considered sweepable during the Parnell or Walker
administrations. He remarked there was an uncertain
arbitrary nature in terms of what was or was not sweepable.
He highlighted that if the courts decided the fund was part
of the CBRF and was to be swept, it meant the legislature
had to come up with the money annually. He pointed out that
it was adding $20 million or more to the budget annually
because the legislature's only recourse was to pay the
money out of UGF. He asked if he was missing something.
1:59:02 PM
Mr. Fechter agreed that in the absence of having the
endowment to fund the programs, another funding source
would need to be identified. In the current budget, the
governor had selected UGF.
Representative Edgmon observed that the change effectively
meant switching the $400 million pot of money from an
expected return rate of 5.6 percent [in the Higher
Education Investment Fund] to a rate of 0.05 percent [in
the CBRF]. He remarked that it was unfortunate.
Vice-Chair Ortiz referenced Representative Wool's question
related to the amount withdrawn from the account annually.
He highlighted that Mr. Fechter had stated the number of
people who qualify for the scholarship fund or the WWAMI
program had an impact on the withdrawal amount. He asked if
the number of individuals receiving funding could be cut
off at a certain point in order to maintain the fund's
health and avoid an overdraw. Alternatively, he wondered if
it was purely dictated by the number of people who
qualified each year.
Mr. Fechter believed it was a flat dollar amount put into
the budget where the Department of Education and Early
Development and Alaska Commission on Postsecondary
Education (ACPE) developed an estimate of the amount needed
to fully fulfill the earned scholarships and WWAMI slots.
He elaborated that if student numbers came in low, the
money would remain in the fund for future use. Conversely,
he believed there was a buffer built into the numbers if
the student numbers came in high. The buffer was aimed at
avoiding a situation where there were more obligations than
spending authority. He noted the supplemental budget
process was an option as well.
2:01:57 PM
Representative Wool remarked that 10 to 20 WWAMI students
represented a small portion of the overall fund draw. He
surmised the majority of the fund recipients were
undergraduate students at the University of Alaska
Fairbanks.
Mr. Fechter confirmed that the lion's share of the funds
went to the performance scholarship recipients and largely
prospective University of Alaska students. Over the years
there had been some off-designation appropriations from the
fund. For example, one year, the funding for the Public
Employees' Retirement System (PERS) and Teachers'
Retirement System (TRS) pension obligations came from the
fund. He elaborated that periodically over the years some
related programs such as Online with Libraries and Live
Homework Help had been appropriated from the fund. He noted
it depended on the year and how the budget process
progressed.
Representative Wool stated that he had not been aware of
the anomalies. He stated that perhaps the appropriation use
was perfectly within the defined use of the fund. He
referenced a line item in the FY 23 budget to fund all of
the scholarships without the withdrawal from the fund. He
remarked that if the fund was swept, it would contain no
earnings available to pay for the scholarships. He stated
the amount currently in the budget was for performance
scholarships and WWAMI. He asked for the number.
Mr. Fechter replied that he did not have the number on hand
but would follow up with the information. He noted the
figure was in the normal range. He added that a few seats
had been added to the WWAMI program; therefore, the amount
would be an uptick from the previous year.
Representative Wool asked if paying PERS and TRS and other
things from the fund was an anomaly or something that
occurred more frequently.
Mr. Fechter answered that the payment had occurred under
the previous administration and was an anomaly. He
elaborated that for the most part, the legislature tended
to stick with designations written in statute. He furthered
that occasionally for ease of budgeting there were
anomalous funding events.
Representative Wool could understand how online libraries
could be attached to education. He thought paying for PERS
and TRS was a larger leap.
Representative Edgmon remarked that the state was looking
at having some surplus funding in the current year. He
asked if it would take statutory change to put some of the
surplus funding into the Higher Education Investment Fund.
He did not believe the action would require statutory
change; however, he believed expanding the purpose of the
fund would likely take statutory language.
Mr. Fechter agreed that changing the designation of the
fund would take a statutory change. He noted that the
legislature was permitted to spend funds outside of the
designation due to the anti-dedicated funds clause within
the state constitution.
2:06:21 PM
Representative Edgmon stated his understanding that the
legislature would not be prohibited from capitalizing the
fund further.
Mr. Fechter agreed.
Ms. Leary advanced to slide 10 showing historical invested
assets of the General Fund and Other Non-Segregated
Investments (GeFONSI). She explained there were two GeFONSI
components. She detailed that GEFONSI II was created in
2018 to target a higher risk return profile for a subset of
funds. There were approximately 180 funds managed together
in the two GeFONSI components, but they were accounted for
separately. As of December 31, 2021, there was about $3.5
billion in total GeFONSI funds. She elaborated that the
General Fund was included in the group of GeFONSI funds and
had been about $1.6 billion at the end of June; however,
the fund had been reduced to about $600 million by July
because it was the state's working capital account.
2:08:06 PM
Ms. Leary turned to investment statistics on slide 11 for
GeFONSI I and II investments. She highlighted that GeFONSI
II had a 6 percent allocation to equity and a slightly
higher fixed income allocation slated for a slightly higher
return. The combined total in the two GeFONSI components
was $2.8 billion at the end of December. The returns for
the year ending December 31 were -0.35 percent for GeFONSI
I and 0.85 percent for GeFONSI II. The short-term return
projections were 0.27 percent for GeFONSI I and 0.91
percent for GeFONSI II.
Representative Edgmon referenced the location of the
community assistance funds. He clarified he was asking
about the fund itself and not the money that came from PCE
in the event of a surplus. He asked if the community
assistance funds resided in the GeFONSI accounts.
Ms. Leary responded affirmatively.
2:09:28 PM
Ms. Leary addressed the Public School Trust Fund on slide
12. The fund was funded by one half of one percent of state
receipts from the management of state lands, mineral
leases, rentals, and royalties. The fund was established in
1978. She detailed that it had previously been managed as
two separate principal and interest funds, but it was
currently managed as one fund. She elaborated that the fund
was managed under a POMV method. She explained that 5
percent of the average market value for the five years
preceding the last previous fiscal year was used to make
payments from the fund to provide an offset to the K-12
formula funding. The amount was roughly $32 million for FY
23.
Representative Wool asked if the $32 million was used to
augment other general funds used to fund education.
Ms. Leary agreed.
Ms. Leary turned to slide 13 showing the Public School
Trust Fund investment statistics. The fund had a long
investment horizon with a target asset allocation of 69
percent equity and 31 percent fixed income. As of December
31, the balance was $850 million with a rolling one-year
return of 12.56 percent, and a ten-year target return of
5.62 percent. She noted the previous year there had been
discussion about the introduction of a state investment
review board started by the DOR commissioner. She relayed
the board was coming up on its sixth meeting to go over the
investments under the commissioner's fiduciary care. She
elaborated that the Investment Advisory Council for the
state's pension funds had been providing guidance
separately to the state funds. She explained that meetings
included discussion on the asset allocations. She noted
that meeting information and minutes were available on the
DOR website.
2:12:33 PM
Ms. Leary advanced to slide 14 showing historical assets
for PERS and TRS including pension and health Defined
Benefit plans, totaling $31.7 billion on June 30, 2021.
Slide 15 showed investment allocations for the retirement
funds. She highlighted there was a much more diverse target
asset allocation for the retirement funds when compared to
many of the state funds. She detailed that 49 percent was
allocated to public equity, 30 percent was allocated to
private equity, and 21 percent was allocated to fixed
income. At the end of December, assets for defined benefit
and health care plan were $22.5 billion for PERS and $10.8
billion for TRS. She pointed to the 24.64 percent returns
at the end of September, which were calculated by DOR's
performance consultant Callan Associates. She noted that as
of December, DOR's internal returns were closer to 19
percent.
2:14:27 PM
Ms. Leary discussed cash flows on slide 17. She reminded
committee members that the Cash Management Section and
Treasury Division managed all of the banking relationships
and cash flows in and out of the state, in addition to
forecasting all of the expected cash positions on a daily
basis. She clarified that discussions about funds or money
movement within the Treasury pertained to cash balances,
not the amounts in the annual financial report or the
budget. She explained that the cash balance was the money
in the bank at a given point in time.
2:15:38 PM
Ms. Leary moved to an illustration on slide 18 reflecting
money moving in and out of the General Fund into the
Division of Treasury. Cash inflows included tax revenues
and federal dollars for things like Medicaid and grants on
their way to various funds.
Representative Edgmon asked for verification that the
initial Coronavirus Aid, Relief, and Economic Security
(CARES) Act federal funding had been deposited into the
state Treasury in 2020.
Ms. Leary agreed.
Representative Edgmon asked if the same was expected with
the federal infrastructure money.
Mr. Fechter answered that he would confer with the
infrastructure lead Miles Baker and would follow up with
the committee.
Representative Edgmon stated he would be very interested in
the response. He was interested to find out if there was a
sense of timing.
2:17:44 PM
Ms. Leary moved to slide 19 and addressed cash flow
deficiencies. She noted that historically many of the
incoming funds went into the General Fund and remained
there for working capital account purposes. She explained
that the monies were put into the budget to spend money
from the General Fund for different purposes; however, many
sub-funds had been created over time to segregate cash for
specific purposes, which had resulted in less cash
available to pay day-to-day operating costs. She explained
that expenditures could occur prior to the receipt of
revenue, resulting in cash flow timing mismatches. She
highlighted federal programs required expenditures before
reimbursement for things like Medicaid and transportation
costs.
Representative Edgmon asked if there were any sub-funds
associated with the Statutory Budget Reserve (SBR).
Ms. Leary answered that the SBR was part of the sub-funds
within the GeFONSI.
Representative Edgmon asked for verification that the SBR
was not considered sweepable based on the court case the
previous August.
Ms. Leary agreed.
Representative Wool asked for verification that a balance
was needed in the CBRF in the event of cash flow
deficiencies. He surmised funds could be used from the CBRF
when the state was short on cash and repaid when revenues
came in.
Ms. Leary confirmed the CBRF was one of the sources for
filling gaps in addition to the ERA. She intended to
address the issue in more detail later in the presentation.
2:19:55 PM
Ms. Leary advanced to slide 20 and discussed cash
deficiency memorandum of understanding (MOU) developed
between DOR, OMB, the Department of Administration, and the
Department of Law. She explained that the MOU walked
through the process DOR would take when dealing with the
deficiencies. She detailed that the target cash flow
balance had a floor of $400 million. She explained that the
number had been developed over time and provided coverage
for two days of high volume outflows in the event cash
calls all occurred at one time. She elaborated that the MOU
addressed temporary interfund borrowing including transfers
from the SBR, CBRF, Permanent Fund Earnings Reserve Account
(ERA), or General Fund sub-funds.
Ms. Leary explained that the transfers were targeted at
temporary short-term cash flow mismatches where DOR
anticipated incoming revenue that would be used to make the
funds whole again. She explained that in the event of a
revenue shortfall without a backstop in the budget bills,
measures would need to be taken to address the issue. The
department would first seek legislative action [through the
governor] to access additional funds through an
appropriation, supplemental, or other cash reserves. She
explained that disbursements may have to be limited if
additional funds could not be secured.
Representative Edgmon recalled committee discussion the
previous summer about the possibility of a government
shutdown and the administration's ability to move money
around outside of the legislature's appropriation
authority. He remarked that DOR had the ability to move
money around. He believed DOR had the ability to tap into
the CBRF. He asked about the process of using funds from
the CBRF without an appropriation from the legislature.
2:23:16 PM
Mr. Fechter believed the situation Representative Edgmon
was referring to for a variety of previous government
shutdown scenarios spoke to the fact that DOR could only
access the CBRF for inter-year cash flow "lumpiness"
without the three-quarter vote temporarily. He explained
that the method could not be used to fill a systemic
ongoing deficit; DOR would need to have some certainty the
revenues would eventually come in within that fiscal year
to use the CBRF as a cash management tool.
Representative Edgmon provided a hypothetical scenario
where the effective date for the annual operating budget
failed to get the required two-thirds vote. He stated that
DOR would still have some tools to move money around to
cover expenses to some degree until the effective date
naturally came into law in 90 days [after the passage of
the budget].
Mr. Fechter replied affirmatively, but with a number of
caveats. He explained there were borders for interfund
borrowing. For example, DOR could not borrow more than it
could anticipate coming in. For example, if there was an
issue with funding appropriations supported by tobacco
fund, DOR could use the interfund borrowing tool, but not
to a greater degree than anticipated incoming tobacco
receipts.
Representative Edgmon remarked the state had some tools at
its disposal [to cover expenses] in the event the operating
budget effective date clause did not pass. He thought the
subject may bear further examination by the committee as a
contingency measure because it was unknown whether the two-
thirds vote could be obtained.
2:26:30 PM
Representative Wool referred to Representative Edgmon's
mention of the potential for the effective date clause to
fail. He considered the situation was a legislative
roadblock and not a cash flow deficiency. He remarked that
it was not a shortage of revenue problem. He referenced
Representative Edgmon's statement that the bill would
become law after a given number of days [without the
passage of the effective date]. He remarked that the
revenue would be available, but the issue was about giving
the authority to spend the money. He thought it was a
different problem than cash deficiency.
Mr. Fechter agreed it was a bit of a different problem and
there had been competing legal opinions on the topic over
the years.
Representative Wool asked if temporary interfund borrowing
from the SBR, CBRF, and ERA was arbitrary or written in a
descending order of preference. He stated that the
committee heard [throughout time] that the CBRF was the
"slush fund" where cash could be used up to a certain
amount and replaced. He was not aware the ERA could be used
for that purpose.
Ms. Leary answered that it had changed over the years
depending on the department's borrowing authority. She
stated that with the ERA providing much of the state's
revenue for the past several years, it was generally the
first source DOR utilized at present unless there had been
an anticipated deficit. For example, in 2021, DOR had
borrowed money from the CBRF first up to the anticipated
deficit amount. Subsequently, DOR had taken money from the
ERA in order for the money to earn more with the Alaska
Permanent Fund Corporation (APFC) for a longer period of
time.
Representative Wool stated his understanding of Ms. Leary's
response. He asked for verification that the ERA was the
first go-to for necessary funds because it was already
funding government. He asked if it lessened the importance
of maintaining a higher CBRF balance. He thought the
[recommended] $1 billion CBRF balance was for cash flow
needs.
Ms. Leary answered she did not know that it had an impact
on what the state wanted to keep as a rainy day fund. She
elaborated there was change continuing to occur annually in
terms of what the ERA would be used for. She noted that the
amount going to state government was not quite decided. She
highlighted the importance of a rainy day fund and noted
there were many ways to calculate what the amount should
be. The current view was the balance should be about $1
billion.
Representative Wool stated that having a rainy day fund was
an appropriate and apt concern. He recalled when oil prices
had been in the negative. He thought the situation would
potentially qualify as a need for a rainy day fund and
other circumstances.
2:31:14 PM
Ms. Leary moved to slide 21 and continued to discuss cash
flow deficiencies. The use of budget reserve funds had been
the solution for cash flow mismatches and revenue
shortfalls for many years. She noted that the solution had
shifted more to the ERA. She highlighted that the CBRF
balance had been fully repaid by 2010 and borrowing had
recommenced in FY 15. As of the annual financial report in
FY 20, the amount owed to the CBRF was $12.8 billion.
Representative Edgmon recalled there was no requirement for
a payment plan or a date. He described money owed as a "big
IOU out there" with really no specificity attached.
Ms. Leary agreed.
Representative Wool asked for verification that paying the
$12.8 billion back would not really change anything. He
surmised it meant there would be $12.8 billion sitting
there [in the CBRF] that the legislature could use for the
next rainy day.
Mr. Fechter agreed. He detailed it was a debt the state
owed itself. To the extent there were ongoing deficits
annually, it would make the need to balance the CBRF go on
in perpetuity. Whereas, if a sustainable fiscal plan was
achieved resulting in a balanced budget, the $12 billion
would far exceed the amount needed for revenue volatility
management.
2:33:32 PM
Representative Edgmon remarked the situation was another
example of how the legislature was bound by laws passed in
a different era. He believed the CBRF language had passed
in 1990. He highlighted that if the legislature
recapitalized the $12.8 billion, it would be foregoing the
ability to put money in the Higher Education Investment
Fund (with a 5.62 percent target return) or putting money
into the ERA that earned close to 30 percent the previous
year. He pointed out that from an investment perspective,
the situation was a little out of kilter.
Ms. Leary highlighted the concept of the sub-fund for the
CBRF. She detailed that currently the CBRF had a 100
percent cash equivalent target asset allocation. She
explained that there had been a much different asset
allocation in the past, including monies going to the sub-
fund in 2008, which had a significantly higher target
return. She stated there were mechanisms to invest the
money, but the sub-fund could only be utilized if the funds
were not needed for about five years.
Representative Edgmon pointed out that the CBRF was also
bound to certain liquidity thresholds, meaning the fund
could not be invested as a more diversified portfolio like
the pension funds. He stated in essence the department was
bound to a low earning, stable, and low risk fund.
Ms. Leary agreed it was true for the main [CBRF] fund.
Representative Edgmon thought it was interesting that the
state's primary savings account appeared to be outdated
relative to other existing funds that were nimbler and had
a higher earning capability. He recalled in 1990 when the
CBRF was viewed as the state's fiscal plan where every last
dollar was swept into the "concrete vault" the legislature
could not access without a three-quarter vote. He stated
that times changed and continued to change. He pointed out
that the Permanent Fund may have been in its best return
decade possibly ever, which everyone hoped was not the
case.
2:36:37 PM
Representative Wool recalled a court decision had been made
that settlement money was deposited into the CBRF, which
helped build up its balance. He stated it was different
than the original fund structure. He used a hypothetical
example where the funds from a $50 million settlement
between the state and an oil tax corporation were deposited
into the CBRF. He believed the court decision had helped
build up the CBRF.
Mr. Fechter agreed the mechanism existed; however, he
clarified it was written into the constitution and was not
the result of a court decision. He explained that any
settlement of mineral leases, bonuses, rents, and other
natural resource type revenues were to be deposited into
the CBRF. He detailed that any court cases he was aware of
dealt with more definitional type matters such as what
counted as a bonus sale.
Representative Wool asked if there were events that caused
the CBRF to grow apart from any deposits by the
legislature. He remarked that the graph [showing the CBRF
balance] was flat for many years and then shot up.
Mr. Fechter answered there had been some sizable
settlements deposited into the fund over the years. He
relayed that in previous years, when the CBRF balance had
been much higher, the sub-fund had a substantially more
aggressive asset allocation. The fund had benefited from
positive investment earnings over the years until it had
been drawn down to the current level. He stated the
situation had precluded the fund from having a more
aggressive, long-term asset allocation.
Representative Wool thought there was a court
interpretation as to what defined a settlement. He would
look into it.
2:39:17 PM
Ms. Leary addressed revenue volatility on slide 23. She
relayed that projected FY 22 revenue was comprised of
approximately 65 percent investment earnings and 25 percent
petroleum revenues. She detailed there was uncertainty
every year regarding petroleum revenues due to price and
production fluctuation and volatility. There was certainty
related to investment fund earnings for FY 23 due to the
lagging POMV formula associated with money coming from the
ERA; however, there was investment return uncertainty in FY
24 and beyond. She noted that volatility had played its
part over the years in terms of the amount of revenue
coming into the state.
2:40:47 PM
Ms. Leary moved to slide 24 and reviewed volatility
management techniques. She detailed that access to savings
funds and other funds had helped with the situation. She
remarked that fiscal tools could be modernized to include
lines of credit in addition to revenue anticipation notes.
She noted there was current legislation that would add
lines of credit. Other techniques included managing the
timing of ERA transfers to the General Fund and managing
timing of expenditures. She elaborated that the Cash
Management team closely managed cash flows and money was
only taken from the ERA when it was needed. The department
managed the timing of expenditures as it had done in the
past with the Public Education Fund, which used to be an
annual draw at the beginning of July but had moved to a
quarterly and monthly draw.
Co-Chair Foster noted that Representative LeBon had joined
the meeting.
Representative LeBon asked about the status of HB 92 and SB
73 related to lines of credit and revenue anticipation
notes.
Mr. Fechter answered that the bills had passed the House
and were currently in the Senate Finance Committee.
Ms. Leary turned to slide 25 and provided takeaways on cash
flows. She stated that even with balanced budgets and if
all revenue was received, cash flow timing mismatches would
continue to occur throughout the year. She highlighted that
like most forecasting, cash flow forecasting was always
wrong. She relayed that revenue shortfalls could occur if
forecasted assumptions were wrong. Additionally, higher
revenue volatility required greater cash reserves until
volatility decreased. She stated the good news was
volatility management techniques were available.
Co-Chair Foster noted that Representative Carpenter had
joined the meeting.
Representative Edgmon thought it would be interesting to
see the historical percentage of UGF funding for state
government, beginning the late 1970s when oil first flowed
through the pipeline and the state income tax had been
repealed around 1982. He referenced the current UGF revenue
estimated at 65 percent investment earnings, 25 percent
petroleum revenues, and 10 percent non-petroleum revenues.
He thought someone along the way, including the
legislature, deserved a pat on the back for playing a big
role in reducing the volatility. He reasoned that the
Permanent Fund performance had been great, and the
legislature had put a significant amount of money into the
fund via special appropriations and inflation proofing.
Additionally, the legislature had not taken the allowable
50 percent each year for spending on the capital and
operating budget. He believed it was significant that the
state's volatility picture had been reduced via sound
financial management.
2:45:11 PM
Representative Edgmon looked at slide 15 related to the
PERS and TRS investment allocations and returns. He pointed
to the bottom of the slide, which showed an actuarial
assumed rate of return of 7.38 percent. He asked if the
rate was higher than the Permanent Fund.
Ms. Leary answered that the actuarial assumed rate of
return was part of the economic assumptions that went into
identifying the funding status of the pension plans. The
number was one of the department's targets and there was
another target of 6.89 percent based on the asset
allocation, which differed from APFC. She elaborated that
APFC was at CPI plus 5 percent (above 6 percent). She
continued that the pension funds and the Permanent Fund had
well-diversified allocations, but each had different
purposes, liquidity needs, and structures. She informed the
committee that the 7.38 percent had been derived in the
last experience study the pension plans and Alaska
Retirement Management Board (ARMB) were currently going
through to determine the number for future actuarial
determinations.
Representative Edgmon thought it illustrated the
unpredictability of inflows and outflows. He pointed out
that healthcare costs could rise unexpectedly. He referred
to money coming in from Tier I and II employees. He guessed
there were still over 30,000 people participating in the
plan. He compared the pension plans to the Permanent Fund
with the predictable 5 percent annual payout. He observed
there was much more unpredictability built into the pension
plans, which he speculated was the reason for the
difference in investment strategy.
Co-Chair Foster thanked the department for its
presentation. He reviewed the schedule for the following
day.
ADJOURNMENT
2:48:57 PM
The meeting was adjourned at 2:48 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DOR State Investment Funds and Cash Flow presentation - House Finance January 31 2022 Final.pdf |
HFIN 1/31/2022 1:30:00 PM |
|
| DOR H FIN Response Letter to Jan 31 mtg. 2.8.2022.pdf |
HFIN 1/31/2022 1:30:00 PM |