Legislature(2023 - 2024)ADAMS 519
01/31/2023 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
HOUSE FINANCE COMMITTEE
January 31, 2023
1:33 p.m.
1:33:59 PM
CALL TO ORDER
Co-Chair Johnson called the House Finance Committee meeting
to order at 1:33 p.m.
MEMBERS PRESENT
Representative Bryce Edgmon, Co-Chair
Representative Neal Foster, Co-Chair
Representative DeLena Johnson, Co-Chair
Representative Julie Coulombe
Representative Mike Cronk
Representative Alyse Galvin
Representative Sara Hannan
Representative Andy Josephson
Representative Dan Ortiz
Representative Will Stapp
Representative Frank Tomaszewski
MEMBERS ABSENT
None
ALSO PRESENT
Adam Crum, Commissioner, Department of Revenue; Pam Leary,
Director, Treasury Division, Department of Revenue.
SUMMARY
PRESENTATION: SAVINGS ACCOUNT/BUDGET RESERVES/INVESTMENT
FUNDS
1:34:05 PM
Co-Chair Johnson reviewed the meeting agenda.
^PRESENTATION: SAVINGS ACCOUNT/BUDGET RESERVES/INVESTMENT
FUNDS
1:35:24 PM
ADAM CRUM, COMMISSIONER, DEPARTMENT OF REVENUE, introduced
the PowerPoint Presentation "Update on the State's Cash
Reserve Funds and Discussion of State Cash Flows" dated
January 31, 2023 (copy on file). He introduced Director Pam
Leary and explained that she would be giving the
presentation.
Co-Chair Johnson asked if there were any questions before
the presentation began.
1:36:51 PM
PAM LEARY, DIRECTOR, TREASURY DIVISION, DEPARTMENT OF
REVENUE, introduced herself and began on slide 2 to go over
the agenda for the presentation. She advanced to slide 3
briefly and relayed the four elements of the treasury:
investment management, cash management, debt management,
and unclaimed property. She moved to slide 4 to discuss
some statistics about the treasury. The slide read as
follows:
• 45 Treasury Division staff positions, most of whom
touch investments in some capacity via portfolio
management, accounting, operations, compliance, debt
management, cash management and unclaimed property.
• $46.8 billion in assets under management (AUM) as of
12/31/22.
• Combined operating budget of $15.3 million.
• The Division is a resource to state fiduciaries, state
agencies, the legislature and the general public.
Ms. Leary advanced to slide 5 to go over some investment
management information. Of the $47 billion in assets held
by the treasury, 47 assets were in separate accounts. There
were 14 defined benefit funds and four participant direct
funds under the direction of the Alaska Retirement
Management Board (ARMB). Additionally, 25 funds were under
the purview of the commissioner of revenue and four funds
were under the direction of other state fiduciaries. She
explained that accounts were managed in a pooled
environment which was an efficient way to invest multiple
funds.
Representative Ortiz returned to slide 4 and referred to
the 45 staff treasury division positions. He asked if the
number of positions had remained stable or if it had it
grown over the years.
Ms. Leary responded that the growth had been relatively
flat. There was some growth about ten years ago, but the
division had remained at about 40 to 45 staff on average.
The division currently had about six vacancies.
Representative Ortiz asked for clarification that there
were 45 positions and 39 of them were filled.
Ms. Leary replied that Representative Ortiz was correct.
1:39:58 PM
Ms. Leary continued on slide 5. She indicated that there
were seven asset classes that rolled up into 23 investment
pools in which retirement funds were invested. Similarly,
the state had nine pools in which state funds could be
invested. She advanced to slide 6 to continue to speak on
investment management. The slide read as follows:
• The Chief Investment Officer and staff meet regularly
with the Commissioner, ARMB or other fiduciary to
discuss and determine asset allocations.
• Consideration is given to:
the type and use of the fund.
how long the fund is expected to be invested.
what type of risk the fund can take.
• Callan's Capital Markets Assumptions and other
industry data are used to build models to generate
potential asset allocation targets.
• Invest, Invest, Invest!
• State Investment Review and ARMB meetings are held
quarterly to review performance, investment policy,
and asset allocations with an independent investment
advisory committee. Summaries and materials for the
meetings are publicly available on our website.
Ms. Leary advanced to slide 7 to speak on the cash
management sector of the treasury. She relayed that the
cash management group had an important job that generally
happened under the radar and involved monitoring all of the
cash coming in and out of the state. The cash management
group also managed procurement, administration, and
implementation of all statewide banking service contracts,
including warrant clearing contracts, primary and alternate
depository services contracts, automated clearing house
(ACH) origination contracts, credit card acceptance
contracts, and treasury management system contracts.
Additionally, the group was responsible for projecting and
reconciling, on a daily basis, all incoming and outgoing
cashflows to determine excess funds that could be invested
by the staff.
Ms. Leary continued to slide 8 to discuss debt management
as follows:
• Implement directives from the Commissioner's office
and the State Bond Committee ('SBC') on policy
decisions related to debt issuances, rating
strategies, and potential use of debt capacity.
• Coordinate activity among various professionals for
any authorized debt issuance (bond counsel, financial
advisor, arbitrage, underwriter).
• Conduct meetings with Rating Agencies.
• Prepare all statutorily required reporting: Revenue
Sources Book
Annual Comprehensive Financial Report
Alaska Public Debt Book
Alaska Debt Affordability Analysis
• Perform all continuing disclosure undertakings for
outstanding bonds.
• Provide leadership and staff for the Alaska Municipal
Bond Bank Authority (AMBBA).
Ms. Leary continued on slide 9 to speak on unclaimed
property. She explained that February 1 was unclaimed
property day nationally. The division encouraged everyone
in the state to look through the unclaimed property listed
on the website [unclaimedproperty.alaska.gov] to see if
their name was included in the list. The duties of the
unclaimed property group included the following: providing
services to reunite owners, heirs, or legal representatives
with their unclaimed property; determining entitlement by
analyzing statutes, court orders, legal cases, and
reviewing evidence; and promoting unclaimed property
reporting. There were currently 1.8 million claimable
properties in the state with a value of $258 million.
1:45:35 PM
Representative Hannan asked how long the state held
unclaimed property before it became a state asset. She
asked if there was a legal process to arrive at the
conclusion that the property would never be claimed. She
wondered if the property would become an asset of the state
or if it would always be a liability because an individual
could return at any time and ask for the property.
Ms. Leary responded that there was always a liability that
was owed and individuals could always ask for the property
from the state. There was a reserve of money that would not
go to the state that would always be available if an
individual decided to claim the property. The beneficiary
of the excess funds was the general fund and if there was
ever a situation where the state needed more money to repay
an individual, it would likely be sourced from the general
fund. However, such an event had never happened because of
the available reserve of money.
Representative Hannan asked if there was obligation from
the unclaimed property division to seek out property owners
or was the burden upon the legal entity.
Ms. Leary responded that the burden was on the individual,
however the systems had recently been updated which allowed
the group to cross-reference names with other databases to
reunite the owner with the property.
1:47:54 PM
Representative Stapp asked if the $258 million in unclaimed
property was kept in a liquid fund.
Ms. Leary responded that there was a database that showed
everything that was held and the amount that was claimable.
The value of the fund ranged depending upon the amount of
unclaimed property. There had recently been a surge in
unclaimed property coming through the division and it was
working through the claims. The amount in the fund was just
enough to cover a year's worth of anticipated unclaimed
property claims.
Representative Stapp asked for clarification that there was
an actual fund in existence. He asked what the point was of
keeping a separate fund if it was going to be paid out of
general fund dollars. He wondered if there was a legal
reason.
Ms. Leary would follow up with the information.
Ms. Leary continued on slide 10 and discussed some treasury
accomplishments.
• Professional Certifications:
Increase in professional designations: CFAs,
CPAs, CIPMs & CTPs
• Delivered outstanding investment performance results:
In FY22, PERS and TRS performance of -4.1%
resulted in an average of 9.0% during the 38-year
history of the retirement systems. Over the past
decade, the systems have outperformed their
benchmark by 126 basis points and the median peer
plan by 98 bps. This performance places the
systems well into the top quartile, outperforming
over 85% of peer plans.
State assets have grown by 9.0% in the last 12
months, largely outperforming fund benchmarks.
• ARMB Savings:
$35 million annual savings in management fees by
reducing the amount of assets invested with
external investment managers and investing those
assets utilizing Treasury Investment Officers.
Representative Hannan pointed out that the retirement
system was listed to be 38 years old. She thought that the
retirement system was older than 38 years.
Ms. Leary responded that Representative Hannan was correct.
The 38-year time frame referred to the time period during
which the division had investment and performance history
information for the aggregate group of funds it was
managing.
1:53:21 PM
Representative Josephson asked if it would suggest that it
was an easy target to meet if a person was interested in a
pension reform plan and the formula relied on less than 7
percent returns on average.
Ms. Leary asked him to rephrase the question. She explained
that a 7.3 percent actuarial rate was currently being used
by the actuaries when they looked at their calculations for
the funding status of the plans. If the percentage was
under the actuarial amount, which was the case in FY 22, it
would mean that there was less of a funded status when all
of the actuarial math occurred. The needs were being met
from an investment perspective over the lifetime of the
plan.
Representative Josephson remarked that about a year prior,
ARMB indicated that the revenue commissioner at the time
concluded that the health commissioner at the [Alaska
Mental Health Trust Authority (AMHTA)] trust did not need
additional funding. The legislature and ARMB did not agree.
He had been told that the medical section of the trust was
the portion that resulted in the demise of the defined
benefits plan, but it was now fully solvent. He asked if
there was an easy explanation.
Ms. Leary replied that the topic required a longer
presentation and would be better met by the Division of
Retirement and Benefits (DRB). There was overfunding of the
healthcare plan assets in the last two years and ARMB
decided against contributing additional funds to the plans.
The money from the healthcare plans could not be used for
the pension plans due to legal requirements.
Representative Josephson had heard talk the previous year
that the unfunded liability had been resolved; however, he
had also been told that there was [a liability of]$6.9
billion. He asked if both things were true at one point and
if the $30 billion on paper could be that variable
depending on plan performance.
Ms. Leary responded there were many components to the
funding status. Healthcare costs had gone up and gone down
and had a broad impact and many components could lead to
fully funded statuses, overfunded statuses, and unfunded
statuses. All of the information was analyzed by actuaries
each year. Every four years, an actuary did a deep dive and
completed a separate analysis to ensure that the
assumptions were valid.
1:59:13 PM
Co-Chair Johnson asked about the difference between the
investment earnings and the Permanent Fund earnings.
Ms. Leary replied that over the 38-year period, the
performance was neck-in-neck. Sometimes the performance of
the Permanent Fund was higher, sometimes the retirement
plans were higher. The two targeted very different mandates
and different asset allocations. She understood that the
Alaska Permanent Fund Corporation (APFC) came in just under
9 percent over the 38-year period. However over 30 years,
the total was 7.95 percent for APFC and 7.8 percent for the
treasury.
Co-Chair Johnson asked if the numbers were broken out by
internal and external investment officers.
Ms. Leary responded that she was not sure what the breakout
was for APFC, but it was about half and half for all of the
assets that the treasury managed for the state and for
ARMB. All fixed income was done internally, and about 70
percent of management was done internally for state assets.
Ms. Leary continued to slide 11 to speak on the debt side
of the treasury accomplishments. The slide read as follows:
• Increase in the State's credit rating outlook with
Fitch and Standard and Poor's.
• In the past two fiscal years, the Alaska Municipal
Bond Bank Authority has funded $408.1 million in loans
resulting in an estimated $55.4 million in savings to
Alaskans through lowered borrowing costs.
• Restructured outstanding debt of the airport system
saving $81.8 million from future debt service
payments.
• During FY22, Unclaimed Property returned approximately
$13.5 million to current or former Alaska owners and
businesses, transferred $12.0 million into the state
general fund, had a 16% increase in reported holdings.
• Maintained a reduced claims backlog since
transitioning to a new unclaimed property system in
FY21, despite a 15% increase in claims being received.
• Since FY19, $90.9 million in cash and stock sale
proceeds have been received as unclaimed property,
$45.5M million was transferred into the state general
fund and over $34.4 million dollars has been returned
to current or former Alaska owners and businesses.
Ms. Leary continued that in the current week, the division
hit the $100 million mark in terms of unclaimed property
monies paid back to Alaskans since the start of the program
in 1986.
Representative Hannan asked about the restructuring of the
airport debt that came about due to a cash infusion. She
concluded that it came from federal monies for airports
that were one-time occurrences.
Ms. Leary responded that she was unsure if she had the
answer. She was aware that $40 million in cash in prior
debt service funds were utilized for the restructuring of
the airport debt. She was not sure how it related to
appropriations.
2:05:09 PM
Ms. Leary advanced to slide 12 to speak on the update on
cash reserve and other funds. She explained that the next
set of slides would highlight six of the funds in which the
treasury invested on behalf of fiduciaries. There would be
two graphs for each fund: the first showed fiscal year
balances and the second showed investments statistics. She
noted that the prior year's market conditions were mostly
not positive due to inflation and the dramatic increase in
interest rates. She relayed that U.S. stocks were down by
19 percent, broad market fixed income was down by 13
percent, and international equity was down by 16 percent.
Although the funds were down, all of the funds that the
treasury managed had moderate performances compared to the
benchmarks, with the exception of one fund.
Ms. Leary advanced to slide 13 and discussed the
Constitutional Budget Reserve Fund (CBRF). The graph on the
slide showed the historical invested assets of the fund
since its inception in 1990. The blue section of the graph
showed the main fund and the yellow section showed the sub-
fund created in 2000, which referred to money that would
not need to be used for five years and could therefore be
invested at a slightly higher risk rate of return. The grey
section was the Statutory Budget Reserve (SBR). The CBRF
was funded through resolutions of disputes on mineral
income. A simple majority vote for an appropriation could
happen if the amount appropriated was less than the prior
year, otherwise it was a three quarter vote. She emphasized
that appropriations must always be repaid. The fund itself
had two main purposes: funding temporary cash flow and
revenue mismatches. It had also been used to appropriate
for structural deficits in revenue shortfalls.
Representative Hannan stated that she had only heard the
fund referred to as the Constitutional Budget Reserve
(CBR), not the CBRF. She asked if the only difference was
how the funds were invested. She understood that there was
no difference in terms of policy but wondered if there was
a difference in the legal structure and draw.
Ms. Leary responded that the sub-fund was statutorily
created. It was at the discretion of the fiduciary, who was
the commissioner of DOR, to determine when and if money
would come out of the fund. Generally, the money being
withdrawn from the sub-fund was triggered by a particular
event. For example, all of the money in the sub-fund was
transferred to the main fund in 2015 because it was thought
at the time that the money would need to be liquidated for
funding the budget due to the decreases in the balances.
Representative Hannan asked for clarification that the
legislature was not making the decision of whether the
money was coming from the sub-fund or the main fund. She
understood that the decision was up to the commissioner of
DOR.
Ms. Leary responded that the money would be coming from the
main fund to support any expenditures. The sub-fund would
be liquidated into the main fund and invested in a
different manner.
2:10:24 PM
Representative Josephson asked for clarification that the
CBRF had no creditor waiting to be repaid. He understood
that the CBRF needed to be repaid, but there was a
constitutional promise that the state would repay it.
Ms. Leary responded in the affirmative.
Co-Chair Johnson asked if Ms. Leary could provide the same
chart that was on slide 13, but with the debt included.
Ms. Leary would provide the chart. She pointed out that the
balances on the slide were the invested balances. There was
a difference between the invested balances and what was
being reflected either in the budget or in the Annual
Comprehensive Financial Report (ACFR). The amount owed to
the CBRF changed and that was reflected in the report as
well. As of FY 21, the amount owed was just over $12
billion and was expected to be reduced in the ACFR for FY
22 by around $1 billion due to surpluses.
Co-Chair Edgmon added that one could also say that the
deposits in the CBR were above and beyond the amounts
required by law. During time periods when oil prices were
high, the legislature deposited additional money into the
CBR that was not required.
Ms. Leary advanced to slide 14, which showed statistics
about the CBRF. The pie chart showed the target asset
allocation of 100 percent cash equivalence. The fund had a
short investment horizon because the money had a constant
potential to be used, therefore the investment strategy was
low risk and the investments were in money markets and
treasury bills. The current balance was just over $1
billion as of the end of December of 2022. There were also
some rolling returns for the period ending in December. The
actual was a 1.6 percent return which compared favorably to
the benchmark of 1.46 percent. The short-term projection
for the asset allocation had a target of 2.39 percent.
Representative Stapp referred to the projected return of
2.39 percent. He asked how it was certain that the state
would have a better rate of return than it had during the
previous ten years.
Ms. Leary responded that it was a short-term expected rate
of return and that inflation rates were currently high. She
thought the projected return would be lower if a longer
term view was examined.
Representative Stapp asked for a clarification of short-
term.
Ms. Leary responded that short-term was essentially one
year. Most of the returns later on in the presentation were
closer to ten years.
2:16:43 PM
Co-Chair Edgmon asked if there was an optimum amount that
should be in the CBR. He had heard a variety of figures: $5
billion, $1 billion, and higher than $5 billion. He asked
if there was a number that seemed carelessly low when it
came to meeting the state's cash flow needs. He wondered if
there was an optimum number.
Ms. Leary responded that the fund had seen a variety of
different balances and one could use different metrics to
determine what the balance should be based on possible
usages. She explained that the treasury had not utilized
the account in the prior year because there were available
resources through the Earnings Reserve Account (ERA) that
had been appropriated to the general fund. It was a policy
call under the purview of the Office of Management and
Budget (OMB). She noted that cash flow was different than
budget, and there was a threshold of $400 million that
needed to be in the general fund to pay two days' worth of
high bills. The department used cash projections to
determine whether cash would be needed to cover all of the
expenses. The account from which the cash would be
withdrawn was dependent upon the budget and appropriations.
If expenses became higher than revenue, the CBR would be
utilized. There was an order of operations when a deficit
was not expected, and money would be withdrawn from the ERA
before the CBR. When there were deficits, the money was
more likely to be borrowed from the CBR first.
Co-Chair Edgmon thanked her for her answer and thought it
illustrated how the topic was complicated.
2:21:16 PM
Ms. Leary advanced to slide 15 and the Power Cost
Equalization (PCE) fund. The purpose was to provide for a
long-term stable financing source that provided affordable
levels of electric utility costs in otherwise high-cost
service areas of the state. She explained that 5 percent of
the monthly average market value of the fund for the
previous three fiscal years could be appropriated. If prior
years' earnings exceeded the amount, 70 percent of the
difference could be spent on related identified programs.
As of the end of FY 22, the balance of the fund was $967
million.
Ms. Leary moved to slide 16 and gave information about the
PCE fund, which had a long investment horizon and tended to
involve riskier asset classes such as equities. The target
asset allocation was shown on the pie chart on the slide
and equated to about a 70/30 percent equity to bond ratio
on investments. There were four other funds that had the
high risk tolerance and were invested in a similar fashion.
The balances for the past five years were listed on the
slide. Rolling returns for the last year were -14.95
percent, which was slightly better than the -15 percent
benchmark. The projected ten-year returns were 5.6 percent.
Co-Chair Edgmon noted that the legislature passed HB 243 in
2022 which changed the investment approach from a low-risk
rate of return to a strategy more on-par with that of the
Permanent Fund. He recalled that the bill was signed into
law in June of 2022, and he assumed it would not have had
much of an impact on the losses experienced by the PCE
fund. He understood that the losses were more significant
than those of the Permanent Fund.
Ms. Leary responded that HB 243 changed the context of the
purpose of the investments. By statute, the fiduciaries
followed the prudent investor rule. The language in HB 243
gave support to targeting a greater rate of return. The
investments in the PCE fund were significantly different
than the Permanent Fund in that the PCE fund did not have
illiquid assets such as private equity, which impacted how
returns would show in a given period of time. Although
there were negative returns, the PCE fund was similar to
other funds that were managed with the available asset
classes.
Representative Cronk asked when it was decided that the PCE
fund could be used for community revenue sharing.
Ms. Leary responded that there was other legislation in
which the target of expenditures was reduced from 7 percent
to 5 percent. She believed the legislation was passed in
2017. The legislation included language that pointed to a
waterfall effect if the earnings were plentiful, which
would allow other funds to manage to have additional
funding sources.
Representative Cronk thought it would be better to find
other projects with reduced energy costs.
2:27:44 PM
Ms. Leary advanced to slide 17 and the Alaska Higher
Education Investment Fund (AHEIF). She explained that AHEIF
was established in 2012 and capitalized with a $400 million
deposit from receipts of the Alaska Housing Capital
Corporation (AHCC) for use in paying Alaska Performance
Scholarship Awards and AlaskAdvantage Education Grants. In
FY 17 and FY 18, the fund was used to assist deposits into
retirement plans for the Public Employees' Retirement
System (PERS) and the Teachers' Retirement System (TRS). As
of the end of FY 22, the $394.6 million balance of the fund
was swept to the general fund, of which $342.6 million came
directly from AHEIF and $52 million came from the CBRF due
to FY 22 investment losses in AHEIF. Up to 7 percent of the
fund could be appropriated for scholarships. There had been
additional legislation that ensured that the fund was
separate and was no longer included as a sweepable fund.
2:29:34 PM
Representative Stapp asked if the mechanisms affected the
investment performance. He noticed on slide 17 that the
ten-year rate of return was projected at 5.6 percent, but
the five-year average was 4.5 percent. He asked where the
discrepancy was.
Ms. Leary moved to slide 18 to respond to the question. The
ten-year return was based on what was currently known about
the market space and expectations of the future. The actual
five-year performance was 4.5 percent, which was on par
with the 4.46 benchmark. The accuracy of the projections
depended upon a variety of things, but most importantly it
depended upon market activity.
Ms. Leary continued on slide 18. Like PCE, AHEIF had a high
risk long-term investment horizon and also targeted an
equity to fixed income investment ratio of 70/30. The
balance as of December of 2022 was $347 million and had a
negative return of -16.19. However, it was positive in the
three and five-year histories that it had. It benefited
from not having as much equity exposure when the asset
allocation was first changed.
Ms. Leary advanced to slide 19 to speak on the General Fund
and Other Non-Segregated Investments (GeFONSI). The slide
showed a graph of the historical invested assets of the
fund in billions. There were two types of GeFONSI funds:
GeFONSI I and GeFONSI II. The GeFONSI I included the
general fund proper, which was essentially the checkbook
through which all money in the account flowed. Between the
two GeFONSI accounts, there were 185 sub-funds. The GeFONSI
II was created to target a slightly higher risk return and
did not retain its monies; instead, the GeFONSI I was the
beneficiary of the account.
Co-Chair Johnson referred to the internally and externally
managed investment funds. She asked for clarification that
Ms. Leary was speaking to GeFONSI when she mentioned 70/30
internal and external management split. She asked how the
internally and externally managed accounts compared in
terms of rate of returns.
Ms. Leary responded that GeFONSI I was primarily based in
fixed income and cash equivalence while GeFONSI II had some
equity to it. The majority of both funds were mostly
managed internally by the investment staff. She would
follow up with the committee on the comparison between
internal and external rates of return. She suggested that
the fact that many assets in the public space beat their
benchmarks showed that the internal investment staff were
successful in their jobs.
2:35:11 PM
Representative Josephson pointed out that the graph on
slide 19 showed $9 billion in GeFONSI in 2012, which was a
peak year for taxes and royalties. He asked if the money
was above and beyond the CBR balance.
Ms. Leary responded in the affirmative. However, the
balance did not include the SBR as it was managed as a
separate account.
Representative Josephson asked about the right side of the
graph showing $4.7 billion. He understood that there was
close to $2 billion in the CBR and the balance was unspent
for the current fiscal year. He asked if the practice was
in line with general government operations and what
constituted the $4.7 billion.
Ms. Leary responded that there were 185 funds in the
GeFONSI, including the general fund. The balance of the
general fund proper on June 30 of 2022 was approximately $3
billion and was about $1.8 billion by the end of December
of 2022. The balance still included the cash value of the
surpluses in the prior fiscal year and the $3 billion
figure included the transfer of the ERA. There were many
expenditures at the beginning of a fiscal year, which was
why there was an expected reduction in the balance. The
balance also included the surpluses and revenues in excess
of expenses, though she expected to learn the exact figure
when the ACFR was audited.
Ms. Leary moved to slide 20 and the asset allocations of
the GeFONSI accounts. The GeFONSI I did not have equity and
had a moderate risk objective while GeFONSI II had equity
and had a moderate to high risk objective. The combined
total of the funds was $4 billion as of the end of December
of 2022. The six month mark showed positive returns while
the one year mark showed slightly negative returns at -0.28
percent for GeFONSI I and -3 percent for GeFONSI II. The
projected returns were 2.5 and 3 percent respectively.
Ms. Leary continued to slide 21 and the Public School Trust
Fund (PSTF) that was funded by one half of one percent of
the state receipts from the management of state lands. The
PSTF was established in 1978, replacing the territorial era
public school land grant originally created by congress in
1915 through a transfer of the balance from the permanent
school trust. Following passage of HB 213 in 2018, the fund
was now managed as one fund, under a percentage of market
value (POMV) method, which was 5 percent of the average
market value for the five years preceding the previous
fiscal year. It was used to provide an offset for the K-12
formula funding for the schools. For FY 24, the amount of
$32 million was included in the budget.
Ms. Leary advanced to slide 22 and briefly explained that
the PSTF fund was a high-risk account with a 70/30 asset
allocation. The balance at the end of December of 2022 was
$700 million and had negative returns of -16.19 percent;
however, the account did beat its benchmark. The projected
ten-year returns were 5.6 percent.
Ms. Leary moved to slide 24 which discussed the PERS and
TRS plans. The graph on the slide showed the returns for
PERS in blue and TRS in yellow. The ARMB was comprised of
nine members and was the fiduciary of the state's pension
and health systems. The defined benefit plans currently
experienced about $1 billion per year of net outflows from
the funds. The 38-year return average for PRS and TRS was 9
percent.
2:41:22 PM
Representative Stapp understood that the defined benefit
plans were experiencing a net outflow of about $1 billion
per year. He asked if the funds were basically exhausted.
Ms. Leary responded that there was significant actuarial
work that went into defining the contribution rates that
employers would put into the plans. There was money and
earnings coming into the plans, but since the defined
benefit plan was currently distributing money to retired
individuals, the outflows were occurring. She relayed that
greater detail would be provided by DRB.
Ms. Leary continued on slide 24 which showed the target
asset allocation of the TRS and PERS plans. The investment
objectives for the plans were high risk and had long-term
investment horizons. The target allocation included private
equity and real assets, which were referred to as illiquid
assets. She pointed out that the total between the PERS and
TRS was $28.6 billion. The returns as of September 30 of
2022 were -10 percent for both plans, beating the benchmark
of about -14 percent. The official calculated returns were
not yet available.
Representative Tomaszewski noted that much of the returns
were not audited. He asked what the auditing schedule was
and who was responsible for the auditing.
Ms. Leary responded that the auditor was Klynveld Peat
Marwick Goerdeler (KPMG). She indicated that KPMG performed
an audit of the invested asset balances. The audits were
finalized as of June 30, which was the end of the fiscal
year. The audits were published online and she would be
happy to direct the committee to the website.
2:44:50 PM
Representative Josephson understood that there were routine
actuarial analyses of the balances and the health of the
plans overall. He asked if Ms. Leary was comfortable that
the system was vigilant and protective of the asset and not
cavalier about its health.
Ms. Leary responded that the changes and additions to the
actuarial lineup occurred "some time ago" when there was an
actuary whose assumptions were not accurate. Since then, an
annual review and a deeper dive of the activity of the
actuaries became procedural. She felt comfortable with the
level of monitoring that was occurring and thought the risk
was being taken seriously. There was a compliance group
that monitored the investments to ensure they were within
the appropriate parameters. Through the ARMB meetings and
state investment review board meetings, outside consultants
and the investment advisory council monitored the
investments, compared the investments from year to year,
and ensured that there were strong internal controls. She
felt confident in the team and consultants.
Representative Galvin asked about the term "some time ago."
She asked for more detail on how long ago the event
occurred.
Ms. Leary responded that she would have to get back to the
committee with the information.
Co-Chair Johnson suggested that the committee focus on the
current presentation.
2:49:30 PM
Ms. Leary advanced to slide 26 and the third portion of the
presentation revolving around cash flows. She explained
that the cash balance was what was held in the bank at a
given point in time. The amount in the budget and the
amount in the ACFR would be quite different. For example,
the CBR balance was currently $1 billion in cash, but at
the end of June of 2023, it was expected to reflect $2.2
billion available for appropriations.
Ms. Leary continued to slide 27 which depicted a flow chart
of the state's treasury cash. Money would flow in from oil
and gas, excise taxes, federal dollars, and other sources,
then payments would flow out for payroll and pension
payments, debt service, and other payments.
Ms. Leary moved to slide 28 and incoming revenue and
relayed that there was definite volatility in the money
coming in. For example, petroleum revenues were 47 percent
of the FY 23 projected unrestricted general fund (UGF)
revenues, but there was uncertainty about what the specific
number would actually be. There would always be uncertainty
because oil prices and investments could fluctuate
dramatically. Investment earnings were 47 percent of the FY
23 projected unrestricted general fund revenues. There was
certainty about what would be in the FY 24 budget because
there was a lagging POMV formula; however, there was still
uncertainty in FY 24 in terms of the amount.
Ms. Leary continued to slide 29 to discuss expenditures.
There were sometimes situations where money needed to be
laid out, particularly for federal programs, before the
cash could flow in. That sometimes meant that cash needed
to be called from elsewhere. There were many mismatches
that occurred at the beginning of a fiscal year in which
appropriations did not match incoming revenue. Seasonal
cash flow needs also caused mismatches when large amounts
of money were needed at a particular time.
Ms. Leary advanced to slide 30 to speak to cash flow
deficiencies, which were situations in which the state did
not have sufficient funds for the bills that were due.
Prior to 1985, most unrestricted revenues flowed into the
general fund and remained there. Over time, the legislature
established many sub-funds within the general fund to
segregate cash for budgeting purposes, resulting in less
cash available to pay daily operating costs. The
legislature typically included language in the budget bill
allowing for a transfer from the CBR if unrestricted
revenue was insufficient to cover the general fund
appropriations in a given year.
Ms. Leary moved to slide 31 and explained the cash
deficiency memorandum of understanding (MOU). In 1994,
various state departments created a cash efficiency plan.
The target was a $400 million minimum cash threshold in the
general fund proper which would outline procedures for
addressing cash flow timing mismatches. Some procedures
were developing monthly cash projections, monitoring daily
general fund cash balances, and executing appropriated
transfers from ERA, CBR, or other accounts. The MOU also
spoke to temporary fund borrowing that had to be repaid by
the end of a fiscal year. The memorandum also outlined what
would happen if all appropriations were exhausted and it
was evident that there would not be enough money to pay the
bills. In the situation, DOR would seek legislative action
through the governor to access additional funds through
appropriation from other cash reserve funds or other funds.
2:55:34 PM
Ms. Leary continued to slide 32 and continued to discuss
cash flow deficiencies. She indicated that using budget
reserve funds had been the solution for cash flow timing
mismatches and revenue shortfalls. The FY 21 ACFR showed
$12.8 billion owed to the CBR, but the amount was expected
to be reduced in FY 22 due to the sweep of unassigned
balances and sub-funds.
Ms. Leary advanced to slide 33 to speak about volatility
management techniques. Some management strategies were as
follows: accessing cash reserves and other funds, managing
the timing of ERA transfers to the general fund, managing
the timing of expenditures, and modernizing fiscal tools to
include lines of credit.
Ms. Leary moved to slide 34 and offered some cash flow
takeaways. She highlighted that forecasts for cash flow
were never correct and even with balanced budgets, cash
flow timing mismatches would occur, and revenue shortfalls
might occur if forecasted assumptions were wrong.
Additionally, higher revenue volatility required greater
cash reserves until volatility decreased, but volatility
management techniques were available. She concluded her
presentation.
Representative Stapp asked if there was a ballpark number
as far as cost to the state for cash flow timing
mismatches.
Ms. Leary responded that the mismatches were taken from the
ERA and were now appropriations. There was no real cost to
the state because the money was destined to move into the
general fund regardless. She assumed Representative Stapp
was referring to a situation in which money from the ERA
was taken at any point in time and was not invested at the
Permanent Fund to a higher risk rate of return. She was not
sure a cost to the state had ever been calculated and there
were lots of components that comprised it.
2:59:53 PM
Representative Hannan made a request for future
information. When she first became a legislator, it became
a burden for DOR to manage the physical cash for cannabis
taxes. She wondered if Ms. Leary had the opportunity to
look at how the cash collection process could be improved
upon. She understood that additional employees needed to be
brought on to physically manage and secure large amounts of
cash. She wondered what the legislature could do to support
change.
Mr. Crum responded to the question. The Division of Tax
managed the marijuana revenues and he was working on a risk
management system for DOR. He had attended a recent
departmental meeting on developing a safer and more
effective process. The department was looking at
outsourcing some of the responsibilities to contractors. It
was important to make the process safe and easy and to
minimize the risk.
Representative Coulombe asked which year the fixed asset
management became internally managed.
Ms. Leary responded that there was a long history of
internal fixed income management. The equity aspects had
been brought internally as well and almost all internal
fixed income was managed within DOR.
Representative Coulombe asked if the $35 million annual
savings in management fees were incurred over a long period
of time.
Ms. Leary responded that it was within the last five years
that management had been moved internally to identify the
savings.
Co-Chair Johnson reviewed the following meeting's agenda.
3:03:33 PM
ADJOURNMENT
The meeting was adjourned at 3:04 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| January 31 2023 Savings Accounts and Cash Flow presentation to House Finance.pdf |
HFIN 1/31/2023 1:30:00 PM |