Legislature(2023 - 2024)ADAMS 519
01/23/2024 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Savings, 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 23, 2024
1:36 p.m.
1:36:13 PM
CALL TO ORDER
Co-Chair Johnson called the House Finance Committee meeting
to order at 1:36 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
Pam Leary, Director, Treasury Division, Department of
Revenue; Zach Hanna, Chief Investment Officer, Treasury
Division, Department of Revenue.
PRESENT VIA TELECONFERENCE
Adam Crum, Commissioner, Department of Revenue.
SUMMARY
PRESENTATION: SAVINGS, RESERVES, & INVESTMENT FUNDS
Co-Chair Johnson gave an overview of the agenda for the
day. She indicated that testifiers were online and in the
room to present.
^PRESENTATION: SAVINGS, RESERVES, & INVESTMENT FUNDS
1:37:56 PM
PAM LEARY, DIRECTOR, TREASURY DIVISION, introduced herself
and her staff.
ADAM CRUM, COMMISSIONER, DEPARTMENT OF REVENUE, ANCHORAGE
(via teleconference), appreciated the committee's time. He
apologized for not being at the meeting in person due to
weather issues.
Ms. Leary introduced the PowerPoint Presentation "Update on
the State's Investment Funds and Cash Flows" dated January
18, 2024 (copy on file). She reviewed the agenda for the
presentation on slide 2. She advanced to slide 4 and
offered an overview of the Treasury Division's role under
the Department of Revenue (DOR). The slide showed four of
the sections in the division: the Cash Management Section
was in the bottom right corner of the slide and the
remaining three sections related to the investments. The
division had 40 experienced staff members, many of whom
held professional designations such as CFAs, CPAs, CTPs,
and other advanced degrees and designations. Managing
numerous funds and cash flows was a complex task and
required an understanding of investment management and
banking systems which were highly integrated into the state
accounting system.
Ms. Leary directed attention to the Portfolio Management
Section on the slide. She relayed that the section was
referred to as the "front office" of the treasury and
invested assets for state fiduciaries using the Alaska
Retirement Management Board (ARMB). In FY 23, there were
57,000 trades made on behalf of hundreds of state accounts
that rolled into 48 investment funds and utilized 32
investment pools. The pools were supported by 150 external
and internal investment managers and 600 private equity
funds.
Ms. Leary continued to the accounting and operations
portion of the treasury, which ensured that all trades and
costs were directed and accounted for in the correct
accounts and funds. The next section of the division was
the compliance office, or "middle" office, which performed
160 compliance tests on trades every day and calculated
daily performance for 30 state funds internally. Cash
management processed roughly 100,000 transactions annually
for departments to realize revenue and expenditures in the
accounting system. Cash inflows and cash outflows totaled
over $15 billion annually. The cash management team
coordinated with the investment team to maximize the
state's investment assets.
Ms. Leary advanced to slide 5 and gave an overview of the
complex funds that were managed by the treasury. The
treasury managed $50 billion in assets for 48 funds across
the risk spectrum from lower risk cash-equivalent
investments through higher risk endowment and retirement
funds. Retirement funds had the highest risk tolerance and
included 18 different funds totaling $41 billion. The
remaining funds on the slide were state funds and were
listed by risk tolerance. Over half the assets managed by
the treasury were directed or traded internally by treasury
staff. The treasury met with ARMB and state fiduciaries
quarterly to review investment performance and set
investment policy and asset allocations. There was also a
three-person investment advisory committee that provided
independent viewpoints based on the members' respective
investment backgrounds. The treasury team had provided
excess returns, cost savings, and error prevention.
1:42:52 PM
Co-Chair Johnson asked what the chart on the right side of
the slide was referring to. She asked for more information
on the Illinois Creek Mine.
Ms. Leary responded that the Illinois Creek Mine fund
contained money that was given out upon bankruptcy of a
mine managed by the state. The monies would be used for
mine reclamation for the Illinois Creek Mine.
Co-Chair Johnson asked where the mine was located.
Ms. Leary responded that she did not know but she would
follow up.
Representative Josephson responded that he thought the mine
was in the YukonKuskokwim Delta.
Ms. Leary remarked that the mine had a long history and
money changed hands multiple times in order to acquire the
funds for the mine reclamation. She would follow up with
more detail.
Co-Chair Johnson asked if the mine was already on deposit
for reclamation of the site. She asked if the mine itself
transferred hands.
Ms. Leary responded that the management company transferred
hands. The responsible company experienced bankruptcy and
the money was received by the state as payment for the
bankruptcy. She understood that there was a schedule for
using the money.
Co-Chair Johnson wanted to ensure that the proper
reclamation efforts had occurred.
Representative Hannan asked what the assumed end date would
be for the reclamation plan. She wondered if the state
still needed $1 million from reclamation or if it needed
closer to $1 billion.
Co-Chair Johnson asked Ms. Leary to follow up with some
general information about the mine.
Ms. Leary would follow up with the requested information.
Representative Tomaszewski noted that there were two school
funds listed on the slide: the Public School Trust Fund
(PSTF) with $799 million in assets and the Education
Endowment with $1.3 million. He asked for more information
about the funds.
Commissioner Crum replied that he would be covering PSTF in
more detail later in the presentation. The Education
Endowment fund was essentially a raffle, and it was growing
in size.
Representative Tomaszewski replied that he would be happy
to wait for the information further on in the presentation.
1:46:47 PM
ZACH HANNA, CHIEF INVESTMENT OFFICER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, continued the presentation on slide
6. Overall, 2023 was a strong year for the funds managed by
the treasury. Returns exceeded peer-performance and
benchmarks which meant that state assets had seen an influx
of revenue. The treasury team focused on low-cost internal
investment management which made the state's costs lower
than its peers.
Mr. Hanna advanced to slide 8 which detailed an update on
the capital market performance. The prior few years had
been volatile and capital markets had been focused on the
interplay of inflation, interest rates, and economic
growth. The Federal Reserve responded strongly to inflation
by increasing short-term interest rates to 5.25 percent,
which decreased annualized inflation from 9.1 percent in
June of 2022 to 3.4 percent in December of 2023. The chart
on the right side of the slide ranked benchmark returns by
asset class from 2018 through 2023 and performance in 2023
was positive across all measured asset classes. There was
also a 26 percent increase in broad U.S. equities and
roughly 5 percent in returns for core U.S. fixed income and
cash equivalents.
Mr. Hanna continued to slide 9, which included a chart on
the treasury asset class performance that the treasury
managed for non-retirement state portfolios. The investment
pools were all comingled and used to construct highly
lucrative portfolios for the state that were efficient and
low cost. The majority of the assets were managed
internally and focused on delivering market returns with
significant upsides and limited downsides.
Mr. Hanna explained that the top section of the chart
showed the total performance by asset class, the middle
section showed benchmark performance, and the bottom
section showed performance relative to the benchmark. All
of the numbers were relevant through December of 2023.
Returns were strong in the top section and cash and bonds
ranged from 4 percent to 8 percent and equities ranged from
10 percent to 26 percent. The returns added over $300
million in income gains during 2023.
Mr. Hanna relayed that the bottom section also showed
strong overall returns. More than 80 percent of the assets
in the state portfolio were in the first three categories:
cash, short-term fixed income, and core fixed income. The
categories were all internally managed and produced
consistently excellent returns. Total excess returns in
2023 for internally managed accounts across ARMB and state
assets added $90 million in value over benchmark returns.
1:50:29 PM
Representative Stapp referred to the Real Estate Investment
Trust (REIT) asset class listed on the slide. He noted that
REITs typically paid high dividends. He asked if the high
dividend payouts were included in the figures or if the
figures represented the base of the investment itself.
Mr. Hanna responded that REIT performance figures
represented the total return between the appreciation and
the income component. The REITs returns were the lowest
returns listed on the chart due to the challenging real
estate market.
Representative Stapp assumed that the treasury was
responding accordingly to the market.
Mr. Hanna responded that REITs were a small part of the
state portfolio and were only used in the larger endowment-
style funds. He relayed that REITs were the smallest
allocation of the funds and made up about 1.5 of total
assets. The REITs were used primarily for diversification
of funds and the division was comfortable maintaining the
current allocation given the strong performance.
Co-Chair Edgmon remarked that the PCE Endowment was moved
over to the Alaska Permanent Fund Corporation (APFC)
through a bill that had been passed in the prior session.
He asked whether the transition had been completed.
Mr. Hanna responded that there were upcoming slides that
would cover the topic in detail. The transition occurred at
the end of the prior fiscal year and was successful.
Co-Chair Johnson asked about the relationship between
Callan and Associates and the state agencies.
Mr. Hanna responded that Callan was the consultant for ARMB
but it was not a consultant for the treasury's assets. He
explained that ARMB went through a periodic request for
proposal (RFP) process to hire investment consultants and
Callan had been a successful recipient of the RFP for a
long period of time. The RFP process was set to occur in
the present year. He added that Callan was also APFC's
consultant. From the division's perspective, Callan was an
ARMB consultant and not a state retirement consultant.
Callan had often reported to the legislature due to the
meaningful relationships it had with ARMB and APFC.
1:55:08 PM
Ms. Leary continued to slide 10 and detailed the savings
reserve funds. She relayed that the blue part of the chart
on the slide discussed the fiscal year-end balance of the
main fund of the Constitutional Budget Reserve Fund (CBRF).
The fund was created in 1990 when Alaska voters approved an
amendment to the constitution. All money received by the
state after July 1, 1990, through resolution of disputes
about the amount of certain mineral-related income was
required to be deposited into the CBRF.
Ms. Leary explained that the yellow area of the chart
showed the amounts of the subaccount of the CBRF which the
legislature created in 2000. In accordance with AS
37.10.430, money invested in the subaccount would be
invested to earn higher returns than in the main fund.
Utilizing the subaccount was limited based on the
assumption that the funds would not be needed for at least
five years. In 2008, $4.1 billion was deposited into the
subaccount and was managed to achieve a higher return than
the main fund. In April of 2015, the balance was returned
to the main fund when it was determined that the fund would
be needed within five years. The legislature may
appropriate funds from the CBRF under certain circumstances
to fund the operations of state government with a simple
majority vote when the amount for appropriation was less
than the prior year, in which case a three-quarters vote
would be required.
Ms. Leary indicated that the green area represented the
statutory budget reserve (SBR) fund which was created in
1986 and was part of the General Fund and Other Non-
Segregated Investments (GeFONSI) before and after being
managed as a separate fund from 2013 through 2015. On June
30, 2023, the balance of the CBRF was $2.6 billion and the
SBR contained $404 million.
1:57:37 PM
Mr. Hanna continued on slide 11. The treasury had a formal
state investment review with the commissioner and an
independent investment advisory committee. Capital markets
and performance were reviewed for each fund quarterly and
reviewed capital market assumptions and select asset
classes for investment at least once per year. The treasury
went through each fund and set the appropriate policy and
asset allocation in a transparent manner. He relayed that
the CBRF had a low-risk tolerance and could be used as an
emergency reserve during times of cash flow uncertainty.
The fund had a potentially short time horizon and needed
high principal protection. The CBRF was invested in 100
percent cash equivalents and 2023 was a good year for
short-term investments such as the CBRF. The one-year
performance was 5.39 percent, which beat the benchmark by
41 basis points. He clarified that one basis point
represented one one-hundredth of a percent; therefore, 41
basis points was 0.41 percent.
Co-Chair Edgmon commented that it seemed like there was a
lot going on and that the treasury had a substantial amount
of in-flow and out-flow. He asked if the CBRF was a buffer
and if it was considered the working capital reserve. He
appreciated all of the work done by the treasury.
Mr. Hanna replied that he appreciated the acknowledgment.
Both the general fund and the CBRF were subject to a
potentially high volume of cash transactions.
Representative Josephson asked Mr. Hanna to explain the
growth in the CBRF over the previous year. He understood
that the legislature did not draw from the CBRF in the
prior year and that there would be surplus funds coming in,
but the funds had not been seen yet. He was surprised by
the growth of the fund.
Ms. Leary responded that the sweep occurred in the prior
two years but there was not a reverse sweep. The surplus of
about $1.5 million had been moved to the CBRF permanently.
She did not have all of the details but the Department of
Administration (DOA) would have the information.
Representative Josephson understood that when the previous
$400 million balance of the higher education fund was
swept, it would account for $400 million of the $2.7
billion.
Ms. Leary responded that Representative Josephson offered
an accurate example, but the higher education fund was
refinanced. There were smaller funds that were also swept
and the monies were not put back into the smaller funds.
Representative Hannan asked if the treasury had an opinion
or formula as to how much money should be kept in the CBRF.
Ms. Leary responded that there were various types of
metrics that cities, states, and other organizations
utilized to determine the amount of money that should be
kept in a fund. A variety of amounts had been cited as the
ideal number for a variety of reasons, from about $500
million to $2 billion and above. The treasury thought that
$2 billion was a reasonable marker.
2:02:53 PM
Commissioner Crum added that DOR would continue to address
the amount of money kept in the CBRF. A previous slide
showed the subaccount structure, and he explained that the
subaccounts were at the discretion of the commissioner of
DOR as to how much to invest. The topic was brought up
before the Senate Finance Committee and there were internal
discussions on the topic within DOR. The department
continued to discuss how to determine when it was
appropriate to put dollars forward from the CBRF to the
subaccount to invest for the long term.
Ms. Leary continued on slide 12 and the historical balances
of the two GeFONSI accounts. The general fund itself was
part of the GeFONSI and all cash flows that came into the
state and went out of the state flowed through the general
fund. A minimum of $400 million was kept in the general
fund to ensure that there were enough funds for the state
to make its required payments. There were about 180 other
accounts and funds that had assets within the GeFONSI and
the accounts were managed together but accounted for
separately. The first GeFONSI was created in 1992 as a way
to pool accounts for investments and the second GeFONSI was
created in 2018 to target a slightly higher risk tolerance
for a subset of the funds. As on June 30, 2023, there was
$3.27 billion in the GeFONSI funds combined and $1.2
billion of the total represented the general fund.
2:05:22 PM
Representative Josephson asked why money was left in the
general fund during the years of high oil prices from
around 2007 through 2012.
Ms. Leary responded that the legislature decided to
maintain the money in the general fund and not put it into
the CBRF.
Representative Galvin asked if there was an opinion as to
what the balance of the CBRF would need to be to allow the
subaccount to be funded.
Ms. Leary replied that there was a five-year usage
requirement for any funds that went into the subaccount.
Unless there was money that would not be touched or needed
for five years, the money would remain in the main account.
Both the subaccount and the main account had independent
asset allocations, which was also a matter of discussion.
Representative Stapp understood that the CBRF was being
utilized in five years depending upon revenue factors. He
asked if there was a ballpark number for the amount of
money that needed to be kept in the CBRF.
Ms. Leary responded that the total amount incoming to the
CBRF was known, but the amount coming to the general fund
was not known. There was a significant amount of
uncertainty about whether money would be available to the
general fund.
Ms. Leary mentioned that the appendix and the end of the
presentation listed the top 30 funds in both GeFONSI
accounts. She thought members might be interested in
reading through the list.
2:09:25 PM
Mr. Hanna continued on slide 13. The risk factors for
GeFONSI I and GeFONSI II were on the moderate high end of
the scale. Both funds had a short-term investment horizon
and principal protection needed to be high. He indicated
that GeFONSI I was 85 percent cash equivalents and 15
percent short-term bonds and GeFONSI II was 61 percent cash
equivalents, 33 percent short-term bonds, and 6 percent
equity. Performance was good for both funds in 2023 with a
5.34 percent return for GeFONSI I and a 6.22 percent return
for GeFONSI II. Both accounts performed well in excess of
benchmarks.
Ms. Leary continued to slide 14 and detailed the Alaska
Higher Education and Investment Fund (AHEIF). The slide
showed the historical balances of AHEIF. The fund was
capitalized with a $400 million balance from receipts of
the Alaska Housing Capital Corporation (AHCC) and was used
for paying Alaska Performance Scholarship Awards (APSA) and
the AlaskAdvantage Education Grants (AEG). She relayed that
at least 7 percent could be appropriated for scholarships,
two-thirds of which was allocated to the APSA and one-third
was allocated to AEG. In FY 22, HB 322 established AHEIF as
a separate fund and deemed it as a fund that could not be
swept to the CBRF.
Representative Josephson acknowledged that using the word
"separate" when referring to AHEIF was "magical." He
consulted the appendix and noted that there were large sums
in other accounts. He asked how vulnerable the other
accounts were to the failure to reverse sweep on June 30,
2023. He wondered if the accounts would all be essentially
spent by the operating budget.
Ms. Leary replied that she was unsure which components of
the funds were sweepable, but she understood that it was a
fairly small number. Some funds were used over time and
other funds were replenished at the start of the year and
were used for a particular year.
Mr. Hanna continued on slide 15 and explained that AHEIF
had a high-risk profile to work to achieve the fund's
spending objective, which was capped at 7 percent. The risk
profile for the fund was set at the risk equivalent of 70
percent equities and 30 percent bonds. The full asset
allocation for 2022 was 39 percent U.S. equities, 29
percent international equities, 5 percents REITs, 30
percent core U.S. fixed income, and 1 percent cash. The
performance over the past year was strong at 16.45 percent,
which was 55 basis points in excess of the benchmark. The
ten-year performance was strong at 6.74 percent through a
volatile period.
2:13:59 PM
Ms. Leary continued on slide 16 and detailed the historical
invested assets in PSTF. She shared that the ending value
of the fund in 2023 was $761 billion. The fund was stood up
in 1978 and was funded by one half of one percent of state
receipts from the management of state lands. The fund was
used to provide an offset for the kindergarten through
twelfth grade formula funding. For FY 24, the fund
contributed $32 million to the public education fund and
was expected to contribute approximately $35 million in FY
25.
Mr. Hanna continued on slide 17 and explained that the PSTF
had a long time horizon. The fund had the same high risk
profile as the higher education fund and its performance
over the last year was similar and strong at 16.43 percent,
which was 53 points in excess of the benchmark. The ten-
year performance of the fund was 6.46 percent.
Representative Coulombe understood that there was a five
percent draw from the PSTF which contributed to funding the
formula; however, there were boundaries around the use of
the fund. She asked if there was any avenue to access the
account apart from the five percent draw.
Ms. Leary responded that she was not aware of any other
avenue.
Representative Coulombe recalled that AHEIF was capped at 7
percent. She asked if all of the funds from the 7 percent
appropriation were being used for the scholarship grants.
She asked if the money was only pulled out as it was
needed.
Ms. Leary responded that AHEIF had been used for awards and
grants and less than 7 percent had been taken out. The rest
of the monies still remained in the fund. She indicated
that the fund was used in the past for other purposes and
was not exclusively for PSTF. She understood that there was
a bill that would potentially increase the amount of the
scholarships and the grants.
Ms. Leary continued on slide 18 and the Power Cost
Equalization (PCE) fund. The slide showed the asset
balances through June 30, 2023, which totaled $946 million.
The management duties of the fund were transferred to APFC
through the passage of SB 98 and would go into effect on
July 1, 2023.
Mr. Hanna continued on slide 19 and noted that PCE was
fully liquidated to cash for transfer at the end of the
fiscal year [FY 23]. Performance was tracked through June
30, 2023, and the fund performed well with a one-year
performance of 9.59 percent. The team made sure that the
fund was fully invested for as long as possible, and it
managed to capture the majority of the market rebound that
occurred during the first part of the fiscal year. The fund
was at 100 percent cash on the last day of the fiscal year.
2:19:17 PM
Ms. Leary advanced to slide 20 and noted the assets for two
of the funds for which ARMB was the fiduciary: Public
Employees' Retirement System (PERS) and Teacher's
Retirement System (TRS). The funds totaled $29.8 billion.
She explained that the defined benefits plans were closed
funds and experienced withdrawals. The board was comprised
of nine trustees: two for PERS, two for TRS, two
commissioners, two public representatives, and one finance
officer. The investment returns were just over 7 percent in
2023 and the 39-year average for PERS and TRS was 8.95
percent, which compared favorably with the current assumed
actuarial rate of 7.25 percent.
Representative Stapp understood that the treasury had to
liquidate all of the assets of the PCE fund in order to
transfer the assets. He asked why the assets could not
simply be transferred from the fund without being
liquidated.
Mr. Hanna clarified that when assets were sold, new
securities needed to be purchased by APFC. He explained
that APFC had a different asset allocation than the
incoming PCE assets; therefore, many of the assets needed
to be sold anyway in order to buy into the pools managed by
APFC. There were also many operational and legal
complexities in transferring securities between entities.
The judgement of the treasury in consultation with APFC was
that the operational challenges and potential implications
of the challenges outweighed the potential benefits of
transferring assets without first liquidating the assets.
Mr. Hanna continued on slide 21 and noted that PERS and TRS
made up about 80 percent of assets managed by the treasury.
The systems had a more complex asset allocation because the
accounts did not have the same liquidity requirements as
direct state assets. The current asset allocation was 43
percent public equities, 21 percent fixed income, and 36
percent alternative investments. Returns had been strong
and the treasury typically focused on longer-term returns
for the retirement systems to increase stability. The ten-
year return had been 7.4 percent, which was 91 basis points
over the benchmark return.
Mr. Hanna relayed that the treasury had received a
suggestion from one of the state's independent investment
advisors to quantify the benefit in dollars because the
basis points system was sometimes confusing. The analytics
team used ten years of daily cash flow data to calculate
how much additional value the excess returns provided in
assets. On average, the total excess returns were well over
$2 billion when the retirements systems were roughly valued
at $20 billion. The returns were in the top quartile when
compared with other public pension systems. Part of the
excess return could be attributed to the low-cost approach
employed by the treasury, which led to costs that were
roughly 30 percent lower than the systems' median peers and
equated to a consistent annual savings of between 30
million and 50 million. Overall, strong returns from ARMB
had provided meaningful contributions to retirement assets
and reduced the needs for higher state contributions.
2:24:12 PM
Co-Chair Johnson commented that the returns were
impressive. She asked if the treasury's unique strategy was
the reason that the retirement systems had higher returns
than the Permanent Fund.
Mr. Hanna replied that the returns from the Permanent Fund
and from the retirement systems had been fairly similar
over the long term. The retirement systems had differing
asset allocations from the Permanent Fund and a different
purpose. The retirement systems were mature and were
becoming more mature over time and the liquidity
requirements would increase as time went on while the
ability to hold alternative investment would decrease over
time. Returns would differ on an annual basis and in some
years, the retirement systems had higher returns while in
other years the Permanent Fund had higher returns. He
thought that all of the funds were well-managed investments
for the state.
Representative Stapp commented that Alaska State Senate was
debating a bill regarding retirement systems that assumed a
rate of return that was above the five-year average of the
existing retirement funds. The board revised the rate of
return down from 7.38 percent to 7.25 percent. He was
concerned that the rate of return from the board itself
would be revised down again and cause problems with the
benefits system. He asked if the treasury had seen anything
that would suggest that the projected rates of return would
be revised down in the near future.
Mr. Hanna replied that ARMB went through a process every
four years that involved setting accrual assumptions
inclusive of the rates of return. In 2022, the long-
standing expected return of 7.3 percent had been revised
downward to 7.25 percent. The numbers tended to be
influenced by a backward look at performance and there had
been a long period of extremely low rates that cumulated in
zero interest rates in 2021. Rates influenced the expected
returns and performance for a long period of time, which
had culminated in most public pensions reducing the rates
of return, including ARMB. A few years prior, the interest
rates were at 0 percent but in the present day, interest
rates were over 5 percent, which provided a significant
uplift for most portfolios. The retirement systems'
portfolio had a 21 percent exposed fixed income and the
expected returns were now in excess of 5 percent. The
expected returns influenced other asset classes.
Mr. Hanna remarked that he had seen the capital market
assumptions released by Callan in the prior week and the
treasury utilized the assumptions for ARMB as well as other
longer-term state assets. The treasury assumed that ARMB
and other 70/30 endowments like PSTF would experience an
increase of 25 basis points to 40 basis points over a ten-
year investment horizon. The next time ARMB set actuarial
assumptions, it would review capital market assumptions and
all of the economic information and set the best
expectation possible. A decrease in expected returns was no
longer expected and it was more likely that the returns
would "bottom out" or potentially experience an uplift.
2:29:41 PM
Representative Galvin asked for a description of the
treasury's low cost methods.
Mr. Hanna responded there were dedicated direct investment
teams within the treasury. His team had a group that had
managed direct fixed-income investments for the state for
decades and managed long-standing direct investments of
cash portfolios and fixed income. There was a dedicated
equity group that managed direct investments on the equity
side that focused mainly on retirement systems, which was a
source of savings. The treasury was able to manage
investments and assets which made the process better and
cheaper than outsourcing the tasks. The treasury had moved
away from "active" management on the equity side towards
more index oriented management which was much less costly.
Returns were not always higher, but the returns in the
recent years had been higher.
Representative Tomaszewski understood that there was $29.8
billion in PERS and TRS. He directed attention to slide 5
which indicated that there was $41.5 billion in assets in
ARMB. He asked where the discrepancy was.
Mr. Hanna responded that there were fourteen retirement
systems and he was only discussing four of the systems. The
defined contributions systems were close to $10 billion in
assets, which made up most of the discrepancy. The other
$1.1 billion was a collection of other retirement and
defined benefit systems or defined benefit components of
the defined contribution plans.
Representative Tomaszewski asked if there was a slide on
the topic.
Mr. Hanna responded that he would be happy to follow up
with the information.
Representative Josephson asked for clarification that the
$10 billion in defined contributions was the employer share
of assets. He asked if the employee contributions were
segregated from the total.
Mr. Hanna responded in the affirmative. As of December 31,
2023, participant directed investments totaled $9.4
billion. The figure represented the asset value in
participant directed accounts in total and included both
the employee and employer contributions that occurred
through the end of the calendar year.
Representative Stapp asked if the consumer-directed
accounts were performing better than other types of
accounts.
Mr. Hanna replied that he did not have the information. The
default option for participant-directed assets were age-
appropriate target-date funds and the funds had a strong
performance overall.
2:34:45 PM
Ms. Leary continued on slide 22 and indicated that the next
portion of the presentation would focus on state cash
flows. She advanced to slide 23 which was a depiction of
the general fund and the cash inflows and cash outflows of
the fund. Examples of cash inflows included tax revenue,
the earnings reserve funds, federal dollars, and agency
receipts. Examples of cash outflows included school
education payments, Medicaid payments, payroll and pension
payments, and debt service payments. All of the money
coming in and out of the state went through the general
fund.
Ms. Leary continued to slide 24 to discuss the cash inflows
and outflows in greater detail. One of the biggest
components of cash inflows was commodity or petroleum
revenues, which were projected to be 37 percent for FY 24.
There was some uncertainty surrounding petroleum revenue
due to volatility and production. There would always be
uncertainty because oil was based on in-year forecasted
revenues. The other large component of cash inflows was
investment revenues, which accounted for about 56 percent
of general funds in FY 24. There was certainty surrounding
incoming investment revenues in the present year and in the
following year due to a lagging percent of market value
(POMV) from APFC. The certainty allowed for more
consistency in knowing which funds were coming into the
general fund to make payments.
Ms. Leary moved to slide 25 and discussed the impact of
expenditures. There was often a need for cash outflows
before there were sufficient cash inflows, such as for
federal programs like Medicaid that required that the state
spend money before it could be reimbursed. There were also
appropriations at the beginning of each year which needed
to be allocated to various funds in order to be utilized by
various agencies. The appropriations would not match
incoming revenue at the beginning of the year. There were
also seasonal cash flow needs that impacted the amount of
money that was needed to flow out of the general fund each
year; for example, summer was the peak season for
construction projects and seasonal workers.
Co-Chair Johnson noted that a concern she had heard from
state contractors was that the contractors were "carrying
the state at a level they had never carried the state
before." Many contractors were not getting invoices paid on
time. One contractor in particular told her that they were
owed $18 million. She did not think it was an isolated
incident and it seemed to be a pattern. She asked if Ms.
Leary had any thoughts as to what was causing the
situation.
Ms. Leary responded that the treasury's cash management
group oversaw net cash inflows and outflows. The group
could see which agency the cash was flowing through but not
necessarily the details of which bills were being paid. The
only situation in which the treasury would get involved was
if agencies were not requesting federal funds in a timely
manner. She did not have a detailed response and thought it
was an agency issue.
Co-Chair Johnson wanted to clarify that the problem was not
systemic across all state payments, but it seemed to her
that it was systemic. She wanted to make sure payments were
being made and would continue to look into the issue.
2:40:52 PM
Representative Josephson commented that for the second year
in a row, the Foraker Group had expressed frustration that
non-profits were not receiving payments from grants. He
understood that non-profit groups could legally charge
interest and penalty to the state if the groups were not
paid on time. He assumed the treasury was not the correct
agency to consult about the issue.
Ms. Leary responded that the treasury was purely "agnostic"
in terms of cash inflows and outflows. The role of the
treasury was to ensure that the money was flowing to the
correct destination. The treasury was not independently
able to stop payments unless it was informed that payments
going out needed to be halted. There was often a lack of
direction or description on where general fund inflows
belonged, in which case the cash inflows would be put into
a suspense account until the treasury could determine where
the money belonged.
Representative Coulombe asked for more information on the
Federal Emergency Management Agency (FEMA) payment process,
particularly in relation to wildfire mitigation.
Ms. Leary responded that the money that came in from FEMA
was put into a fund with a direct purpose and would be
under the purview of the agency overseeing the FEMA
amounts. She was not overly familiar with the process.
Representative Coulombe understood that DOR would spend the
money, then the FEMA money would be set aside for a direct
purpose and the funds would return to the department.
Ms. Leary responded in the affirmative.
2:44:08 PM
Ms. Leary continued on slide 26 and detailed cash flow
deficiencies, which referred to situations in which there
were expenditures that were greater than the sum of the
incoming revenue. The general fund was used in the past for
a wider variety of reasons, while there were more specified
funds in the present day that captured funds like the ones
detailed in the appendix of the presentation. The general
fund was somewhat constricted by the amount of money
contained in the fund for the purpose of paying the state's
bills. There would be cash flow deficiencies throughout the
year which were managed by adjusting the timing of the ERA
transfer to the general fund and managing timing of
expenditures. About ten years prior, all of the money went
into the education funds for payment all at once, but the
money was not being used immediately. The treasury worked
out a payment structure to implement more consistency by
transferring money into the education fund on a quarterly
basis. She relayed that the treasury would employ the same
strategy with other expenditures.
Ms. Leary advanced to slide 27 and explained that revenue
shortfalls were different than cash flow timing
deficiencies. Revenue shortfalls occurred when revenue was
insufficient to cover general fund appropriations in any
given fiscal year. There was language in the operating
budget that appropriated budget reserve funds for revenue
shortfalls. The treasury had relied on the appropriation to
authorize use of budget reserve funds to address both
revenue shortfalls and cash flow timing mismatches. The
CBRF had been used to cover revenue shortfalls
historically. She clarified that revenue shortfalls did not
necessarily occur every year.
Representative Galvin understood that there had been issues
paying contractors in a timely manner. She asked if the
funds were available for the check writers. She wondered if
the problem was that the funds had not been transferred
early enough for the check writers to have access to the
funds when writing the checks.
Ms. Leary responded that one of the main functions of the
cash management groups was to ensure that there was enough
money to pay the state's bills on time. The treasury had a
$400 million minimum cash threshold for the general fund
and it acted as a safeguard to ensure that the state could
pay its bills even if the bills were all due at once, which
was unlikely. The treasury maintained the threshold and any
time there was a risk of the total decreasing below the
threshold, it would utilize funds from an available source
to compensate for the lower total. There was $3.5 billion
scheduled in ERA transfers in the current year, and from
January 1, 2024, through the present day, the treasury had
called about $2.1 billion of the ERA transfers. The
treasury worked with APFC to change the schedule when it
was necessary. The schedule was set at the beginning of the
year and it was based on forecasted incoming revenue.
Specific expenses were also a known value and the treasure
aimed to monitor the expenses at all times. The treasury
intended to always have enough money to pay the bills.
Representative Galvin commented that important transactions
should always continue. She hoped that the state could get
to the bottom of the problem.
2:50:03 PM
Ms. Leary advanced to slide 28, which was a discussion on
the cash deficiency memorandum of understanding developed
in 1994 between DOR, DOA, the Office of Management and
Budget (OMB), and the Department of Law (DOL). The minimum
cash threshold had changed over the years to become the
current $400 million threshold. The memorandum outlined
procedures on how to address cash flow timing mismatches.
The procedures included developing monthly cash
projections, monitoring daily general fund cash balances,
executing appropriated transfers, and performing temporary
fund borrowing to be repaid by the fiscal year end. In the
event of a forecasted revenue shortfall, the treasury would
seek legislative action through the governor's office to
access additional funds through appropriation from other
reserve funds. If all strategies failed, the treasury would
begin to prioritize disbursements.
Representative Tomaszewski asked about the details of
borrowing money and whether it would involve inter-fund
borrowing or if there was a line of credit.
Ms. Leary replied that the treasury did not have a line of
credit. She explained that there was a past legislative
bill that allowed borrowing to be an alternative to
accessing any funds. The treasury was presently limited to
the ERA and CBRF and borrowing from the sweepable sub
funds. She emphasized that the treasury had never
restricted cash payments out the door.
Representative Hannan asked if there was an update on the
management of cash from cannabis sales. She acknowledged
that the question was slightly off-topic.
Co-Chair Johnson suggested that Ms. Leary finish the
presentation prior to answering Representative Hannan's
question.
Ms. Leary summarized slide 29 and indicated that cash flow
forecasting changed due to the amount and timing of
revenues and expenditures. Even with balanced budgets, cash
flow timing mismatches would still occur. She explained
that revenue shortfalls could occur if the forecasted
assumptions were wrong. She concluded her presentation.
Representative Hannan restated her question about cannabis
cash management. She knew there were some issues regarding
the cash used to pay taxes on cannabis. She understood that
there was a plan to address the problem and she was looking
for an update.
Ms. Leary responded that she did not have an update. There
was a plan to deposit cash into a safe, but she did not
know the status of the plan. She relayed that the issue was
mainly under the purview of the Tax Division although the
treasury would receive the money.
Representative Hannan asked for clarification that Ms.
Leary's understanding was that there was still only one
depository with an inflow of cash and all of the taxes
across the state had to transfer the cash to Anchorage.
Ms. Leary responded in the affirmative.
2:55:17 PM
Representative Stapp asked about the GeFONSI Permanent Fund
Dividend (PFD) Trust account listed in the appendix of the
presentation. He asked for confirmation that the account
contained the "hold harmless" funds.
Ms. Leary responded that the fund contained the money that
was transferred to APFC to pay dividends. She clarified
that the account held the funds that were used to pay out
the PFD checks.
Representative Stapp noted that there was a budgetary
provision that took PFD revenue and paid the hold harmless
funds to the Social Security Administration. When the money
was allocated for the dividend, the actual spending for the
program was around $6 million below what was appropriated
in the budget. He asked what happened to the excess funds.
Ms. Leary responded that the money remained in the account
and was used in the calculations going forward for the
following year.
2:56:53 PM
Co-Chair Johnson reviewed the agenda for the following
day's meeting.
ADJOURNMENT
2:57:25 PM
The meeting was adjourned at 2:57 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| H.FIN DOR Savings Accounts and Cash Flow Presentation 01.18.24.pdf |
HFIN 1/23/2024 1:30:00 PM |
|
| DOR Response to HFIN Savings, Reserves, & Investment Funds 01.23.24 .pdf |
HFIN 1/23/2024 1:30:00 PM |