Legislature(2023 - 2024)ADAMS 519
01/26/2024 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Overview: Alaska Permanent Fund Corporation | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
January 26, 2024
1:36 p.m.
1:36:41 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 Dan Ortiz
Representative Will Stapp
Representative Frank Tomaszewski
MEMBERS ABSENT
Representative Andy Josephson
ALSO PRESENT
Deven Mitchell, Executive Director, Alaska Permanent Fund
Corporation; Ethan Schutt, Chair, Alaska Permanent Fund
Corporation; Marcus Frampton, Chief Investment Officer,
Alaska Permanent Fund Corporation; Representative Dan
Saddler.
SUMMARY
OVERVIEW: ALASKA PERMANENT FUND CORPORATION
Co-Chair Johnson reviewed the meeting agenda.
^OVERVIEW: ALASKA PERMANENT FUND CORPORATION
1:38:05 PM
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, asked colleagues to join him at the
presentation table. He introduced a PowerPoint presentation
titled "Alaska Permanent Fund Corporation: House Finance
Committee, Alaska Permanent Fund," dated January 2024 (copy
on file). He explained that the Alaska Permanent Fund
Corporation (APFC) board chair Ethan Schutt would provide
an overview from the board's perspective and information on
duties and responsibilities of the corporation related to
management of the Permanent Fund. In the next portion of
the presentation, he would personally provide history and
background of current APFC events and on some of the issues
the corporation anticipated policymakers would discuss.
Lastly, Chief Investment Officer (CIO) Marcus Frampton
would give an investment performance update.
Mr. Mitchell began on slide 2 and reviewed APFC's mission
to manage and invest the assets of the Permanent Fund. The
corporation had a directive to first keep principal safe
and then maximize returns. He referenced the risk adjusted
rate of return and the mission to achieve the highest
target possible. The work was done on behalf of current and
future generations with respect for the past generations
that had enabled the fund to grow.
Mr. Mitchel reviewed assets under management on slide 2.
The management of the Power Cost Equalization (PCE)
Endowment had been moved to APFC in 2023 and was managed
with the same asset allocation as the Permanent Fund. The
corporation also managed the Alaska Mental Health Trust
Fund as a separate account. The Amerada Hess settlement was
a portion of the Permanent Fund, but it was segregated due
to the nature of the settlement. He elaborated that the
jury on the case had been comprised of Alaska residents and
to avoid the argument that the jury would be compromised by
the potential of the deposit into the Permanent Fund that
would increase the size of the Permanent Fund Dividend
(PFD), the court directed the settlement revenue to be held
outside of the fund's principal. He elaborated that the
money was principal of the Permanent Fund, but it was not
included in the calculations for payments out of the fund.
The settlement money funded the Alaska Capital Income Fund
created in the early 2000s for the purpose of paying for
capital projects.
1:41:30 PM
ETHAN SCHUTT, CHAIR, ALASKA PERMANENT FUND CORPORATION,
moved to slide 3 and highlighted that the Permanent Fund
was created by virtue of a constitutional provision,
Article IX, Section 15. The fund was a public endowment,
and the wealth of the fund was the responsibility of the
corporation and every Alaskan to ensure that future
generations would enjoy the same financial benefits. He
noted it was consistent with the vision of the fund at its
inception.
1:42:33 PM
Mr. Schutt turned to slide 4 titled "Fiduciary Duties." He
relayed that AS 37.13.120 set out the four statutorily
created fiduciary duties for trustees: the duty of
prudence, duty of loyalty, duty to diversify, and duty of
impartiality. The corporation operated as a separate state
entity under the oversight of an independent board of
trustees who serve as the fund fiduciaries. The corporation
honored the past and was cognizant of the history of the
fund and what it meant for Alaskans and worked to ensure
the fund led to a healthy and bright future for state
government and PFDs for Alaskans. The board looked at the
key role of transitioning from revenues from non-renewable
resources into wealth creation through renewable financial
resources and investment. The board acted as stewards
mandated to protect the fund principal. Additionally, it
was necessary to invest to make returns and there was an
element of acting prudently and somewhat conservatively to
maximize returns while minimizing risk. The corporation was
not in the business of chasing risk for the sake of chasing
unreasonable returns or chasing risk.
Mr. Schutt highlighted the corporation's duty to public
accountability on slide 4. He detailed that APFC was a
public corporation with public funds and tried to earn and
maintain the public's trust. He detailed that all of APFC's
meetings were public. The corporation tried to be judicious
about executive sessions and there were only a couple of
topics, including personnel matters, that were allowed to
be done in executive session. He and trustee [Craig]
Richards were the "guard dogs" on that subject and ensured
that discussion in executive session remained on topic and
did not include items that should be discussed in the
public portion of the meetings. The corporation also had
financial controls and regular reporting and acted under
the guidance of the Open Meetings Act and records
disclosures.
Representative Hannan recalled that APFC was seeking a
change to the Open Meetings Act to deal with some items.
She had listened to an APFC board meeting recording that
seemed to reference members of the board asking to meet out
of state to avoid the Open Meetings Act. She found the
suggestion distressing. She thought it had pertained to a
dialogue about personnel matters the corporation may be
seeking a change to. She asked for comment on the
conversation, which had led many Alaskans to contact her
office. She explained that members of the public had asked
her why the board was seeking to do things in a less
transparent way and how it would benefit Alaska.
1:46:52 PM
Mr. Schutt replied that he had responded in the meeting
that the idea would not happen. He reiterated that it would
not happen. He thought it was a situation where the speaker
had been outthinking himself. He did not believe hosting a
meeting outside of Alaska would escape the confines of the
Open Meetings Act. He explained that APFC was a state
corporation bound by rules. He did not believe holding a
meeting outside of Alaska resulted in anything other than
optics problems. He stated that as long as he was the board
chair it would not happen. He stressed that APFC was an
Alaskan institution that would not meet out of state.
Representative Hannan appreciated the response and
confirmed that she had heard Mr. Schutt's response in the
board meeting recording. She referenced his adherence to a
philosophy, principle, and law ensuring that any
discussions about changing the Open Meetings Act were very
narrow in scope and did not pertain to things the public
had a right to hear. She understood that with personnel
matters there was a nuance there about the ability to do
that and operate. She wondered what would happen if Mr.
Schutt were not chair and some of the members were
advocating for the idea [of holding meetings out of state
to avoid the Public Meetings Act]. She thought they had
almost been speaking of the Permanent Fund as if it were a
private endowment instead of a public endowment and
obligation and were forgetting it was Alaska's money, not
the trustee's money.
Mr. Schutt deferred the topic to a later slide. He thought
it was fair to remind trustees that the money belonged to
current and future Alaskans and that the corporation was an
Alaskan institution by definition. He relayed there had
been some debate and dialogue about what other sovereign
wealth funds did. He reminded APFC board members that the
sovereign for the Permanent Fund is the State of Alaska and
it did things in a certain way. For example, he had
clarified to board members that he did not want to be like
the sovereign wealth fund for Saudi Arabia because he was
not Saudi Arabian. He concluded that Representative
Hannan's point was fair.
1:49:52 PM
Mr. Schutt moved to slide 5 titled "Updated Strategic
Plan." The board was nearing the end of the process of
updating its strategic plan. The board had been looking at
options to determine whether there were improvements that
could be made. The plan included the goal to build an
organization that set the standard for endowment-style
sovereign wealth funds. He stated that the Permanent Fund
was an endowment-style sovereign wealth fund, and the
aspiration was to build the right system, enhance its
systems, and do everything to be the model. He believed
that the Permanent Fund was viewed that way globally and
nationally; therefore, it was more of an enhancement and
preservation of that status rather than creating it from
whole cloth.
Mr. Schutt addressed the goal of growing the fund to $100
billion as the first item listed under the updated
strategic plan on slide 5. The initial thought had been to
be more aggressive and have a timeframe related to the
goal; however, APFC had determined that establishing a
timeframe was too aggressive when it came to what it would
take to achieve the goal. He stated it would be nice to
reach a balance of $100 billion and perhaps increase it to
$125 billion; the bigger the fund, the more investment
returns that could be used to sustain state government and
pay PFDs. He explained that an aggressive timeframe would
create risk that may not be prudent.
Co-Chair Johnson thought Representative Hannan's question
and Mr. Schutt's response was valuable. She remarked that
she and Mr. Schutt had had some positive conversations. She
noted there had been some close examination of the board
over the past year. She asked Mr. Schutt to provide detail
about his background and time on the board including
management of the board.
Mr. Schutt introduced himself and shared that he had grown
up in Tok watching a committee member [Representative
Cronk] play basketball. He shared details about growing up
in Tok. He had received a degree in pure math from
Washington State University and had attended law school at
Stanford. He shared information about his professional
career in Alaska. He currently worked at the Bristol Bay
Native Corporation as the executive vice president and
general counsel. He had served on various boards and as
board chair over the years. He listed various organizations
he had worked for. He currently served on the APFC board
and on the board of a small publicly traded company. He
shared that he had been involved in executive management,
project development, and investment in Alaska for over 20
years.
Co-Chair Johnson thanked Mr. Schutt for the information.
1:56:41 PM
Representative Ortiz for an explanation of the term "pure
math."
Mr. Schutt explained the distinction between pure math and
applied math. He explained that applied math was used in
engineering, whereas pure math used proofs and was more
theoretical and abstract. He elaborated pure math was where
the numbers disappeared and Greek letters and concepts
remained.
Mr. Schutt continued to discuss the goal to grow the
Permanent Fund to $100 billion on slide 5. The corporation
had considered real leverage at the balance sheet level but
rejected the idea as too aggressive and risky. The
corporation was still looking at limited leverage for very
narrow purposes and it would likely fall mostly to the CIO
and staff. He highlighted the goal of "alpha
outperformance" and explained it meant performing better
than others in its classes and asset classes. He noted that
the Permanent Fund typically outperformed in most of its
asset classes against its benchmarks and peers. The last
goal listed under the bullet point was asset class goal
alignment. The corporation was constantly evaluating the
various allocations in different asset classes based on the
macro market conditions and other occurrences.
Mr. Schutt addressed the second bullet point on slide 5:
Improve Corporate Functionality. He acknowledged Mr.
Mitchell and Mr. Frampton and clarified there was no view
or perception that either would be leaving APFC anytime
soon; however, the roles were critical, and the corporation
was trying to anticipate ways to maximize the likelihood of
getting an excellent replacement in the event of a vacancy
in one of the positions. Key person risk encompassed the
corporation's asset class managers. He explained the
Permanent Fund had substantial investments in various asset
classes and it generally ran small, lean teams; therefore,
identifying and planning for succession was part of the key
person risk and planning exercise. He thanked the
legislature for allowing APFC to implement and continue an
incentive compensation program a couple of years back,
which had been helpful in recruiting and retaining
investment professionals.
2:00:22 PM
Representative Stapp thanked the presenters. He referenced
various terms shown on slide 5. He asked Mr. Schutt to
describe the term "limited leverage" and how it may or may
not achieve some of APFC's targeted goals.
Mr. Schutt answered that leverage was basically borrowing
money. The corporation had considered whether it should use
a larger scale, fund-level leverage, which could enhance
returns if done right in certain market conditions. He
explained that leverage as an investment tool amplified
outcomes in a positive or negative way. The corporation had
decided that leverage at the fund level was too risky and
not as conservative as desired. He clarified there was
leverage in areas like the real estate portfolio, which was
very common. For example, the fund purchased large
commercial real estate assets and had debt against those
investments. He explained that the recourse for the debt
was only the asset itself. The idea was to continue with
existing programs with leverage and explore other narrow
and small areas to apply leverage where it may be
beneficial and to limit it to those applications.
Representative Coulombe asked why the goal of $100 billion
had been chosen as a target number. She asked if the figure
had come from the board or fund management. She asked what
would happen at $100 billion that made it necessary to
reach the number quickly.
Mr. Schutt replied that the $100 billion target was a nice
round number that did not mean anything in particular. He
explained that funds exceeding $100 billion were compared
against each other in a larger fund class. He explained
that it was a target aimed at focusing on growing the fund
because it meant APFC was doing things right. The
corporation had backed off any explicit goal on pacing. He
elaborated that APFC had started off with a three to five
year timeframe, but the things it would have to do to reach
$100 billion during that timeframe were far riskier than
the corporation was comfortable with. The board did not
want to give the staff the impression it was the policy of
the board. There was no timeframe specified; the board
would like to reach the goal as soon as possible but if it
took 10 to 12 years it was better to be prudent than
anxious about reaching an "ego goal."
2:04:48 PM
Representative Coulombe relayed that she had listened to
the APFC meeting recently and she felt she was missing
something. She remarked that the corporation seemed to be
trying to reach $100 billion quickly, which made her think
there was something momentous that happened once the
threshold was met. She asked if there was something that
would happen for the state if the balance reached $100
billion.
Mr. Schutt replied, "No, nothing happens."
Mr. Schutt continued to review the second bullet point on
slide 5: Improve Corporate Functionality. The evaluation of
location expansion involved two things. He apologized that
the way things had transpired with the opening of the small
office in Anchorage had been rushed and inelegant. The
board viewed the Anchorage office as a preliminary success
and wanted to see how it played out over the next year or
more. He reported that the office seemed to be helpful in
the recruitment of staff who had indicated they may not
come to Alaska unless they could live in Anchorage. He
elaborated that the cost was low, and he described it as a
net zero for the state because it was located in unused
state space APFC took over from the Department of
Environmental Conservation. The board asked for some
patience to see how the exercise worked in determining
whether it was successful and worthwhile. The second piece
was evaluating whether the board should take a look at
other markets to open an office. The preliminary view was
the board was not ready to look at the idea seriously and
it would be a careful and considered exercise because it
was a much bigger step and larger commitment than opening
the office in Anchorage.
2:07:07 PM
Representative Hannan stated that the strategic plan spoke
to opening continental U.S. and international offices. She
highlighted that Anchorage and Juneau were located on the
continent. She wondered if Anchorage was part of the
continental plan. She remarked that there had been
significant heartburn about the opening of the Anchorage
office because it had not been mentioned to the legislature
last session and suddenly it had become a high priority
thing that had to be done. She asked how many staff were
working there.
Mr. Schutt answered, "Five."
Representative Hannan asked if the five positions were new
or filled with existing staff who had moved from the Juneau
office to Anchorage.
Mr. Mitchell replied that the five positions were filled
with three existing staff who had moved from the Juneau
office and two new staff.
Representative Hannan highlighted that most state employees
in Juneau received a cost differential because Juneau was
more expensive than Anchorage. She asked if the employees
had to take a pay cut to move from Juneau to Anchorage.
Alternatively, she asked if their salaries were held flat.
Mr. Mitchell replied that all APFC positions were exempt,
and their salaries were not adjusted. He relayed that
exempt employees were not eligible for cost of living
allowances.
Representative Hannan hoped that when looking at offices
that APFC evaluated the target and economic benefit to the
state. She remarked that of all the state agencies, APFC
had one of the lowest turnover and vacancy rates. She
reasoned that the attractiveness of working for APFC seemed
to be there. She stated that if the goal was economic
growth, she hoped the corporation was looking at the
economic return when considering international markets, San
Francisco, or New York. She noted her understanding that in
st
the 21 century almost all of the trading and investments
were done digitally.
Co-Chair Johnson assumed the topic would be further
discussed in the presentation. She wanted to get through
the beginning of the presentation prior to more questions.
2:10:04 PM
Representative Stapp thought Mr. Mitchell had stated that
the employees chose to move to Anchorage.
Mr. Mitchell replied affirmatively.
Co-Chair Johnson stated her concern that the appropriation
from the legislature [the previous session] had been for
office upgrades, not office relocation. She asked why APFC
had not indicated it wanted an office location in Anchorage
in its FY 24 or FY 25 budget request. She asked why there
had been a need to move quickly outside of the typical
budget process. She stated that the legislature tended to
work favorably and without much change to the APFC budget.
Mr. Schutt replied that the decision was board driven. He
stated it was a policy decision made by the board three to
four years back that kept getting kicked down the road. He
relayed that the majority of the trustees were anxious to
take action and a couple of trustees had been very vocal
about the issue. He acknowledged that it was not the ideal
process, yet the office had been opened and the board
believed it was a benefit and did not involve a large
financial commitment. He reiterated his earlier statement
that it was an inelegant process that took place, which
would not happen again. He relayed that a step towards an
office outside of Alaska was a whole different commitment
that would require two compensation structures. He
explained that APFC could get away with being a little
under market by lifestyle and other factors when 100
percent of its employees were located in Alaska, whereas
compensation in an office in New York, San Francisco, or
London would need to exceed that amount or there would be
no applicants. There were big picture policy implications
and much larger financial commitments [of opening an office
in one of those locations]. He reasoned that the
corporation would have to determine the reason for trying
to open an office out of state and whether it served a
specific purpose that was not attainable in the current
model. He characterized the item as a backburner priority
and noted it was out in the future.
2:13:30 PM
Co-Chair Johnson indicated that while funding [appropriated
by the legislature] could be moved amongst lines and for
different things, it was not the preferred method. She
relayed that as the appropriators, the legislature liked to
be able to appropriate to "what we are actually going to
see happen."
Mr. Schutt responded that he was appreciative and mindful
of the remarks.
Mr. Schutt addressed the third bullet point on slide 5:
Advance Comprehensive Communications Plan. The corporation
was doing more robust instate work to educate and raise
awareness on the fund, its history, and some of the issues
with the two account structure. The corporation was working
to elevate its profile with a national and global focus to
enhance its reputation for purposes of recruitment and
investment opportunities.
Mr. Schutt reviewed the fourth bullet point on slide 5:
Review and Assess the Optimal Structure of the Alaska
Permanent Fund, Rules-based Endowment Practices and
Modernization. The corporation was currently working on a
draft of trustee paper number 10, which was out for public
comment and looked at the fund's current two account
structure. He would discuss the topic later in the
presentation but noted that as things progressed the
available cash for the POMV transfer and support for the
function of the of the fund could become a serious issue.
2:15:34 PM
Mr. Schutt turned to slide 6 titled "Proposed Legislation:
Seeking Amendments to Improve Corporate Functionality." He
explained it was intended to be narrowly targeted around
the recruitment process for the APFC executive director and
chief investment officer positions. He explained the
proposal was to take part of the recruitment process out of
the public setting because independent advisers had
suggested that quality candidates were lost due to the open
nature of the process. Currently, the list of applicants
who submitted their name for one of the positions was
public information. He explained it discouraged people from
applying because their current employer would learn of
their potential intent to leave. He noted there was
currently no legislative vehicle to move the idea forward,
but it was something the board had identified to try to
facilitate future recruitment of the positions. The board's
proposal would also provide it with the authority to
interview finalists for the positions in executive session.
Additionally, the board was proposing that the personnel
records of all APFC staff be confidential. He noted the
topic was not related to the first two proposals. The
corporation had been advised by the Department of Law and
counsel that APFC staff records were all subject to the
public record unless they had a specific exemption to allow
the information to be withheld. He stated it was awkward to
have the records of an ordinary staff member subject to
public records requests and fighting over what was public
and what was private.
2:17:47 PM
Co-Chair Edgmon stated that in the ordinary corporate world
it was standard to not go public with the information. He
wondered why it had taken APFC so many years to propose the
change. He asked if it was due to recent turnover in the
CEO position and perhaps some other maturing of the
organization. He noted the fund had started out as a public
private corporate model and was having to adapt as it
increased in size. He elaborated that the fund was on a
sovereign wealth scale similar to other funds around the
globe. He asked if the Permanent Fund was maturing to a
point where it was necessary to do certain things to
attract the talent it needed to continue to grow.
Mr. Schutt answered it was one factor and there were many
factors at play. Another factor was the profile of the
fund; it had grown and had a track record of success
nationally and globally. He explained that it had become
easy to make public records requests to obtain documents
and the names of employees electronically. In the past,
getting the information may have required looking through
paper records in Juneau. Additionally, the prominence and
role of the fund in state operating budget funding via the
POMV attracted more attention from people following state
government. He thought there was a corollary interest in
the Permanent Fund and its operations. He believed the
factors and more had resulted in a high profile situation
of interest to everyone.
Mr. Mitchell agreed. He thought the issue related to
personnel records was separate. He believed it had been a
surprise several years back when the [former] CEO's
personnel records had been released and people thought the
records were to be held in confidence. He referenced a
court case specifying that if a public employee in the
exempt service had a high enough profile position, their
personnel records are not confidential. The corporation had
been talking about how to potentially modify statute since
that time, but there had not yet been a good vehicle or
opportunity to achieve the goal. He noted that APFC had
discussed the personnel privacy issue the prior session as
well. He stated that the potential exemption from the Open
Meetings Act for purposes of recruiting certain high level
employees was a new realization by the board.
2:22:03 PM
Mr. Schutt moved to slide 7 titled "Investing for the Long
Term." He stated that APFC was investing for the long term
and did not try to time the market. He highlighted that the
board allocated between asset classes and supervised the
performance of the fund, but it did not make investment
decisions. He believed the structure had historically
proven itself with the success of the fund. The corporation
adhered to the legislature's defined statutory purpose of
the Permanent Fund to conserve a portion of the state's
revenue from mineral resources and tried to convert it into
enduring financial resources through prudent investing. The
corporation was trying to invest in conservative and
prudent ways to maximize returns while minimizing risk and
was constantly attentive to the preservation of the fund's
principal. Additionally, the fund was founded as a savings
device and the corporation carried that tenet on.
Mr. Schutt continued to review slide 7. The corporation
tried to achieve the highest level of performance while
acting prudently and keeping risk in mind. The fund's
current investment performance target was CPI [Consumer
Price Index] + 5 percent over a ten-year period. He
remarked that the target may not seem aggressive, but it
was actually fairly aggressive in the current environment.
He highlighted that the board had considered reducing the
target, but it had decided to hold steady recognizing it
was somewhat aggressive. Part of the reasoning was because
it aligned with the 5 percent POMV. He explained that a
return of 5 percent plus inflation exceeding the 5 percent
POMV draw would result in growth of the fund. He relayed
that the corporation tried to conform to prudent
investments and asset allocation decisions to achieve its
long-term investment goal.
2:25:11 PM
Mr. Mitchell stated there was a theme throughout the coming
slides related to some of the issues discussed the previous
session on the Permanent Fund's two account structure. He
characterized the trust administration and investment
structure as a relic of a different time that resulted in
the potential of a liquidity issue in the ERA. He clarified
that he did not mean a liquidity issue in the sense that
there was insufficient income or cash, but that there was
not enough money categorized as spendable in the statutory
framework.
Mr. Mitchell addressed diversification on slide 9, showing
the fund's historical asset allocation in four pie charts.
He highlighted that the fund's entire asset allocation in
1980 was fixed income. He elaborated that fixed income was
well suited to the existing structure where there was
interest income coming in regularly securities were
bought and hold to maturity that was realized and
statutorily available for expenditure. In 2024, the
portfolio included eight asset classes and over 40 percent
of the assets were illiquid. The current allocation
targeted total return, but not realized income. He
explained that the total return was greater, but there were
numerous unrealized gains which were not eligible to be
spent in the ERA despite being income from an accounting
perspective. He clarified that the liquidity issue revolved
around the construct created for the fund based on the
fund's inception compared to the present.
Mr. Mitchell directed attention to a world map at the top
of slide 9. He highlighted that the people of Alaska had
done an incredible thing where excess revenue had been
deposited into the Permanent Fund beginning in 1978 and the
funds were now invested in the worldwide economy. He
explained that a state with one of the smaller GDPs [gross
domestic product] had a revenue source created by the
worldwide economy, resulting in a more diversified revenue
source than perhaps any other state.
2:28:26 PM
Co-Chair Edgmon relayed that the committee had heard
presentations from Adam Crum [commissioner of the
Department of Revenue] and the Legislative Finance Division
recently. He recalled that a handful of years ago Callan
and Associates was projecting a ten-year outlook at around
6.25 percent and the latest projections were a little more
optimistic at 7.1 percent. He stated that when funneled
through the statutory net income construct, the 1 percent
difference over a long period of time was significant. He
considered it from a liquidity standpoint in a shorter term
perspective. He understood that the board had compiled low,
mid, and high case scenarios. He remarked that many
legislators did not really understand it, but it was an
important concept.
Mr. Mitchell responded that it was a great point that
projections using Callan's assumptions showed a smooth
upward ascending expectation of revenue, which was similar
to the [DOR] Revenue Sources Book (primarily generating
revenue from oil, a commodity with inherent volatility). He
explained that historical performance showed a volatile
line of highs and lows and the future would be the same.
Projections were based on a middle ground perhaps with a
slight optimism. He stated the challenge was that there was
a lot of cause for concern with the low case scenarios,
while under the high case scenarios things would be fine.
He elaborated that under Callan's projection of 7 percent
with realized earnings the fund would be fine. He stated
that market cycles were the reality, and they could last
ten years. He elaborated that a cycle resulting in
diminished statutory net income was extraordinarily
impactful to the ability to make the annual transfers to
the state under the current two account construct.
Co-Chair Edgmon suggested that perhaps the topic could be
addressed separately in front of the committee.
Mr. Mitchell replied that the issue would be discussed
again later in the presentation.
2:31:58 PM
AT EASE
2:34:53 PM
RECONVENED
Representative Johnson noted there would likely not be
enough time to make it through the entire presentation. She
anticipated asking APFC to come back in the future. She
wanted to give the opportunity to ask questions.
Mr. Mitchell turned to slide 10 titled "Renewable Financial
Resource." The first royalty deposit into the Permanent
Fund was $734,000. The principal of the fund was non-
spendable and had grown to $56.7 billion. Realized earnings
over the life of the fund totaled $85 billion. He
highlighted that during the first 40-something years there
had been dividend draws of $24.4 billion (the fund had been
growing during that timeframe) and over the past five years
there had been $19 billion in POMV draws. He explained that
the Permanent Fund was being used in a much larger way than
it had been historically. He reported that POMV draws would
exceed the prior dividend draws in the next several years
in the $3.5 billion to $3.7 billion range.
Mr. Mitchell relayed that inflation proofing was another
requirement of the current two account structure. For
example, if a loaf of bread currently cost $2.00, at a 5
percent rate of inflation the bread would cost $2.05 the
following year. He explained that without inflation
proofing it would only be possible to buy a portion of the
loaf of bread with a distribution from an endowment. He
reported that $23.6 billion had been used to inflation
proof the fund. There had been special appropriations to
principal from the ERA including a $4 billion appropriation
in 2022. The Permanent Fund also contained the Amerada Hess
subaccount.
2:38:20 PM
Mr. Mitchell turned to slide 11 titled "Savings." The slide
included a bar graph showing where the money used to fund
the Permanent Fund had come from. The royalty deposits
totaled $19.5 billion over the life of the fund (25 percent
of constitutionally dedicated royalty proceeds and 50
percent of statutorily mandated deposits for leases since
1979). There was $15 billion in special appropriations, of
which about $2.7 billion came from the general fund. He
stated that about $22 billion had been deposited into an
account with a value of $77 billion in addition to the
distributions made. He remarked it was an amazing success
story where leaders of the past had set up the account and
used a portion of the wealth that they could have otherwise
spent. He viewed 1987 as the "poster child" for the
sacrifice required to create the Permanent Fund. He
elaborated that the price of oil had diminished in 1987 and
the state did not have a Constitutional Budget Reserve
(CBR) Fund at the time (the CBR was created in the 1990s).
There were no alternatives for funding state expenditures;
therefore, the budget was reduced in a stark way. As a
result, there had been significant negative economic
ramifications where assets could be purchased for pennies
on the dollar and people had left the state because they
could not find employment. He explained that the
legislature had still appropriated money from the ERA into
principal, which had been a real sacrifice. He elaborated
that the specific situation resonated with him when
thinking about the intergenerational responsibility to
respect and protect the funds for current and future
generations.
Mr. Mitchell pointed to the inflation proofing transfers
made throughout time reflected in the gold portion of the
bars on slide 11. He noted it was important to consider
that the calculation for inflation proofing was based in
statute. The calculation from 2016 through 2024 was $12.6
billion. The legislature had appropriated $11.3 billion,
which was theoretically $1.3 billion under the statutory
requirement. The special appropriation of $4 billion in
2020 was not categorized as inflation proofing. He
explained that for legislators who were present at the time
of the payment, there was a thought process that perhaps
the funds had been intended to be inflation proofing. If
the $4 billion was included in inflation proofing, there
would be a slight surplus in inflation proofing in that
timeframe. He noted it merely depended on a person's
perspective.
2:42:10 PM
Mr. Mitchell turned to slide 12, which was intended to show
the difference between gap income and statutory net income.
The slide addressed the concept that revenue had to be a
certain category of earning in order to be eligible for
expenditure by the legislature. He explained that in 2022
the Permanent Fund had negative performance of -1.32
percent, yet there was $4.5 billion of statutory net income
that same year. He stressed there was a huge disconnect
between accounting income and statutory net income. In FY
23, the portfolio's rate of return was 5.18 percent and
statutory net income had only been $2.5 billion. The slide
highlighted the difference between liquidity and money that
was available to expend. The chart on the right showed how
statutory net income was realized from FY 18 through FY 23.
He pointed out that FY 18 and FY 21 were outlier years with
extraordinarily strong net income.
Mr. Mitchell explained there had been some "one off"
activity in the portfolio in FY 18, and FY 21 had been an
outstanding equity performance year with statutory net
income levels significantly outside the norm. He noted
there was a slide later in the presentation showing the
averages of various timeframes. He explained that
historically the averages were much closer to $4 billion
than the $8 billion in FY 21 and should be what was
expected when looking at statutory net income at least in
the short term. The presentation included slides showing
how the current fiscal year was performing, but the fund
was generally in a depressed statutory net income phase
with a large amount of unrealized gains that were not
churning into the realized category as quickly as they had
historically.
Mr. Mitchell moved to slide 13 titled "Earnings Reserve
Account (ERA)." A graph on the slide showed the ERA in
isolation and the effective POMV draw rate. The draw was 5
percent of the ending balance of the last five fiscal
years. He explained it created an effective rate that was
less than 5 percent due to an increasing fund value. He
expounded that if there was a decreasing fund value, the
POMV draws would be greater than 5 percent. He pointed out
that draws had ranged from 3.79 percent to 4.52 percent
since the inception of the POMV draw. He stated the ERA
durability issue was highlighted in FY 23 where statutory
net income was $2.49 billion with a POMV transfer of $3.3
billion and inflation proofing of $4.2 billion and a draw
on the Alaska Capital Income Fund, resulting in a net
negative to the ERA of $5 billion. The draw rate was
unsustainable and resulted in an ERA ending balance of
$10.491 billion. He remarked that $10 billion sounded like
a lot of money; however, it included the FY 24 POMV, FY 24
inflation proofing, the FY 25 POMV, and potentially FY 25
inflation proofing. Additionally, there was a component of
unrealized gains that were not spendable. There was a
balance of approximately $200 million that was not
accounted for in the ERA at the end of FY 23. He elaborated
that if the current statutory net income pattern continued
through the end of FY 24, there would not be sufficient
funding to commit to the FY 26 POMV payment. Under the
scenario, it would mean relying on a portion of next year's
(hopefully) investment income to provide for the transfer.
2:47:36 PM
Mr. Mitchell advanced to slide 14 titled "Revenue
Stability." He stated that from a stability perspective,
the POMV had an incredibly positive impact on state
revenues. The historic volatility of state revenues had
been extraordinary; it was one of the blessings and
shortcomings for the state. A chart on the left reflected
historic revenue volatility and a chart on the right
reflected the stability and predictability of POMV draws.
He noted the slide showed the calculation for the FY 25
POMV. He highlighted that the lower fund values in FY 19
and FY 20 of $65 billion and $64 billion respectively,
would be dropping off in the next couple of years and the
POMV was expected to increase after that time. He explained
that the ERA balance would diminish if earnings were not
robust enough to grow the fund balance. The Permanent Fund
balance peaked at $81.5 billion, followed by a balance of
$75.9 billion in FY 22, and $77 billion in FY 23. If the
balance remained within the range of the last several
years, the POMV was not expected to see additional growth
until an additional positive market experience provided for
increased fund value.
2:48:54 PM
Mr. Mitchell turned to slide 15 showing fund values as of
December 31, 2023. The total fund value was $77.4 billion
including the ERA and principal. The unrealized gains
allocated between the principal and ERA were $12.2 billion
and $1.5 billion, respectively. He highlighted that if the
legislature spent the $3.7 billion on the POMV and $1.4
billion on FY 24 inflation proofing, around 70 percent of
the $1.5 billion [in unrealized gains in the ERA] would
shift up to principal because it was pro rata allocated. He
stressed it was a false balance. He explained that it was
an insulator from negative market experience; if there were
unrealized losses, it ensured the spendable portion of the
ERA balance would not diminish. The $1.5 billion [in
unrealized gains in the ERA] was a form of shock absorber,
but it was not currently a spendable balance. The
uncommitted realized earnings as of December 31 were $1.9
billion. He explained it represented the $200 million
balance at the start of the year in addition to $1.7
billion in realized statutory net income fiscal year to
date.
2:50:18 PM
Mr. Mitchell moved to slide 16 titled "10 Year Annualized
Returns." A bar chart on the slide showed the cyclicality
of markets and the difficulty of hitting a CPI + 5 percent
target. The gold dots reflected the return objective and
the bars reflected real return and inflation for each ten-
year cycle. The chart showed that the target had not been
hit in the years 1999 to 2008 and 2008 to 2018. He stated
it was not unusual and the draws during the timeframe only
funded the PFD program with smaller annual draws than under
the current POMV system. The situation highlighted the need
to be conservative during times of largess when investments
were doing well and to ensure the money remained within the
fund in order to have funding to draw from when investment
performance was not as strong. He expected a continuation
of the cycle going forward to include multiple years of
outperformance and multiple years of underperformance.
Mr. Mitchell pointed to a table showing fund performance on
the right of slide 16 and indicated the corporation would
have liked the fund's one-year performance to be better.
There had been an underrepresentation of growth stocks in
the fund's public equity portfolio. He relayed there were
seven stocks within the S&P 500 that represented almost all
of the increase in value during the same period. He
explained that the fund's underrepresented position in the
stocks occurred because it had employed a value play
looking for stocks with lower price-to-equity ratios based
on a belief and historical realization of value from that
perspective. He remarked that for whatever reason there had
been an exuberance about the seven stocks during the same
timeframe that resulted in the fund underperforming its
benchmark by approximately 50 to 60 basis points in the
passive index in particular. The three-year fund
performance of 10.49 percent showed that the success of the
fund's active strategies (exceeding the passive index by
over 4 percent and the performance benchmark by 1 percent).
The fund also outperformed the passive index and
performance benchmark in the five-year and ten-year
periods.
2:53:48 PM
Co-Chair Johnson asked if the fund's one-year
underperformance was because it had not held positions in
the five best performing stocks.
Mr. Mitchell deferred the question to Mr. Frampton for
details. He stated that generally there were seven stocks
referred to as the "magnificent seven" where
underrepresentation in those stocks resulted in weaker
performance.
MARCUS FRAMPTON, CHIEF INVESTMENT OFFICER, ALASKA PERMANENT
FUND CORPORATION, provided information about his
educational and professional background. He worked in
private market investments until 2018 when he had been the
CIO. The one-year performance in June of 2023 had been
disappointing. He explained that the underperformance had
been focused in the public equities or stock investments
accounting for 36 percent of the fund. The fund had
outperformed its benchmark in the other asset allocations.
He explained that the fund had deemphasized growth tech
stocks, which had become very expensive compared to banks,
industrials, consumer staples, and lower volatility stocks.
The Permanent Fund's top 10 holdings were the large S&P 500
companies such as Google and Microsoft, but it owned less
than its benchmark. The fund had a robust risk system and
if APFC managers believed Google to be overvalued, there
were limits on the magnitude they could express it.
Mr. Frampton explained that the fund's risk system that
looked at the fund's positions, benchmark, and tracking
error, showed how much it would underperform if it got all
of its bets wrong and how much it would outperform if it
got bets right. The fund had a tracking error limit of 4
percent, but it typically did not push up to that limit.
The fund's tracking error in public equities had been about
2 percent in the past year. Managers had chosen value
stocks over tech stocks and the fund had underperformed in
public equities by 2 percent. He explained that
underperforming by 2 percent in 36 percent of the fund
resulted in the .5 percent underperformance. He was
disappointed by the performance, but in a sense, it
validated the fund's risk models. He explained that the
fund had gotten it all wrong and had underperformed by what
the system suggested it would probably underperform by.
Over longer term periods that type of looking for value in
the market played out over longer periods of time. He
detailed that that type of trade was used by the fund in
all of its asset classes and it generally worked out,
albeit not last year.
2:57:33 PM
Mr. Frampton turned to slide 18 titled "Fund Performance vs
Benchmarks." He stated that the fund closed its books on
private investments and received appraisals on a quarterly
basis. The slide showed fund performance as of September
30, 2023, and updated performance numbers for stocks and
bonds as of November 30, 2023. He noted that the markets
had been tough during the quarter ending in September, but
the fund resumed outperforming as of September. He pointed
to the bar chart on the left of the slide showing the fund
performance at -0.53 percent in comparison with its
benchmark performance of -1.25 percent fiscal year to date.
The table on the right of the slide reflected a rally in
the stock market through November (continuing through
December). On a preliminary basis, the result was a return
to positive fund performance above its benchmark. When
factoring in the continued rally in December, the estimated
return was about 4 percent through the first six months of
the fiscal year. He stated it was turning into "kind of a
nice year in the markets" and the fund was back to meeting
its benchmarks. Consequently, APFC was happy with "where we
sit right now on that front."
Mr. Frampton moved to slide 19 titled "Focus on Increasing
Internal Management." The pie chart on the left showed
asset classes and accompanying investment staff. He noted
that the number of private equity staff shown on the slide
needed to be updated from five to seven. The corporation
had 28 investment staff, which he believed was lean
compared to some of the state pension funds around the
country. He believed APFC did a lot with an appropriate
number of staff. The right section of the slide highlighted
how APFC had been exploring where it could save money on
fees and bring strategies in-house. He stated that the
entire fixed income management had been brought in-house
the prior year. At that point, APFC had already been
trading investment grade corporate bonds, high yield bonds,
mortgages, cash, and TIPS [Treasury Inflation-Protected
Securities] in-house. The corporation had brought
management of global sovereign bonds in-house in the past
year. He explained that the fund owned treasury bonds of
every major country and hedged the currency. The
corporation brought the management of high yield bonds in-
house in 2018; management had previously been done by
external managers for a substantial fee.
Mr. Frampton reported that APFC currently spent over $100
million per year in stock manager fees. In 2014 (and
further in 2021), the corporation started some U.S. based
stock investments at the staff level. The corporation was
currently working on a plan to begin trading international
stocks in-house in the coming months. He noted that
bringing management in-house saved a substantial amount on
fees; however, paying the fees was superior to getting it
wrong.
3:01:05 PM
Mr. Frampton moved to slide 20 titled "APFC Performance
Relative to Large Public Funds." He stated that APFC
managed money to the benchmarks because every pension fund
had a different asset allocation, mandate, and features;
however, it was worth taking a look at the Permanent Fund's
performance compared to other large public funds. The slide
showed a comparison against the large U.S. state pension
funds. He highlighted that the Permanent Fund had been in
the top decile or quartile over in every time period over
the past 20 years with the exception of last year. He
believed it indicated that the complexity of the fund's
diversification had paid off relative to the performance of
other large pension funds.
Representative Galvin understood the previous year was a
bad year for fund performance. She asked what had been
learned from the experience.
Mr. Frampton answered that the fund's underperformance the
prior year was limited to one asset class, and it was
within the magnitude expected under the circumstances. He
recognized the big investment positions were wrong but
given what APFC knew at the time about the relative values,
the corporation did not believe it got the analysis wrong,
the market merely played out differently during the given
time period. He remarked that even Warren Buffet went
through long periods of underperformance. He clarified he
was not putting APFC in the same category, but he did not
believe any investor would beat their benchmark every year.
He stated that when underperformance occurred it was
necessary to reflect on whether there had been a breakdown
in the decision process or a bad analysis. He did not
believe that had been the case. He explained that because
they got so much wrong [in the particular situation] and
the poor performance was within the range generated by
APFC's modeling, in a sense it was validating even though
it was painful to have a difficult year.
3:03:46 PM
Co-Chair Edgmon asked for verification that it was fair to
say that APFC was successful in keeping its risk profile in
reasonable parameters. He believed the fund had also been
coming off a year that had seen a -1.32 percent return.
Mr. Mitchell replied that APFC had beat the benchmark [in
that particular year].
Mr. Frampton responded that it depended on the definition
of success. He relayed that last year the fund made 5
percent but underperformed its benchmark, whereas the prior
year the fund had been down -1.32 percent, but its
benchmark was down 3.24 percent. He believed that in a
sense it was better to beat the benchmark when the market
was down because anyone could meet the benchmark when the
market was up by taking more risk. He thought performance
should be looked at over the three to five-year period. He
explained that APFC did not generally make investments that
would play out in the next six months, but they should play
out over the next five years or else fund managers were
doing something wrong. He added that APFC looked at the
performance of other endowments and funds. He highlighted
that the Yale endowment was well regarded in the market,
and it published an annual report that did not include
anything less than 10-year performance for its asset
classes because it was focused on long-term performance. He
elaborated that the Yale endowment also included a topline
number annually. He stated that most institutions tried to
focus on the longer term rather than year-to-year, but it
was still disappointing to have a tough year.
Mr. Frampton highlighted that one of APFC's assets was its
limited turnover in key investment and staff positions
(slide 21). The corporation generally recruited its
investment positions from individuals in the private sector
who found APFC's mission and the idea of moving to Alaska
appealing. He noted there were exceptions such as Mr. Ross
Alexander who had been hired from the Alaska Retirement
Management Board (ARMB) several years back [as the senior
portfolio manager of private equity]. He found the turnover
of APFC's 28-person investment staff to be manageable. He
estimated that annually the corporation likely lost one
person it would prefer not to lose. He highlighted that the
fund's head of private equity left APFC a couple of years
back and Allen Waldrop was the most recent hire. The
position had been vacant for around six months and had not
been easy to fill. The corporation was fortunate to hire
Mr. Waldrop who had been a consultant to APFC for ten
years. He highlighted that investment decisions were made
by a three-person committee including himself, Deputy CIO
Jim Parise, and Mr. Waldrop, and reviewed by the executive
director. He explained that investment decisions were well
vetted and not made by an individual person.
3:08:03 PM
Representative Johnson stated her understanding that the
fund's allocation to private equity had not changed in the
current year. She asked for details on the board's decision
not to make a change.
Mr. Frampton replied that when he had joined APFC in 2012,
only about 4 percent of the fund was invested in private
equity. He reported that APFC had leaned into private
equity in the past decade and the asset class currently
accounted for 19 percent of the fund's portfolio. He
relayed it had been a very good decision and a strong area
to be. Often in institutional investing, the highest
performing areas attracted significant capital and the
areas became progressively less attractive as more money
went in. He believed private equity was no longer as
attractive as it had been ten years earlier. He elaborated
that one year ago he had proposed a reduction to the fund's
private equity allocation from 19 percent to 15 percent.
The proposal had been approved by the board and the fund's
investment in private equity had been reduced in pursuit of
the lower target. There had been substantial discussion on
the topic and differing opinions and the topic had been
revisited over time. He explained that one of the
mechanisms that could have achieved higher return
objectives was an increase in private equity and the board
ultimately decided not to change the return objective. The
corporation was still following the decision from one year
ago and was doing less in private equity.
Co-Chair Johnson asked if the decision not to increase the
allocation was because the Permanent Fund was a public
fund. Alternatively, she asked if the decision would have
been the same regardless of the type of fund.
Mr. Frampton responded that being a public versus a private
fund could play into a private equity allocation. For
example, some public pension funds did not have the ability
to maintain certain trade secrets or elements of private
equity that their partners would want to remain
confidential. The corporation had the ability to operate
effectively in private equity because it had better legal
protections over those matters than other funds such as
CalPERS [California Public Employees' Retirement System]
may have. The fact that the Permanent Fund was a public
fund was not necessarily the reason he believed it should
allocate less to private equity. His decision was more
about all of the money that had gone into private equity
and the fact that valuations of the deals were higher and
less attractive. Additionally, funding in private equity
investments was locked up for ten years and fees were high.
He believed investments in private equity should provide a
premium return and he was not certain the asset class was
providing the same returns it had five years ago, which
resulted in his recommendation to do a bit less. He noted
that in five years he may have a different opinion as
conditions may change.
3:11:46 PM
Co-Chair Edgmon stated that as the fund grew and became
more diversified and sophisticated, the capabilities of the
corporation had to grow as well. He referenced Mr.
Frampton's statement that the APFC investment team was
lean. He remarked that the team was also very capable and
dedicated. The committee had heard from Callan Associates
in the past on how prestigious it was to work for APFC, and
a major award had been won several years back. He lauded
Valerie Mertz for her leadership during the transition
[between executive directors] in recent years. He referred
to the expansion into an Anchorage office and wondered
about the statement about growing the corporation's
capabilities and the fund. He asked if the opening of an
office in Anchorage and [potentially] elsewhere reflected a
natural outgrowth. He was not clear why APFC would need to
open an office in Anchorage given its level of success in
its ability to recruit and retain 28 investment staff. He
asked for additional details.
Mr. Schutt responded that regarding the Anchorage office it
was the "subtleties there." He highlighted that every
position was evaluated for whether it had to be located in
Juneau based on position level and interactions needed with
peers and supervisors. For positions that did not need to
be in Juneau, APFC considered whether there was an
advantage to the corporation in the recruitment and
retention of employees. The corporation had determined that
the Anchorage location was beneficial for a small set of
current and potential employees. The board and staff wanted
to internalize functions when it made sense, in part
because the fund had outperformed external managers when
bringing management internally and it saved an incredible
amount of money. He remarked that many of the fees were on
basis points and did not seem that large until they were
applied to the fund's billions under management. He
emphasized the number became large very quickly. He
reported that in some cases the fund paid more to a single
manager than the cost of its entire staff operation because
of the multiplier effect.
Mr. Schutt relayed that staff continued to evaluate
bringing more [management] in-house and the board continued
to support the policy. He stated that the board wanted
Alaska-based employees. He remarked that "if we have to
make a little bit of sacrifice and stir up a little bit of
controversy by doing that with a small Anchorage office, we
think that part is worth it." The corporation would much
rather have a few Anchorage-based employees and a lot of
people managing Alaska's Permanent Fund in Alaska rather
than outsourcing it to third parties on contract or asset
managers. The corporation was taking the "Alaska first"
approach and a component of that was having a bit of
flexibility in the precise location in Alaska where the
work was done.
Co-Chair Edgmon asked if a private company would have made
the same move.
Mr. Schutt replied that he believed a private company would
likely have moved more. He remarked that he was respectful
of Anchorage versus the rest of Alaska and had deep
connections to the rest of Alaska despite living and
working in Anchorage. He stated that it was much easier to
operate a business in Anchorage than it was in Juneau. He
noted the same was true of Fairbanks, Kenai, and the rest
of Alaska. He added that Alaska was special in large part
because of everything that was out of Anchorage; however,
there was also tension for APFC in terms of how to recruit
and retain the best staff. He stated that sometimes the
compromise was to have more [staff] in Anchorage.
3:17:49 PM
Co-Chair Johnson recognized Representative Dan Saddler in
the room.
Representative Hannan asked about private equity on slide
19. She asked if APFC had invested in Alaska businesses
under its private equity asset allocation. She referenced
the reduction to the portfolio's private equity allocation
and asked how much of the Alaska private equity investments
remained. She asked if the Alaska investments were measured
separately from or combined with the rest of the private
equity return.
Mr. Frampton answered that the $200 million in-state
private equity program passed in 2018 and was implemented
in 2019. He explained that the private equity investments
were illiquid and APFC did not control the exits. The
corporation hired two managers who were investing in
companies related to Alaska in some way. The reduction to
the private equity allocation did not impact the
investments, which the corporation would hold for another
five to six years. The performance of the investments was
reported separately on APFC performance reports. He looked
at the November report and relayed that the Alaska
investments had a positive return but had underperformed
the fund's other private equity investments. The board had
elected not to continue the program, but existing
investments remained.
Mr. Frampton turned to slide 22 titled "Permanent Fund
Balance Sheet." He highlighted that the fund had one asset
allocation for its two separate accounts, and everything
was invested pro rata in all of its assets. As of December
31, 2023, the ERA balance was $8.5 billion. He detailed
that $5 billion of the total was categorized as "committed"
including inflation proofing for the current year and the
FY 25 POMV transfer. There was $13 billion in unrealized
gains in the total fund, with the ERA's portion at $1.5
billion. As a result, the available realized ERA balance
was $1.9 billion as of December 31, 2023. The fund's
statutory net income in FY 24 through December 31, 2023,
was $1.7 billion. He explained that if the same $1.7
billion was generated in the second half of FY 24 it would
result in a realized ERA balance of just under $4 billion.
He noted that statutory net income refreshed the ERA
balance, but a current snapshot of the balance would show
funding as largely committed.
3:21:21 PM
Co-Chair Johnson noted that she would end on the current
slide of the presentation in order to leave time for
questions.
Representative Cronk remarked that some people thought the
private investments in Alaska would lead to corruption, but
he did not share that sentiment. He opined that it was the
state's money and it should be invested in Alaska projects
that would bring back a return in addition to benefitting
all Alaskans. He highlighted that Chairman Schutt was
Alaskan grown and it was something to be proud of. He
thanked Mr. Schutt for his work and relayed that people
back home were proud of him.
Representative Coulombe was trying to wrap her head around
inflation proofing and the POMV draw. She noted that she
had not been in the legislature when the POMV draw had been
instituted, but she believed there was an inflation
proofing aspect to the draw. She asked if all of the money
going to inflation proofing was based on statute. She
wondered whether the POMV draw helped with inflation
proofing. She asked for details on how the two intersected.
Mr. Mitchell replied that the confusion may be created by
the concept of a constitutionalized POMV draw because it
would eliminate the need for inflation proofing. He
explained that it would be unnecessary to inflation proof
if there was a limit of one draw on a single fund.
Currently, there was a two account structure with a POMV
draw. He explained that the Permanent Fund was halfway to a
true POMV endowment structure. He elaborated that the POMV
structure was in place, but the fund still had the two
account structure. Within the two account framework,
whatever was in the ERA was spendable by a simple majority
of the legislature and signature of the governor. He
clarified that [under the current structure] without
inflation proofing/transferring money from the ERA to the
principal, the buying power of the Permanent Fund was not
maintained.
3:24:09 PM
Co-Chair Edgmon referenced slide 6 "Proposed Legislation:
Seeking Amendments to Improve Corporate Functionality." He
stated that at first blush he was completely in support of
the legislation should it emerge later on. He pointed out
that after being introduced, bills could be changed and
amended. He stated that if the bill was introduced the way
it was presented on the slide, there would be an attempt to
amend it. For example, there would be an attempt to add a
seventh board member and/or possibly a public member. He
added there had been some consternation about the seats not
being subject to legislative confirmation. He asked if the
board had talked about the possibility of changes that
could be made to a potential bill.
Mr. Schutt answered that the board had talked about the way
topics could fall under amendments to a potential bill as
part of the legislative process. The corporation was aware
of various calls to change either the appointment or
confirmation structure of the board, to add different
members or so called professional members, and various
governance topics. He stated that if a bill were
introduced, he thought it was fair to anticipate there may
be other things that may or may not end up in the bill. The
board had talked about the attendant issues and risks.
Co-Chair Edgmon asked how it would work if a bill was
introduced during the current session and it was amended in
April to add a public member board seat and other things.
He asked if the board would hold a special meeting to
contemplate the bill at that point.
Mr. Schutt answered, "Probably not." The board had a
meeting coming up in a couple of weeks in Juneau and an
accompanying open house. He invited committee members to
attend and invited the co-chairs to address the board
directly. The board had regular quarterly meetings and
would be meeting again in Barrow in May. He relayed that
the legislation was not an urgent priority because APFC did
not have a foreseeable or existing vacancy in any of the
positions the legislation would pertain to. He stated there
was time and perhaps the legislation would come the next
session.
3:27:28 PM
Co-Chair Johnson thanked the presenters and would be in
touch with any questions to be addressed at a later date.
She reviewed the schedule for the following Tuesday.
ADJOURNMENT
3:28:26 PM
The meeting was adjourned at 3:28 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HFIN_Alaska Permanent Fund 202401_.pdf |
HFIN 1/26/2024 1:30:00 PM |