Legislature(2011 - 2012)SENATE FINANCE 532
01/31/2011 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Overview by Department of Revenue: | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
67SENATE FINANCE COMMITTEE
January 31, 2011
9:03 a.m.
9:03:02 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:03 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Johnny Ellis
Senator Dennis Egan
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
Senator Lesil McGuire, Vice-Chair
ALSO PRESENT
Senator Cathy Giessel; Bryan Butcher, Commissioner,
Department of Revenue; Jerry Burnett, Deputy Commissioner,
Division of Treasury, Department of Revenue.
SUMMARY
^Overview by Department of Revenue:
State Savings Account and Budget Reserves
9:03:11 AM
Co-Chair Stedman discussed the ongoing process of reviewing
the state's fiscal and economic condition.
BRYAN BUTCHER, COMMISSIONER, DEPARTMENT OF REVENUE,
discussed the state's advantageous position. Alaska's
financial standing was strong. He commented on Moody's
recent triple-A rating, which only a dozen states
nationwide earned.
Co-Chair Stedman mentioned the absence of Gavel-to-Gavel
during the committee meeting.
Commissioner Butcher responded that rating upgrades
occurred infrequently. He noted that rating agencies played
a role in the most recent recession. He added that most
states with a triple-A rating had held the rating for quite
some time.
9:05:56 AM
JERRY BURNETT, DEPUTY COMMISSIONER, DIVISION OF TREASURY,
DEPARTMENT OF REVENUE, discussed the returns on state funds
including the general fund, Constitutional Budget Reserve
(CBR) main and subaccounts, the Power Cost Equalization
fund, the public school trust fund, the PRS and TRS defined
benefit funds, and the Alaska Permanent fund.
9:06:47 AM
Mr. Burnett introduced Slide 3, "General Fund and other non
segregated investments." He mentioned a small error in the
percentage points presented in the slide. The fund was the
main general investment fund for the state, with
approximately 100 separate funds included. He pointed out
the investment of $500 million on behalf of Alaska Housing
Finance Corporation (AHFC) in the fund.
Co-Chair Stedman asked the definition for short-term versus
intermediate-term. Mr. Burnett responded that the short
term was less than one year.
Co-Chair Stedman asked whether the investment was normally
classified as a money market fund. Mr. Burnett concurred
and stated that the probability of loss was low. The
intermediate term was a one- to five-year aggregate with
duration of 2.4 years. The 2.4 year duration was a
technical term related to the length of the investment term
of the bonds. He mentioned that in the short run, the
yields and the benchmarks were low.
9:10:08 AM
Mr. Burnett stated that the short-term interest rates were
very low in the market place. The rates would likely
increase. When interest rates moved up, there was a loss of
market value for the portfolio. He stated that yields on
fixed income pools were anticipated to remain low for the
several months.
Co-Chair Stedman asked whether the returns against the
benchmarks provided a weighted balance of the entire
holdings. Mr. Burnett responded in the affirmative.
9:11:53 AM
Mr. Burnett detailed Slide, "Constitutional Budget Reserve
Fund (main and sub)." He noted that the main account was
invested over a short period. As of the end of the prior
year, the main account had approximately $5 billion.
Deposits to the fund since 2008 had greatly increased the
value. The increase was due to legislative deposits and tax
settlements. The current period showed that the earnings
were down, but the five-year actual was over 5 percent
return on the fund.
Co-Chair Stedman requested comparisons of the benchmarks
with the short-term and intermediate-term broad market.
Mr. Burnett introduced two Department of Revenue (DOR)
staff: Bob Mitchell, Fixed Income Investment Officer,
Division of Treasury and Pam Leary, Comptroller, Division
of Treasury.
9:14:23 AM
Mr. Burnett discussed the subaccount, which was invested
for a five-year time horizon with an expectation of a
higher yield over time. He stated that the returns for the
last calendar year and the current fiscal year were better
than forecasted returns. The entire amount of the loss
below the benchmark came from a short period in 2008.
Co-Chair Stedman requested an update on the investment. Mr.
Burnett responded that in April 2008, the legislature
appropriated $2.3 billion to the CBR and DOR had decided to
invest approximately $4.1 million and transferred the funds
into the subaccount at the end of April 2008. The total
balance was approximately $4.7 billion. During the
remainder of 2008 (until February 2009), the equity markets
performed poorly and lead to a low balance of $3.1 billion
in the entire subfund. No additional contributions come in
from the legislature or settlements; the change in value
since 2008 was entirely the result of investment earnings.
Co-Chair Stedman discussed the management of the large
savings pool outside of the permanent fund. He pointed to
the initial investment in 2008 and assumed that Alaska was
currently in good standing. He wondered about the potential
outcome if the fund was a standalone investment.
9:18:43 AM
Mr. Burnett stated that with a standalone investment, the
state had recovered and earned $150-$200 million. He
offered to provide details. He stated the total between the
two funds as of the previous Friday of $10,064,000,000.
Co-Chair Stedman asked again for a breakdown of the
benchmarks for the funds. He asked about the five-year time
horizon and the high-risk definition issues. Mr. Burnett
replied that he understood and offered to provide further
information.
9:20:09 AM
Senator Thomas asked about the amount of the mentioned tax
settlements. Mr. Burnett responded that the settlements
were approximately one-half billion for each of the two
years.
Senator Thomas asked how the tax settlements were factored
in. Mr. Burnett answered that the settlements simply added
to the budget of the CBR.
Senator Thomas wondered about the impact the settlements
had on the forecast. Mr. Burnett responded that the
additional money from the settlements affected only the
total dollar amounts of the funds.
Mr. Burnett noted that a large deposit could induce an
effect due to market timing setting the base.
Senator Olson stated concern regarding the losses of
approximately $1.5 billion. He asked about safeguards to
prevent further losses.
9:22:05 AM
Co-Chair Stedman asked for expansion of DOR's internal
structure to aid in the management of the funds. Mr.
Burnett answered that daily returns were reported to the
chief investment officer and deputy commissioner. The
portfolio staff managed most of the fixed income
internally. The other funds were largely managed
externally.
9:23:33 AM
Co-Chair Stedman noted that Callan Associates had testified
that it was not involved with the CBR. He wondered whether
Callan Associates had recently begun consulting on the CBR.
Mr. Burnett responded that Callan Associates provided
consultation services for the general fund, the CBR, and
the commissioner's funds. Callan Associates had always
provided quarterly reports that were reviewed by staff;
Callan participated in the forecast. Callan's capital
market assumptions were used and further optimized by state
staff. He added that discussions were ongoing both
externally and internally.
Co-Chair Stedman stated that Callan Associates was used for
the Alaska Retirement Management Board (ARMB) and the
Permanent Fund.
9:25:03 AM
Mr. Burnett added that Callan Associates was the general
investment officer for the state. The capital market
assumptions provided were presented to the investment staff
and then moved to the commissioner on a regular basis. The
ARMB funds were treated similarly.
Mr. Burnett noted that the asset allocation for the CBR had
not been changed significantly for many years. The decision
was made to rebalance and remain with a selected asset
allocation during the 2008 period.
Co-Chair Stedman asked whether the meetings occurred
quarterly. Mr. Burnett noted quarterly reports.
Co-Chair Stedman asked whether minutes were taken at the
meetings and whether the meetings followed a formal
structure. Mr. Burnett answered no to both questions.
9:26:57 AM
Senator Olson stated concerns about the lack of minutes, as
multi-billion dollar decisions were made during the
meetings. He did not wish to place blame, but wished to
avoid further losses. He requested warning from the
investment officers regarding possible alternatives to
prevent further losses. Mr. Burnett stated that the
mentioned discussions happened internally and that the
chief investment officer brought the information to the
commissioner.
Senator Olson asked whether the warnings received the
necessary action. Mr. Burnett responded in the affirmative.
A decision about whether to remain in the same asset
allocation was always made following notice.
Co-Chair Stedman asked whether Callan Associates had agreed
to the state's definition of high risk on the long-term
investment of the CBR. Mr. Burnett did not believe that the
commissioner would require Callan Associates to sign off on
the definition.
Co-Chair Stedman recommended the good policy of formal
structure for the meetings, in addition to taking minutes
for further review. Commissioner Butcher strived to keep
the committee informed about important events or issues.
9:29:48 AM
Co-Chair Stedman informed listeners that the Federal Fund
and other Non-segregated Investments (GeFonsi) funds were
posted monthly to the Alaska state website on the treasury
home page.
Mr. Burnett added that a combined report illustrating the
values of the funds managed by DOR was also posted on the
website following each completed accounting cycle.
Co-Chair Stedman suggested that the committee discuss the
question of how much cash liquidity was needed in the
department to operate the state, and how much excess should
be shifted off for further investment to help with future
operating costs.
Co-Chair Hoffman referenced the percentages on performance
forecast presented and queried the anticipated balance for
the CBR at the end of the fiscal year. Mr. Burnett
responded that he would discuss the CBR balance later in
the presentation.
9:32:24 AM
Mr. Burnett discussed Slide 5, "Power Cost Equalization
Fund." He explained that the fund was set up as an
endowment to provide funding for the Power Cost
Equalization (PCE) program. The program had a statutory
payout of 7 percent of market value. The aggressive payout
was invested with the assumption of 7 percent earnings. He
explained that the fund had earned an average of 5 percent
over the past five years, with a current balance of
$352,600.
Co-Chair Stedman discussed the payout ratio of 7 percent.
He expressed concern regarding erosion of the principal
balance of the fund. He requested future review of the
payout ratio if the asset was deemed long-term. Mr. Burnett
opined that 7 percent was extremely aggressive for the fund
type. He agreed that a real rate of return in the 5 percent
range was more achievable.
Co-Chair Stedman did not want to confuse the rate of return
with the payout ratio. Mr. Burnett agreed and added that
the value of the fund was eroded over time if a payout
ratio was used at a greater rate of return.
9:34:32 AM
Senator Egan wondered why the investment was so aggressive.
He suggested that the fund would be more sustainable
through further review.
Co-Chair Stedman noted that the payout ratio could be
lowered if the PCE funds were lowered.
9:35:35 AM
Mr. Burnett detailed Slide 6, "Public School Trust Fund
(Principal and Income accounts)." He noted that the fund
was invested differently than the PCE fund due to the
payout rules. The Public School Trust Fund paid out net
income (not including capital gains). The trust fund had
been invested to maximize income while maintaining growth
of the fund. The forecast was slightly lower with the
performance for the last five years at 5 percent. The trust
fund income was the net income placed in a separate fund
for spending following appropriation by the legislature.
9:37:16 AM
Mr. Burnett discussed Slide 7, "PERS and TRS." He noted
that the two accounts were different regarding cash flow
purposes. He communicated the long-term goal of 8.25 percent
as the actuarial expected return used by ARMB. The goal was
recently adjusted downward to 8.12 percent with the slight
change in inflation assumptions. The fund had earned
approximately 4 percent during the past 5 years. He pointed
out that real assets had underperformed during the 2008 to
2009 period.
Co-Chair Stedman pointed out that the retirement portfolio
would be brought before the committee. He stated concerns
that 8.25 percent was too high. He approved of the recent
adjustment. He requested further information about the
portfolio and communicated the need for further updates.
Mr. Burnett stated that total assets equaled approximately
$15 billion.
Co-Chair Stedman asked for a ballpark range for the
liability of both funds.
Mr. Burnett responded that the last actuarial evaluation
was done on June 30, 2009 and showed an unfunded liability
of $9.7 billion. He stated that total liabilities were in
the $25 billion range.
9:41:38 AM
Co-Chair Stedman communicated that the actuarial value of
the asset included historical smoothing or averaging. Both
the actuarial value and the market value had to be
reviewed. Mr. Burnett added that the smoothing occurred in
a five-year period.
Co-Chair Stedman requested information regarding the
contribution of the legal settlement. Mr. Burnett added
that 89 percent went into the Public Employees' Retirement
System (PERS) and approximately 11 percent went into the
Teachers' Retirement System (TRS) in August of 2010. The
actual balance was approximately $38 billion with a
forecast of 7.75 percent.
Mr. Burnett discussed Slide 8, "APFC." He noted the growth
of the Alaska Permanent Fund Corporation Board (AFPC) shown
in the fiscal year-to-date return. The three-year actual
returns were negative for the fund with a forecast of 7.75
percent.
9:43:57 AM
Mr. Burnett discussed Slide 10, "FY 2011 Investment Revenue
Forecast." He pointed out that the returns for the general
fund were lower with GeFonsi. Short-term fixed-income was
not performing well and could continue to do poorly until
interest rates rose. The state was in a time of low
interest rates. He explained the current state of very low
short-term interest rates. When interest rates rose, then
the market value of the assets held would be reduced
temporarily. Short-term fixed-income securities would be
reduced in value with very little return over the following
several months.
Mr. Burnett addressed the CBR fund, which currently had a
balance of approximately $10 billion. He added that he
would not be surprised if the main account performed worse
than the forecast and thought the subaccount could do
better. Settlement deposits since inception for the CBR had
been approximately $7.1 billion.
9:47:17 AM
Co-Chair Stedman requested help presenting the terms as
percentages. Mr. Burnett offered to provide the requested
information.
Mr. Burnett clarified that the income shown as earnings for
the Permanent Dividend Fund was accounting versus realized
income. Co-Chair Stedman offered to update the data for the
public.
Mr. Burnett addressed the additional spreadsheet,
"Constitutional Budget Reserve Fund." The spreadsheet
illustrated the main and subaccounts. The bottom of the
page provided balances for the various funds.
Co-Chair Stedman asked whether the information was also
provided on the state website. Mr. Burnett stated that the
information was not currently available on the website,
although it could be in the future.
9:50:33 AM
Senator Thomas commented on the different philosophical
bases behind the various investments. He opined that the
settlements and lump sums placed in the account would
provide helpful information. Co-Chair Stedman agreed and
reiterated the request.
Mr. Burnett agreed, but stated that GeFonsi had 98
different funds. Each fund had its own set of challenges,
and determining which information to include provided an
additional challenge.
9:53:03 AM
Co-Chair Stedman stated that the committee would provide
flexibility for the new commissioner due to recognition of
the complexity of the department.
Co-Chair Hoffman referred to the spreadsheet (where the
performance forecast was 3.84 percent for the corpus and
6.96 percent for the subaccount) and asked whether the
figures indicated amounts anticipated for the next calendar
or fiscal year. Mr. Burnett responded that the forecasts
provided were based on the capital market assumptions over
five years with a definite risk of loss and probability on
each fund. He added that the information was not used for
the fiscal-year or calendar-year forecasts.
Co-Chair Stedman discussed the requested materials. He
highlighted future presentations.
ADJOURNMENT
The meeting was adjourned at 9:58 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 013111 DOR State Savings Accounts Update.ppt |
SFIN 1/31/2011 9:00:00 AM |
|
| 013111 Quick Reference Sheet December 2011.pdf |
SFIN 1/31/2011 9:00:00 AM |