Legislature(2023 - 2024)SENATE FINANCE 532

01/23/2023 09:00 AM Senate FINANCE

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Audio Topic
09:00:55 AM Start
09:02:42 AM Savings, Reserves, and Investment Funds - Department of Revenue
10:41:40 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Teleconferenced --
+ Savings, Reserves, and Investment Funds - TELECONFERENCED
Department of Revenue
- Commissioner Designee Adam Crum
- Treasury Director Pam Leary
                 SENATE FINANCE COMMITTEE                                                                                       
                     January 23, 2023                                                                                           
                         9:00 a.m.                                                                                              
9:00:55 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair  Stedman   called  the  Senate   Finance  Committee                                                                    
meeting to order at 9:00 a.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Donny Olson, Co-Chair                                                                                                   
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Jesse Kiehl                                                                                                             
Senator Kelly Merrick                                                                                                           
Senator David Wilson                                                                                                            
MEMBERS ABSENT                                                                                                                
Senator Click Bishop                                                                                                            
ALSO PRESENT                                                                                                                  
Adam Crum,  Commissioner, Department of Revenue;  Pam Leary,                                                                    
Director, Treasury Division,  Department of Revenue; Senator                                                                    
Cathy Giessel.                                                                                                                  
^SAVINGS,  RESERVES, and  INVESTMENT FUNDS  - DEPARTMENT  OF                                                                  
9:02:42 AM                                                                                                                    
ADAM  CRUM,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,  (DOR)                                                                    
introduced himself and Ms. Leary.                                                                                               
9:03:18 AM                                                                                                                    
PAM  LEARY,  DIRECTOR,   TREASURY  DIVISION,  DEPARTMENT  OF                                                                    
REVENUE, introduced herself,  and discussed her professional                                                                    
Ms. Leary discussed the presentation, "Update on the                                                                            
State's Cash Reserve Funds and Discussion of State Cash                                                                         
Flows" (copy on file). She highlighted slide 2, "Agenda":                                                                       
     Meet the Treasury                                                                                                          
     Update on Cash Reserve and Other Funds                                                                                     
     State Cash Flows                                                                                                           
Ms. Leary discussed slide 3, "Meet the Treasury":                                                                               
     Investment Management                                                                                                      
     Cash Management                                                                                                            
     Debt Management                                                                                                            
     Unclaimed Property                                                                                                         
Ms. Leary addressed slide 4, "Treasury Statistics":                                                                             
     45  Treasury Division  staff  positions,  most of  whom                                                                    
     touch  investments  in   some  capacity  via  portfolio                                                                    
     management,  accounting,  operations, compliance,  debt                                                                    
    management, cash management and unclaimed property.                                                                         
     $46.8 billion in assets under management (AUM) as of                                                                       
     Combined operating budget of $15.3 million.                                                                                
     The Division is a resource to state fiduciaries, state                                                                     
     agencies, the legislature and the general public.                                                                          
9:05:00 AM                                                                                                                    
Co-Chair Stedman asked about the $46.8 billion, and whether                                                                     
it was included or excluded in the Permanent Funds                                                                              
approximately $70 billion.                                                                                                      
Ms. Leary replied that it was considered separate.                                                                              
Ms. Leary pointed to slide 5, "Investment Management":                                                                          
     At 12/31/22, managed $46.8 billion in assets in 47                                                                         
     separate accounts.                                                                                                         
           14 defined benefit funds under the direction of                                                                      
          the Alaska Retirement Management Board (ARMB):                                                                        
           4 participant directed funds under the direction                                                                     
          of ARMB: $8.0B                                                                                                        
           25 funds under the direction of the Commissioner                                                                     
          of Revenue: $8.2B                                                                                                     
           4 funds under the direction of other state                                                                           
          fiduciaries: $288M                                                                                                    
     Accounts are  managed in a pooled  environment which is                                                                    
     an efficient way to invest multiple funds.                                                                                 
           State assets: 9 pools that state funds can                                                                           
          invest in                                                                                                             
           ARMB assets: 23 investment pools that roll up to                                                                     
          7 asset classes that the retirement funds invest                                                                      
               •Cash Equivalents                                                                                                
               •Fixed Income                                                                                                    
               •Broad Domestic Equity                                                                                           
               •Global Equity ex US                                                                                             
               •Multi Assets                                                                                                    
               •Real Assets                                                                                                     
               •Private Equity                                                                                                  
Ms. Leary highlighted slide 6, "Investment Management                                                                           
     The Chief  Investment Officer and staff  meet regularly                                                                    
     with  the  Commissioner,  ARMB or  other  fiduciary  to                                                                    
     discuss and determine asset allocations.                                                                                   
     Consideration is given to:                                                                                                 
           the type and use of the fund.                                                                                        
           how long the fund is expected to be invested.                                                                        
           what type of risk the fund can take.                                                                                 
     Callan's   Capital   Markets  Assumptions   and   other                                                                    
     industry  data are  used to  build  models to  generate                                                                    
     potential asset allocation targets.                                                                                        
     Invest, Invest, Invest!                                                                                                    
     State  Investment Review  and  ARMB  meetings are  held                                                                    
     quarterly  to  review performance,  investment  policy,                                                                    
     and  asset allocations  with an  independent investment                                                                    
     advisory  committee. Summaries  and  materials for  the                                                                    
     meetings are publicly available on our website.                                                                            
Ms. Leary displayed slide 7, "Cash Management":                                                                                 
     Monitor all cash in and out of the state.                                                                                  
     Manage procurement,  administration, and implementation                                                                    
     of all statewide banking service contracts including:                                                                      
           Warrant clearing contract                                                                                            
           Primary   and   alternate   depository   services                                                                    
           Automated Clearing House (ACH) Origination                                                                           
           Credit card acceptance contract                                                                                      
           Treasury Management System contract                                                                                  
     Consult and coordinate with  all departments on banking                                                                    
     service needs.                                                                                                             
     Project and  reconcile, on a daily  basis, all incoming                                                                    
     and outgoing cash flows to  determine excess funds that                                                                    
     can be invested by the investment staff.                                                                                   
     State bank accounts are reviewed for accuracy daily.                                                                       
     Process  and  apply  financial   coding  to  all  daily                                                                    
     banking transactions  from five  financial institutions                                                                    
     for interface  to the  Statewide accounting  system for                                                                    
     departments to record revenue and expenditures.                                                                            
Ms. Leary pointed to slide 8, "Debt Management":                                                                                
     Implement  directives  from the  Commissioner's  office                                                                    
     and  the   State  Bond  Committee  ('SBC')   on  policy                                                                    
     decisions   related    to   debt    issuances,   rating                                                                    
     strategies, and potential use of debt capacity.                                                                            
     Coordinate  activity  among various  professionals  for                                                                    
     any authorized  debt issuance (bond  counsel, financial                                                                    
     advisor, arbitrage, and underwriter).                                                                                      
     Conduct meetings with Rating Agencies.                                                                                     
     Prepare all statutorily required reporting:                                                                                
           Revenue Sources Book                                                                                                 
           Annual Comprehensive Financial Report                                                                                
           Alaska Public Debt Book                                                                                              
           Alaska Debt Affordability Analysis                                                                                   
     Perform  all  continuing  disclosure  undertakings  for                                                                    
     outstanding bonds.                                                                                                         
     Provide leadership  and staff for the  Alaska Municipal                                                                    
     Bond Bank Authority (AMBBA).                                                                                               
Ms. Leary pointed to slide 9, "Unclaimed Property":                                                                             
     Receive and account for unclaimed  property in the form                                                                    
     of  cash,  securities,  and  safe  deposit  boxes  from                                                                    
     companies,  organizations  (profit and  nonprofit)  and                                                                    
     government  agencies throughout  the  United States  in                                                                    
     accordance with Alaska's Unclaimed Property Act.                                                                           
     Provide  services to  reunite owners,  heirs, or  legal                                                                    
     representatives with their unclaimed property.                                                                             
     Determine  entitlement  by  analyzing  statutes,  court                                                                    
     orders, legal cases, and reviewing evidence.                                                                               
     Promote unclaimed property reporting.                                                                                      
     Alaska  currently  has 1,847,763  claimable  properties                                                                    
     with a value of $258 million.                                                                                              
9:11:09 AM                                                                                                                    
Co-Chair  Stedman queried  the  time limit  on claiming  the                                                                    
Ms. Leary replied that there was no time limit.                                                                                 
Co-Chair  Stedman  wondered  whether  money  that  would  be                                                                    
considered  unclaimed property   from territorial days would                                                                    
still be in the account.                                                                                                        
Ms.  Leary replied  that a  portion  of the  money from  the                                                                    
unclaimed property  was put into  the general  fund, because                                                                    
it was known  that not all of the money  would be claimed by                                                                    
a  person  or  entity.  She   stated  that  there  was  more                                                                    
information on that subject in the upcoming slides.                                                                             
Ms. Leary looked at slide 10, "Treasury Accomplishments":                                                                       
     Professional Certifications:                                                                                               
           Increase in professional designations: CFAs,                                                                         
          CPAs, CIPMs and CTPs                                                                                                  
     Delivered outstanding investment performance results:                                                                      
             In  FY22,  PERS  and  TRS  performance  of  4.1                                                                    
          percent  resulted in  an  average  of 9.0  percent                                                                    
          during  the  38  year history  of  the  retirement                                                                    
          systems. Over  the past  decade, the  systems have                                                                    
          outperformed their  benchmark by 126  basis points                                                                    
          and  the   median  peer  plan  by   98  bps.  This                                                                    
          performance places  the systems well into  the top                                                                    
          quartile,  outperforming over  85 percent  of peer                                                                    
            State  assets have grown  by 9.0 percent  in the                                                                    
          last   12  months,   largely  outperforming   fund                                                                    
     ARMB Savings:                                                                                                              
           $35 million annual savings  in management fees by                                                                    
          reducing  the  amount   of  assets  invested  with                                                                    
          external investment  managers and  investing those                                                                    
          assets utilizing Treasury Investment Officers.                                                                        
Co-Chair Stedman queried the basis point.                                                                                       
Ms.  Leary  replied  that  the  basis  point  was  one  one-                                                                    
hundredth of a percent.                                                                                                         
Co-Chair Stedman wondered asked what  the number would be at                                                                    
126 basis points above a number.                                                                                                
Ms. Leary  replied that  it would be  1.2 percent  more than                                                                    
what would  be in  the public market  sector, which  was the                                                                    
Co-Chair  Stedman  queried  the  reason  for  the  benchmark                                                                    
versus zero.                                                                                                                    
Ms. Leary replied that the  benchmark represented what would                                                                    
be the number  if the money was put into  a public fund. She                                                                    
stated  that   showing  that   performance  was   above  the                                                                    
benchmark reflected  that the active performance  was better                                                                    
than a public fund.                                                                                                             
9:15:00 AM                                                                                                                    
Co-Chair  Stedman   surmised  that   the  benchmark   was  a                                                                    
collection of target components.                                                                                                
Ms.  Leary  stated  that  each   asset  class  had  specific                                                                    
Senator Wilson wondered whether  the investment officers had                                                                    
the high certification level.                                                                                                   
Ms. Leary  replied that  they were either  at that  level or                                                                    
working toward that designation.                                                                                                
Co-Chair Stedman  remarked that it  would be a  question for                                                                    
the subcommittee.                                                                                                               
Ms. Leary addressed slide 11, "Treasury Accomplishments":                                                                       
     Increase  in the  State's  credit  rating outlook  with                                                                    
     Fitch and Standard and Poor's.                                                                                             
     In  the past  two  fiscal years,  the Alaska  Municipal                                                                    
     Bond Bank Authority has funded  $408.1 million in loans                                                                    
     resulting in  an estimated $55.4 million  in savings to                                                                    
     Alaskans through lowered borrowing costs.                                                                                  
     Restructured  outstanding debt  of  the airport  system                                                                    
     saving   $81.8  million   from   future  debt   service                                                                    
     During FY22, Unclaimed  Property returned approximately                                                                    
     $13.5 million  to current or  former Alaska  owners and                                                                    
     businesses,  transferred $12.0  million into  the state                                                                    
     general  fund, had  a 16  percent increase  in reported                                                                    
     Maintained    a    reduced   claims    backlog    since                                                                    
     transitioning  to a  new unclaimed  property system  in                                                                    
     FY21,  despite a  15 percent  increase in  claims being                                                                    
     Since  FY19,  $90.9  million in  cash  and  stock  sale                                                                    
     proceeds  have  been  received as  unclaimed  property,                                                                    
     $45.5M million  was transferred into the  state general                                                                    
     fund and  over $34.4 million dollars  has been returned                                                                    
    to current or former Alaska owners and businesses.                                                                          
Co-Chair Stedman remarked that  some of the communities were                                                                    
dealing with  the issue of  the reissuing of  standing debt.                                                                    
He wondered whether  the airport debt had  stretched out the                                                                    
amortization in time,  or whether it was  the same timeframe                                                                    
of debt service payments or the decline in interest rates.                                                                      
Ms. Leary  agreed to provide that  information, and remarked                                                                    
that the total savings was $81.8 million.                                                                                       
Co-Chair Stedman  noted that there  was a concern  about not                                                                    
taking advantage of the lower interest rates.                                                                                   
Ms. Leary  paused on slide  12, "Update of Cash  Reserve and                                                                    
Other Funds." She summarized the upcoming slides.                                                                               
9:21:33 AM                                                                                                                    
Ms.  Leary   displayed  slide  13,   "Constitutional  Budget                                                                    
Reserve   Fund  (CBRF);   Historical  Invested   Assets  (in                                                                    
     In 1990, voters of Alaska adopted an amendment to the                                                                      
     constitution creating the CBRF.                                                                                            
     CBRF has been used to fund temporary cash flow                                                                             
     expense/revenue mismatches.                                                                                                
     CBRF has been used to appropriate/cover budget revenue                                                                     
     Appropriations from the CBRF must be repaid.                                                                               
Co-Chair  Olson queried  the reason  for the  discrepancy in                                                                    
the information he had been given about the fund.                                                                               
Ms.  Leary  replied  stated  that  she  would  address  that                                                                    
question  in the  presentation,  but stated  that the  slide                                                                    
showed  the actual  cash balances  that  were not  currently                                                                    
invested in  the bank. She  stated that the $2+  billion was                                                                    
the number  that would be  available for  appropriation once                                                                    
the final transfer from the general fund went to the CBR.                                                                       
Co-Chair Olson  wondered how the  public would  be convinced                                                                    
that it was not a consideration of imaginary money.                                                                             
Ms. Leary  replied that  the Division  of Finance  was using                                                                    
the number as a transfer target.                                                                                                
9:25:35 AM                                                                                                                    
Co-Chair Stedman  surmised that  the $1.37 billion  total in                                                                    
cash was the balance on July 1, 2022.                                                                                           
Ms. Leary replied in the affirmative.                                                                                           
Co-Chair  Stedman requested  the  financial statements,  and                                                                    
understood that the exercise was not complete.                                                                                  
Ms.  Leary agreed  to provide  that information.  She stated                                                                    
that there would be estimates and footnotes.                                                                                    
Co-Chair Stedman  stressed that sometimes people  fixated on                                                                    
a  specific number,  so he  wanted to  be able  to show  the                                                                    
reasonings for the forecasts.                                                                                                   
Ms. Leary understood.                                                                                                           
Co-Chair Hoffman  recalled that there  had been a  target to                                                                    
not go below  $500 million, and queried a target  for DOR in                                                                    
the CBR.                                                                                                                        
Ms.  Leary replied  that the  number had  shifted throughout                                                                    
the years, based on a variety of models and circumstances.                                                                      
Co-Chair Stedman requested a range of a minimum number.                                                                         
Ms. Leary agreed to provide that information.                                                                                   
9:30:03 AM                                                                                                                    
Ms.  Leary  looked  at   slide  14,  "Constitutional  Budget                                                                    
Reserve  Fund (CBRF)  Fiduciary  oversight: Commissioner  of                                                                    
Revenue."  She remarked  that the  slide showed  a low  risk                                                                    
tolerance, because the fund needed  to be fairly liquid. She                                                                    
remarked that the  fund was 100 percent  invested in capital                                                                    
cash  equivalents.  She  remarked   that  the  current  cash                                                                    
balance before  the transfers from  the general fund  for FY                                                                    
22 was $1.065 billion as of December 2022.                                                                                      
Ms.  Leary pointed  to slide  15,  "Power Cost  Equalization                                                                    
(PCE) Historical Invested Assets (in millions)":                                                                                
     The purpose  of the  PCE Endowment  fund is  to provide                                                                    
     for a  long term stable financing  source that provides                                                                    
     affordable   levels  of   electric  utility   costs  in                                                                    
     otherwise high cost service areas of the state.                                                                            
     5 percent  of the monthly  average market value  of the                                                                    
     fund   for  the   previous  3   fiscal  years   may  be                                                                    
     appropriated.  If  prior  years  earnings  exceed  this                                                                    
     amount,  70  percent  (not  to   exceed  $55M)  of  the                                                                    
     difference   can  be   spent   on  related   identified                                                                    
Co-Chair Hoffman requested  the outline of how  the fund was                                                                    
faring,  specifically  whether it  was  above  or below  the                                                                    
Ms. Leary  replied with slide  16, "Power  Cost Equalization                                                                    
(PCE)  Fiduciary oversight:  Commissioner  of Revenue."  She                                                                    
remarked that the fund currently  had a high risk tolerance.                                                                    
She  noted  that  legislation was  passed  in  the  previous                                                                    
session  that  changed  how the  fund  was  invested,  which                                                                    
directed  the  commissioner of  DOR  to  uphold the  prudent                                                                    
investment rule.                                                                                                                
Co-Chair  Stedman wondered  whether  the  benchmark had  not                                                                    
been met.                                                                                                                       
Ms. Leary replied in the affirmative.                                                                                           
9:34:37 AM                                                                                                                    
Co-Chair Hoffman recalled when  the guideline was 7 percent,                                                                    
and then was  changed to a new guideline. He  looked at 2018                                                                    
to  2021,   with  the  5  percent   increasing  without  any                                                                    
reductions, but the prudent investment  rule showed that the                                                                    
fund  had  lost  $200  million.   He  wondered  whether  the                                                                    
committee   should   consider    eliminating   the   prudent                                                                    
investment  rule and  returning to  the 5  percent rule.  He                                                                    
remarked that he did not want to request more funds.                                                                            
Ms.  Leary replied  that  the current  year  was a  negative                                                                    
market. She  stated that  there had a  been a  switch, which                                                                    
indicated that  overtime investing  toward a higher  rate of                                                                    
return  showed   a  positive  overall.  She   expected  that                                                                    
management according to the prudent investment rule.                                                                            
Co-Chair Hoffman  stressed that  the CBR was  considered low                                                                    
risk,  and the  benchmarks were  met in  that fund.  He felt                                                                    
that keeping  the PCE in  the low risk category  would still                                                                    
provide a substantial amount in  the bank. He questioned the                                                                    
comments  about   keeping  the   PCE  in   high   risk   and                                                                    
potentially halt the effort to come up with more fund.                                                                          
Co-Chair Stedman requested a presentation  on the PCE broken                                                                    
out by quarter.                                                                                                                 
9:42:24 AM                                                                                                                    
Senator Kiehl  noted the significant difference  between the                                                                    
PCE and  other endowments.  He wondered whether  there could                                                                    
be a five-year lookback.                                                                                                        
Commissioner Crum agreed to provide that information.                                                                           
Senator Wilson queried the  Callan inflation rate projection                                                                    
for 2023.                                                                                                                       
Commissioner Crum  replied that it was  around 2.25 percent,                                                                    
and agreed to provide further information.                                                                                      
Ms. Leary furthered  that the target was 2.5  percent as the                                                                    
long-term forecast for inflation.                                                                                               
Co-Chair Stedman  felt that  those targeted  inflation rates                                                                    
were slightly off.                                                                                                              
Co-Chair Olson  recalled that there  was a loss of  about 20                                                                    
percent  of the  states  nest  egg, and  felt that  the loss                                                                    
would cause great  stress. He wondered what  would happen if                                                                    
there was an elimination of the prudent investment rule.                                                                        
Commissioner Crum  remarked that  it was a  policy decision,                                                                    
and  the department  would respond  to  whatever policy  was                                                                    
written by the legislature.                                                                                                     
9:45:22 AM                                                                                                                    
Co-Chair  Stedman  felt  that the  prudent  investment  rule                                                                    
matches  other  investors   portfolios.  He  felt  that  the                                                                    
discussion might better be around the asset allocation.                                                                         
Commissioner Crum  remarked that  PCE was  one of  the funds                                                                    
that immediately impacted rural Alaskans.                                                                                       
Co-Chair Stedman  stressed that  he would  like to  see when                                                                    
and how quickly there was a shift in the asset allocation.                                                                      
Ms. Leary  clarified that  the funds  were important  to all                                                                    
people  in  Alaska, and  stressed  that  she understood  how                                                                    
important the numbers were to the people.                                                                                       
Ms.  Leary pointed  to slide  17,  "Alaska Higher  Education                                                                    
Investment  Fund  (AHEIF)  Historical  Invested  Assets  (in                                                                    
     On September 1, 2012, the  AHEIF was capitalized with a                                                                    
     $400  million  deposit  from  receipts  of  the  Alaska                                                                    
     Housing Capital  Corporation for  use in  paying Alaska                                                                    
     Performance   Scholarship  Awards   and  AlaskAdvantage                                                                    
     Education Grants.                                                                                                          
     On  June 29,  2022, $394.6M  was swept  to the  General                                                                    
     Fund for FY21, of which  $342.6M came directly from the                                                                    
     AHEIF  and  $52M  came  from   the  CBRF  due  to  FY22                                                                    
     investment losses in the AHEIF.                                                                                            
9:50:27 AM                                                                                                                    
Ms. Leary addressed slide 18, "Alaska Higher Education                                                                          
Investment  Fund (AHEIF)  Fiduciary oversight:  Commissioner                                                                    
of  Revenue."  She displayed  slide  19,  "General Fund  and                                                                    
Other  Non   Segregated  Investments   (GeFONSI)  Historical                                                                    
Invested Assets (in billions)":                                                                                                 
     GeFONSI  includes  the  General   Fund  and  Other  Non                                                                    
     segregated funds  invested in a pooled  environment (GF                                                                    
     proper  carries a  minimum balance  of $400  million to                                                                    
     pay our bills).                                                                                                            
     GeFONSI II was created in  2018 to target a higher risk                                                                    
     return profile for a subset of funds.                                                                                      
Co-Chair  Stedman wondered  whether  any of  the funds  were                                                                    
having difficulty within GeFONSI.                                                                                               
Ms. Leary replied that she  could not speak to that, because                                                                    
it was the purview of the agencies that manage the funds.                                                                       
Co-Chair  Stedman requested  an examination  of any  problem                                                                    
areas in the fund.                                                                                                              
Ms. Leary pointed to slide 20, "General Fund and Other Non                                                                      
Segregated  Investments   (GeFONSI  I  and   II),  Fiduciary                                                                    
oversight: Commissioner of Revenue."                                                                                            
Co-Chair  Stedman  noted that  there  seemed  to be  similar                                                                    
asset  allocation,   and  wondered   whether  there   was  a                                                                    
comingling within the same allocation.                                                                                          
Ms. Leary  replied that each  fund will invest  some portion                                                                    
into an  asset class. She  stated that GeFONSI  was invested                                                                    
85 percent  in cash  equivalents, and  15 percent  in short-                                                                    
term fixed income.                                                                                                              
Co-Chair Stedman  stressed that  the public school  fund pie                                                                    
chart looked  like the same pie  chart as the PCE  and other                                                                    
Ms. Leary  replied that  they were the  high risk  long term                                                                    
asset allocations that were identified during the process.                                                                      
9:56:15 AM                                                                                                                    
Co-Chair Stedman wondered whether  there were other funds in                                                                    
the group.                                                                                                                      
Ms. Leary agreed to confirm the information.                                                                                    
Senator  Kiehl noted  that GeFONSI  II may  be the  only one                                                                    
that did not beat the benchmark.                                                                                                
Ms.  Leary   replied  that  GeFONSI   II  was  one   of  the                                                                    
performance returns that was just under the benchmarks.                                                                         
Senator Kiehl requested a follow up on GeFONSI II.                                                                              
Co-Chair  Stedman  noted  that  there  would  be  benchmarks                                                                    
discussions in a future presentation.                                                                                           
Ms.  Leary discussed  slide 21,  "Public  School Trust  Fund                                                                    
(PSTF) Historical Invested Assets (in millions)."                                                                               
     The  PSTF  was  established   in  1978,  replacing  the                                                                    
     territorial  era public  school  land grant  originally                                                                    
     created  by congress  in 19  15, by  a transfer  of the                                                                    
     balance from the permanent school trust.                                                                                   
     Following passage  of HB 213  in 2018, the fund  is now                                                                    
     managed  as  one fund,  under  a  percentage of  market                                                                    
     value  method (5  percent of  the average  market value                                                                    
     for the 5 years preceding the last previous fiscal                                                                         
Ms.  Leary addressed  slide 22,  "Public  School Trust  Fund                                                                    
(PSTF) Fiduciary oversight: Commissioner of Revenue."                                                                           
10:00:23 AM                                                                                                                   
Co-Chair  Olson   discussed  Public   Employees'  Retirement                                                                    
System (PERS)  and the Teacher  Retirement System  (TRS). He                                                                    
requested an expectation for the future of the funds.                                                                           
Co-Chair Stedman felt that question  might be better for the                                                                    
Alaska Retirement  Management (ARM) Board, and  the upcoming                                                                    
slide may also have some information.                                                                                           
Ms. Leary pointed to slide  23, "Public Employees Retirement                                                                    
System (PERS)  and Teachers Retirement System  (TRS) Pension                                                                    
and Health Defined Benefit  Plans Historical Invested Assets                                                                    
(in billions)":                                                                                                                 
     The Alaska Retirement Management Board (ARMB) is a 9                                                                       
     person board and fiduciary of the state's pension and                                                                      
     health systems.                                                                                                            
     The defined benefit plans currently experiences net                                                                        
     outflows from the funds.                                                                                                   
     The 38 year return Average for PRS/TRS was 9 percent.                                                                      
10:04:49 AM                                                                                                                   
Co-Chair Stedman stressed that  the liabilities exceeded the                                                                    
assets,  so   there  needed  to   be  caution   when  having                                                                    
conversations  about the  assets. He  wondered why  the PERS                                                                    
and TRS system was not similar to the other funds.                                                                              
Ms.  Leary   replied  with   slide  24,   "Public  Employees                                                                    
Retirement System  and Teachers Retirement  System Fiduciary                                                                    
oversight: Alaska Retirement Management Board."                                                                                 
Co-Chair  Stedman  surmised  that   the  estimation  had  an                                                                    
accounting process.                                                                                                             
Ms. Leary  agreed, and  explained that  the cash  flows were                                                                    
apparent, but there was a lag in the included returns.                                                                          
Co-Chair Stedman  felt that there  was a  difference between                                                                    
mark to  market, versus  something that  was not  traded for                                                                    
many years.                                                                                                                     
Ms. Leary agreed.                                                                                                               
Co-Chair Stedman  stated that there  should be  caution when                                                                    
seeing  liquid assets  in  tough  times   and ensuring  that                                                                    
there was an accurate reflection of those assets.                                                                               
Senator Kiehl  requested the risk  of missing a  normal cost                                                                    
for retirement in a year.                                                                                                       
Co-Chair  Stedman felt  that the  question  would be  better                                                                    
addressed to the ARM Board.                                                                                                     
10:11:29 AM                                                                                                                   
Ms.  Leary pointed  to  slide 25,  "State  Cash Flows."  She                                                                    
addressed slide 26, "Cash vs. Accrual Balances                                                                                  
     Cash balance is what you have in the bank at a given                                                                       
     point in time.                                                                                                             
     Accrual  balance  is  what you  have  earned  and  what                                                                    
     liabilities have  been incurred  at a  particular point                                                                    
     in time.  It is  what you should  have at  a particular                                                                    
     point  in   time  after   all  expected   receipts  and                                                                    
     expenditures come in and out.                                                                                              
     Treasury fund balances are cash balances, not what is                                                                      
     available to spend in the budget.                                                                                          
Ms. Leary pointed to slide 27, "SOA Treasury Cash Flow":                                                                        
     Cash Inflows                                                                                                               
         Tax Revenues: Oil and Gas, Excise, Other                                                                               
          Federal    Dollars:   Grants,    Medicaid,   FHWA,                                                                    
          Education, Other                                                                                                      
          Earnings Reserve Funds                                                                                                
          Agency Receipts: Fees, Licenses, Permits, Fines,                                                                      
     Cash Outflows                                                                                                              
          School Education Payments                                                                                             
          Payroll and Pension Payments                                                                                          
          Vendor Payments                                                                                                       
          Medicaid Payments                                                                                                     
          External Program Grant Payments                                                                                       
          Debt Service Payments                                                                                                 
Ms. Leary discussed slide 28, "Revenue":                                                                                        
     Commodity Volatility                                                                                                       
             Petroleum  revenues  are  47  percent  of  FY23                                                                    
          projected unrestricted general fund revenues.                                                                         
             Uncertainty  exists  "in  year"  for  FY23  and                                                                    
            Will always have  in year uncertainty because we                                                                    
          base budget on in year oil collections.                                                                               
     Investment Return Volatility                                                                                               
             Investment  earnings  are 47  percent  of  FY23                                                                    
          projected unrestricted general fund revenues.                                                                         
             Certainty  exists  today for  FY24  (due  to  a                                                                    
          lagging POMV formula; $3.5 billion in FY24).                                                                          
            Uncertainty exists today for FY25 and beyond.                                                                       
Ms. Leary addressed slide 29, "Expenditures":                                                                                   
     Expenditures can occur prior to receipt of revenue,                                                                        
     resulting in cash flow timing mismatches:                                                                                  
             Federal  programs require  expenditures  before                                                                    
               • i.e. Medicaid, Transportation, etc.                                                                            
           Beginning of year  appropriation transfers do not                                                                    
          match incoming revenue.                                                                                               
               • i.e. State pension payments, transfers to                                                                      
               subfunds for programs.                                                                                           
           Seasonal Cash Flow needs.                                                                                            
               • i.e. Summer is the peak season for                                                                             
               construction projects and seasonal workers.                                                                      
Ms. Leary pointed to slide 30, "Cash Flow Deficiencies":                                                                        
     Prior to 1985, most unrestricted revenues flowed into                                                                      
     and stayed in the General Fund for expenditure.                                                                            
     Over  time, the  legislature established  many subfunds                                                                    
     of  the general  fund to  segregate cash  for budgeting                                                                    
     purposes, resulting  in less cash available  to pay day                                                                    
     to day operating costs.                                                                                                    
     The  legislature  typically  includes language  in  the                                                                    
     budget   bill  allowing   for  a   transfer  from   the                                                                    
     Constitutional  Budget  Reserve  Fund  if  unrestricted                                                                    
     revenue  is  insufficient  to cover  the  general  fund                                                                    
     appropriations in a given year.                                                                                            
10:15:32 AM                                                                                                                   
Co-Chair  Stedman stressed  that  using the  CBR required  a                                                                    
three-quarter vote,  and felt that  the legislature  may not                                                                    
need to use that fund.                                                                                                          
Co-Chair  Hoffman queried  the  plan to  address the  three-                                                                    
quarter vote,  and whether the  legislature might  be called                                                                    
back into session in the upcoming summer.                                                                                       
Commissioner  Crum  replied  that  DOR  would  be  in  close                                                                    
contact with the committee about volatility of oil prices.                                                                      
Co-Chair Hoffman queried a timeframe.                                                                                           
Commissioner Crum  replied that there was  an examination of                                                                    
funding  based on  the current  circumstances, but  stressed                                                                    
that  there  would be  continued  conversations  if the  oil                                                                    
price saw sudden volatility.                                                                                                    
Co-Chair Stedman remarked  that there had been  a request of                                                                    
a review of negative appropriations to avoid a crisis.                                                                          
Co-Chair  Olson   felt  that  Commissioner  Crum   was  more                                                                    
optimistic than  what was  actually occurring,  and stressed                                                                    
that a three-quarter vote would be nearly impossible.                                                                           
Co-Chair   Stedman  remarked   that   there   would  be   an                                                                    
examination of any negative appropriations.                                                                                     
10:20:28 AM                                                                                                                   
Ms. Leary  addressed slide  31, "Cash  Deficiency Memorandum                                                                    
of Understanding":                                                                                                              
     Developed in 1994 between DOR, DOA, OMB and DOL.                                                                           
     Updated as needed.                                                                                                         
     Targets $400 million minimum cash threshold in the                                                                         
     General Fund proper.                                                                                                       
     Outlines procedures for addressing cash flow timing                                                                        
           Develop monthly cash projections.                                                                                    
           Monitor daily general fund cash balances. Update                                                                     
          forecasts based on new cash flows.                                                                                    
           Execute appropriated transfers from ERA, CBR, or                                                                     
           Perform temporary fund borrowing (CBR, ERA,                                                                          
          subfunds) to be repaid by fiscal year end.                                                                            
           In the event of forecasted revenue shortfall:                                                                        
               •Seek   legislative    action   through   the                                                                    
               Governor to  access additional  funds through                                                                    
               appropriation from  other Cash  Reserve Funds                                                                    
               discussed above.                                                                                                 
               •Prioritize      disbursements,      restrict                                                                    
Co-Chair Hoffman wanted to examine the provisions for                                                                           
borrowing from the CBR and the ERA.                                                                                             
Co-Chair Stedman asked that the provisions be provided to                                                                       
the committee.                                                                                                                  
Ms. Leary agreed to provide that information.                                                                                   
10:25:35 AM                                                                                                                   
Co-Chair Stedman remarked that there was smoothing for the                                                                      
agencies to protect the cash flow.                                                                                              
Ms. Leary agreed.                                                                                                               
Senator Kiehl wondered whether the slide showed a fixed                                                                         
number and the numbers origin.                                                                                                  
Ms. Leary replied that it was approximately two days' worth                                                                     
of payout all the bills at once.                                                                                                
Co-Chair Stedman stressed that the state could barely make                                                                      
payroll, which he considered unacceptable.                                                                                      
Ms. Leary pointed to slide 32, "Cash Flow Deficiencies":                                                                        
     Use of budget reserve funds has been the solution of                                                                       
    cash flow timing mismatches and revenue shortfalls.                                                                         
     Appropriations From Reserve funds                                                                                          
           The Legislature includes language annually in                                                                        
          the operating budget appropriating budget reserve                                                                     
          funds for revenue shortfalls.                                                                                         
               •Treasury has relied on this appropriation                                                                       
               to authorize use of budget reserve                                                                               
               funds to address timing cashflow mismatches                                                                      
               as well.                                                                                                         
     The CBRF was fully repaid by FY10.                                                                                         
     Borrowing from the CBRF recommenced in FY14.                                                                               
     Per FY21 ACFR $12.8 billion is owed to CBRF (FY22 is                                                                       
     expected to reduce the amount owed to the CBRF due to                                                                      
     sweep of unassigned balances and sub funds).                                                                               
10:30:12 AM                                                                                                                   
Co-Chair Stedman wondered Co-Chair Hoffman had any comment                                                                      
about the CBR being repaid in 2010.                                                                                             
Co-Chair Hoffman replied that "it was good times."                                                                              
Co-Chair Stedman recalled that it was nice to see the CBR                                                                       
paid off.                                                                                                                       
Ms. Leary addressed slide 33, "Volatility Management                                                                            
     Access Cash Reserve and Other Funds (CBR and other                                                                         
     fund balances).                                                                                                            
     Manage timing of Earnings Reserve Account transfers to                                                                     
     the General Fund.                                                                                                          
     Manage timing of expenditures.                                                                                             
     Modernize fiscal tools to include lines of credit in                                                                       
     addition to revenue anticipation notes. (HB92)                                                                             
Co-Chair Stedman recalled that there was not much interest                                                                      
in revenue accumulation, but there was interest in a cash                                                                       
Ms. Leary pointed to slide 34, "Cash Flow Take Aways":                                                                          
     Even with balanced budgets and if all revenue is                                                                           
     received, cash flow timing mismatches will occur.                                                                          
     Cash flow forecasting changes due to amount and timing                                                                     
     of revenues and expenditures.                                                                                              
     Revenue shortfalls may occur if forecasted assumptions                                                                     
     are wrong.                                                                                                                 
     Higher revenue volatility requires greater cash                                                                            
     reserves until volatility decreases.                                                                                       
     Volatility management techniques are available.                                                                            
10:35:18 AM                                                                                                                   
Co-Chair Stedman  asked about  the periodic  staff meetings,                                                                    
and how decisions were made.                                                                                                    
Commissioner  Crum  replied  that   there  was  a  quarterly                                                                    
investment review to ensure that  the risk profiles were the                                                                    
most  prudent response,  which was  ongoing. He  stated that                                                                    
there other divisions that met  at a biweekly basis, because                                                                    
of the status on certain  issues. He stated that the regular                                                                    
updates were  made to ensure that  the commissioner's office                                                                    
was always aware of the issues.                                                                                                 
Co-Chair  Stedman   thanked  Commissioner  Crum   for  those                                                                    
efforts  to   obtain  information.  He  stressed   that  the                                                                    
information and impacts were substantial to the state.                                                                          
Commissioner Crum  agreed to provide  the process  in future                                                                    
presentations,  especially  related  to  the  risk  profiles                                                                    
impacts on the asset allocations.                                                                                               
Co-Chair Stedman  remarked that he  felt that DOR  was well-                                                                    
run, and  wanted to  ensure that  the legislature  created a                                                                    
good  policy   direction.  He  looked  forward   to  working                                                                    
together on the  cash flow, and addressing the  issue of the                                                                    
risk profile  of the PCE.  He discussed the  following day's                                                                    
10:41:40 AM                                                                                                                   
The meeting was adjourned at 10:41 a.m.                                                                                         

Document Name Date/Time Subjects
012323 Savings Accounts and Cash Flow presentation to Senate Finance.pdf SFIN 1/23/2023 9:00:00 AM
012323 Additional Document 2022_12_CBRF_SBRF_GeFONSI.pdf SFIN 1/23/2023 9:00:00 AM