Legislature(2015 - 2016)SENATE FINANCE 532
02/09/2016 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Alaska Permanent Fund Corporation | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
February 9, 2016
9:05 a.m.
9:05:18 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:05 a.m.
MEMBERS PRESENT
Senator Anna MacKinnon, Co-Chair
Senator Pete Kelly, Co-Chair
Senator Peter Micciche, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Angela Rodell, Executive Director, Alaska Permanent Fund
Corporation; Valerie Mertz, Chief Financial Officer, Alaska
Permanent Fund Corporation.
PRESENT VIA TELECONFERENCE
SUMMARY
^PRESENTATION: ALASKA PERMANENT FUND CORPORATION
9:05:55 AM
ANGELA RODELL, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, discussed the history of the ALASKA PERMANENT
FUND CORPORATION (APFC), current asset allocation, and
mechanics of managing the fund.
Ms. Rodell presented the PowerPoint "Alaska Permanent Fund
- Senate Finance Committee, February 9, 2016."
She discussed slide 2, "1969: The debate begins":
Alaska receives $900 million in Prudhoe lease sale
bonuses
Prior year state budget: $112 million
Ms. Rodell showed slide 3, "1976 voters' guide":
"Alaska's state government [should] set aside a rainy
day fund to benefit this and future generations of
Alaskans."
Alaska State Chamber of Commerce
Alaska Voters Agreed:
By a margin of 75,588 to 38,518, voters decided to
create the permanent fund
Ms. Rodell commented on slide 4, "The Alaska Constitution":
Article IX, Section 15, provides:
At least twenty-five percent of all mineral lease
rentals, royalties, royalty sale proceeds, federal
mineral revenue sharing payments and bonuses received
by the State shall be placed in a permanent fund, the
principal of which shall be used only for those
income-producing investments specifically designated
by law as eligible for permanent fund investments. All
income from the permanent fund shall be deposited in
the general fund unless otherwise provided by law
[Effective February 21, 1977].
Ms. Rodell remarked that the statute establishing the
permanent fund was short and straightforward and the more
exhaustive rules governing the fund were set in statute.
Ms. Rodell displayed slide 5, "From 1976 to 1980, Alaskans
debated the Fund's purpose":
Development Bank or Investment Fund
Ms. Rodell turned to slide 6, "1980: Investment Fund
Concept adopted, and with it":
Senate Bill 161
Created the Alaska Permanent Fund Corporation to
manage the investments of the Fund, separate from the
state's other investments managed by the Department of
Revenue. This bill also created a Board of Trustees to
oversee the Fund and started the legal list of allowed
investments.
Senate Bill 122
Created the Permanent Fund Dividend program.
9:10:25 AM
Ms. Rodell discussed slide 7, "APFC Board of Trustees":
•Six board members
•Two state members
•Four public members
-Appointed by Governor
-Experience in finance, investments, or business
management
-May only be removed "for cause"
Senator Dunleavy referred to slide 6, and wondered whether
1980 was the beginning of the "divergence of ideas"
regarding the Permanent Fund (PF) as an investment fund for
state spending versus the peoples corporation for the
dividend. Ms. Rodell answered in the affirmative. Senator
Dunleavy asked whether the original concept to save money
included the purpose of the fund. Ms. Rodell shared that in
order to get the constitutional amendment passed, the focus
was not on how the funds would be spent. Once the decision
was made, the debate and conversation with regard to
purpose began.
Ms. Rodell moved to slide 8, "Statutory investment rules
evolve":
•Evolution from legal list to prudent-investor
•Starting in 2005: "Prudent-investor rule" guides
investment of Fund assets
-Duty of care
-Duty of loyalty
•The Board will maintain a reasonable diversification
of assets
Vice-Chair Micciche noted that the original concept
Proposed depositing the earnings into the general fund. He
wondered when the Earnings Reserve Account (ERA) was
created. Ms. Rodell specified that the ERA was established
in 1983. Vice-Chair Micciche asked whether the investment
distribution mirrored that of the corpus. Ms. Rodell
answered in the affirmative. Vice-Chair Micciche asked
about the logic of segregating the funds. He felt that the
action created the "perception" that the corpus was
"sacred" versus an account that could be spent for its
intended purpose. Ms. Rodell was not sure what the debate
was behind the creation of the ERA. She recounted that the
ERA was created before the Constitutional Budget Reserve
(CBR) and allowed the state to create a "rainy day
account." She agreed to provide additional information.
9:15:15 AM
Ms. Rodell presented slide 9, "Fund Advantages":
Size
•Access to investments
•Ability to negotiate fee savings
Time Horizon
•No set liability
Ms. Rodell commented on slide 10, "Fund Challenges":
Location
•Business travel to financial centers
•Recruitment from financial centers
Flexibility
•New resources often arrive long after they are
needed due to lengthy budget process
Staff Size
•Small staff limits bench strength, creates gaps
during travel and vacancies
Ms. Rodell discussed slide 11, "Target Asset Allocation,"
which displayed a pie chart indicating the asset allocation
percentages.
Target Asset Allocation:
Bonds 20%
Stocks 36%
Real Estate 12%
Special Opportunity 4%
Private equity 6%
Infrastructure 4%
TIPS 2%
Cash 2%
Absolute Return 11%
Ms. Rodell displayed slide 12, "Risk vs. Return," which
depicted a graph depicting returns versus risks in
percentages. She noted that APFC endeavored to balance risk
and return when investing and achieved a good balance. The
chart demonstrated that if the amount of return chosen was
too high, in the area of 8 percent the state carried higher
risk volatility.
Ms. Rodell commented on slide 13, "The effect of
diversification." She pointed out that the blue lines
represented various asset classes and the graph depicted
how they performed differently depending on the stock
market. She concluded that the overall effect was to create
an "all-weather portfolio" and "raise the overall return of
the fund."
Vice-Chair Micciche requested Ms. Rodell provide the return
with each category of asset allocation. Ms. Rodell agreed
to provide the information.
Ms. Rodell displayed slide 14, "Stock Portfolio." She
pointed out that as of June 30, 2015 the fund contained
$20.9 billion in stocks. The graphic depicted the breakdown
of the stock investments. The heaviest concentration of
stocks were in the United States (US) economy.
Approximately one third of the stocks were invested in the
US market and the remainder was invested globally. The
funds were also invested by management strategy; active,
passive, and quasi-passive. She noted that the quasi-
passive management strategy was unique to Index Funds or
Exchange Traded Funds.
9:20:24 AM
Ms. Rodell discussed slide 15, "Bond Portfolio
Composition."
Bond Portfolio Composition
$11.1 billion as of 06/30/2015:
U.S. Corporate 48%
U.S. Treasuries 20%
Non-U.S. Government 11%
Mortgage-backed 7%
CMBS 4%
Non-U.S. Corporate 10%
Ms. Rodell turned to the pie chart on slide 16, "Real
Estate:"
Real Estate
$6.5 billion as of 06/30/2015
58 directly held properties
Exposure to Europe growing
Office 27%
Industrial 4%
REITs 20%
Multifamily 24%
Retail 25%
[REIT - real estate investment trust]
Ms. Rodell remarked that the corporation's goal was to
increase the industrial real estate exposure and reduce the
office investments.
Ms. Rodell showed slide 17, which displayed a map of the
United States, entitled "APFC Real Estate." The map
indicated geographic locations for real estate holdings
owned by APFC. The color of the dot reflected the type of
property. She revealed that in addition to the property
listed on the map, APFC held direct stakes in two real
estate operating companies; Simpson Housing and Permanent
Fund Share of the Partnership, jointly owned with the state
of Michigan Retirement System. The investments were worth
approximately $1 billion. She noted that Simpson Housing
owned and operated large multi-family properties across the
country. She added that the fund held a 21 percent stake in
the publically traded company, American Homes for Rent,
which purchased single family homes for rental properties.
Ms. Rodell commented on slide 18, "Tysons Corner Center."
She indicated that Tysons Corner Center was a property
owned by APFC since 1985. She communicated that the center
was located in Tysons, Virginia and APFC held 50 percent
ownership in partnership with Macerich who owned the
remaining 50 percent. In 2010, the Commonwealth of
Virginian constructed the Silver Metro Line that included a
stop at Tysons Corner. Subsequently, the corporation
engaged in its first construction project that expanded the
property to include a luxury apartment building, a 22 story
office building with two anchor tenants; Deloitte and
Intelsat. She added that a Hyatt Regency Hotel was also
added along with and outdoor plaza. She directed attention
to the aerial photograph, which depicted the expansion.
Ms. Rodell displayed slide 19, "Absolute Return:"
Absolute Return
$5.3 billion as of 06/30/2015
Externally Managed-$2.5 billion
Internally Managed-$2.8 billion
Ms. Rodell presented slide 20, "Private Equity:"
Private Equity
$3.2 billion as of 06/30/2015
2,800 underlying companies
Co-investment program implemented in FY2014
U.S. 67%
Europe 15%
Asia 9%
Other 9%
Ms. Rodell detailed that the co-investment program allowed
APFC to co-invest side by side with fund managers in
various companies.
9:24:59 AM
Ms. Rodell continued to slide 21, "Infrastructure Holdings"
Infrastructure Holdings
$1.5 billion as of 06/30/2015
Transportation 38%
Energy 50%
Water & Waste Management 11%
Co-investment program implemented in FY14, currently
at $35 million
Properties in the U.S., U.K., India, Argentina and
Canada
Senator Bishop referred to slide 21 asked whether the APFC
would be interested in an IPO for the Saudi Arabian company
Aramco. Ms. Rodell responded that the corporation looked at
many investments, however many factors were considered in
order to make a final decision with regard to risks and
rewards.
Ms. Rodell moved to slide 22, "Special Opportunities":
· Direct investments in private companies-examples: Juno
Therapeutics and Denali Therapeutics
· Direct investments in specialized funds-examples: Dyal
and Blackstone funds
· $1.9 billion as of 06/30/2015
Ms. Rodell explained that Juno Therapeutics was a venture
capital investment. The venture was a strategy to fight
blood born cancers through cell manipulation. The APFC
invested $129 million in the venture. The biotech venture
offered an initial public offering (IPO) in December 2014
and was currently valued in excess of $600 million.
Ms. Rodell moved to slide 23, "Statutory Net Income:"
Statutory Net Income
Principal (income-producing investments)
Net Income gets deposited into the ERA {Earnings
Reserve Account]
Income in ERA available for Appropriation
Ms. Rodell discussed slide 24, "Pro rata share of main fund
assets, not cash, are transferred to ERA." She explained
that a slice of every investment was assigned a pro rata
share each to the ERA and the main fund until it was sold.
9:30:02 AM
Vice-Chair Micciche asked whether the proportion of
unrealized gains mirrored the proportional distribution of
the corpus and ERA. Ms. Rodell thought that the
distribution was pro rata. She explained that the corpus
contained the unrealized earnings for accounting purposes.
However, earnings were distributed into the ERA, so
unrealized earnings actually belonged to the ERA even
though, they were unrealized funds and did not move into
the account.
Vice-Chair Micciche asked how Ms. Rodell would describe the
liquidity of the ERA. He wondered how a draw on the ERA in
order to fund a budget shortfall worked in terms of a cash
transfer between the corpus and the ERA. Ms. Rodell
explained that the answer was difficult because the
situation never happened before and the actual plan was yet
unknown. She thought that internal discussions on how the
transfers would work were necessary when a plan was
developed. Vice-Chair Micciche wondered if APFC was
constructing a hypothetical procedure as to how a draw
would work to avoid a time lag between the funding request
and fund transfer. Ms. Rodell stated that 6 percent of
APFCs portfolio was in cash. She referred to the
corporation's mandate as producing income and protecting
the principle, and suggested that it would be premature to
start liquidating investments without a specific plan for
the ERA in place. She asserted that management and
coordination of the draws needed to happen between APFC,
the Department of Revenue (DOR), and the Office of
Management and Budget (OMB) in order to avoid a cash drag
on investment income. She informed the committee that 3
percent of the fund (over $3 billion) was in cash and 60
percent of the fund was in liquid investments (stocks and
bonds).
9:35:07 AM
Vice-Chair Micciche clarified that he was not suggesting
liquidating assets in preparation of an unknown amount, but
was curious if APFC was thinking about a future potential
draw.
Co-Chair Kelly wondered whether there was a need for
emergency provisions to allow the corporation flexibility
to produce funds in case a lag time occurred.
Co-Chair MacKinnon asked whether it was fair to say that
APFC was monitoring the situation and currently working
under existing statute. Ms. Rodell answered in the
affirmative. She specified that none of the holdings had
been shifted to cash in any way in anticipation of action
by the legislature. The amount of 6 percent cash was the
standard for the previous 6 years.
Ms. Rodell showed slide 25, "Fund breakdown:"
ERA $7.2 ($6.6 deposits, $1.1 unrealized gains)
Principal $45.6
•$39.2 in deposits
•$6.4 unrealized gains
Ms. Rodell referred to the realized versus unrealized gains
on the chart.
Ms. Rodell commented on slide 26, "Statutory Net Income"
and explicated that the chart portrayed the realized net
income and realized returns (listed as a percentage over
the last ten years) for fiscal years 2005 through 2015. She
pointed to the losses in 2009.
Ms. Rodell moved to slide 27, "Use of Realized Net Income:"
She highlighted that the pie chart illustrated the
distribution of realized income as follows:
General fund $536.3 million
Dividend appropriations $23,002.7 billion
Inflation proofing transfer to principal $16,236.4
billion
Special appropriations to principal $4,340.3 billion
Undistributed realized income balance $6,146.5 billion
Ms. Rodell remarked that the undistributed realized income
was deposited into the ERA.
9:40:00 AM
Ms. Rodell presented slide 28, "Inflation proofing."
Inflation proofing
• Provides a deposit back to corpus
• Maintains purchasing power of corpus
• Added $16.2 billion to corpus
• Based on value of corpus on June 30 and inflation
rate for prior two calendar years
Fiscal Year Transfer
2005 $641
2006 $856
2007 $860
2008 $808
2009 $1,144
2010 $0
2011 $533
2012 $1,073
2013 $743
2014 $546
2015 $624
Ms. Rodell explained that inflation proofing provided a
deposit to the corpus of the fund. She noted that in FY 16
the total amount of inflation proofing was $47 million due
to a low inflationary environment. She used a hypothetical
situation to illustrate inflation-proofing. She offered
that if the Tyson's Corner investment was purchased for $10
million and grew to $200 million today and was sold, the
$190 million in earnings would be deposited into the ERA.
She deemed that even though the value increased despite
inflation all of the realized earnings were deposited into
the ERA and inflation proofing appropriations allowed the
corpus of the fund to "recognize some of that wealth effect
from making the investment and grow the corpus of the
fund." She voiced that the only way for the corpus to build
up wealth was through inflation proofing appropriations.
Ms. Rodell displayed slide 29, "Money in and out, and
current value:"
$39.2 billion Deposited into Principal
$45.6 billion Market Value of Principal
$52.8 billion Total Fund Value 6/30/15
Ms. Rodell emphasized that even after paying out a total of
over $20 billion in dividends the fund still grew.
Ms. Rodell discussed slide 30, "The Income-Producing
Blueberry Pie:"
•Assume the basic following facts:
-Fund buys blueberry pie for $20
-Earnings reserve reflects 25% of total fund
-So, $20 pie was funded with
•$15 of principal, and
•$5 of earnings
Ms. Rodell remarked that the following 5 slides illustrated
a hypothetical investment in a pie to explain the
distribution of funds with gains and losses within the
Permanent Fund.
Ms. Rodell continued to slide 31, "Capital Appreciation":
•Assume a horrible storm destroys most of existing
blueberry stock
-Supply goes down, but demand is static
-Value of our pie appreciates from $20 to $40
•Principal's share now worth $30 (initial
cost $15)
•Earnings reserve share now worth $10
-But, unless we sell (realize) a portion of the
pie,
•The increased value reflects unrealized
gain, not statutory net income
•No income is transferred from principal to
earnings
Ms. Rodell continued on slide 32, "Harvesting Gains":
•Assume we learn blueberry supply will recover in 6
months and our unrealized gains will disappear
•So, we sell the whole pie for $40
-$15 remains in principal to cover its cost
-$15 realized gain is transferred to earnings
reserve
-Earnings reserve now has $25
•$5 original cost
•$5 of its realized gain and
•$15 of realized gain from principal
9:45:39 AM
Ms. Rodell moved to slide 33, "Capital Depreciation":
•Assume a health report comes out announcing that
blueberries cause insomnia
•Demand for our pie is decreased and the value drops
from $20 to $12
-principal investment is valued at $9, reflecting
unrealized loss of $6
-Earnings investment is valued at $3, reflecting
unrealized loss of $2
•Should we sell or hold?
Ms. Rodell presented slide 34, "Realizing Losses":
•Assume we conclude demand will continue to erode,
making it prudent to cut our losses
•So, we sell the whole pie for $12
-$12 is returned to principal from sale proceeds
-$3 is moved to principal from earnings reserve
-Leaving earnings reserve with a loss of $8
•Note: with a long-term time investment horizon, this
activity is rare (example-2009)
Ms. Rodell discussed slide 35, "ERA Going Forward":
•Liquidity Consideration:
-Some APFC asset classes, like private equity,
are illiquid, making a portion of the ERA
illiquid
-Yet all of the ERA is "available for
appropriation"
•Volatility Consideration:
-Permanent Fund and ERA are subject to ups and
downs experienced by capital markets
-Going forward, is a long-term time horizon for
ERA workable?
Senator Bishop asked whether the ERA "acted like a shock
absorber" in the hypothetical case of the blueberry pie.
Ms. Rodell replied in the affirmative.
Co-Chair MacKinnon interjected that the fictitious example
demonstrated how the unrealized gains and losses were
reflected in the corpus and ERA.
Ms. Rodell discussed slide 36, "ERA Going Forward":
•Counterweight:
-Net Income in ERA is immediately invested
alongside main fund
-allowing the nominal value of this income to
remain deployed and continue earning income until
it is appropriated
-Over the last ten years, the Fund's annualized
return was 6.4%
-Can we have our cake and eat it too?
9:49:12 AM
Co-Chair MacKinnon asked about inflation proofing, and
referred to slides 11, 28, 13. She referred to the ERAs
description as a "cushion" that could be used to help fill
revenue shortfall. She mentioned the governor's proposal to
utilize the state's assets to help guide the state through
the fiscal challenge. Co-Chair MacKinnon referred to slide
11, and agreed that the asset diversification was
protecting the corpus of the fund. She asked how the asset
allocation, inflation, and the "cushion" intersected in
relation to legislative considerations on use of the funds.
She asked what the finance committee should consider when
discussing the issue. Ms. Rodell wanted the committee to
consider the recognition that there was an "inherent
conflict" within the fund. She recounted that the
constitutional amendment was written in 1976 and was a
simple directive. She compared the time under which the
fund was established, with the current time when the fund
was investing world-wide and was highly diversified, which
resulted in minimized risk and highest returns. She
wondered how it was possible to grow the wealth of the
corpus of the fund if all of the income from the fund was
deposited into the General Fund (GF). She thought the
policy call for the committee was how to continue to grow
the wealth of the fund, if the oil revenues continue to
decline, and inflation proofing and other deposits into the
corpus were halted. She reported that "there was no natural
mechanism under the constitution for the wealth of the fund
to grow the corpus." She cited that the challenge was that
all of the gain of the fund was available for appropriation
via the ERA. She suggested that changes to the asset
allocation may be required for liquidity and volatility
needs depending on the plan chosen to utilize earnings. She
posited the crucial question back to the committee of "how
do you want the wealth of the fund to grow in the future."
9:55:12 AM
Co-Chair MacKinnon asked whether the board still had an
"active resolution for the support for an endowment
approach for the payout" as a percent of market value
(POMV). She referred to her service on the Anchorage
Assembly and shared an example of decisions regarding a
windfall from the sale of a utility and trusting the advice
from the APFC on how to invest it as a POMV. She wondered
whether the POMV or an annual percentage payout was still
an active resolution of the board. Ms. Rodell responded in
the affirmative and detailed that the active resolution was
in support of a 2003 proposed Board of Trustees
constitutional amendment that would "simplify" the current
language from "all income" to "a POMV transferred over."
She clarified that the resolution's purpose eliminated the
"concept of realized, unrealized, and inflation."
Senator Olson referred to slides 26 and 28, and understood
that inflation proofing was based on a two year average.
He pointed to the negative realized return and the high
inflation proofing allocation of $1.1 billion for 2009, and
asked for clarification. Ms. Rodell specified that slide 26
depicted the actual realized losses on investment income
and slide 28 reflected the change in inflation rates over
two years, which drove the inflation proofing
appropriation.
Vice-Chair Micciche discussed the events in 1983 and
wondered why APFC did not include language that provided
for a level of corpus growth versus "all funds." He thought
it would be interesting to listen to the transcripts of
discussions at the time. Vice-Chair Micciche asked what
kind of philosophy was put in to place to ensure growth of
the corpus using a POMV approach. Ms. Rodell thought that
one of the unintended consequences of inflation proofing
was how much it added to the value of the corpus. She
voiced that the legislature had the authority to create a
mechanism to grow the corpus. She opined that the challenge
of placing funds into the corpus was that only the earnings
were available and not the face value of the appropriation.
10:00:45 AM
Co-Chair MacKinnon discussed Standard and Poor's downgrade
of the state's credit rating from AAA to AA+. She referred
to the rating agency's document suggesting that to follow
the governor's spending plan the corpus would need to
amount to $100 billion. She had asked the Department of
Revenue what the plan was to raise sufficient funds to
maintain current spending. She wondered whether there was a
way to try to raise the state's assets to $100 billion to
sustain the current level of services in the state. Ms.
Rodell stated that APFC was looking at all the proposed
plans, and examining models during a February 19, 2016
meeting. She detailed that the Board of Trustees would be
meeting and the premise of the discussion was for the board
to understand the proposals and consider whether management
adjustments were necessary for the ERA. She referred to
state statute which dictated management of the ERA in the
same manner as the corpus and needed a direction change
from the legislature to revise management of the account.
10:04:22 AM
Co-Chair MacKinnon clarified that she had not engaged in
discussions regarding the issues with Ms. Rodell at any
time prior to the meeting. Ms. Rodell affirmed the
statement. Co-Chair MacKinnon pointed out that Ms. Rodell
had the "privilege" of managing a fund that had been well
managed and non-political. She wondered whether there was a
way to grow the fund to $100 billion and maintain the
status quo budget and services, without cuts or taxes. She
requested that the board seriously consider the idea and
offer guidance and expertise as financial managers to the
legislature. Ms. Rodell maintained that the Board of
Trustees recognized that its main priority was to manage
the corpus of the fund and purchase income producing assets
to maximize income and protect the fund. She reiterated
that the board would "wrangle" with the question of whether
any plan adopted by the legislature would require different
management of the ERA.
10:07:56 AM
Co-Chair MacKinnon stated that she chaired the Senate
Finance Subcommittee on DOR. She relayed that previous APFC
directors and DOR commissioners "asserted" that by managing
state assets "in-house" greater returns would be realized
through gains and cost savings on managing the funds. She
suggested that the APFC manage all of the state's assets in
order to maximize returns. She observed that DOR and APFC
managed that state's assets and at times DOR had exceeded
the APFC but typically the Permanent Fund had greater
earnings. She wondered whether all of the state's assets
should be "consolidated" and managed by the APFC in order
to gain greater returns for the state. She reminded the
committee that Ms. Rodell was the previous commissioner of
DOR.
10:10:33 AM
Ms. Rodell relayed that she had not discussed the idea of
consolidation with the Board of Trustees, and did not have
an idea of how the board would respond. She continued that
the corporation currently managed some funds for the Alaska
Mental Health Trust Authority (AMHTA) and revealed that a
statute allowed DOR to turn over any of the state's assets
to APFC for management.
Vice-Chair Micciche referred to the fund as a "shock
absorber" in times of commodity price volatility and
thought that inflation proofing's purpose was maintaining
the proportional value of the fund in 2036 at its current
value. He hoped that the fund was not being viewed as a
primary funding source for government, but as a shock
absorber for revenue downturns. He voiced that without
budget reductions the state did not have enough assets to
fund government.
Co-Chair MacKinnon reiterated that the state needed $100
billion to maintain the governor's spending plan as
indicated in the Standard and Poor's report. She believed
that spending reductions were necessary. She hoped that the
administration would look at the Standard and Poor's
conclusions.
Senator Bishop thought that there was "a point of no
return" with budget reductions in a low oil market. He
believed that revenue generation was necessary at some
point.
10:15:18 AM
Co-Chair MacKinnon referred back to slide 9, and noted the
advantages of the size of the fund and no time horizon. She
wondered whether the state should adopt a fiscal plan to
include some use of the corpus and earnings in support of
the government via a fixed draw or a POMV. She asked
whether Ms. Rodell could suggest any considerations beyond
the size of the fund and the time horizon when discussing
the governor's fiscal plan. Ms. Rodell thought that the
time horizon was important as a continued advantage for the
corpus. She reminded the committee that currently each
investment was purchased with the corpus along with a share
for the ERA. She continued that if the ERA had a limited
time horizon in the future, under current statute, it was
possible to use a different asset allocation for the ERA
and manage it separately from the fund. She indicated that
the corpus of the fund's advantages would remain with any
changes to the ERA management.
Co-Chair MacKinnon referred to slide 10, and related that
she had heard past leadership of the fund express
challenges. She wondered if there would be an advantage or
disadvantage to having a satellite office outside of
Alaska, and wondered if the board had considered the idea.
She recounted that during examination of the DOR budget,
she discovered the challenges of filling the corporation's
investment positions. She discussed hiring challenges, and
wondered if a different location would make the jobs easier
to fill or whether it was advantageous to keep the
investors in Alaska.
10:20:07 AM
Ms. Rodell relayed that the APFC had received four
positions in the FY 16 budget, of which three were
investment staff and all were filled with "good talent."
She reported that satellite offices were a topic of
discussion and relayed that the board had mixed feelings.
She was unsure of the current board's position. She noted
benefits of satellite offices. She shared her concern that
staff located in offices in the Lower 48 may not understand
the culture of the fund and its place in the state of
Alaska. She believed it was an investment fund owned by the
state and she would only allow transfers of seasoned
investors who understood the culture and value of the fund
to Alaskans to staff a satellite office. She spoke to the
increased costs of operating offices in remote locations
like New York City and San Francisco. She thought that part
of the board's reticence over satellite offices was not
gaining approval from the "oversight bodies" of the fund.
She spoke to the benefits of utilizing communications
technology.
Vice-Chair Micciche asked whether external management was
more cost effective and if the corporation was "shifting"
towards more external reliance. Ms. Rodell related that
internal management was increasing in various asset classes
and began in fixed income assets and spread to some real
estate and private equity infrastructure investments. She
continued that the externally managed portfolio was
primarily in the equity portfolio. She added that more
passive strategy management was performed in-house. She
relayed that external management brought benefits such as
staff capabilities and research that the corporation could
not perform. The corporation measured the value of external
management by the return and to the extent that in-house
management could do as well or better, than the focus would
shift to in-house management.
10:26:29 AM
Co-Chair MacKinnon referred to slide 14, and asked Ms.
Rodell to discuss the passive and active management of
assets. Ms. Rodell explained that active management
included buy and sell decisions based on their observations
of companies strategies and performance and moved stocks in
and out the portfolio. A passive strategy could be
considered rules-based; a well-known passive strategy was
to invest in something like the S and P 500 index fund.
She continued that a quasi-passive approach was in-between
passive and active and employed the consideration of
"certain factors" to inform the rules under which
investments were bought and sold.
VALERIE MERTZ, CHIEF FINANCIAL OFFICER, ALASKA PERMANENT
FUND CORPORATION, stated that she was available to provide
historical information or information regarding the
mechanics of the fund.
10:29:33 AM
Senator Bishop asked for the time and location of the next
board meeting. Ms. Rodell stated that the board meeting was
being held at 1:00 PM [February 19, 2016] at the Atwood
Building in Anchorage, Alaska.
Senator Bishop asked whether the meeting was open to the
public. Ms. Rodell stated that the meeting was completely
open to the public.
Co-Chair MacKinnon discussed the schedule.
ADJOURNMENT
10:31:03 AM
The meeting was adjourned at 10:31 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 020916 APFC Rodell SFC Presentation.pdf |
SFIN 2/9/2016 9:00:00 AM |
Presentation: APFC |