Legislature(2017 - 2018)SENATE FINANCE 532
02/21/2017 09:00 AM Senate FINANCE
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| Start | |
| Alaska Permanent Fund Corporation Overview | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
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SENATE FINANCE COMMITTEE
February 21, 2017
9:02 a.m.
9:02:30 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Senator Anna MacKinnon, Co-Chair
Senator Click Bishop, Vice-Chair
Senator Mike Dunleavy
Senator Peter Micciche
Senator Natasha von Imhof
MEMBERS ABSENT
Senator Lyman Hoffman, Co-Chair
Senator Donny Olson
ALSO PRESENT
Angela Rodell, Chief Executive Officer, Alaska Permanent
Fund Corporation; Senator Gary Stevens.
SUMMARY
^ALASKA PERMANENT FUND CORPORATION OVERVIEW
9:03:21 AM
ANGELA RODELL, CHIEF EXECUTIVE OFFICER, ALASKA PERMANENT
FUND CORPORATION, discussed the PowerPoint, "Alaska
Permanent Fund; February 2017" (copy on file).
9:04:20 AM
Ms. Rodell highlighted Slide 2, "The Corporation":
AS 37.13.040. Alaska Permanent Fund Corporation.
There is established the Alaska Permanent Fund
Corporation. The corporation is a public corporation
and government instrumentality in the Department of
Revenue managed by the board of trustees. The purpose
of the corporation is to manage and invest the assets
of the permanent fund and other funds designated by
law in accordance with AS 37.13.010-37.13.190.
9:04:52 AM
Ms. Rodell addressed Slide 3, "The Board of Trustees":
As the fiduciaries, the Trustees have a duty to Alaskans
in assuring that the Fund is managed and invested in a
manner consistent with legislative findings: AS 37.13.020
· The Permanent Fund should provide a means of
conserving revenue from mineral resources to benefit
all generations of Alaskans
· The Permanent Fund's goal should be to maintain
safety of principal while maximizing total return
· The Fund should be used as a savings device managed
to allow the maximum use of disposable income from
the fund for the purposes designated by law.
9:05:43 AM
Ms. Rodell discussed Slide 4, "Corporate Mission":
"to manage and invest the assets of the Permanent Fund
and other funds designated by law"
AS 37.13.120. Investment Responsibilities
· Designate types of investments
· Use the prudent investor rule
· Related to an investment, may only borrow money
if the borrowing is nonrecourse to the
Corporation and the Fund
· Shall maintain a reasonable diversification among
investments
9:06:36 AM
Ms. Rodell highlighted Slide 5, "APFC's Vision":
"to deliver sustained, compelling investment returns as
the United States' leading sovereign endowment manager,
benefitting all current and future generations of
Alaskans"
· Reflects statutory language and intent, as well as
Board and staff aspirations.
· Emphasizes maximizing returns in a fully sustainable
manner.
· Underscores the intention for the Fund to be a
perpetual resource for the State of Alaska.
· Embodies core values of Integrity, Stewardship, and
Passion.
9:08:23 AM
Ms. Rodell discussed Slide 6, "Strategic Plan":
Every 5 years, as required by the Board of Trustees'
Charter, a strategic plan is developed.
· APFC's 2017-2021 Strategic Plan was developed by
staff; reviewed then adopted by the Board of
Trustees during the Annual Meeting in September
2016.
· Four strategic priorities were identified to be
pursued over the next five years.
o Takes into account stakeholder expectations.
o Builds on a common vision for the Corporation.
9:09:03 AM
Ms. Rodell highlighted Slide 7, "APFC's Strategic 5 Yr
Plan":
Strategic Priorities FY17-FY21
· Gain greater control of resource allocations
· Optimize APFC's operational processes and use of
financial networks and resources
· Develop best-in-class investment management
capabilities, partnerships, and geographic reach to
maximize investment returns
· Enhance talent and staff across APFC
9:09:32 AM
Ms. Rodell looked at Slide 8, "APFC Values Human Capital":
· APFC needs to have all the tools necessary to recruit
and retain the best professionals.
· APFC appreciates the support of the Legislature for
the positions authorized in past years for internal
management of assets.
· Current budget has a vacancy rate of 7.82 percent
which translates to a funding deficit of $811,901.
This requires positions to be held vacant.
Ms. Rodell noted that the corporation had 51 total
positions, including vacancies and summer internships. She
said that the current budget shoed a vacancy rate of 7.8
percent; 6 positions in the corporation were currently
being held vacant, with 2 more becoming vacant within the
next two months.
9:10:28 AM
Co-Chair MacKinnon spoke of the assumed difficulty the
corporation faced in attracting investors. She asked
whether there were applicants that could fill the vacant
positions, or were they being held open specifically for
the vacancy factor.
Ms. Rodell replied that the positions were being held open
due to the vacancy factor. She furthered that 3 people had
been recently hired for positions in investments that had
been added in FY 16, for which 91 applications had been
received from around the world. She believed that the
corporation's ability to recruit was strong.
9:11:47 AM
Co-Chair MacKinnon wondered who requested that the
positions be held open in FY 16. She queried the difference
in cost between hiring an in-house investor manager versus
hiring one from out-of-state.
Ms. Rodell replied that there were slides further in the
presentation that would touch on the subject. She added
that in-house management allowed the corporation more
flexibility and the ability to generate additional returns
to the state, while reducing fees. She related that the in-
house Juneau staff allowed the corporation to maximize
savings when hiring.
9:13:35 AM
Ms. Rodell relayed that the request to include the vacancy
factor had been made by the Governor's office because the
corporation was part of the executive budget act and was
required to carry a vacancy factor similar to other
departments.
9:13:56 AM
Senator von Imhof asked whether the corporation engaged in
peer comparisons with other large funds in term of staff
ratios and appropriate staff levels for the fund's size and
asset mix.
Ms. Rodell replied that peer comparisons for fund size did
exist. She offered to provide the statistics to the
committee at a later date. She shared that funds that
managed $30 to $100 billion had an average of 23
information technology (IT) staff alone, compared to the
corporation's 5 IT positions. She noted that, on average,
comparable funds retained bigger back office and support
staff than the corporation.
9:15:33 AM
Senator von Imhof asked whether the comparisons had been
published for the public in an annual report.
Ms. Rodell responded that the reports were publicly
available.
9:16:10 AM
Senator Dunleavy looked at Slide 6, and queried a defined
list of stakeholders.
Ms. Rodell replied that the stakeholders were defined as
"Alaskans".
9:17:11 AM
Co-Chair MacKinnon understood "Alaskans" to mean future
Alaskans and the current generation of Alaskans.
Ms. Rodell replied in the affirmative.
9:17:23 AM
Vice-Chair Bishop queried the length of the hiring process.
Ms. Rodell replied that the hiring process took
approximately sixty to ninety days.
9:19:33 AM
AT EASE
9:22:44 AM
RECONVENED
9:22:56 AM
Senator Dunleavy wondered whether the fund invested in
derivatives.
Ms. Rodell replied in the affirmative. She explained that
they were not purchased directly, but through funds that
the corporation owned.
9:23:10 AM
Senator Dunleavy understood that derivatives would be
incidental to the purchase of a fund.
Ms. Rodell replied in the affirmative.
9:23:21 AM
Co-Chair MacKinnon queried the definition of "derivative"
for the listening public.
9:23:30 AM
Senator Dunleavy wondered whether it would be possible for
the legislature to modify the definition of statutory net
income; could the definition of net income be modified to
eliminate the need to make legislative appropriations
inflation proof to the corpus.
Ms. Rodell deferred the question to the Department of Law
and Legislative Legal Division. She said that state
Constitution was clear in directing that all income should
go to the general fund.
9:24:32 AM
Ms. Rodell explained the definition of "derivative". She
said that derivatives were generally used to hedge
different market movements as predicte4d by investors.
9:26:07 AM
Ms. Rodell shared that the corporation had a fund value
well in excess of $55 billion, and addressed Slide 9,
"Renewable Resource Use of Income Since Inception":
$29.1 billion
· Saved for Future Generations Alaskans
· ERA
· Inflation Proofing
· Other Appropriations
$24.3 billion
· Distributed to Current Generations Alaskans
· Dividend Fund
· Alaska Capital Income Fund
$52.8 billion
· Fund Value FY16
· Principal $44.2
· ERA $8.6
9:27:42 AM
Ms. Rodell discussed Slide 10, "Value of the Fund." She
relayed that in FY 14 the principal of the fund was $45
billion, with $6.2 billion in the ERA. She noted that
through the second quarter of FY 17 the corpus had grown to
$45.1 billion, and the ERA had grown to $10.3 billion.
9:28:04 AM
Ms. Rodell looked at Slide 11, "Inflation Proofing":
· Provides a deposit back to corpus
· Maintains purchasing power of corpus
Since Inception of the Fund -
· Inflation Proofing
o added $16.2 billion to corpus
· Royalty Deposits
o added $16.2 billion to corpus
ƒBased on value of corpus on June 30 and the
change in inflation rate over the prior two
calendar years
Ms. Rodell stated that over the years inflation proofing
had varied widely based on what inflation was for the given
year; for example, in 2010 the inflation calculation was
zero, which resulted in zero appropriation.
9:28:47 AM
Ms. Rodell discussed Slide 12, "$55.4 Billion Portfolio;
Target Asset Allocation." She relayed that approximately 62
percent of the portfolio was in public markets, which
included public equities and fixed income plus. 38 percent
of the portfolio was in private markets, which included
private equity/growth opportunities, absolute return (hedge
funds), real estate, private infrastructure/private
credit/income opportunities, and asset allocation
strategies/cash. She noted that allocation strategies were
overlay strategies that could involve multiple asset
classes and were used to manage the portfolio.
9:29:45 AM
Ms. Rodell addressed Slide 13, "Performance FY 17 Q2." She
said that the slide showed short-term performance returns
for periods ending December 31, 2016; total funds versus
total fund targets. The green bars represented the total
fund, the orange bar reflected the passive index benchmark
(60/30/5/5), the brown bar marked the performance
benchmark, and the teal bar represented the TF return
objective (CPIU+5 percent). She noted that the benchmark
had been made over the past two years. She shared that the
board of trustees set the performance benchmarks.
9:31:41 AM
Co-Chair MacKinnon thought that the slide was intended to
reflect that the leadership in investments that the fund
had made for the people of Alaska had been fruitful.
Ms. Rodell replied in the affirmative.
Co-Chair MacKinnon asked whether the 8.10 percent total
fund return could be maintained under changes that was
occurring in the international and national markets,
specifically to consumer confidence under the Trump
Administration.
Ms. Rodell replied that the next slide would speak to
volatility in the current market. She stressed that the
permanent fund was invested in the long-term, and the
corporation recognized that the priority should be to
maintain safety of principal while maximizing returns.
9:33:38 AM
Ms. Rodell highlighted Slide 14, "Performance Past 20
Years." The slide illustrated how the diversification of
the asset allocation had weathered various incidents in the
financial market over the past 20 years.
9:35:03 AM
Senator Micciche queried the total 40-year return of the
fund.
Ms. Rodell replied that the information was available on
the website.
9:35:37 AM
Ms. Rodell addressed Slide 15, "Statutory Net Income":
o Statutory net income excludes unrealized gains and
losses; only realized gains are transferred to ERA.
o In 1998, the definition of "income" for accounting
purposes was modified to account for "unrealized
gains and losses."
o Unrealized gains earned by principal are a part of
principal until realized, and unrealized gains
earned by ERA are part of ERA.
Ms. Rodell explained that in 1997, the generally accepted
accounting principals changed some of the rules for income,
unrealized income became required to be included as income.
She said that there had been a recognition that it was
difficult to spend or appropriate unrealized gains and
losses, which had resulted in the current exclusion of
unrealized gains and losses. She noted that over the years
the realized net income had been between $2 and $3 billion,
and was a function of the regular monthly cash-flow that
was coming in from investments, and any gains that were
made because of investment decisions being made by
corporation staff and external fund managers. She stated
that a statutory net income number had never been targeted.
9:37:45 AM
Co-Chair MacKinnon wondered whether the board made the
determination to hold a loss for a while, in anticipation
of a recovery, and wondered about the criteria used to move
things into a loss or a realized gain.
Ms. Rodell responded that it would depend on the asset
class. She said that for some asset classed the corporation
would be patient in recouping the loss. She related that if
losses continued for an extended period (2 to 3 years) the
corporation would mark them down and begin to recognize the
loss. She said that in the public market, where buying and
selling occurred more frequently, the loss would be
recognized more quickly. She stated that taking a loss
meant that the corporation would need to reinvest somewhere
else, so the loss would be booked but cash would need to be
put to work in the asset class.
9:39:48 AM
Co-Chair MacKinnon wondered whether there had ever been a
struggle to deploy cash resources over the asset
allocation.
Ms. Rodell answered that there had been times when higher
cash positions had been deliberately held due to market
volatility. She said that external fund manager was
forbidden to hold significant cash balances, but the
corporation managed well internally the several times that
they had been cash-rich and had deliberately moved into
other asset classes.
9:41:07 AM
Senator von Imhof looked at Slide 16, which listed the
corporations top three successes over the past 5 years. She
lamented that past returns were not a guarantee of future
returns. She queried the future returns on the fund in
terms of the asset mix.
Ms. Rodell said that the corporation had worked to move
into asset classes and create more international and global
exposure. She said that the global portfolio and
diversification within each asset class would be beneficial
for expected growth areas during demographic shifts. She
reiterated that her first job was to protect principal and
her second was to maximize returns.
9:44:00 AM
Senator von Imhof queried the associated risk in volatility
by making the shift in investment.
Ms. Rodell believed that that volatility and risk were
being reduced by making the shift in investment. She
offered an overview of the concept of "value at risk." She
expounded on the low level of volatility in the private
markets. She stressed that the corporation was considered a
very patient, long-term investor.
9:46:46 AM
Ms. Rodell discussed Slide 16, "Last 5 Years, APFC has:
o Beat Passive Performance Benchmark: Outperformed 60%
stock, 30% bond, 10% real assets mix by 2.07% (8.36%
versus 6.29%).
o Improved Diversification: Reduced value-at-risk from
24% to 19% by increasing private markets investments
from 22% to 30%.
o Reduced Management Expenses: Declined from 42bps on
assets-under-management to 29bps (a 31% reduction).
Ms. Rodell pointed out that the 2.07 percent equated to $4
billion in value. She relayed that having the corporation
staff direct external managers, and making investment
decisions internally, an additional $4 billion had been
generated into the fund that would no be there otherwise.
She stressed that the corporation had work diligently to
reduce management expenses, which had declined from 42
basis points to 29; a 31 percent reduction on management
fees.
9:48:11 AM
Ms. Rodell addressed Slide 17, "Management of the Fund":
o In FY16, 39% of the total assets were under in-house
management.
o Over the last 10 years, the Board of Trustees has
set a priority of building in-house talent.
o Private markets have received most recent investment
of talent and resources.
9:49:02 AM
Co-Chair MacKinnon wondered whether the trustees had an
ideal amount of asset allocation, internal versus external,
for management of the portfolio.
Ms. Rodell replied that there was a target of 50/50. She
asserted that there was value to external management, which
was why the goal was not 100 percent internal.
9:50:11 AM
Co-Chair MacKinnon asked whether the 6 vacancies were in
the investor category.
Ms. Rodell said no. She explained that one of the positions
was a part-time position, three others were in investments,
two were back office support.
9:50:45 AM
Co-Chair MacKinnon recalled that 3 investor positions had
been added within the past few years, and wondered whether
those were the same as the currently vacant positions.
Ms. Rodell replied that 4 positions had been added in FY
16, and 6 in FY 17. She relayed that one out of the FY 16
positions, and 2 from FY 17, were vacant.
9:51:14 AM
Senator Micciche queried the returns for internal and
external investors.
Ms. Rodell replied that internal and external returns were
not tracked, which was the reason for the creation of the
benchmarks. She said that the portfolio was nearly entirely
managed in-house, with a few high-yield bond funds that
were managed externally.
9:52:42 AM
Senator Micciche wondered whether the management cost of
the external investments brought greater value to the
overall investment.
Ms. Rodell said that external managers had done well for
the fund. She shared that there had ben a move toward more
performance driven fee arrangements so that there would be
more incentive compensation built into the external
management contracts.
9:54:11 AM
Vice-Chair Bishop commented that if the incentives were
performance based, investors could take higher risks.
Ms. Rodell said that the investment staff was on due
diligence on a regular basis to be sure not to engage in
risky behavior that was outside of the mandate they had
been directed to fulfill.
9:55:01 AM
Ms. Rodell looked at Slide 18, "Real Estate":
· Value of Direct RE Investments: $5.5 billion
· Real Estate Internal Mgmt. $83,333/month
· Monthly Cash Flow: $21.2 million (gross of fees)
· Compare to: 30-year Treasury Bonds, 2.875% coupon rate
· Monthly Cash Flow $13.2 million
Ms. Rodell explained that the corporation generated an
excess of $8 million by managing the portfolio and having
the asset class in-house.
9:57:12 AM
Ms. Rodell addressed Slide 19, "Best Practices":
"By establishing independent entities to oversee their
sovereign wealth funds, New Zealand and Alaska have
ensured prudent governance, monitoring, and disclosure
of their financials and management practices. They
stand as examples of many of the best practices for
sovereign wealth funds domestically or
internationally."
9:58:41 AM
Ms. Rodell discussed Slide 20, "Peer Recognition":
· Two aiCIO Industry Innovation Awards (2011, 2015)
· Public and Private Fund Managers
o Singapore Government Investment Corp
o Norway Government Pension Fund
o Massachusetts PRIM
o Finance Ministry of Mongolia
o International Forum of Sovereign Wealth Funds
9:58:48 AM
Ms. Rodell highlighted Slide 21, "Key Takeaways":
· Fortitude: Strength
· Flexible, Adaptive: Role is Changing
· Corporation Key to Success of The Fund
· Continued Investment into The Corporation:
o People
o Workplace Environment
o Resources
9:59:28 AM
Senator Dunleavy solicited Ms. Rodell's advice on how the
state should move forward using the fund to "do more for
Alaska."
Ms. Rodell thought that allowing the corporation to
continue to operate independently was important.
10:01:00 AM
Senator Dunleavy wondered whether the drop in the price of
oil had cause investors to approach the fund differently.
Ms. Rodell replied that greater pressure was being placed
on funds to become budget stabilization funds, which were
very different than long-term endowment or sovereign wealth
funds.
10:02:07 AM
Senator Micciche asked whether the fund's trustees were
knowledgeable on the early formation of the fund and the
purpose of its creation, and whether that knowledge
informed their policies. He wondered whether trustees
considered that someday the fund would transfer into a
source of revenue for partially funding government.
Ms. Rodell stated that when trustees were new they were
given a thorough orientation. She said that trustees were
Alaskans, and the history of the fund was shared with them.
She related that the current board had strong and long-
lived ties to the state and took their jobs as trustees and
fiduciaries of the corpus of the fund very seriously. She
said that the subject of spending the ERA was a sensitive
to trustees because they believed that the account had
always been viewed as a state spending account. She added
that statute had directed the ERA to be invested alongside
the corpus of the fund, but that it was available for
appropriation - in its entirety - every year. She thought
that trustees had refrained from taking a position on the
subject to maintain the integrity of the corporation, while
recognizing that they are not politicians; their job is to
protect the fund and not to weigh in on political debates.
10:05:24 AM
Senator Micciche understood that the trustees could
experience changes in investment philosophy associated with
the use of the ERA for government funding.
Ms. Rodell replied in the affirmative.
10:05:53 AM
Senator von Imhof felt that the corporation would retain
independence once the ERA was used to fund government. She
asked about the third bullet on Slide 3, and wondered what
the maximum use of an annual income draw would be under a
long-term and predictable endowment model.
Ms. Rodell replied the corporation did not have an opinion
of what the draw should be. She stated that the range of
numbers in all the bills that were currently in play
regarding the use of the fund, ranging from 4.5 to 5.25
percent draw amounts, were all reasonable draw amounts.
10:08:11 AM
Co-Chair MacKinnon reminded that committee that for the
past three years the state had drawn form its savings
accounts, and that the state faced a deficit. She said that
using the ERA was not ideal, but necessary given the
current fiscal climate. She lamented that the state could
be losing returns on assets. She stressed that the number
one goal for all parties involved was the safety of the
principal of the corpus of the fund. She asked if there
were specific characteristics in any of the bill in play
that would allow the corporation the flexibility, and when
would the board be reviewing this year's legislative
actions.
Ms. Rodell noted that when talking about a budget
stabilization fund as a glide path down to a new revenue
balance, people generally assumed that the drawing would be
for a limited period until the revenue and expenditures
equalized. She said that this differed from an endowment
that would be a revenue source every year going forward.
She stated that if investments in the ERA were going to
need to be moved into short-term, liquid investments
because the budget stabilization factor was at play, the
percentage of generated returns would decrease. She
highlighted the differences in the bills pertaining to the
use of the fund for government. She said that when the
trustees evaluated the bills a year ago, there had been
less information than what was currently available. She
thought that if the bills gained momentum that the trustees
would consider considering them.
10:16:10 AM
Senator Micciche noted the subject of liquidity. He
wondered whether the board of trustees had been frustrated
with the lack of healthy fund balance in the CBR. He
wondered whether the corporation should be managing the CBR
for greater return.
Ms. Rodell responded that as the revenue commissioner for
the administration she had been a trustee of the permanent
fund, and she furthered that during that time she did not
recall any discussions on the issue of how the funds should
be managed. She believed that having the revenue
commissioner as both the fiduciary for state funds and on
the board for the trustees provided a consistency of
application for the entire financial portfolio. She hailed
the treasury division for their daily cash management,
particularly at a time when revenue was not meeting target
numbers. She noted that payroll for the state was made
every 15th and final day of every month, with limited tax
revenue flow. She warned that if the corporation managed
too much of the state's money an external bank would need
to be added. She felt that the CBR should be managed more
conservatively that the permanent fund, and that the
state's prudent handling of the CBR to date has been wise.
10:21:10 AM
Senator Micciche felt that Ms. Rodell had misinterpreted
the question. He agreed that the CBR had been managed
prudently and well for the past several years, but thought
that when things were more stable, and the CBR was fully
funded, lost opportunities for investment could be
expensive.
10:21:50 AM
Senator Dunleavy spoke to the "rainy day" account with the
understanding that it was a temporary approach to temporary
issue. He understood that the concept of an endowment was
that the approach became permanent. He wondered whether
investment strategies would be impacted once the
legislature determined whether the fund was a "rainy day"
account or and endowment.
Ms. Rodell replied that if the fund remained an endowment
there would be very little shift in the investment
strategy. She believed that the asset allocation would need
to shift for a "rainy day" fund to make sure that there was
cash and liquidity when necessary because many of the bills
currently circulating in the legislature had a 5 to 6 year
look back timeframe. She stressed that the corporation did
not want to be in the uncomfortable position of being the
sole funder of state government.
10:25:01 AM
Vice-Chair Bishop thanked the presenter and noted her as an
example of grace under fire.
10:25:10 AM
Senator Micciche noted that SB 128 had a maximum draw,
which he characterized as a combination of a "rainy day"
fund and an endowment model. He wondered how SB 128
presented from a management perspective.
Ms. Rodell replied that it did create some management
flexibility, because it would not exceed a dollar amount
for liquidity purposes.
10:26:45 AM
Co-Chair MacKinnon offered a brief history of SB 128, which
had died in chamber in June of 2016.
Ms. Rodell agreed with her comments.
10:27:02 AM
Senator Micciche hoped that the corporation could view a
bill of the nature of SB 128 as a protection of their
responsibility for maximum returns.
10:28:14 AM
Co-Chair MacKinnon noted that the limit that had been
included in SB 128 had a draw limit of $1.2 billion, which
dropped with increases in revenue from other sources, on a
dollar per dollar basis. She discussed housekeeping.
ADJOURNMENT
10:29:05 AM
The meeting was adjourned at 10:29 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 022117 APFC SFIN Presentation.pdf |
SFIN 2/21/2017 9:00:00 AM |
Operating Budget FY18 |