Legislature(2019 - 2020)SENATE FINANCE 532
01/27/2020 09:00 AM Senate FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| Presentation: Savings Accounts, Budget Reserves, and Cash Deficiency | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
January 27, 2020
9:01 a.m.
9:01:29 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:01 a.m.
MEMBERS PRESENT
Senator Natasha von Imhof, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Lyman Hoffman
Senator Donny Olson
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Senator Cathy Giessel, Mike Barnhill, Acting Commissioner,
Department of Revenue; Pam Leary, Director, Treasury
Division, Department of Revenue.
SUMMARY
PRESENTATION: SAVINGS ACCOUNTS, BUDGET RESERVES, and CASH
DEFICIENCY
Co-Chair Stedman stated that the committee would discuss
the state's savings positions and cash flow. The following
day the committee would consider a presentation on the
governor's budget by the Office of Management and Budget
(OMB). The day after the Legislative Finance Division (LFD)
would present its view on the governor's proposed budget.
He thought the week started a more robust discussion on the
state's operating and capital budgets.
^PRESENTATION: SAVINGS ACCOUNTS, BUDGET RESERVES, and CASH
DEFICIENCY
9:03:21 AM
MIKE BARNHILL, ACTING COMMISSIONER, DEPARTMENT OF REVENUE,
stated that his colleague would handle most of the slide
presentation, but he would converse on the topic of
volatility. He anticipated that some topics would serve as
an introduction of volatility management concepts. He was
happy to return to delve further into the topics.
Mr. Barnhill expressed that there were two types of
volatility associated with the discussion of rainy-day
funds and state cash flows. He thought the concepts could
be confused because the same tool was used to address both.
He discussed structural revenue volatility, whereby the
revenue structure assumed a certain amount of revenue would
come in any particular year and then did not. He used the
example of declining sales tax and oil taxes because of oil
price or production differentials. The state used various
techniques to absorb that volatility, and historically used
the Constitutional Budget Reserve (CBR).
Mr. Barnhill discussed a second type of volatility - in-
year cash flow volatility; whereby cash inflows were not
evenly matched with cash outflows. He reiterated that the
state had used the CBR to manage the in-year cash flow
volatility; and had done so through a memorandum of
understanding with respect to cash deficiency.
Mr. Barnhill stated there were other ways to manage in-year
cash flow volatility, but the state had primarily used the
CBR. He reiterated that there were multiple techniques to
manage the volatility. He stated that there were many
slides in the presentation with granular information
regarding topics regarding state funds, returns, balances,
and asset allocation. He queried the chair as to the will
of the committee regarding hearing the detailed
information.
Co-Chair Stedman pointed out that it was important to
identify the slide numbers during the discussion. He
thought the committee might want the granular discussion.
He emphasized the importance of cash flow.
Mr. Barnhill stated that the presentation would proceed
with discussion of rainy-day funds and other funds.
9:07:44 AM
PAM LEARY, DIRECTOR, TREASURY DIVISION, DEPARTMENT OF
REVENUE, stated she had been with the state since 2007. She
first worked with the Alaska Permanent Fund Corporation
(APFC) and with the Department of Revenue (DOR) in the
Treasury as comptroller. She had been a partner in Price
Waterhouse Coopers in 2001.
Ms. Leary spoke to the presentation, "Update on the State's
Rainy Day Funds and Discussion of State Cash Flows" (copy
on file). She stated that the goal of the presentation was
to give a high-level overview of the state's rainy-day
funds and cash flows. She showed slide 2, "Update on Rainy
Day and Other Funds."
Ms. Leary spoke to slide 3, "FY21 Days that Alaska could
run on Total Balances (Rainy Day and Other Funds)," which
showed a table depicting the total estimated balances of
Alaska's Funds at the start of FY 21, and how many days
each fund could pay for the operating budget of $4.5
billion absent all revenues. She noted that the slide did
not show the Permanent Fund Dividend (PFD) amount as an
expense. She considered the CBR and estimated that there
would be a beginning balance of $1.9 billion, or six months
of coverage of the $4.5 billion operating budget. She
explained that states differed in using revenue-based or
expense-based statistic to determine how large a rainy-day
fund should be. She explained that each state had a
different set of circumstances, and Alaska experienced more
volatility and required greater amounts in reserves.
Ms. Leary pointed out other funds listed on the table which
could be appropriated if deemed necessary, such as the
Power Cost Equalization (PCE) Fund and the Alaska Higher
Education Investment fund. If the funds were added there
would be about $3.8 billion, for coverage of about 9 months
of operating budget expense. She furthered that the
Earnings Reserve Account (ERA) had an uncommitted balance
of approximately $10.2 billion, which would add 800 or so
days to the coverage calculation. With the ERA, the
coverage would total approximately 3 years.
Co-Chair Stedman asked if the amount excluded PFD payments.
Ms. Leary answered in the affirmative.
Ms. Leary commented that the slide provided context in
terms of state assets and budget coverage but not
necessarily how the assets should be used.
9:11:08 AM
Co-Chair von Imhof looked at the slide as an academic
experience. She noted that Ms. Leary had alluded to the
fact that there were consequences with each decision in
choosing to liquidate any of the funds wholly or partially.
She referenced use of the Higher Education Fund,
liquidation of which would be detrimental to the
Washington, Wyoming, Alaska, Montana, and Idaho (WWAMI)
Program and scholarship programs. She asserted that
liquidation of the ERA would create a loss of approximately
half a billion dollars and would be detrimental to the
growth of the Permanent Fund over time. She mentioned the
percent of market value (POMV) draw. She reiterated that
there were consequences to each decision.
Mr. Barnhill thought Co-Chair von Imhof made an excellent
point. He suggested that there was more than an academic
quality to the chart. He thought the slide begged the
question of whether the state was using the traditional
rainy-day fund like other states did. He thought the state
was using its rainy-day fund as recurring revenue, which
something more similar to a countdown clock rather than an
economic cushion. He pointed out that five years previously
the CBR had a balance of higher than $12 billion. He
thought there were ways to slow or arrest the progression
of the fund balance countdown. He asserted that if the
state continued to spend without making structural changes
to the fiscal system, one could see where the end was.
Senator Hoffman asked for Mr. Barnhill to discuss the
difference in the earnings of the CBR and the ERA.
Mr. Barnhill explained that the ERA of the Permanent Fund
was invested more aggressively and had higher exposure. The
CBR was invested with a lower exposure to equities and a
much lower expected return than the Permanent Fund. He
pointed out that the previous year was a banner year for
fixed income. He expected the calendar year returns for the
CBR would be very healthy but was dubious whether it would
persist through the end of the fiscal year.
9:15:25 AM
Ms. Leary referenced slide 4, "Days Each State Could Run on
Total Balances in FY 2018," which showed a map of the
United States. She noted that part of the impetus for the
information on slide 3 had been a study by the Pew
Charitable Trusts. She pointed out that that even with the
large draws it had taken, Alaska was second only to the
State of Wyoming for total number of days of expenses in
the funds. The median for all 50 states was about 40 days
of coverage. The information on the slide looked at total
balances, and the prior slide showed that Alaska was still
in a healthy position.
Co-Chair Stedman asked if the total for Alaska funds
included the $14 billion total that included the ERA.
Mr. Barnhill stated that for purposes of the chart on slide
3 and in order to provide a comparison to other states, the
total had included the balance of the ERA as of December
2019. He acknowledged that no one planned to use the ERA,
but it could potentially be used. He pointed out that on
slide 4, the chart had not included the ERA. He commented
that the Pew Charitable Trusts reports ran on a lagging
basis and the state had not been in the practice of
appropriating from the ERA for purposes of spending. He
shared that the Pew Charitable Trusts had a number of
substantive informational reports. Alaska was featured in
most reports as having high revenue volatility. A future
slide would address the computation of the volatility.
Mr. Barnhill continued to address Co-Chair Stedman's
question and slide 4. He described that when Alaska had
over 80 percent of its Unrestricted General Fund revenue
coming from petroleum, the volatility of revenue was quite
high. Now that SB 26 had been enacted [legislation passed
in 2018 that established a new statutory structure for
expenditure of Permanent Fund income], and there was a
different mix of revenue, the composition of the state's
volatility was changing. He thought consideration of the
"right" level for the CBR would require looking at the
composition volatility. He thought five years previously
the savings cushion would have rightly been high since the
volatility was high. Moving forward with a new mix of
volatility that was part oil and part investment earnings,
the volatility would come down and the cushion could come
down. He thought the state was not there yet since it had a
structural problem with revenues and was using its rainy-
day fund as recurring revenue.
9:19:02 AM
Ms. Leary stated that the next series of slides were
snapshots of the information on slide 3.
Ms. Leary turned to slide 5, "Constitutional Budget Reserve
Fund":
• In 1990, voters of Alaska adopted an amendment to
the constitution creating the CBRF. The fund was
established as a savings fund to enhance budget
stability. Consists of deposits resulting from
resolutions of disputes about the amount of
mineral lease bonuses, royalties or taxes.
• Legislature may appropriate from the CBRF to fund
operations under certain conditions:
• Simple majority vote if available funds from
other sources are less than amount appropriated
to fund state government for the previous fiscal
year.
• Otherwise 3/4s vote.
• Borrowings are allowed to fund temporary cash
deficiencies and budget shortfalls as
appropriated by the legislature.
• Borrowings must be repaid to the CBRF when there
is a surplus in the general fund at the end of
the year.
• As of FY10, the CBRF was repaid and no borrowing
occurred FY 11-FY14.
• A Sub-fund of the CBRF was established in 2000.
In 2008, $4.1 B was deposited
• (1.5 CBRF Main + $2.6B from GF). Sub Fund was
liquidated in 2015 as required by statute as
funds were deemed to be needed with 5 years.
Ms. Leary considered slide 6, "Constitutional Budget
Reserve Fund Historical Invested Assets (in billions),"
which showed a graph depicting historical balances of the
CBR. She pointed out that the blue portion of the chart
showed what was considered the "main" part of the CBR,
while the yellow part of the chart depicted the sub-fund of
the CBR which was created in 2000. In 2008, $4 billion was
deposited into the fund, so that some portion of the CBR
could be managed at a higher target of return.
Co-Chair Stedman asked Ms. Leary to discuss the internal
structure of the management of the fund. He wondered if
there were regular meetings and if minutes were taken. He
asked about any paper trail the commissioner had to show
the legislature and the public why a particular decision
was or was not made. He recounted that several years
previously when the large deposit had been moved into the
subfund of the CBR, and the Senate Finance Committee co-
chairs had objected to the decision. The decision lay
solely in the hands of the DOR commissioner and had turned
out abysmally. There had been concern that there was a lack
of internal structure in the governance of the fund, and
there was no paper trail showing the basis for the
decision. He asked if there was a structure in place.
9:23:38 AM
Mr. Barnhill thought every commissioner of DOR had to
answer for the actions taken in 2008. He recalled that the
CBR was established in 1990, and the purpose of the fund
was to deposit settlements from royalty and petroleum tax
disputes. Over time the balance of the CBR had grown and
the legislature had authorized a sub account that could be
invested more aggressively. He continued that DOR, up until
2008, did not have a policy dictating when it would move
funds from the main account into the sub account. In 2008,
a decision was made to move a large chunk of money from the
main account to be more aggressively invested in sub-
accounts.
Mr. Barnhill recalled that in September 2008, the market
crashed and there was a significant loss to the fund. He
thought the first lesson learned was that when moving a
large amount of money there should be a dollar-cost average
and a different practice to avoid some of the draw-down. He
continued that the beginning of 2009 had shown the
beginning of a bull market with some ups and downs but that
had persisted to the present time and was at an all time
high.
Mr. Barnhill shared that there was a statute governing the
CBR that established a 5-year horizon. The state had
withdrawn all the sub-account money in 2015 because the
chief investment officer at the time had believed the state
had crossed the time horizon. None of the money was exposed
to aggressive management techniques and had not been since
that time. He thought the chart on slide 3 illustrated that
the state was well within a five-year horizon for spending
the CBR.
9:27:26 AM
Co-Chair Stedman thought the unfortunate money shift in
2008 could be chalked up to inexperience. He was concerned
that roughly 15 years previously there was an internal
practice of having discussions and quarterly meetings. He
considered that with the awesome authority of the DOR
commissioner, he or she had to have practices in place to
show the decision process. He emphasized that there should
be a process and discussion that was shown.
Mr. Barnhill thought Co-Chair Stedman's point went to
governance. He recalled that there was an annual discussion
and paper trail that documented the conversation concerning
all funds which the commissioner had under its investment
authority - ranging from the General Fund to the PCE Fund
and others. He asserted that there was a paper trail and
different asset allocations for each. He thought there was
quarterly reporting.
Co-Chair Stedman opined that there should be meetings more
frequently than once per year. He advised that quarterly
meetings and a paper trail had ceased to exist since a
commissioner under former Governor Frank Murkowski.
Mr. Barnhill stated that there were boards and governing
structures for large funds such as the Permanent Fund and
the Public Employees' Retirement System (PERS). He thought
the benefit of a board was the encouragement of regular
discussion and transparency to the public. He hastened to
add that he did not believe that the funds under the
investment authority since 2009 had suffered from the lack
of such governance.
Co-Chair Stedman wanted to move on from the topic but
reiterated that there was a fundamental governance
question.
Mr. Barnhill thought that Co-Chair Stedman had raised
excellent questions. He stated he would love to return and
share further thoughts. He was starting to consider side-
by-side performance of management, returns, and expenses;
which had been included for budget subcommittees to see. He
thought it was possible to see there were very different
forms of governance, but ultimately returns were probably
similar.
Co-Chair Stedman asserted that the commissioner should do
the paperwork.
9:31:58 AM
Ms. Leary displayed slide 7, "Constitutional Budget Reserve
Fund Fiduciary oversight: Commissioner of Revenue," which
showed a data table including a pie chart that depicted an
investment snapshot of the CBR. She noted the target asset
allocation and the fact that there was moderate risk and an
intermediate investment horizon. She pointed out that the
balance as of December 31, 2019 was $2.1 billion. She
qualified that the slides showing cash and investment
balances were a snapshot in time and may have information
that differed from other sources. Future slides would
address cash versus accrual. The one-year return for the
period ending December 31 was 5.48 percent, which beat its
benchmark.
Ms. Leary highlighted slide 8, "Power Cost Equalization":
o 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.
o 5% 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% (not to
exceed $55M) of the difference can be spent on related
identified programs. Commerce is the agency that
oversees the spending of the fund. SB196, effective
6/30/2016, changed the spending target from 7% to 5%.
Fund History:
o 2000-Power Cost Equalization Endowment Fund
established from Constitutional Budget Reserve
Appropriation of $100 million
o 2002-PCE receives $89.6 million from proceeds of the
sale of the four dam pool hydroelectric project.
o 2007-Additional appropriation of $182.7 million
o 2012-Additional appropriation of $400 million
Ms. Leary looked at slide 9, "Power Cost Equalization -
Historical Invested Assets (in millions)," which showed a
line graph showing the balance of the PCE Fund over time.
Ms. Leary addressed slide 10, "Power Cost Equalization Fund
- Fiduciary oversight: Commissioner of Revenue," which
showed a data table containing a pie chart. She made note
of the target asset allocation as well as the balance of
$1.1 billion as on December 31, 2019. The target asset
allocation had a general mix of about 70 percent equity and
30 percent fixed income. The one-year actual returns were
21.66 percent as of December 31.
9:34:03 AM
Ms. Leary advanced to slide 11, "Alaska Higher Education
Investment Fund":
• On September 1, 2012, the Alaska Higher Education
Investment Fund was capitalized with a $400 million
deposit from receipts of the Alaska Housing Capital
Corporation.
• On January 28, 2013 the Alaska Higher Education
Investment Fund was moved out of the General Fund
into a segregated fund, and an asset allocation was
approved to generate earnings sufficient to meet the
seven percent annual appropriation amount as
required by AS 37.14.750.(c).
• Two-thirds of each year's appropriation is allocated
for Alaska Performance Scholarship Awards and one-
third of the appropriation be allocated for
AlaskAdvantage Education Grants.
• In FY2019, $11.75 million was allocated for Alaska
Performance Scholarship Awards, and $5.875 million
was allocated for AlaskAdvantage Education Grants.
• In FY2020, $11.75 million was allocated for Alaska
Performance Scholarship Awards, and $5.842 million
was allocated for AlaskAdvantage Education Grants.
Ms. Leary looked at slide 12, "Alaska Higher Education
Investment Fund - Historical Invested Assets (in
millions)," which showed a line graph depicting the balance
over the life of the fund, from $400 million down to its
current balance of $359,000 as of December 31, 2019.
Ms. Leary showed slide 13, "Alaska Higher Education
Investment Fund Fiduciary oversight: Commissioner of
Revenue which showed a data table and a pie chart with
target asset allocations, market values, and returns of the
fund.
Co-Chair von Imhof discussed the PCE Fund and the Higher
Education Investment Fund, which were swept the previous
year. She questioned what would happen in the current year
with the funds and if they would be swept again.
Mr. Barnhill stated that the sweeping of the PCE Fund had
been a product of an opinion from the Department of Law
(LAW). He stated that historically the state had almost
always enacted an immediate reverse-sweep and the funds did
not actually move. He mentioned the three-quarters vote
required to secure the reverse sweep, which he thought was
unusual. He thought having a three-quarters access vote
required to access a rainy-day fund was unusual amongst the
states. He thought that unless LAW came up with a different
opinion, the process from the previous year would be
repeated.
Co-Chair von Imhof asked if the funds were swept the
previous year for a period of time before the vote could
take place, and what kind of accounting quagmire was
created.
Mr. Barnhill did not know what had happened in the interim.
Ms. Leary did not know what happened. She stated that from
an investment perspective, the funds had stayed intact.
Co-Chair Stedman thought the department could get back to
the committee with further explanation of the mechanics of
the accounting. He recalled that there had been a delay in
the sweep mechanism.
Co-Chair Stedman added to Co-Chair von Imhof's question and
queried the position of the administration on the reverse
sweep.
Mr. Barnhill did not mean to suggest the administration's
perspective. He stated that from an investment management
perspective, having a delay and possibly having the funds
lapse into the CBR and being reversed some months later was
disruptive.
9:39:01 AM
Co-Chair Stedman wanted clarity for the committee regarding
the position of the administration regarding the reverse
sweep. The committee had concerns about financial havoc
when the legislature was not prepared for a reverse sweep
not to take place. He recognized that the required vote was
a hurdle, and he reiterated that he wanted the position of
the administration to be clear.
Mr. Barnhill did not know how to answer for the
administration's position. He knew that if there was not a
reverse sweep that the state would have to move funds that
were invested in equities into a fund that was 4 percent in
equities, which would be challenging.
Co-Chair Stedman stated that the committee would address
the question directly with the director of OMB. He
understood that the administration had no interest in not
having a reverse sweep.
Senator Hoffman had a vested interest in the PCE Fund and
prior to the current administration, the fund had never
been deemed a sweepable fund. He thought there had been
strong legal opinions from the Legislative Legal Department
indicated why the fund should not be part of the sweep. He
thought there were two options, including to challenge the
administration in court and assert that the attorney
general's opinion did not have strong legal grounds. He
thought there were organizations and individuals that
wanted to challenge the administration in court. He thought
the governor had stated publicly that he strongly supported
the PCE Program and wanted to come up with legal language
to ensure that future governors would not sweep the fund
and work with the legislature to make the fund a non-
sweepable item. He thought both paths should be pursued. He
was working with the administration to come up with
language to ensure the fund was not sweepable.
Senator Hoffman continued to address the topic of the PCE
Fund. He would provide further information to members of
the committee and the legislature on the strong arguments
as to why the PCE Fund should not be sweepable.
9:43:15 AM
Co-Chair von Imhof wanted to clarify that if the reverse
sweep did not happen, it would be difficult to fund
programs that the funds provided revenue for. She thought
it was important to determine the administration's
interpretation of the constitution and how it may or may
not continue in the next two or three months.
Mr. Barnhill appreciated the information and would relay
the information to OMB.
Co-Chair Stedman asked for members and testifiers to
abstain from using acronyms. He referenced a one-page
report created by committee staff (copy on file) that
showed balances and a look-back for the General Fund and
Other Non-Segregated Investments (GeFONSI). He thought the
report could serve to remind members of historical balances
and returns. The report would be updated monthly by DOR.
9:45:36 AM
Ms. Leary referenced slide 14, "GeFONSI I and II":
• GeFONSI includes the General Fund and Other Non-
segregated funds invested in a pooled environment
(GF proper= $400 million).
• Department of Administration separately accounts for
each fund within State Accounting system.
• Department of Revenue is responsible for investing
the GeFONSI and calculating and allocating daily
investment earnings to each fund.
• 185 funds, assigned as Types 1, 2, or 3. Type 1
funds receive their earnings, the others do not.
• GeFONSI II was created in 2018 to target a higher
risk return profile and includes funds that are type
2 or 3.
Ms. Leary estimated that there were 185 smaller funds in
the GeFONSI that had particular purposes and were accounted
for separately but had similar investment make-ups and were
invested together. She explained that GeFONSI II funds may
get its earnings if decided by the legislature.
Ms. Leary turned to slide 15, "General Fund and other non-
segregated investments Historical Invested Assets (in
billions)*," which showed a chart of historical balances of
invested assets. She informed that the Statutory Budget
Reserve Fund (SBR) was part of the GeFONSI before and after
being managed as a separate fund. There had been sufficient
funds in the SBR that allowed it to be managed at a higher
target return before lack of funding caused it to be
rejoined to part of the GeFONSI.
9:47:59 AM
Co-Chair Stedman looked at the account balance reflected
during 1994 to 2004 relative to the current balance and
considered inflation and population change. He thought it
appeared as if the state was in a better cash position
currently. He asked for comment on the change from 2004 to
2019.
Ms. Leary thought historically the way the General Fund was
used was for funding all different types of programs. A
practice was created by which smaller funds were created to
target specific programs. She qualified that when the
department discussed cash, it generally spoke of the
General Fund proper. There was a minimum balance in a
working capital account from which the cash was used. She
thought previously that with smaller budgets and cash
flows, the amounts were smaller. She stated that a
forthcoming slide would address cash balances specifically.
The size of the funds had grown but the cash portion had
remained relatively stable.
Co-Chair Stedman observed a $2.3 billion increase since
2004.
Mr. Barnhill noted that in the 1990's the price of oil was
averaging $20/bbl, and bottomed in 1998 around $8/bbl. Then
there was a huge bull market after which oil prices had
steadily climbed, had peaked in 2009, and then had started
to decline again. He commented that state revenues had gone
up dramatically with the price of oil in the 2000's and the
budget had risen commensurately. The current budget had
reset at a much higher level than the 1990's because the
price of oil had gone up, and now the state struggled with
the structural gap between revenues and expenditures.
9:50:57 AM
Co-Chair Stedman looked at 2004 and 2005 and thought there
had been roughly about a $2.3 billion increase in balance.
He asked if Mr. Barnhill suggested that the state should
try and keep a balance of $3.5 billion in cash, and the
state could not operate under the cash balances reflected
in 2004.
Mr. Barnhill thought ultimately there was as structural
imbalance in the state. There were statutory structures
that called for certain payments and did not have the funds
to cover all of them. He thought there was a difficult
choice for the administration and the legislature. He
pondered whether the state would change the revenues,
change the statutory commitments, or change the PFD
formula; all of which the governor had stated were on the
table for consideration. The governor had also pondered a
spending cap and consideration of the PFD payment.
Co-Chair Stedman mentioned the minimum cash position of the
state. He was interested in the recommendation of the
administration on the minimum balance of the CBR.
Senator Bishop added that there were also constitutional
payments to the CBR.
Mr. Barnhill assumed that Senator Bishop was referencing
the repayment obligation. He referenced Co-Chair Stedman's
mention of the minimum balance of the CBR. He thought as
long as the state was using rainy-day funds as current
revenue, it made the question of the size of cushion moot.
9:54:36 AM
Co-Chair von Imhof thought it might be helpful to do an
inflation-adjusted comparison of 2004 to 2019 as mentioned
by Co-Chair Stedman. She pondered the real value of the
dollars over time. She asked how much of the funds were
tied up in designated funds.
Co-Chair Stedman asked for the information to account for
population changes and inflation. He affirmed that no one
was asserting there was not a structural imbalance.
Mr. Barnhill thought the data points were important, and
particularly relevant to the governor's proposed spending
cap.
Co-Chair Stedman asked to move on.
Mr. Barnhill stated that the cap was adjusted by population
and inflation.
Ms. Leary considered slide 16, "General Fund and other non-
segregated investments (GeFONSI I & II) Fiduciary
oversight: Commissioner of Revenue," which showed a data
table that contained two pie charts showing the target
asset allocation of the investments. She informed that the
total of the combined funds was $2.6 billion. She addressed
the general operating account, which the department viewed
as a floor minimum of about $400 million. The one-year
returns from 2019 for the GeFONSI I account was 2.9
percent, and GeFONSI II was 6.38 percent. She reminded that
the additional returns from the fund went to the General
Fund.
Ms. Leary displayed slide 17, "Revenue Volatility
Management."
Mr. Barnhill stated that the point of the next slides would
reintroduce management concepts that the state had not
discussed in 20 years.
Mr. Barnhill highlighted slide 18, "Alaska has the highest
Tax Revenue Volatility," which showed a bar graph. The
graph showed that Alaska had the highest level of revenue
volatility of any state. He thought the point of the report
on rainy-day funds from the Pew Charitable Trusts was that
the cushion correspond to the level of revenue volatility.
He thought facts would suggest the state should have the
largest cushion since it had the greatest amount of revenue
volatility.
9:58:28 AM
Mr. Barnhill looked at slide 19, "Revenue Volatility Now
Comes From":
• Commodity Volatility
o Petroleum revenues are 28% of FY21
projected unrestricted general fund
revenues
o Uncertainty exists "in-year" for FY21
o Will always have in-year uncertainty
because we base budget on in-year oil
collections
• Investment Return Volatility
o Investment earnings are 62% of FY21
projected unrestricted general fund
revenues
o Certainty exists today for FY21 (lagging
POMV formula)
o Uncertainty today for FY22 and beyond
Mr. Barnhill asserted that the state reduced its volatility
in the time since the passage of SB 26 and after bringing
on investment earnings. He expected over time that the
level of the state's rainy-day cushion would come down. He
thought the chart on the previous slide would show that
Alaska's revenue volatility was starting to tighten up. He
pointed out that investment revenue could be volatile as
well. He discussed the concept of standard deviation,
through which one could see volatility for both commodities
and investment return.
Mr. Barnhill relayed that for Alaska North Slope Crude over
the previous ten years, the mean had been $71/bbl and the
standard deviation had been plus or minus $25/bbl. He
reiterated that past returns were not predictive of the
future. He pondered a worst-case scenario in which the
price of oil was $30/bbl and considered the consequence of
$700 million less in revenue for FY 21. He suggested that
$700 million was a reasonable cushion to have in a rainy-
day fund to accommodate the commodity volatility with a
rainy day fund.
Mr. Barnhill discussed investment return volatility due to
fluctuations in the stock market and Permanent Fund
returns. He offered to work with legislative staff on a
variety of models. He thought it was reasonable to say that
expected Permanent Fund earnings for the following ten
years could vary up or down by as much as a few hundred to
several hundred million dollars per year based on changes
to investment revenue. The analysis could be used to
determine the appropriate size of the state's rainy-day
cushion.
10:03:30 AM
Mr. Barnhill continued to address slide 19. He thought the
state should model a range of scenarios and come up with a
50th percentile in a Monte Carlo analysis for commodity and
investment return volatility, which he thought would
produce a reasonable number for a cushion. He reminded that
DOR had advised the committee the previous year that $2
billion was an appropriate number for a rainy-day cushion.
He reiterated that the state was using its rainy-day funds
as recurring revenue, and thought the state needed to deal
with the issue.
Co-Chair Stedman stated that the discussion would be
revisited after having the administration's proposed
operating budget for consideration.
Mr. Barnhill addressed slide 20, "Volatility Management
Techniques":
• Rainy Day and Other Funds (CBR and other fund
balances)
• Oil Price Hedging
• Lagging PF Distribution Formula
• Distribution Formula Alternatives
(Harvard/Yale/Tobin)
Mr. Barnhill qualified that the slide showed various
techniques for addressing structural revenue volatility. He
thought the technique used by the state for the past 20
years was to use the CBR as the rainy-day fund. He
described the "backstop provision" in which the state
utilized monies from the CBR if funds did not come in as
expected. He mentioned oil price hedging, and recalled the
state had last used the tool in 2001. He noted that there
was a section in the Revenue Sources Book that discussed
oil price hedging. Ultimately DOR believed as long as the
state had a cushion, the cheapest way to absorb oil price
volatility was through the CBR.
Mr. Barnhill continued to discuss slide 20. He noted that
Mexico used oil price hedging and bought insurance every
year on a particular price of oil. The practice was called
"buying a put" and was the most expensive method of oil
price hedging.
10:07:21 AM
Co-Chair Stedman asked for Mr. Barnhill to discuss the
lagging formula for distribution from the Permanent Fund.
Mr. Barnhill stated that through the mechanism of SB 26,
the state calculated an average of the earnings coming from
the Permanent Fund that could be accessed by taking five
percent of the lagging five-year market average. Using the
five-year average smoothed out the investment volatility
somewhat. He qualified that even using the lagging five-
year distribution formula, there could still be highs and
lows in the earnings the formula produced.
Senator Wielechowski asked what Mr. Barnhill believed to be
the minimum cushion the state should maintain the CBR.
Mr. Barnhill stated that there was no hard number for a
minimum balance since the state was using the CBR for
recurring revenues.
Co-Chair Stedman stated that the topic would be a major
point of discussion after the budget was on the table and
had heard from OMB and LFD.
Mr. Barnhill reminded that the methodology discussed on the
previous slide would apply to how the state would arrive at
an answer for a minimum cushion.
Co-Chair Stedman thought Senator Wielechowski's question
was on point and thought there needed to be further
refinement. He wanted the administration to have time to
consider the question.
Ms. Leary advanced to slide 21, "Discussion of State Cash
Flows."
Ms. Leary looked at slide 22, "SOA Treasury Cash Flow":
State of Alaska Division of Treasury Cash Management
Cash Inflows
? Tax Revenues
? Oil & Gas, Excise, Other
? Federal Dollars
? Grants, Medicaid, FHWA, Education, Other
? Earnings Reserve Funds
? Agency Receipts
? Fees, Licenses, Permits, Fines, Other
Cash Outflows
?School Education Payments
ayroll & Pension Payments
?Vendor Payments
?Medicaid Payments
?External Program Grant Payments
?Debt Service Payments
10:10:22 AM
Ms. Leary spoke to slide 23, "Cash Management Objectives":
• Maintain adequate liquidity ($400 million)
• Optimize cash resources.
• Safeguard State assets.
• Record financial activity affecting cash.
Co-Chair Stedman asked about the first bullet on slide 23.
Ms. Leary stated that the department wanted to make sure
there was sufficient cash in the treasury to pay whatever
bills came in. The treasury had targeted a balance of $400
million as a base minimum, which would cover about two days
of what she considered "perfect storm" expenses such as
payroll and pension payments that occurred on the same day.
The money would be replenished, and additional slides would
address the mechanics by which cash calls were determined.
Co-Chair Stedman asked if the slide was an answer to
Senator Wielechowski's question.
Mr. Barnhill reiterated that there were two types of
structural volatilities: structural revenue volatility and
in-year cash flow volatility. He noted that the slide
addressed in-year cash flow volatility. The CBR was used to
solve for both issues.
Co-Chair Stedman summarized that the slide addressed the
amount of cash that was needed monthly to make bi-weekly
payroll.
Ms. Leary answered in the affirmative. She qualified that
the funds were different from reserves.
Ms. Leary referenced slide 24, "Cash vs. Accrual balances":
• Cash balance is what you have in the bank at a given
point in time.
• Accrual balance takes into account what you have
earned and when a liability is 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.
• Simple example: Your bank balance shows you have
$1,000 in cash at July 31. However, you know that
you wrote checks for utilities on July 25 for $400
that are for July utilities that have not yet
cleared. You may have also earned a pay check of
$1,200 for work performed in July. Your accrual
balance at July 31 would be $1,800.
10:13:57 AM
Ms. Leary turned to slide 25, "Cash Flow Deficiencies":
• Prior to 1985, most unrestricted revenues flowed
into and stayed in the General Fund for
expenditure.
• Over time, the legislature has established many
subfunds to segregate cash for budgeting
purposes, resulting in less cash available to pay
day-to-day operating costs.
• Expenditures can occur prior to receipt of
revenue, resulting in a cash flow deficit:
square4 Federal programs require expenditures before
reimbursement.
• i.e. Medicaid, Transportation, etc?
square4 Beginning of year appropriation transfers do
not match incoming revenue.
Ms. Leary explained that the treasury looked into the
future to determine a cash flow deficiency.
Ms. Leary considered slide 26, "Cash Flow Deficiencies":
• Borrowing from budget reserve funds has been the
solution of both cash shortages (cash flow
deficits) and revenue shortfalls (budget
deficits).
• During FY93-FY05, the legislature included
language in the appropriation act permitting
borrowings from budget reserve funds.
• The CBRF was fully repaid by FY10.
• Borrowing from the CBRF recommenced in FY14
• Per FY18 CAFR $9.9B is owed to CBR
Senator Bishop asked if the $3 billion transfer to PERS and
the Teacher's Retirement System was included in the total
owed to the CBR as reflected on the slide.
Mr. Barnhill believed the $3 billion was included as it was
from the CBR and subject to payback.
Senator Bishop thought the funds were still invested.
Co-Chair Stedman thought that the amount contributed was
closer to $2 billion. He stated that the committee would
revisit the subject when the committee was discussing the
state retirement system.
10:17:55 AM
Ms. Leary displayed slide 27, "Cash Deficiency Memorandum
of Understanding":
• Original MOU signed 1994 by DOR, DOA, OMB & LAW.
• Updated December 1, 2017.
• Targets $400m dollar minimum threshold.
• Outlines procedures for addressing cash
deficiencies:
o Develop monthly cash projections.
o Monitor daily general fund cash balances.
o Transfer from SBR, CBR & ERA as
appropriated.
o Perform temporary interfund borrowing.
o Borrow from general fund sub funds, if
temporary
o If all appropriations/borrowing are
exhausted:
• Seek legislative action through the
Governor to access additional funds
through appropriation from other Rainy
Day Funds discussed above.
• Prioritize disbursements, restrict
expenditures.
Ms. Leary commented that historically there was a time when
the treasury encountered a cap on the amount that could be
borrowed from the CBR and the treasury had to come to the
legislature for additional funds to pay bills.
Co-Chair Stedman thought that there should be discussion on
the subject. He was concerned about the easy access to the
ERA. He did not recall borrowing from the ERA but was
concerned it was easy to access the account with a simple
majority vote.
Mr. Barnhill clarified that the borrowing discussed in the
MOU was intended to manage the state's in-year cash-flow
and must be paid back. The borrowing did not require an
appropriation, but there was a danger of not being able to
repay the funds because of a structural revenue issue. He
thought Co-Chair Stedman's point was well put.
Co-Chair Stedman saw the phrase "as appropriated" and
wanted to have further discussion at a later time. He was
not personally comfortable with borrowing from the ERA
after seeing what had happened with the CBR.
10:22:08 AM
Senator Olson considered the MOU and asked about the
frequency of borrowing from the funds, specifically in the
previous four years.
Mr. Barnhill stated that there would be a forthcoming slide
that showed the CBR borrowing.
Ms. Leary stated that generally quarterly there was
borrowing, depending upon what was seen in the forecast.
Ms. Leary showed slide 28, "CASH FLOWS IN THE GEFONSI
OPERATING ACCOUNT."
Ms. Leary looked at slide 29, "Historic Actual Cash Inflows
and Outflows FY 2017 2019*," which showed a bar graph
depicting total cash inflows and total cash outflows. She
commented that often there would be money in the treasury
that stopped on its way to where it was going in the GF,
which would be an inflow. The same funds could go to
another fund for program expenditures and would be
considered an outflow; and the graph might make it appear
as if a lot more money was coming in and going out than in
reality. She pointed out that the next cash amount in 2017
and 2018 had more cash outflows than inflows. The CBR
borrowing, shown by the yellow bar, offset the situation
fairly well. She pointed out that in 2019 there was a blue
bar representing the ERA appropriation that was taken for
FY 19 and almost offset the outflow.
Co-Chair Stedman asked if the appropriation was the POMV
draw of 5.25 percent.
Ms. Leary answered in the affirmative.
Co-Chair von Imhof looked at 2019, and asked if the green
bar included federal money, mineral revenue, and all cash
coming in. She pondered if the federal dollars were taken
out, the blue bar became a bigger portion of the General
Fund. She thought the point was that the blue bar was very
small when you considered the total; however the amount was
65 percent of what was available to allocate.
Ms. Leary stated that Co-Chair von Imhof was correct. The
blue line looked too small and was a portion of the cash
supporting operations.
Co-Chair Stedman asked if the department could get back to
the committee with regard to the relationship of the total
less the federal funds.
Ms. Leary addressed slide 30, "Seasonal Cash Flow
Fluctuations":
• June Annual oil & gas property tax revenue.
• July Debt service payments.
• Re-appropriation (July & August):
o Finishing prior FY expenditures + current FY
expenditures.
o Allocating funds in or out of GF per new
legislation.
• Summer Peak season for construction projects and
seasonal workers.
10:26:44 AM
Ms. Leary showed slide 31, "CASH IN THE GENERAL FUND
PROPER."
Ms. Leary advanced to slide 32, "Daily General Fund
Sufficiency Balance Calculation," which showed a graphical
flow chart. She reminded that the treasury looked at the
daily cash balance, subtracted obligations and cash
receipts in suspense, in order to determine the sufficiency
of the cash balance.
Ms. Leary turned to slide 33, "FY2020 GENERAL FUND
FORECAST."
Ms. Leary noted that slides 34 and 35 showed a graph that
could be found on the treasury website that was updated
every day. The "A" chart was for the beginning of any
fiscal year, and the "B" chart was for the end. The graph
was a visualization of what the model was showing for cash
balance needs into the future. She highlighted larger
transactions that impacted cash availability.
Ms. Leary considered slide 34, "General Fund Sufficiency
July 1, 2019 December 31, 2019," which showed a line
graph showing the first six months of the fiscal year. She
pointed out large transfers in the Public Education Fund
and pension contribution transfer for about $650 million at
the start of the year. Just after, there was a
replenishment of $500 from the ERA to the General Fund. She
made note of other smaller transfers, after which
additional funds from the ERA were needed, particularly for
the PFD disbursement. She noted that the items were tracked
closely, and the division relied heavily on the previous
year's net cash flow imprint to base modelling on.
10:30:11 AM
Ms. Leary reviewed slide 35, "General Fund Sufficiency
January 1, 2020 June 30, 2020," which showed a line graph
addressing what was anticipated for the subsequent six
months from the previous slide. She noted one significant
change for the second half of the year was to implement
monthly Public Education Fund transfers rather than
quarterly, which was creating a smoothing effect in dealing
with some of the state's cash flow needs. She addressed
Senator Olson's question and noted that the quarterly
receipt from the earnings was generally timed for the
historical public education transfer and additional funds
were requested if needed. The goal was to maintain above a
$400 million balance threshold.
Senator Olson asked if the intra-fund amounts borrowed had
increased, decreased, or stayed the same.
Mr. Barnhill explained that not all the transfers were
borrowed; the money being transferred from the ERA was an
appropriation. When money coming from the CBR was coming
via the operating language backstop, it was also an
appropriation after having passed the three-quarter vote
threshold. The funds did have to be repaid eventually. He
thought the term "borrowing" could mean multiple things and
was confusing.
Co-Chair Stedman articulated that the technically when
funds were taken from the CBR, the monies had to be paid
back at no interest. Any surplus in a given year
automatically flowed back to the CBR if there was a debt.
There was currently an approximately $10 billion debt to
the CBR. He thought if there was a surplus of recurring
revenue it would automatically go back to the CBR.
Mr. Barnhill stated that the point of the chart was to
illustrate what the overall cash position was on any given
day. In order to meet the policy of maintaining a $400
million daily cash balance, the flows were timed.
Co-Chair Stedman reminded that he would run the meeting.
10:33:25 AM
Co-Chair von Imhof understood that any surplus funds would
get transferred back to the CBR. She asked if there was a
trigger or upper limit.
Ms. Leary stated there was no upper limit, and the treasury
tried to manage the money as closely as possible to what
was needed. The trigger was when it was thought that the
balance would dip below $400 million for five consecutive
days. The treasury set a schedule at the beginning of the
year based on forecasts, which sometimes needed to be
adjusted as quarterly revenues came in higher or lower than
expected. She continued that the treasury tended to ask for
enough funds to use for two or three months and tried to
maintain the smallest balance possible so that funds could
be invested elsewhere at a higher targeted rate.
Co-Chair von Imhof was curious about the trigger for moving
funds back to the CBR. She observed there was three
instances where amounts were transferred from the General
Fund to the CBR.
10:35:39 AM
AT EASE
10:36:03 AM
RECONVENED
Co-Chair Stedman explained that there had been a brief at
ease to discuss the question of the upper range that
triggered funds to flow back to the CBR.
Ms. Leary stated that the transfers back to the CBR were
funds that were supposed to be in the CBR rather than the
GF, such as royalties.
Co-Chair Stedman asked if the chart would look different if
the transactions were not present.
Mr. Barnhill stated that the transfers were relatively
small amounts and would not make the chart look much
different. He was not aware of an upper limit trigger.
Ms. Leary spoke to slide 36, "FY2021 GENERAL FUND FORECAST
(using FY19 actuals)."
Ms. Leary noted that slides 37 and 38 showed the best guess
at the time for FY 21, divided into the first and second
six months of the year.
Ms. Leary discussed slide 37, "General Fund Sufficiency
July 1, 2020 December 31, 2020," which showed what the
treasury anticipated will be happening for the year. She
noted that the division did not normally forecast more than
six months in advance because there were significant
changes. She continued that the slide was up on the
division's website. It was possible to see general patterns
of cash inflows and cash outflows. at the start of FY 21,
she anticipated large needs for public education and
pension contribution transfers. It was possible to see the
schedule for the ERA transfer to the General Fund would
occur as anticipated in July, September, and December.
10:39:00 AM
Ms. Leary addressed slide 38, "General Fund Sufficiency
January 1, 2021 June 30, 2021," which showed the same
line graph from the previous slide updated for the next six
months. She pointed out the remaining request for funds
would come from the CBR, since the currently anticipated
ERA allocation of $1.086 billion in the governor's budget
would be exhausted. There would be a need for $1.4 billion
from the CBR for cash flow purposes.
Co-Chair Stedman asked about the balance of the CBR.
Ms. Leary stated that currently there was $2.1 billion in
the CBR.
Co-Chair Stedman asked if under the scenario there was an
expected CBR balance of $600 million in the next fiscal
year.
Mr. Barnhill stated that the OMB fiscal summary had
projected a $542 billion residual balance in the CBR.
Ms. Leary affirmed that the graph on slide 38 contained an
estimate of where the money was needed.
Co-Chair Stedman thought the committee would take a more
detailed look at the subject as the budget was considered
and would discuss how to fund the deficit. He commented
that choices were limited.
Senator Hoffman looked at slide 38 and asked if it was
accurate to say that on June 30, 2021, the amount available
in the CBR would be $500 million.
Mr. Barnhill answered in the affirmative.
Co-Chair von Imhof asked at what point did end-year
borrowing become deficit borrowing.
Mr. Barnhill stated that the OMB fiscal summary showed the
deficit as $1.5 billion, so there was deficit borrowing. He
reiterated that the state was using its rainy-day fund as
recurring revenue, which was deficit spending and borrowing
from the rainy-day fund.
Ms. Leary went back to slide 37 and noted that the first
time there was borrowing from the CBR was in December 2020.
Co-Chair Stedman thought some people in the building
advocated for structural deficits, which would eventually
make the state go broke.
Mr. Barnhill agreed, and stated that the chart on page 3
functionally served as a countdown clock. He thought the
point of the whole presentation was to show that there was
a structural deficit that needed to be addressed. It
occurred to him that there a chicken-and-egg that had
emerged. He thought everyone would agree there was a
structural deficit and pondered what changes the state
would make to the fiscal structure. He continued that DOR
could tell the legislature what the right cushion would be
based on the changes. He thought that he had heard from the
committee that it wanted to hear what the cushion was and
then decide on structural changes. He thought as long as
there was agreement on the assumption that there was as
structural problem, the issue could be worked through.
10:43:49 AM
Senator Wielechowski requested the chart on slide 38 with a
projection of July 1, 2021 through June 30, 2022.
Ms. Leary stated that the second half of the chart would be
an estimate based on a model, and that cash flows were
extrapolated even further from revenue forecasting. She
stated that the department could do the estimate, but it
might not be as useful as anticipated.
Co-Chair Stedman thought the department would return when
the committee got further into the discussion of the
account balances under different budget scenarios. He
thought Senator Wielechowski had raised a legitimate
question and concern. He thought a projection would be
easier to do an estimate on a quarterly basis. He pondered
how the budget would set up future years.
Ms. Leary reviewed slide 39, "Take Aways":
• Cash flow forecasting is always wrong.
• Even if the State budget is balanced, borrowing
for cash flow deficits will occur.
• Budget deficit borrowing may occur if forecasted
assumptions are wrong.
• How much is borrowed depends on the actual
amounts and timing of revenues and expenses.
• Higher Revenue Volatility requires greater Rainy
Day fund reserves.
• Volatility management techniques are available.
Co-Chair Stedman thought the commissioner would be back in
committee several times, as well as staff as appropriate.
Co-Chair Stedman discussed the agenda the following day.
ADJOURNMENT
10:47:46 AM
The meeting was adjourned at 10:47 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 012720 Savings Accounts and Cash Flow presentation Senate Finance January 27 2020.pdf |
SFIN 1/27/2020 9:00:00 AM |
Savings Accounts and Cash Flow |