Legislature(2021 - 2022)SENATE FINANCE 532
01/25/2022 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Callan Associates - Permanent Fund Performance Measures and Impact of Ad Hoc Draws | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
January 25, 2022
9:02 a.m.
9:02:12 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Senator Click Bishop, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Lyman Hoffman
Senator Donny Olson (via teleconference)
Senator Natasha von Imhof
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Greg Allen, CEO, Callan Associates, Juneau.
SUMMARY
^CALLAN ASSOCIATES - PERMANENT FUND PERFORMANCE MEASURES
and IMPACT OF AD HOC DRAWS
9:04:47 AM
GREG ALLEN, CEO, CALLAN ASSOCIATES, JUNEAU, introduced
himself, and discussed some of the history with the
company. He stated that he had been working with the
Permanent Fund since approximately 1990. He stated that his
expertise, when he joined the company, was financial
modeling. He remarked that he created a model for the
Permanent Fund durability in the late 1990s, and that model
will be used later in the day's presentation.
Senator Wielechowski wondered whether Callan provided
financial advice to the Permanent Fund on investment.
Mr. Allen stated that Callan gave advice related to asset
allocation to the Permanent Fund board. Callan also
assisted in searching for investment managers for the
Permanent Fund Corporation staff.
Senator Wielechowski wondered to whom the advice was given,
and how often there was a rejection of the advice.
Mr. Allen replied that the recommendations were made to the
investment staff, and the information was digested within
the internal investment committee and then the decision was
made.
Mr. Allen presented, "Permanent Fund Performance Review,
and Simulation Model Results" (copy on file). He looked at
slide 3, "Broad Capital Market Performance." He noted that
the returns were for the various asset classes.
9:09:20 AM
Mr. Allen addressed slide 4, "Global Equity Market
Performance." He stressed that the global market was led by
the U.S. markets. He stated that the emerging markets had
lagged over the period. He remarked that the emerging
markets outside of the U.S. markets reduced the returns
over the period.
Mr. Allen pointed to slide 5, "Market Environment":
? One-year returns from September 2020 are still eye
popping:
US Equity: +32 percent
Non US Equity: +27 percent
Private Equity: +56 percent
Real Estate: +12 percent
? Economic data began to show signs of softening;
consumer and business spending hit by the concern over
the 3Q surge in the Delta variant of COVID-19.
? 3Q GDP growth dropped sharply to 2 percent from a
robust 6.7 percent in 2Q, but the economic recovery is
still solid.
Co-Chair Bishop wondered whether this was the first time
there was a listing as gold spot price.
Mr. Allen replied in the affirmative.
Mr. Allen looked at slide 6, "Callan Periodic Table of
Investment Returns." He stated that the slide showed that
diversification was essential, and the chart reflected
that.
Mr. Allen addressed slide 7, "APFC Total Fund Cumulative
Returns." He remarked there was an outperformance of the
benchmark after fees.
Mr. Allen pointed to slide 8, "APFC Total Fund Cumulative
Returns."
Mr. Allen discussed slide 9, "APFC Total Fund versus Callan
Large Public Fund Database."
Mr. Allen pointed to slide 10, "APFC Total Fund versus
Callan Large Public Fund Database."
Senator von Imhof compared slides 9 and 10. She felt that
perhaps the permanent fund fit between the two subjects.
She wondered whether the large endowment was generally
private or public.
Mr. Allen replied that it was private for the most part.
Senator von Imhof felt that the permanent fund did not have
the same full freedoms as a private fund, but had more of a
private feel than a fully public fund.
Mr. Allen agreed.
Senator Wilson asked for more information about the APFC
bonus programs.
Mr. Allen replied that he was not familiar with the details
of the bonus program, but noted that it was typical for the
investment staff to participate in a performance-based
bonus system. He clarified that the public investment side
did not have bonus programs for investment staff.
Senator Wilson asked about expectations of the real estate
investments for the fund.
Mr. Allen replied that real estate was the most
disappointing area of the fund over the last ten years. He
stated that he was comfortable with the staffs efforts. He
stressed that real estate took a long time to adjust in the
market.
Senator Wielechowski wondered whether a difference in
performance of organizations that would give incentives or
performance based bonuses.
Mr. Allen replied that he could not comment on the
difference in performance. He stated that the bonus
programs attracted individuals from the private sector with
larger staff for the private market investments.
9:21:06 AM
Senator von Imhof felt that compensation mattered in
attracting workers in any sector.
Mr. Allen looked at slide 11, "APFC Total Fund versus
Callan Large Public Fund Database."
Senator Wielechowski queried the percentage of the fund
that was invested in private equity, and the recommended
percentage.
Mr. Allen pointed to slide 47, "APFC Total Fund Policy
Target, Projected Return and Standard Deviation":
? Projected median 10-year annualized return of 6.20
percent is a reduction of roughly 55 basis points
relative to last year.
? Inflation expectation reduced from 2.25 percent to
2.00 percent.
? Projected median 10-year annualized real return of
4.20 percent is a reduction of roughly 30 basis points
relative to last year.
? Projected standard deviation of 13.50 percent is
roughly the same as last year.
? Percent probability of exceeding 5 percent
annualized real return over 10-year horizon is
estimated to be 45.6 percent.
Senator von Imhof asked for a specific percentage.
Mr. Allen replied that it would be fifty-fifty or above.
9:24:53 AM
Co-Chair Stedman remarked that values replied on
appraisals, and the volatilities were not as efficient as a
traded asset.
Mr. Allen agreed. He addressed slide 12, "APFC Total Fund
versus Callan Large Public Fund Database."
9:28:29 AM
Mr. Allen displayed slide 14, "Simulation Model Results":
? Review Accounting Concepts and History
Statutory Net Income
Earnings Reserve Account and Principal
? Review Spending Rule and Appropriation History
? Projected Key Financial Variables under Different
Appropriation Scenarios
Status Quo No additional draws
One-time ad hoc draw of $5 billion in FY 2022
One-time ad hoc draw of $1 billion in FY 2022
Ad hoc draws of $1 billion in FY 2022 and 2023
Ad hoc draws of $1 billion in FY 2022, 2023,
and 2024
? Introduce Volatility into Projections using Monte
Carlo Simulation
Range of outcomes for key financial variables
Market Value
Earnings Reserve Balance
Statutory Net Income
Probability of an impaired POMV draw
Principal Balance
Co-Chair Bishop wondered when Mr. Allen was asked to run
the models.
Mr. Allen replied that he was first asked to run a model
was in 1991.
9:31:45 AM
Co-Chair Stedman asked about the analysis of the percent of
market value (POMV).
Mr. Allen stated that he was first asked to run this
analysis at the recent December 13 board meeting.
Co-Chair Stedman wondered who had asked him to present.
Mr. Allen replied that he had been asked by Angela Rodell
to run the specific scenarios.
Senator von Imhof pointed out that the POMV implantation in
2015 caused a significant shift in the interplay of the
fund with state government.
9:34:48 AM
Mr. Allen highlighted slide 15, "Statutory Net Income
(Realized Return), Fiscal Year 2021":
? Statutory Net Income (SNI) in each year is the sum
of total income (dividends, coupon payments, real
estate income, etc.), plus realized capital gains
minus realized capital losses.
? Gains are realized when assets are sold for an
amount above their purchase price (cost basis).
? Gains realization events include annual turnover in
equity and bond accounts, rebalancing related
turnover, sales to fund distributions, distributions
from private market investments, etc.
Co-Chair Stedman remarked that there had been discussion in
recent years about the impact of selling real estate.
Senator Wielechowski felt that the there was a high
likelihood of unrealized gains from the increased
investment in private equity.
Mr. Allen replied that investing more in private equity
would reduce the liquidity of the fund. He stated that the
impact on statutory net income was positive.
Senator von Imhof remarked that there were many funds that
constructed a latter with either private equity or bonds
and noted that, over time the bonds and equity were
purchased with different maturity dates. She noted that the
ERA was a unique feature for the Permanent Fund, and had
injected some complexity in the management of the entire
fund. She queried the recommendations about having a
separate ERA.
9:40:27 AM
Mr. Allen replied that he had been asked about creating a
separate asset allocation for the ERA. He stressed that
there could not be a separation of the performance of the
fund and the ERA.
Senator von Imhof suggested that there could be a creation
of a full endowment by folding the ERA back into the fund.
She felt that because the percent of market value (POMV)
had been passed, the fund could be managed as a whole. She
wondered whether that recommendation had been given to the
Board of Trustees.
Mr. Allen replied that there should be a
constitutionalizing of the POMV. He spoke of
predictability.
9:44:46 AM
Senator Wielechowski asked whether an increase in returns
to the funds if there was a shift to POMV.
Mr. Allen replied no.
Mr. Allen looked at slide 16, "Earnings Reserve Account,
Fiscal Year 2019":
? Earnings Reserve Account is equal to total
cumulative Statutory Net Income minus total cumulative
spending minus total cumulative appropriations to
Principal plus a pro-rata share of unrealized gains or
losses.
? ERA receives a pro-rata share of unrealized gains or
losses based on the size of the ERA relative to the
size of Principal.
? ERA receives 100 percent of SNI if SNI is positive.
? ERA receives pro-rata share of SNI if SNI is
negative.
Mr. Allen discussed slide 17, "Historical Statutory Net
Income, Last Ten Years":
? Statutory Net Income has been positive in all of the
last ten years.
? "Normal" years have been in the $3 - $4 billion
range.
? 2018 and 2021 experienced outsized Statutory Net
Income due to:
Strong equity markets;
High unrealized gains balances;
Increased rebalancing activity resulting in
equity sales;
Private markets transactions.
Co-Chair Stedman asked for the component parts of the chart
for clarity.
Mr. Allen said he could generate a chart, and agreed to
provide that information.
Mr. Allen highlighted slide 18, "Historical Earnings
Reserve Account Balance; Last Ten Years":
? With healthy Statutory Net income levels Earnings
Reserve balance has grown consistently since 2012.
? As ERA balance grows proportion of unrealized gains
allocated to ERA increases.
? In 2020 $4 billion of ERA was appropriated to
Principal. This had the knock-on effect of reducing
the percent of unrealized gains allocated to ERA.
? Unrealized ERA as percent of total at an historic
high at the end of 2021.
Co-Chair Stedman asked about the $4 billion.
Mr. Allen said that the slide reflected before the $4
billion appropriation.
Co-Chair Stedman asked that the bar be restated for July 1.
Mr. Allen looked at slide 19, "Historical Principal Account
Balance, Last Ten Years":
? The Principal Account balance has grown steadily
over time as a result of oil revenue and inflation
proofing appropriations.
? $4 billion appropriation to Principal in 2020.
Another one scheduled in 2022.
? The unrealized portion as a percentage of total is
at its highest point in the last ten years.
? The unrealized portion of Principal causes some
asymmetrical volatility in the Principal balance over
time, as Principal absorbs entire unrealized loss
balance.
Mr. Allen highlighted slide 20, "Historical Ending Market
Value; Last Ten Years":
? Market value has grown steadily over last ten years.
? Slight drop in FY 2020 as markets hadn't fully
recovered in June.
? Extraordinary increase in FY 2021 with market
recovery.
? APFC Public and Private Equity portfolios
contributed significantly to this growth in 2021.
9:49:15 AM
Mr. Allen addressed slide 21, "Stochastic versus Simulation
Modelling, Monte Carlo Simulation":
? Stochastic modelling assumes median market outcomes
in each year.
? Results are generally intuitive and the models are
easier to build.
? No need to consider "corner cases" or things that
happen at the limits.
? Lend themselves to graphical representations of
variables over time.
? Simulation modelling assumes a range of potential
market outcomes in each year.
? Captures the impact of volatility.
? Requires you to consider things that happen at the
limits (negative SNI, zero ERA, net unrealized losses
(cost basis below market value), etc.).
? Results are less intuitive and more difficult to
represent graphically over time.
? Assigns probabilities to various ranges of outcomes
for variables of interest (versus point estimates).
? Requires multi-dimensional assumptions for market
variables (return, standard deviation, correlation,
auto-correlation, etc.).
Mr. Allen discussed the process of simulation and
stochastic modeling.
Co-Chair Stedman shared that the committee understood Monte
Carlo scenarios and frequently had them run for
projections.
Mr. Allen pointed to slide 22, "Projected Returns (No
Volatility), Annual Returns Stochastic Projection":
? Stochastic projections assume median outcome in each
year for market variables (returns, inflation, rates,
etc.).
? This results in unrealistically smooth paths for
financial variables (EMV, ERA, Principal, etc.).
? Does not reflect the impact of year-to-year market
volatility on financial variables of interest.
? Monte Carlo simulation introduces volatility.
Mr. Allen looked at slide 23, "Projected ERA Balance (No
Volatility), Earnings Reserve Balance Stochastic
Projection":
? ERA Balance expected to grow in early years due to
Statutory Net Income being amplified by current high
unrealized gains balances.
? ERA balance stabilizes in 2024 once unrealized gains
normalize.
? After 2024 median projected draw and Statutory Net
Income are similar in size resulting in relatively
flat ERA.
Mr. Allen highlighted slide 24, " Simulated Returns with
Volatility, 95th Percentile Tail Risk Scenario';
? Bad outcomes for the ERA balance generally have
multiple low or negative return years in a row and do
not necessarily contain a "really bad" year.
? Large negative single years (like 2008) feel
terrible, but the ERA is generally robust to those
events as long as there is a recovery soon after.
? In this hypothetical scenario ("Trial 178") the
current ERA holds up pretty well until 2027 in spite
of persistent negative returns in 23-26.
Co-Chair Stedman understood the asset allocation measure
but wondered about the broader market.
Mr. Allen spoke of private equity and real estate prices.
He could not comment on inflation but going into the
simulation interest rates had been low. Bonds could have
negative returns and interest rates rose.
Co-Chair Stedman recalled down rest in financial markets.
Mr. Allen said that the model did not use a concept called
regime switches - he explained the correlation between real
estate and equities.
Mr. Allen explained correlation one and minus one for the
listening public.
Senator von Imhof wondered whether the slide reflected a
worse-case scenario.
Mr. Allen replied in the affirmative.
Mr. Allen pointed to slide 25, "Simulated Statutory Net
Income with Volatility, 95th Percentile Tail Risk
Scenario":
? High SNI in 2022 due to positive total return and
current high unrealized gains.
? Negative returns in 2023-2025 (combined with gains
realization from rebalancing and draws) wipes out
current unrealized gains resulting in unrealized
losses at total portfolio level.
? Turnover then results in net realized losses in 26,
27, 28 and 29.
? ERA balance is small relative to principal so ERA
gets a small proportion of net realized losses
(negative SNI) in 26, 27, and 28.
Mr. Allen looked at slide 26, "Simulated Earnings Reserve
Balance with Volatility, 95th Percentile Tail Risk
Scenario":
? 2022 return slightly above median resulting in 2022
ERA being slightly above result on previous slide (so
far so good).
? Declining SNI (due to gains realization and negative
returns) combined with cumulative effect of POMV draw
erodes ERA balance until it is exhausted in 2028.
? ERA balance remains at zero in 2029 due to zero SNI
in that year.
? Slight positive SNI in 2030 bumps ERA up to about
$700 million in 2030.
Mr. Allen said that there had been no inflation proofing in
2022.
Mr. Allen discussed slide 27, "Simulated POMV Distribution
with Volatility, 95th Percentile Tail Risk Scenario."
? Current high ERA balance supports full POMV draw
through 2027 in spite of declining SNI.
? Combination of zero SNI and zero starting ERA
balances in 2028 and 2029 results in zero draws in
2029 and 2030.
? The positive draw in 2031 is equal to the total SNI
generated in 2030 (ending ERA in 2030).
? Draw will continue to be equal to SNI in previous
year until SNI exceeds POMV formula.
10:00:54 AM
Mr. Allen pointed to slide 28, " Stress Testing the ERA and
the POMV Spending Rule, Monte Carlo Simulation":
? Examine how resilient the Fund and the particularly
the ERA are to varying levels of ad hoc draws.
? Tested four different ad hoc draw scenarios and
compared them to the base case.
One-time ad hoc draw of $1 billion in FY 2022
Ad hoc draws of $1 billion in FY 2022 and 2023
Ad hoc draws of $1 billion in FY 2022, 2023,
and 2024
One-time ad hoc draw of $5 billion in FY 2022
? 2000 simulations were run representing a full range
of potential capital market outcomes.
? Asset allocation for the Fund was assumed to remain
constant at the FY 2022 target.
6.2 percent expected ten-year return;
13.2 percent expected annualized standard
deviation;
Gradually rising interest rates resulting in
slightly lower distributions of returns in
earlier years and higher distributions of returns
in later years.
? Model tracked range of outcomes for variables
including:
Market Value, Earnings Reserve Balance,
Statutory Net Income, Distributions
? Output focuses on median and 95th percentile (1 in
20) worst case outcomes for each variable.
Senator Wilson wondered whether the model was run for each
500 or whether the scenario was run 500 times.
Mr. Allen replied that each run of the model had 2000
scenarios, and then were layered on top of the scenarios.
Mr. Allen discussed slide 29, "Monte Carlo Simulation;
Range of Outcomes":
? Simulation output describes range of possible
outcomes for each variable with associated
probabilities.
? 50 percent of outcomes are above median and 50
percent below.
? Probability of a $24 billion balance is roughly 50
percent assuming POMV draw and no additional
appropriations to principal.
? Probability of a zero ERA balance in 2028 is roughly
1.5 percent.
Co-Chair Stedman remarked that there were some anomalies in
the last few decades including COVID-19 shutting down the
world economy as well as other recessions. He noted that
the rare occurrences did not seem to be so rare. He
queried the management and response to various anomalies.
Mr. Allen replied that there was a trade-off between making
complex models, and also manageable and easy to understand.
10:07:46 AM
Co-Chair Stedman remarked that returns regressed to the
mean, and to reach that mean there must be years below the
mean. He queried the occurrences after good years.
Mr. Allen replied that models were models without trending
behaviors built in, therefore using a random lock. He
stated that valuations were taken into account for the
overall capital projections.
Co-Chair Stedman surmised that it was one-half percent
outside the financial markets.
Mr. Allen agreed.
10:11:40 AM
Senator von Imhof noted that the slide had $21 billion as
the median range for the ERA, and was the highest point
ever. She queried that rational.
Mr. Allen replied that it was the median, because of the
outcome, due to a huge pile of potential energy from
unrealized gains.
Co-Chair Bishop wondered whether the model included the
federal reserves proposed actions moving forward.
Mr. Allen replied that it was not specifically included,
but was a part of the conversation in the collective.
10:14:34 AM
Mr. Allen pointed to slide 30, " Median Case Draws; Stress
Test Results:"
? Base Case is standard POMV formula.
? Draw gradually increases at a declining rate as
recent outsized return years move out of rolling
average.
? Alternative cases increase draw in early years, but
modestly decrease draw in later years.
? This is due to the associated reduction in market
value from the additional draw in early years.
Mr. Allen addressed slide 31, "95th Percentile Worse Case
Draws; Stress Test Results":
? 95th percentile worst case results are driven by low
or negative returns.
? 2022 and 2023 draw is already determined based on
POMV formula.
? All cases have a better than 95 percent chance of
supporting the POMV draw in first two years.
? Base case holds up well in worst case through 2026.
? All cases have at least 5 percent chance of impaired
draw beginning in 2027.
? Draw for $5 billion case is roughly half of draw for
base case beginning in 2027.
Mr. Allen pointed to slide 32, "Median Case Statutory Net
Income, Stress Test Results":
? ad hoc draws actually increase SNI relative to base
case in the year that they happen.
? This is due to the fact that a larger draw requires
a larger asset sale resulting in higher realized
gains.
? In later years the SNI is lower for the ad hoc draw
cases due to lower market values and the early gains
realization.
? SNI in median case is relatively similar across all
cases.
Co-Chair Stedman queried the impact on the fund from the ad
hoc draw.
Mr. Allen replied that there would be a determination of
where the draw could be taken in order to maintain net
income, but were unconcerned with whether there was
statutory net income.
10:20:24 AM
Mr. Allen addressed slide 33, "95th Percentile Worse Case
Statutory Net Income, Stress Test Results":
? As with the median outcome ad hoc draws increase SNI
in the 95th percentile case in the year that they
happen due to increased gains realization to fund the
bigger draws.
? 95th percentile SNI outcomes are relatively similar
across all cases in all years of the projection.
Mr. Allen pointed to slide 34, "Median Earnings Reserve
Account Balances, Stress Test Results":
? Ad hoc draws result in immediate reductions in ERA
balance in the year that they happen.
? Median ERA balances for all ad hoc draw cases are
lower than the base case in all years of the
projection.
? ERA balances relatively stable after 2026 for all
cases reflecting sustainability of POMV spending rule.
Mr. Allen addressed slide 35, "95th Percentile Earnings
Reserve Account Balances, Stress Test Results":
? 95th Percentile ERA balances are generally lower for
ad hoc draw cases than base cases.
? 95th percentile ERA balances are significantly below
median balances for all cases.
? Differences between cases get smaller in out years
as negative returns impact all cases.
? Ad hoc draw cases hit ERA spending limits in earlier
years which ultimately equalizes ERA balances in later
years in worse case outcomes.
Mr. Allen pointed to slide 36, "Median Ending Market Value,
Stress Test Results":
? Impact of ad hoc draws on median market value is
relatively straightforward.
? In the median case the returns are generally
positive which means that the differences in market
value compound over time.
? This results in a larger difference in market value
in year 10 than the size of the original draw.
Mr. Allen looked at slide 37, "95th Percentile Ending
Market Value, Stress Test Results":
? In worse case (negative return) outcomes the smaller
market value created by the ad hoc draws actually
results in slightly smaller dollar losses (same
percentage).
? This means that the differences in the first year
ending market values is actually modestly smaller than
the size of the ad hoc draws.
? Adding inflation proofing in 2023 and 2024 modestly
improves worst-case EMV outcomes (relative to December
BOT analysis) due to spending limits kicking in
earlier.
Mr. Allen addressed slide 38, "Range of Outcomes
Probability of Shortfall by Year, Stress Test Results":
? Another perspective is the probability of a
shortfall in each year.
? A shortfall is defined as the difference between the
allowable draw and the prescribed POMV draw.
? In the base case it isn't until year 2026 that we
observe any probability of a shortfall.
? As the size of the ad hoc draw increases the
probability of a shortfall in each year goes up (in
spite of the POMV draws being modestly lower due to
lower EMV).
? The $5 billion case has an 11 percent probability of
a shortfall in 2026.
Mr. Allen highlighted slide 39, "Range of Outcomes
Cumulative Shortfall over Ten Years, Stress Test Results":
? Cumulative shortfall is a measure of the sum of the
differences between the POMV prescribed draw and the
actual draw.
? In years when the ERA balance is insufficient to
support the POMV draw there is a shortfall.
? The base case has at least a 20 percent probability
of generating a shortfall during the ten-year
projection period
? The $5 billion case has at least a 30 percent chance
of generating a shortfall.
? The size and probability of the cumulative shortfall
increases with the size of the ad hoc draw
Mr. Allen pointed to slide 40, "Range of Outcomes Year 10
Distribution":
? This variable is the nominal value of the
distribution in year 10 of the projection.
? The higher the ad hoc draw the lower the
distribution in year 10.
? This is true across all cases from 5th through 95th
percentile.
? The better the capital market outcome the larger the
dollar difference in the year 10 distribution.
? The $5 billion ad hoc draw case reduces the median
year-10 distribution by roughly $330 million relative
to the base case.
10:26:06 AM
Co-Chair Stedman asked for a detail in dollars.
Mr. Allen stated that the fifth percentile worst case would
be a draw of $500 billion.
Senator von Imhof stressed the importance of examining
decades versus generations. The actions had the potential
to impact future generations.
Co-Chair Bishop asked for a display of the distribution
over 40 years.
Mr. Allen agreed to provide that information.
10:30:20 AM
Mr. Allen addressed slide 41, "Range of Outcomes
Cumulative Distributions over 10 Years":
? This variable sums all of the distributions, both ad
hoc and POMV, over the first ten years of the
projection period.
? Total cumulative distributions are higher across the
full range of outcomes for the ad hoc draw cases
relative to the base case.
? Total cumulative distributions increase with the
size of the ad hoc draw.
? The increase in total cumulative distributions is
smaller than the size of the ad hoc draw in all cases.
? A higher draw in early years results in lower draws
in later years due to lower EMV.
Senator von Imhof looked at slides 31, 33, and 35. She
asked that there be additional scenarios that might show
the different ten-year periods.
Mr. Allen agreed to provide that information. He asked that
the requests come through the APFC staff.
Co-Chair Stedman agreed to connect with APFC for the
requests.
Senator Wielechowski remarked that the charts would look
different when run with the $1.3 billion in oil tax credits
and the impact.
Mr. Allen pointed to slide 42, "Range of Outcomes Year 10
Market Value":
? This variable is the market value of the fund at the
end of the 10th year of the projection.
? The larger the ad hoc draw the lower the ending
market value in year 10.
? This is true across all outcomes from 5th through
95th percentile.
? The dollar difference in year 10 market value
between the base case and ad hoc cases is larger than
the size of the ad hoc draw for all outcomes better
than the 60th percentile (i.e. over 60 percent of
outcomes).
10:36:07 AM
Co-Chair Stedman wondered whether the $4 billion could be
modeled, even though it would not go into effect until July
1.
Mr. Allen replied that each scenario had $4 billion coming
out on July 1.
Mr. Allen addressed slide 43, "Range of Outcomes Year 10
Statutory Net Income, Stress Test Results":
? This variable is the Statutory Net Income generated
in the 10th year of the projection.
? In all outcomes above the 95th percentile the ad hoc
draws result in lower statutory net income than the
base case.
? The reduction in SNI increases with the size of the
ad hoc draw.
? The reduction in SNI is greater in the better
capital market outcomes due to the impact of
compounding.
Mr. Allen discussed slide 44, "Conclusions from Stress
Test, Summary Observations":
? Generally speaking, relative to the base case ad hoc
draws are expected to:
Reduce future Market Values;
Reduce future Statutory Net Income;
Reduce future POMV Distributions;
Reduce the future Earnings Reserve Balance;
Increase the probability of shortfalls relative
to the POMV formula.
? The current size of the ERA balance combined with
the high levels of unrealized gains makes the ERA
relatively robust to ad hoc draws over the next three
to five years.
? Over longer periods larger ad hoc draws result in
smaller ERA balances which means greater probability
of impaired distributions in future years.
? Under the $5 billion ad hoc draw case the ERA is
expected to be able to support the POMV formula
through 2025 (albeit with lower POMV amounts due to
the lower market value).
? After 2026, the $5 billion ad hoc draw increases the
probability of impaired distributions to 10 percent in
2027, and to 19 percent by 2031.
? Total cumulative distributions over the ten year
projection period are generally higher for the ad hoc
draw cases, but by less than the amount of the ad hoc
draws.
10:41:16 AM
Senator Wilson queried whether there was a consideration
about North Dakotas ad hoc draw of their Legacy Fund.
Mr. Allen replied that Callan had worked with North Dakota
on that fund, and was approximately $8 billion. He stated
that it was embroiled in political theatre. Their
legislature had required that 20 percent of the fund be
invested in instate investments, and had relaxed the
fiduciary standard for judging the performance of those
investments to give cover to those who were investing in
it. He stated that he had enjoyed working with APFC,
because it was an apolitical board, but might be different
because of the POMV. He shared that there was a desire to
invest in Bison World in North Dakota.
Co-Chair Stedman remarked that there was interest on
tightening up the fiduciary restraints, and felt that they
would go the opposite direction of North Dakota.
10:45:14 AM
Senator Wilson asked about the APFC conversations about
instate investing, and the disclosure of public money and
protecting the investors.
Mr. Allen replied that remarked that public finance
transparency was very important, he also stated that
protecting information in private markets was important in
protecting their returns.
Co-Chair Stedman stressed that APFC was working on a
presentation related to that issue.
Senator Wielechowski queried which other sovereign wealth
funds efforts to insulate their staff from politics that
might be possible in Alaska.
Mr. Allen replied that Alaska had done the right work to
ensure fiduciary standards for investment. He felt that
there could be a predictable spending rule, and take ad hoc
spending off the table and potential ERA limit to further
insulate the investment staff.
10:51:32 AM
Co-Chair Stedman surmised that there should be a rule-based
system.
Mr. Allen agreed. He furthered that predictability of
withdrawals was essential for stability.
ADJOURNMENT
10:53:13 AM
The meeting was adjourned at 10:53 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 012522 Callan.APFC.House.Senate.Fin.Com.Discussion.pdf |
SFIN 1/25/2022 9:00:00 AM |
APFC |