Legislature(2021 - 2022)SENATE FINANCE 532
02/22/2022 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Sovereign Wealth Funds - Global Trends and Practices | |
| 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
February 22, 2022
9:01 a.m.
9:01:37 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:01 a.m.
MEMBERS PRESENT
Senator Click Bishop, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Lyman Hoffman
Senator Donny Olson
Senator Natasha von Imhof
Senator Bill Wielechowski
MEMBERS ABSENT
Senator David Wilson
PRESENT VIA TELECONFERENCE
Dr. Malan Rietveld, Advisor, International Sovereign Wealth
Fund, South Africa.
SUMMARY
^SOVEREIGN WEALTH FUNDS - GLOBAL TRENDS and PRACTICES
9:04:08 AM
DR. MALAN RIETVELD, ADVISOR, INTERNATIONAL SOVEREIGN WEALTH
FUND, SOUTH AFRICA (via teleconference), discussed the
presentation, "The Fiscal Rules of Sovereign Wealth Funds;
Global Trends and Practices" (copy on file).
Co-Chair Stedman stated that Dr. Rietveld was calling from
South Africa.
Dr. Rietveld provided his professional history, and looked
at slide 1, "Background":
Public sector, fiscal reform & sovereign wealth funds
? Senior Expert Consultant to Asian Development
Bank
? Advisor and testimony on fiscal reforms in
Alaska (2016-17)
? Researcher for Board of Trustees of The Alaska
Permanent Fund Corporation (2019)
? Mongolian Ministry of Finance on the
establishment of a SWF
? Pula Fund fiscal reforms in Botswana
? The establishment of a new SWF framework in
Namibia (fiscal and operational)
? Mongolian Ministry of Mining on establishment
of a Sovereign Development Fund
Pension funds
? Australian Superannuation (US$100bn AUM)
? FirstState Super (US$70bn AUM)
? Construction and Building Unions Superannuation
(US$25bn AUM)
? OPSEU Pension Trust (US15bn)
9:06:34 AM
Dr. Rietveld addressed slide 2. He stated that his work was
supported by academic research. He listed the various
schools he had worked with.
9:07:27 AM
Dr. Rietveld addressed slide 4, "The Growth of SWFS":
? A number of established, large funds
? Proliferation of new funds since 2000, with new
funds in the works in at least 15 countries
? Non-commodity funds growing; as are "sovereign
development funds"
Assets-under-Management of c.$10 trillion
? Alaska Permanent Fund is a major player and a highly
regarded capital allocator
Dr. Rietveld relayed that that the Alaska Permanent Fund
Corporation (APFC) was part of a larger international
community of sovereign wealth funds. The slide showed a map
of sovereign wealth funds that were funded by revenues from
natural resources. He noted that the APFC was regarded as a
major sovereign wealth fund with an exemplary record of
operation independence from political influence when making
investment decisions. He added that the corporation had a
good track record for making good investments and being a
good steward of public capital.
9:10:13 AM
Dr. Rietveld pointed to slide 5, "Policy Levers in Rule-
Based SWF Framework":
Transfer (saving) rule: how much to transfer to SWF,
and when?
? Transfer to SWF; and between stabilization fund
(liquid assets) and savings/investment fund (risk
assets)
Spending rule: how much to transfer from SWF, and
when?
? Depends on fund's purpose:
1. Short-term stabilization ("stabilization-
" or "buffer funds")
2. Long-term/permanent endowment
("investment-income fund")
3. Locked-up savings for the future
("savings fund")
? Move towards POMV rules (total portfolio value)
vs realized income for investment-income funds
Investment policy: policy and execution choices
? Active vs passive
? In-house vs outsourced
? Public vs private markets
? Asset allocation: risk-bearing capacity,
investment beliefs, cost-aware implementation
strategy
? Developmental or purely financial investment
objectives
9:14:45 AM
Dr. Rietveld looked at slide 6, "Adjusting to New Fiscal
Realities":
"Cyclically robust" savings and spending rules
? The post-2014 commodities slump and staggered
recovery has underlined the need for
? "Rules of thumb" work okay when running
surpluses (accumulating assets)
? But how can SWF help management volatility in
up and down cycles?
Focus for resource-based SWFs
? After 2014: avoiding the depletion of assets
? Managing (or limiting) domestic-investment
mandates
? Now: decoupling saving/spending from commodity
cycle (maintaining reform momentum)
Ebbing tide after 2014 revealed who had been swimming
naked
? Group A: never saved enough (Venezuela,
Nigeria)
? Group B: depleted savings (Russia, Saudi
Arabia, Kuwait)
? Group C: reforming saving and spending rules
(Abu Dhabi, Norway => Alaska)
9:19:13 AM
Dr. Rietveld pointed to slide 7, "Spending Policy and
Stabilizing Income: Illustrative Examples":
Abu Dhabi Investment Authority
? Multi-year effort to establish a comprehensive,
integrated fiscal framework
? Preparing for unexpected disruptions along an
anticipated post-oil future
? ADIA is (a dominant) part of large "sovereign
balance sheet" of assets and liabilities
Kuwait Investment Authority
? Very large drawdowns on Kuwait Investment
Authority assets unscheduled
? Breakdown of governance arrangement
? Standoffs between Board, Minister and
Legislature
Botswana
? Rules are too informal
? Insufficient distinction between foreign
exchange reserves and fiscal surplus funds
? Buffer has been dramatically reduced work
under way to formalize spending policy
Norway
? Not highly dependent on oil revenue or
investment income
? However, draws on fund have been increasing
(2009; 2016; and 2020-21)
? Rules are still too informal something is
going to give (see below)
9:23:06 AM
Co-Chair Stedman wondered whether there was a large
majority of large drawdowns or informal rule-based systems
within other funds, and where Alaska fit into the
structure.
9:23:35 AM
Dr. Rietveld replied that, broadly, many Middle Eastern
funds did not have rule-based systems, with the exception
being Abu Dhabi. He stated that Saudi Arabia, Kuwait,
Bahrain, Qatar all had significant drawdowns due to the
drop in oil price in 2014, and during the first few months
of Covid-19. He said that some of that was being offset now
that oil prices were on the upswing. He relayed those
permanent funds in New Mexico and Wyoming had some unhappy
history surrounding spending out of permanent funds, which
had led to improvement in the rules and the avoidance of
unscheduled withdrawals. He related that some of the Middle
Eastern funds were intended, however informally, to be
available for drawdowns and understood that pert of those
portfolios would be available as a stabilization mechanism.
9:26:10 AM
Senator Olson requested examples of rules that were too
"informal."
9:26:32 AM
Dr. Rietveld looked at Botswana, which showed that the
amount of savings was linked to multi-year public
investment plans approved by the legislature and if there
was a surplus it would be deposited into the SWF. He said
that the process was open to manipulation by changing the
5-year spending profile, which would make saving a last
priority. He said that the typical permanent fund in the
United States had the opposite of informal rules where the
minimum amount of savings was typically constitutionally
mandated. He thought that spending policies were typically
based on statutory language, not constitutional language,
or on custom and tradition and agreement between the
legislative branch, executive branch, and voters.
9:28:35 AM
Dr. Rietveld discussed slide 9, "U.S. Permanent Funds":
? American permanent funds are the oldest existing
SWFs (Texas and New Mexico)
? Most US permanent funds collect Constitutionally-
mandated fixed percent shares of resource revenues
from public lands
? And then provide a fixed (or range-bound) POMV
source of income
? To General Fund or specific owners/earmarked
purposes
? Most US permanent funds operate in a sub-optimal
framework
? The model, particularly at the bigger funds, gets
the basics right (no small thing)
? But there are weaknesses and shortcomings
? Prime example: the Wyoming permanent funds
Dr. Rietveld said that SWF in the United States predated
those in the Middle East. He noted that some permanent fund
monies in Wyoming had earmarked purposes.
9:31:51 AM
Dr. Rietveld pointed to slide 10, "Wyoming's Multiple
Funds." The largest fund in Wyoming was the Wyoming Mineral
Trust Fund. He said that the fund got severance tax
revenues on coal and gas production in the state and was
the largest of several state funds.
9:32:38 AM
Dr. Rietveld looked at slide 11, "Wyoming Spending Policy."
He noted that the picture was the result of what it would
look like to start off the wrong way an retrofit the system
overtime. He shared that half of the POMV went to the
general fund and the other half was split between several
other accounts. He relayed that the main problem with the
Wyoming system was that the investment policy and profile
of the permanent fund did not fit the expectation of how
much could be spent out of the fund on a POMV basis. He
thought that the asset allocation and risk bearing capacity
tolerance was smaller than for the Alaska permanent fund,
but the spending policy amount was similar. He said that it
was difficult the guarantee that the fund could generate
the amount of average return to be commensurate with the
spending amount, which meant that money had to be kept in a
reserve account and a mechanism to replenish that account
had to be established. He asserted that the Wyoming system
was not terrible but did have weaknesses. He predicted
problems for the fund in the future and discussed options
related to avoiding possible problems. He concluded that
the final problem with the fund was that it had no official
mechanism for inflation proofing. He said that Alaska had a
good history of inflation proofing but needed to do it with
greater consistency.
9:37:12 AM
Co-Chair Stedman assumed an annual inflation proofing
structure was most desirable.
Dr. Rietveld thought at least inflation proofing should be
done regularly. An annual inflation proofing mechanism was
the most simplistic way to ensure the health of the fund.
He thought that accounting for the impact of inflation,
particularly as we enter a high inflation period, a rule
based and formulaic inflation proofing mechanism would be
beneficial.
9:38:49 AM
Dr. Rietveld discussed slide 12, "New Mexico":
Land Grant Permanent Fund
POMV spending rate of 5 percent of 5-year
market value
? Majority of beneficiaries are educational
institutions
? Following the adoption of a POMV rule in the
late-1990s, the spending rate changed many times.
? Following a narrow public vote in 2003 to amend
the Constitution, the established 4.7 percent
POMV draw was amended to 5.8 percent (2005-12),
then to 5.5 percent (2013-16), and 5 percent
thereafter
Severance Tax Permanent Fund
? POMV spending rate of 4.7 percent of its 5-year
market value
? The fund has a slightly lower return
expectation/POMV than the Land Grant Permanent
Fund
? This is due to the inclusion of in-state
investments (to a maximum of 8 percent of the
portfolio), which lowers the overall expected
return performance
Dr. Rietveld discussed the bullet pointes pertaining to the
funds in New Mexico.
9:41:06 AM
Dr. Rietveld looked at slide 13, "New Mexico." The slide
showed the election results for the constitutional
amendment in 2003. He returned to slide 12 pointing out
that the POMV rate had increased and decreased over the
years since that vote.
9:41:47 AM
Dr. Rietveld pointed to slide 14, "Alaska in Context":
SWF functions: savings, income and stabilization
? The savings function is firmly established
(constitutional certainty); although large share in
ERA is a risk
? The income-producing function of the SWF has
come into sharper focus with the POMV
? However, it currently rests on less solid
institutional foundations than savings
? Can be undermined fairly easily
? The POMV rule also promotes the stabilization
function
? Could be enhanced through a rule to transfer
surplus revenues to APF (spending cap; oil price
ceiling, etc.).
? Increases the size of the APF and revenue it
generates, over the long run
Dr. Rietveld wanted to provide context for Alaska. He
indicated that SWFs had three functions in commodity
producing economies: savings, income, and stabilization. He
highlighted that the earning reserve account (ERA) savings
for Alaska, because it was not in the constitution, was
vulnerable. He thought that in 2016 the income producing
function of the fund had come into sharper focus with the
adoption of the POMV rule. He suggested that the function
rested on less solid institutional and legislative
foundations than the savings function because that function
was enshrined in the constitution. He thought it was
possible to undo the good work of creating a predictable
and well understood POMV spending rule. He thought there
was value in thinking about how elements of the income
producing spending part of the Alaska permanent fund could
be better supported and protected. He spoke of
stabilization function and stated that the POMV rule
promoted stabilization. He relayed that the stabilization
function could be further enhanced by having a process of
insuring that when oil prices were high, a larger share
than the constitutionally require minimum of revenue was
deposited into the fund. He offered several ways in which
that could be done and the benefits of the exercise.
9:46:23 AM
Senator Wielechowski appreciated the presentation. He asked
whether the state should roll the ERA into the corpus of
the fund and enshrine the POMV draw percentage in the
constitution.
9:46:43 AM
Dr. Rietveld replied that those were potential policy calls
that could be made by the legislature. He lamented that the
ERA could pose more problems than it solved in relation to
how the state accounted for realized and unrealized gains
and losses. He said that sometimes very large amounts of
money sat in the funds without any constitutional
protections. He thought that there was merit in having one
pool of capital under the same constitutional set of rules.
He said that cash to fund the POMV should be considered so
that the corporation never feels the need to sell equities
or assets. He thought that there was merit in a system that
reduced the size of the ERA or rolled it into the corpus.
He added that some sort of form constitutional
formalization of the POMV percentage spending policy could
be beneficial. He asserted that he would never hard wire
the spending amount in the constitution and added that
although the amount should not be regularly changed,
forward-looking and backward-looking assessments would be
realistic. He concluded that a spending policy that
followed a POMV principal, and the ability to adjust the
spending amount, when necessary, could be written into the
constitution.
9:50:21 AM
Senator Wielechowski asked for clarification about "never
hard wire the amount of spending".
9:50:49 AM
Dr. Rietveld replied that a spending policy that stated
that a share of the fund earnings would support the general
state budget could be constitutionalized. He said that the
POMV based formula and additional language that spoke to
the necessary flexibility POMV percentage amount could also
be included.
9:52:10 AM
Senator von Imhof thought that having language that said
up to 5 percent would give the legislature the ability to
appropriate less if necessary. She thought that a
percentage would be a better choice than a specific amount.
She understood that if the ERA were rolled into the corpus,
and the APFC knew that there was up to a 5 percent draw,
the funds investment team would work to provide the cash
to the general fund up to the 5 percent. She added that the
legislature would not tell the fund how to manage its cash
that was up to the APFC board.
9:53:55 AM
Dr. Rietveld agreed and stated that the constitutional
language should not have a specific dollar amount. He said
something like up to 5 percent would be workable
language. He agreed that the APFC board needed to manage
cash flows.
9:54:46 AM
Senator Wielechowski wondered how the independence of the
APFC compared with other SWFs in the world.
9:55:17 AM
Dr. Rietveld replied that the state compared favorably. He
stressed that the most important function of the board was
to manage the assets it received in an appropriate manner
relative to its investment policy. He stated that the
independence of the APFC had been historically strong. He
compared it to the SWF in New Zealand. He noted that in New
Zealand the board candidates were chosen by the legislature
from a pool of candidates put for the by the executive
branch. He said that the independence of the APFC was
important.
9:56:51 AM
Senator von Imhof agreed that the separate board of
trustees and corporation, with well defined roles, was
important. She spoke of how the board was selected in New
Zealand and mentioned that the issue of the selection of
board members was a growing concern for the legislature.
She wondered whether Dr. Rietveld had studied the different
ways that boards were selected for the various SWFs in his
presentation.
9:57:49 AM
Dr. Rietveld replied that he had studied governance and
board appointment practices. He thought that the APFC had a
standard procedure in comparison to other SWFs. He added
that for many Middle Eastern funds the board of trustees
was the members of the executive.
9:59:23 AM
Senator von Imhof noted that legislative confirmation was
the standard. She noted the two current member of the APFC
board were part of the governors cabinet and the other 4
had not been confirmed by the legislature. She asked
whether legislative confirmation was the common practice
when selecting SWF board members.
10:00:10 AM
Dr. Rietveld replied that the more common practice was for
the executive to directly appoint trustees.
10:01:19 AM
Dr. Rietveld added a few comments to slide 14, Alaska in
Context:
? SWF functions: savings, income and stabilization
? The savings function is firmly established
(constitutional certainty); although large share in
ERA is a risk
? The income-producing function of the SWF has come
into sharper focus with the POMV
However, it currently rests on less solid
institutional foundations than savings
? Can be undermined fairly easily
? The POMV rule also promotes the stabilization
function
? Could be enhanced through a rule to transfer surplus
revenues to APF (spending cap; oil price ceiling,
etc.).
? Increases the size of the APF and revenue it
generates, over the long run
Dr. Rietveld shared that the horizontal axis illustrated
the oil revenue as a percentage of overall revenue. He
noted that any economy over 80 percent was an extremely oil
dependent economy; the oil dependent economies included
Saudi Arabia, UAE, Qatar, Bahrain, Kuwait, and Alaska. He
pointed to the vertical axis, which showed the break-even
price of oil, or the per barrel price of oil needed to
balance the budget. He stated that without the POMV the
state had been in the green group, but using POMV, Alaska
had shifted to a group that could run a balanced budget a
lower oil prices.
10:03:22 AM
Dr. Rietveld addressed slide 15, "Alaska in Context":
Alaska has considerable advantages over peers
? Constitutional clarity and history of savings
? Very large asset pool
? World-class investment capacity and asset
allocation
But also weaknesses and vulnerabilities
? High oil revenue dependence and uncertain long-
term production outlook
? Spending rule lacks constitutional certainty:
ERA balances are really exposed (in downturn and
a boom)
? More can be done to save windfalls and break
boombust link between oil revenues/prices and
spending
Dr. Rietveld said that the summary chart on the right-hand
side of the slide showed how Alaska compared to other
places on several metrics. He said that said that the size
of assets and the size of historical savings was an
advantage for the state. He discussed the states
weaknesses as detailed on the slide.
10:08:10 AM
Senator von Imhof noted the resource investment management
entity and the two x on the table. She thought that
external managers would be more expensive and would offer
less control.
10:08:52 AM
Dr. Rietveld thought that the APFC did an excellent job at
tracking external managers and holding them to account,
while negotiating good fee structures. He agreed that it
could be a false economy to think that the fund was doing
well with a small staff while paying external manager fees.
He said that challenges had been debated for SWF management
staff pay scales. He thought that in the long-term the plan
should be for the team to grow commensurate to the size of
the asset.
10:11:02 AM
Co-Chair Stedman asked about the side of the APFC portfolio
compared the size of the state budget and whether Alaska
was an outlier in comparison to other SWFs.
10:11:29 AM
Dr. Rietveld replied that, in both cases, relative to the
size of government spending, and relative to the size of
the population and economy, the states pool of savings
through the fund was very high.
10:12:14 AM
Co-Chair Stedman thought the scale difference would be a
surprise to most Alaskans.
10:12:56 AM
Dr. Rietveld replied in the affirmative. He said that the
fund was the biggest SWF relative to annual spending that
he had encountered.
10:13:41 AM
Co-Chair Stedman felt that the state had apparently done
something right in setting up the fund in this manner.
10:13:43 AM
Senator Hoffman asked about the comparison chart on slide
15. He noted that under SWFs Contribution to Fiscal
Stability and Provisions for Sustainable Income
Generation Norway had three check marks while Alaska had
only one. He wondered whether Norway scored higher in those
areas because they had an income tax.
10:14:22 AM
Dr. Rietveld replied that that the advantage of other
sources of revenue had been beneficial to Norway. He said
that Norway had been able to take their oil revenue and put
it directly into their SFW and then formed their budget
from revenue from other sources. He furthered that if there
was a budget deficit, they could draw from the SWF on a
POMV basis, but they did not base their budget on oil
revenue.
10:16:10 AM
Senator Olson asked about tax structures in other countries
with permanent funds. He wondered whether there was a
correlation between a healthy permanent fund and whether
the countries had a wealth tax versus an income tax.
Dr. Rietveld replied that the question was outside of his
wheelhouse. He offered that there was no real pattern;
there were countries with SFWs that had no other source of
revenue and there were countries that had multitudes of
other revenue sources in addition to their SFWs.
10:17:51 AM
Co-Chair Stedman asked that the pace be picked up.
10:18:09 AM
Dr. Rietveld looked at slide 18, "Norway in Detail: An
Historic Break is Underway":
The context
? Norway collects significant revenues from taxes
on personal income, corporates, and consumption
? Oil revenue accounts from roughly one-third of
budget revenue
? However: all oil revenue flows directly into
the SWF
The fiscal rule
? Minister of Finance formulates a non-oil budget
? The structural non-oil fiscal deficit can then
equal the POMV (3 percent) draw on the SWF
? In theory means that income from the SWF can
fund the non-oil deficit in perpetuity
10:19:51 AM
Dr. Rietveld discussed slide 19, "Norway in Detail: An
Historic Break is Underway":
In practice
? The POMV/real-return expectation was previously
set at 4 percent, reduced to 3 percent in 2017
? The draw has typically been less than the POMV
amount
? However, in 2009 (4.2 percent) and 2010 (4
percent), the draw exceeded the rule
? For, 2020 the 3 percent draw was increased to
4.2 percent in the revised budget (in retrospect,
that came to 3.6 percent)
? 2021 budget sees a 2.6 percent draw (subject to
revision)
This is not really a rule-based system
? The "rule" is not binding; it merely serves as
a customary anchor
? System relies on consensus, which is being
challenged
? In recent years, net outflows have exceeded
inflows (masked by market-value gains)
? Headlines: "Raiding the fund" or "tapping fund
for the first time" => misleading
10:23:03 AM
Dr. Rietveld jumped to slide 17, which had headlines.
10:24:15 AM
Dr. Rietveld looked at slide 20, "A Comparison with
Endowments":
? Many of the trends we see amongst SWFs, are also at
play amongst university endowments, foundations and
trusts
? Most endowments are have POMV spending policies
(large equity and private market allocations)
? Many large endowments have "rules" that are not
binding operate more as principles and retrospective
sense checks
? Like Norway, endowment income is not typically
dominant
? Universities also have gifts, grants, Federal
and State funding, fund raising, intellectual
property, student fees, etc
10:25:34 AM
Dr. Rietveld addressed slide 21, "A Comparison With
Endowments." He said that 73 percent of the surveyed
university endowments used a POMV structure, which he felt
was becoming increasingly popular.
10:26:43 AM
Senator von Imhof remarked that the average pre specified
percentage spent was in the mid-4s. She understood that the
prevailing amount was 5 percent or less.
10:27:04 AM
Dr. Rietveld thought that the 4.6 number reflected the
number of endowment funds that made use of an average pre-
specified percentage spend.
10:27:31 AM
Co-Chair Stedman stressed that the question was on the
average pre-specified percentage spend.
Mr. Rietveld thought that the average spending amount on a
POMV basis was 4.6 percent.
10:28:06 AM
Senator Hoffman looked at slide 20 and asked about
endowments that had rules that were non-binding. He asked
about the rules in Norway versus the rules in Alaska. He
asked whether the statute in Alaska was binding.
10:28:42 AM
Dr. Rietveld replied that it was more binding that the
current Norwegian custom. He remarked that there was an
imbalance in Alaska with the savings percentage tightly
bound in the constitution, while the spending was only in
statute.
10:30:02 AM
Senator Hoffman surmised that Alaskas statute was binding
but not as binding as it would be if it were written into
the constitution.
10:30:20 AM
Dr. Rietveld highlighted slide 22, "What Happened at
Harvard":
? Most famous and largest endowment
? Spending "rule" leaves some wiggle room
? Balance of "spending stability" (highly
influenced by non-endowment revenue) and
endowment's capital growth and preservation
? "Generally targets" 5.0 percent to 5.5 percent
POMV but not binding, and not how the Harvard
Corp decides
? Low of 4.2 percent in 2006 and pre-Covid high
of 6.1 percent in 2010
? In 2020: highly unusual draw on restricted funds
inside the Endowment
? In 2021: growth of dollar value of draw on Endowment
originally capped at 1 percent; but later increased to
2.5 percent (note: dollar-value spend, not POMV)
? POMV calculation is tricky at Harvard, given timing
of financial-planning process and no 5-year averaging
? Harvard has a diversified pool of revenue sources
(and access to CARES and PPP funds); with none subject
to expectations of structural decline
10:33:28 AM
Senator von Imhof understood that if Harvard wanted to take
more, or less, from the endowment they simply raised
tuition.
10:33:57 AM
Dr. Rietveld looked at slide 23, "What Happened at
Harvard?" He shared that the slide showed that the
endowment enjoyed flexibility in increase in some areas
when other areas were slumping.
10:34:59 AM
Dr. Rietveld pointed to slide 25, "Trustee Paper Vol. 9:
Building on Reforms":
? APFC Trustee Paper 2020 Vol. 09
? The Role of Sovereign Wealth Funds in Saving,
Stabilization and Generating Income
? Considered what has worked and what has failed in
past amongst comparable peers
? SWFs and Permanent Funds in accountable, commodity-
based democracies
? Alberta, Wyoming, New Mexico, Texas, Norway and
Chile
10:35:46 AM
Dr. Rietveld addressed slide 26, "Trustee Paper Vol. 9:
Building on Reforms":
? Lesson #1: Mission clarity
? There has been a shift in the APF's mission:
income generation and fiscal stability
increasingly important
? This is now well understood, and should be
supported by constitutional language
? Lesson #2: Rules matter
? Very clear that reliance on custom, discretion
and negotiation leads to inferior long-term
outcomes
? Rules de-escalate tough decisions and promote
consistency
? Clarity and predictability also helps the APFC
invest with a suitable risk and liquidity
appetite
? Lesson #3: Enforcing rules
? Alaska and other US Permanent Funds have saved
because it is Constitutionally mandated
? Note: inflation proofing; supplementary savings
and the POMV are not Constitutionally guaranteed
(in the past, the "right thing" was eventually
done but no guarantee)
? Empirically, adherence to rules is lower where
it is not Constitutionally mandated (many
examples: Alberta, Middle Eastern funds, US
permanent funds
10:39:58 AM
Dr. Rietveld pointed to slide 27, "Trustee Paper Vol. 9:
Building on Reforms":
? Lesson #4: Getting a POMV rule right
? Focus on total returns rather than realized
earnings: mindset shift; long overdue
? Moving averaging is essential for smoothing
? Long-term POMV rate must match long-term portfolio
returns, minus inflation and costs
? Lesson #5: Mechanics of the draw and the ERA problem
? The ERA/Principal split creates unnecessary risks:
political and financial
? Having the POMV and the appropriate risk allocation
is more important that the Fund's mechanics
? Trustee Paper 2020-09 considered reform options
? But no compelling reasons for ERA, if move away from
earnings-based spending rule is perm
10:43:31 AM
Co-Chair Stedman looked at slide 26, and noted the bullet
point:
• Very clear that reliance on custom, discretion and
negotiation leads to inferior long-term outcomes
Co-Chair Stedman assumed that there were examples of ad hoc
draws leading to inferior long-term outcomes.
10:44:04 AM
Dr. Rietveld replied that in the paper the New Mexico
permanent fund was used as an example. He added the Alberta
Heritage Fund had also been cited.
10:45:35 AM
Dr. Rietveld addressed slide 28, "Main Messages":
? Alaska enjoys a number of critical structural
advantages
? Big reforms have been made: budgetary-income
function has been established
? Critical to invest in infrastructure, mechanisms and
institutions that ensure this transition
which will be permanent enjoys Constitutional
certainty
? The ERA creates unnecessary political and financial
risks under POMV
? No compelling reasons to have the ERA, if one
moves towards a POMV model
? A worthy cause: promoting the transfer of (a share
of) unanticipated future revenue windfalls to APF or
replenish other fiscal buffers
? For example, spending caps, oil-price trigger,
supplementary windfall savings rule
? This will enhance the stabilization function
? A bridge period is needed as Alaska transitions to a
system with Constitutionally protected savings and
spending
? The bridge should be comprehensive, with all
available options on the table
? One-time higher draws have happened elsewhere
could be made conditional on lasting reforms and
rules
? Key is having a credible commitment mechanism
to sustainability and rule-based constraint
10:51:20 AM
Co-Chair Stedman thanked the presenter. He canceled the
afternoon meeting. He discussed the following day's agenda.
ADJOURNMENT
10:52:05 AM
The meeting was adjourned at 10:52 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 022222 APFC_Trustees-Paper-9.pdf |
SFIN 2/22/2022 9:00:00 AM |
|
| 022222 Malan Rietveld Presentation_AK Leg_Senate Finance_Feb 2022.pdf |
SFIN 2/22/2022 9:00:00 AM |