Legislature(2023 - 2024)SENATE FINANCE 532
02/13/2023 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Alaska Permanent Fund Corporation | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
February 13, 2023
9:01 a.m.
9:01:01 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:01 a.m.
MEMBERS PRESENT
Senator Donny Olson, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Jesse Kiehl
Senator Kelly Merrick
Senator David Wilson
MEMBERS ABSENT
Senator Lyman Hoffman, Co-Chair
Senator Click Bishop
ALSO PRESENT
Deven Mitchell, Executive Director, Alaska Permanent Fund
Corporation; Marcus Frampton, Chief Investment Officer,
Alaska Permanent Fund Corporation.
SUMMARY
PRESENTATION: ALASKA PERMANENT FUND CORPORATION
Co-Chair Stedman relayed that the presentation would
address the Earnings Reserve Account (ERA), which is the
spendable portion of the permanent fund, not protected by
the constitution, and accessible by a three-quarter vote of
the legislature. He noted that the state relied heavily on
the ERA to fund the permanent fund dividend (PFD) and for
state expenditures. He stressed that the health of the fund
was a major priority. He relayed that the matter of the PFD
had the attention of the legislature. He hoped that the
other body would consider the information in the
presentation and use it to educate new legislators.
^PRESENTATION: ALASKA PERMANENT FUND CORPORATION
9:04:16 AM
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, introduced himself and his support staff. He
discussed his background as the state's debt manager. He
shared that he had been in his current position for three
months.
Mr. Mitchell discussed a PowerPoint presentation entitled
"Senate Finance Committee - February 13, 2023," (copy on
file).
9:05:56 AM
Mr. Mitchell looked at slide 2, which was a timeline of
milestones related to the creation of the Permanent Fund:
1969 The Prudhoe Bay lease sale brings more than $900
million to the State for drilling rights
1971 President Nixon signs Alaska Native Claims
Settlement Act (ANCSA)
1973 Congress passes Trans Alaska Pipeline
Authorization Act
1974 Pipeline construction begins
1976 Alaska voters approve Constitutional Amendment
establishing the Permanent Fund 2/3rds margin 75,588
to 38,518
1977 The Permanent Fund receives its first deposit of
dedicated oil royalties totaling $734,000
1980 The Alaska Permanent Fund Corporation was
established to manage and invest the Fund
Mr. Mitchell noted that the fur trade had been a revenue
source prior to 1969. He thought that by 1976 it was clear
that oil funds should be managed for future use, resulting
in the creation of the Permanent Fund. He stated that the
APFC was created to maintain the fund as an
intergenerational resource for Alaska and Alaskans.
9:07:57 AM
Mr. Mitchell reviewed slide 3, which cited Article IX,
Section 15 of the Alaska Constitution:
The Permanent Fund
Alaska Constitution
Article IX, Section 15
At least twenty-five percent of all mineral lease
rentals, royalties, royalty sale proceeds, federal
mineral revenue sharing payments and bonuses received
by the state shall be placed in a permanent fund, the
principal of which shall be used only for those
income-producing investments specifically designated
by law as eligible for permanent fund investments. All
income from the permanent fund shall be deposited in
the general fund unless otherwise provided by law.
9:08:33 AM
Mr. Mitchell referenced slide 4, "Renewable Financial
Resource,"
Savings
Since the First Royalty Deposit of $734 thousand
The Principal has grown to $52 billion
Income-Producing
The Earnings Reserve Account has received more
than $82.1 billion
Earnings Use
Inflation Proofing Principal $18.0 B
• Special Appropriations to Principal $12.3 B
• Alaska Capital Income Amerada Hess ~$0.4 B
• Dividend Fund through FY18 $24.4 B
• Percent of Market Value FY19-FY23 $15.9 B
Mr. Mitchell explained that there were different ways to
discuss the concept of "principal." He outlined that there
had been financial and accounting changings in the world
that the account has needed to catch up with. He discussed
the Alaska Capital Income Account, which was a sub-account
formed from a court case, resulting in the Amerada Hess
settlement. In the case, the defense argued that the jury
would potentially be biased by a deposit into the Permanent
Fund, so the judge ordered the funds to be segregated into
a separated account.
Mr. Mitchell discussed the percent of market value (POMV)
draw, which was established in FY19 and increased reliance
on the permanent fund.
9:11:43 AM
Mr. Mitchell showed slide 5, "To Manage and Invest for
Generations."
Mr. Mitchell considered slide 6, "Investing for the Long-
Term":
Legislature's findings for the purpose of the
Permanent Fund in AS 37.13.020,
• the fund should provide a means of conserving a
portion of the state's revenue from mineral
resources to benefit all generations of Alaskans;
• the fund's goal should be to maintain safety of
principal while maximizing total return;
• the fund should be used as a savings device
managed to allow the maximum use of disposable
income from the fund for purposes designated by
law.
The Board's objective for the Fund, as set forth in
the Investment Policy, is to achieve the highest level
of performance within the investment responsibilities
of AS 37.13.120 and prudent investment practices.
Investment Performance
Ability to generate an annualized return of inflation
(CPI) + 5% over a 10-year period (long-term target).
Investment Risk
Ability of the Fund to achieve the long-term target
while conforming to the Board's approved risk appetite
metric.
Mr. Mitchell summarized that the investment strategies of
the fund were broad, and included a methodical, board
reviewed process. He said that opportunities that added
value on a long-term basis was the priority.
Mr. Mitchell explained that the primary focus was to
protect principal. He mentioned the role of the risk
officer, who sometimes had to have difficult conversations
concerning how to maintain the balance and protect
principal overtime.
9:13:51 AM
Co-Chair Stedman asked for further discussion related to
the POMV draw, which was split between PFDs, inflation
proofing, and state spending. He recalled that in the past
the state continually reinvested into the fund to ensure
its growth.
Mr. Mitchell agreed with Co-Chair Stedman that there were
two statutory formulas for drawing from the Permanent Fund.
The first manner was using the statutory 21 percent of the
last 5 years net income divided in half half for the PFD
and half for the, which was subsequently reinvested rather
than used for operating costs. He commented that the gift
and sacrifice made by past generations of Alaskans, to
provides the resource that exists today. He followed that
the obligation of todays generation was like that of the
past to adhere to prudent policy and restraint.
9:16:26 AM
Co-Chair Stedman thought the point was an important one to
be remembered. He said that for decades the state
reinvested its percentage, which resulted in a near
doubling of the fund.
9:17:04 AM
Co-Chair Olson considered slide 4, which showed a fund
principal of $52 billion and the earnings reserve fund
(ERA) of $82.2 billion. He asked whether the board
considered the two funds differently.
Mr. Mitchell answered in the affirmative. He explained that
the principal was a combination of deposits that included
the constitutional and statutory contributions. He said
that the balance of the fund was a result of appropriations
from the General Fund, and the ERA for inflation proofing
and special appropriations.
Co-Chair Olson wondered whether protections for drawing on
the funds were similar.
Mr. Mitchell relayed that there was no limit on how much
the state could segregate and provide into the permanent
fund and protect as principal.
9:20:10 AM
Co-Chair Olson understood that only the corpus of the fund
at $52 billion was protected as opposed to the remainder of
the entire fund. He wondered what would happen if the
protection was challenged legally.
Mr. Mitchell shared that his opinion, based on conversation
with legal counsel, was that the $52 billion was
irrevocably placed in the fund despite the source of the
deposits, whether they be royalties or other.
9:21:15 AM
Senator Merrick asked if it was feasible and whether there
were benefits to combining the Earnings Reserve Account and
the principal.
Co-Chair Stedman requested that the questions remain in the
order of the slides.
Mr. Mitchell replied in the affirmative to Senator
Merricks question and said that more information would be
provided in a future slide.
9:22:06 AM
Mr. Mitchell displayed slide 7, "Diversified Portfolio,"
which showed a world map that depicted Permanent Fund
investments around the world. He cited that the state had a
small economy for a gross domestic product (GDP) point of
view. He qualified that Permanent Fund revenue was not
derived from the state's economy, but rather from the world
economy. He said that, from a credit perspective, this
reduced reliance on the states economy for providing for
Alaska. He reiterated that this was an achievement borne
from the sacrifices of the past.
9:23:36 AM
Senator Kiehl noted that North America comprised
approximately one-quarter of the global economy, while the
slide showed and APFC investment of three-quarters in North
America.
Mr. Mitchell deferred the question to the Chief Investment
Officer of APFC.
9:24:07 AM
MARCUS FRAMPTON, CHIEF INVESTMENT OFFICER, ALASKA PERMANENT
FUND CORPORATION, explained that the largest asset class in
the portfolio was public stocks, with a benchmark a global
equity index. He said that U.S. Stocks were roughly 60
percent of the index. He said that there was limited
advantage in international real estate investments. He said
that there was a bit of a home country bias, but less than
some other peers.
Senator Kiehl thought Mr. Frampton's answer offered a
helpful perspective. He wondered about the underlying
reasons for the home country bias.
Mr. Frampton thought the underlying reasons were
familiarity, rule of law, and the development of the
financial system. He considered the United Kingdom, where
the fund had a higher mix of assets than the United
Kingdom's GDP mix. He used China as an example, which would
become the highest GDP country, with only 5 percent of the
funds portfolio.
9:27:33 AM
Co-Chair Stedman asked for more detail regarding the fund's
exposure in Russia.
Mr. Frampton cited that the APFC had not divested its
investments in Russia at the time of the invasion of
Ukraine. Those investment had been ridden down by
approximately 90 percent. He said that APFC did not ascribe
much value to the currently held assets in Russia.
9:28:39 AM
Mr. Mitchell highlighted slide 8, which was a group of pie
charts to give a snapshot of the fund's asset allocation
evolution.
9:29:11 AM
Mr. Mitchell looked at slide 9, which showed a bar graph to
illustrate annual investment performance adjusted for
inflation. He noted that the gold dots represented the
target return objective, which was shown to move due to
changing inflation. He said that the combination of fund
real return and inflation equaled experience. He explained
that longer-term lookbacks of 20 years to 30 years would
show times of unmet return objectives, but that the slide
showed that annual investment performance, adjusted for
inflation, indicated sustained value, and purchasing power.
Co-Chair Stedman relayed that there was a considerable
amount of concern related to the risk exposure of the ERA.
He thought the slide showed that there were 10-year
increments when the target was surpassed, but also
increments when the target was not met. He asked for help
in understanding the range of outcomes. He considered the
underperformance of the early 2000s and wondered how
concerned they committee should be about 10-year increments
of underperformance.
9:32:35 AM
Mr. Mitchell thought there should be a concern that there
were periods of time when the market would not provide the
targeted return. He reminded the committee that there was
no POMV payout during the timeframes of low performance on
the slide, which made it easier to withstand negative
market experiences and even maintain or grow the fund. He
mentioned working with partners in the Legislative Finance
Division (LFD) which had built a probabilistic model to
explore what the different scenarios of the future might
provide for the fund. He believed it was important to have
both the expected and the average expected outcomes,
alongside the downside experiences of the past and consider
the outcome should those experiences happen today.
9:34:16 AM
Co-Chair Stedman recalled that in 2008 and 2009 many
current committee members were sitting at the table, or
were staff in the room, with a collective worry of paying
out a dividend in those years. He noted that the
combination of good fortune and creativity had resulted in
the ability to pay a dividend at that time, but the
experience had not been forgotten.
9:35:46 AM
Mr. Frampton addressed slide 10, which showed a bar graph
that showed fund performance versus benchmarks. He
discussed asset allocation and investment strategy. He
explained that the fund had a return objective of inflation
plus five percent. The board met each year to consider
asset allocation and chose a mix of asset types that would
be expected to earn a return of CPI plus five, reflected on
the grey bar on the slide. The gold bars represented the
funds performance. He shared that asset allocations with
Callan would occur in the coming week.
Mr. Frampton furthered that a security did not exist that
delivered CPI plus five, so a mix of assets was chosen, and
year to year performance was benchmarked against the asset
mix. He said that this was done on both on a passive basis,
represented by the dark blue bar on the slide, and by
performance benchmark, reflected in light blue. He thought
that the performance benchmark measured whether the
complexity of the asset allocation was paying off. He said
that the key focus on the 10-year column showed that the
performance benchmark had outperformed the passive
benchmark. He said that people in London and New York City
were closer to the market and had greater resources. He
shared that the corporation tried to use a long-term
orientation and patient approach to investing to step into
situations where they were not transacting with people who
had an informational adage. He provided several examples.
9:40:10 AM
Mr. Frampton explained that APFC was most proud of the
previous performance benchmark that had returned 29
percent. He cited that the previous year had declined a
bit.
9:40:52 AM
Co-Chair Stedman asked for more detail on understanding the
illiquidity portion of the portfolio.
Mr. Frampton explained that for private areas, which was
about 40 percent of the fund's portfolio, the indexes were
broadly appraisal based; on a quarterly basis the assets
were valued. Conversely, public securities prices were
reflected in periodicals daily. He said that the illiquid
assets did not move with the same volatility as public
stocks. He said that the comparison versus the benchmark as
apples to apples.
Co-Chair Stedman mentioned the illiquid portion of the
holdings.
9:43:14 AM
Senator Kiehl pondered that the illiquid nature, as well as
the example used by Mr. Frampton, and the complexity of the
issue. He wondered whether selling the rental houses
mentioned worked in terms of the market value after the
sale and the realized income of the statutory net income.
Mr. Frampton explained that in the last ten years, when
APFC sold assets on a private basis, it was generally above
where they had been marked. He said that private assets
were harder to sell in a down market. He discussed sale of
the rental homes. He explained that the care was taken
about how assets were unloaded and selling in a compressed
timeframe put pressure on asset values. He discussed rental
home sales over the last 10-years. He said that unrealized
gains, by asset class, as of December 2022 showed over 90
percent (approximately $10 billion) of the unrealized gains
were in the private portfolio, with a fixed income
portfolio of approximately $1 billion and a stick portfolio
of $1.5 billion. He said that currently, as the portfolio
was turned over, not as much was being generated by the
public portfolio. He stated that as markets had been more
challenging, exits of private companies were down about 50
percent. He relayed that the factors he had just described
had led to a
9:47:05 AM
Mr. Frampton explained that the factors he had descried had
led to the year-to-date statutory income being lower than
had what had been seen in past years.
9:47:24 AM
Senator Kiehl appreciated Mr. Frampton's level of detail.
He referenced slide 8 and understood that it was difficult
to determine the value of the assets represented by the
pink wedge and other private assets. He thought that the
decision to sell those assets would move the statutory net
income all over the place but would not change the value
of the fund.
Mr. Frampton answered affirmatively.
Senator Kiehl emphasized that the statutory net income was
how the state determines the PFD formula. He said that the
value of the fund did not necessarily spike and drop.
Co-Chair Stedman thought in FY19 and FY20, there was
approximately $3 billion in statutory net income. He
furthered that in FY21, real estate sales brought that
total to $7.9 billion. He thought that that moved the PFD
calculation up, and that the total remained well above $3
billion for FY19 and FY20. He stated that, looking at
historical numbers of $2 and $3 billion would bring the PFD
number down under the formula. He shared that when the
state went from $3.1 billion to $7.9 billion in a year APFC
had cautioned the legislature of the decrease. He related
that the numbers significantly moved the PFD calculation.
He noted that references to his comments could be found in
a historic review of the fund, which included a table
illustrating the numbers, on the APFC website.
9:51:38 AM
Mr. Frampton advanced to slide 11, "Benchmarks Internal
Fixed Income Example," which showed a bar graph of the
internal fixed income portfolio. He explained that the
portfolio was comprised of 6 sub-composites, which had
managers and analysts reviewing all the securities
available. He described the process of reviewing
performance security by security.
9:53:21 AM
Mr. Frampton looked at slide 12, "Focus on Increasing
Internal Management":
Strategies brought in-house since 2013
• 2013 Private market co-investments and direct
investments
• 2014 Internal tactical equities
• 2015 Hedge fund-of-fund management
• 2018 High yield bonds
• 2020 Real estate directly managed properties
2021 Internal factor equities
• 2022 All of fixed income
Mr. Frampton stated that APFC attempted to be deliberate in
what was brough in-house. The left side of the slide
showed a pie chart illustrating fiscal year 2023 target
asset allocation.
9:55:01 AM
Senator Wilson referenced $8 million in savings through
bringing some items in-house. He asked whether there had
been any failures from bringing items in-house.
Mr. Frampton replied in the negative.
9:55:34 AM
Senator Kiehl asked whether the lack of failures indicated
that the APFC should be more assertive.
Mr. Frampton thought Senator Kiehl's question was a concept
that he and Mr. Mitchell would spend more time considering.
He said that each initiative saves millions. He said that
public stocks had been considered as $1 million per year
was spent on external public stock manager fees.
Co-Chair Stedman suggested not managing the fund into
breaking.
Senator Kiehl agreed.
9:57:04 AM
Co-Chair Olson considered the pie chart on slide 12, which
showed FY 23 target asset allocation. He asked about the
absolute return.
Mr. Frampton explained that absolute return was commonly
referred to as hedge funds, which had several meanings.
He said that what it meant to APFC was that external
managers, that managed money with zero correlation to
public markets. He said that the largest area were stock
managers whose whole return was how well they chose stocks
and not how well the market performed. He said another area
was macro hedge fund managers who invested in different
currencies around the world in ways unrelated to
traditional markets. He said that initially APFC had hired
fund-to-fund managers and in 2015 they decided that the
managers could be selected by the fund.
Co-Chair Olson asked whether the practice had been
profitable for the Permanent Fund.
Mr. Frampton answered in the affirmative.
9:59:07 AM
Mr. Frampton showed slide 13, "APFC Performance Relative to
Large Public Funds," which showed returns for periods ended
December 31, 2022. He noted that the page was from Callan,
which tracked 72 public funds over $1 billion.
9:59:51 AM
Mr. Frampton referenced slide 14, Tenured and Seasoned
Investment Leadership. He shared that the corporation had
a very strong team.
Co-Chair Stedman referenced slide 13 and queried the
corporations attempt to improve performance of real estate
performance benchmarks.
Mr. Frampton mentioned that in the previous year the fund
had beat its benchmark for real estate and remained
satisfied with real estate performance.
10:01:14 AM
Mr. Mitchell turned to slide 15, "Enduring Financial
Resource," and reiterated the strength of the investment
staff. He emphasized that that the support staff for the
investment staff was equally strong. He noted that the
mission of the fund was maximum return with limited risk,
while being responsive to the needs of the organization.
10:02:43 AM
Mr. Mitchell considered slide 16, "Financial Resource for
Alaska,":
Now, more than ever, the State is dependent upon
APFCs effective management and investment of the
Fund, one of Alaskas primary sources of renewable
revenue.
APFCs stewardship fulfills dual roles:
• Protecting the Principal and maximizing
investment returns for the benefit of current and
future generations of Alaskans.
• Providing a predictable revenue stream to help
balance the States budget now and into the
future.
Mission Driven: To manage and invest the asset of the
permanent fund and other funds designated by law in
accordance with Alaska Statues 37.13.010 37.13.190
Fiduciaries: The Board of Trustees has a duty to
assure that the Fund is managed and invested in a
manner consistent with constitutional and statutory
mandates.
10:03:38 AM
Mr. Mitchell displayed slide 17, "State Revenue," which
showed a bar graph of UGF revenues from the fund. He noted
that the slide reflected the impact of the POMV
distribution as the largest single revenue source received
by the state. He pointed to the right-hand side of the
slide, which showed the POMB formula. Listed were the
calculations for fiscal years back to FY18.
Co-Chair Stedman thought that the numbers for the fund
looked relatively flat.
Mr. Mitchell noted that there was a slight amount of growth
in the POMV transfer that was hidden by the other
categories reflected by the bars. He said that a clearer
picture of only the POMV transfer could be provided.
Co-Chair Stedman said that that information would be
helpful to understand the growth of the transfer.
Mr. Mitchell thought Co-Chair Stedman made a legitimate
point.
10:06:00 AM
Mr. Mitchell highlighted slide 18, Principal Contributions
Intergenerational Benefit:
The Constitution directs at least 25 percent of
mineral royalties. Statute directs 50 percent of
royalties post-1979 and provides for special
appropriations and inflation proofing.
Mr. Mitchell which showed a bar graph depicting transfers
into the principal of the fund from royalties, special
appropriations, and inflation proofing. He said that most
of the deposits were constitutionally mandated. He said
that the inflation proofing was appropriated for FY23 in
the governors proposed budget. He said that the projection
for 2023 relied on the price of oil and production from the
North Slope.
Co-Chair Stedman queried the appropriation request for
FY23.
Mr. Mitchell cited that the amount was $4.2 billion, based
on FY21 and FY22 inflation rates.
Co-Chair Stedman asked Mr. Mitchell to explain what would
happen if the legislature failed to fund the appropriation.
He requested an explanation of the mechanism of the corpus
of the fund versus the ERA.
Mr. Mitchell explained that the ERA was the source of
inflation proofing, so to the extent that inflation-
proofing was foregone, the balance of the ERA that could be
used for other purposes increased. He observed the lack of
inflation-proofing in FY16, FY17, FY18, and FY21
illustrated on the slide. He noted that the lack of
inflation proofing from FY16 through FY18 was the result of
fiscal stress experienced but the state, in addition to the
state not following the historical dividend formula for the
first time. He asserted that the significant drop in the
price of oil at that time, coupled with the fiscal gap,
ultimately resulted in the implementation of the POMV
construct. He opined that if the inflation-proofing was not
made, it was a breaking of the compact with past generation
who had made the appropriations, and more. He said that a
deferral of inflation proofing should only be done when
there was a plan of replacing those funds in the future. He
said that retaining the ability to draw funds, without
maintaining inflation proofing, was unsustainable into the
future.
10:10:42 AM
Mr. Mitchell looked at slide 19, which addressed the ERA
with a graph of the account's deposits and withdrawals. He
observed a tension in the current two-account system, that
as the ERA balance grew to levels that were beyond the need
of the POMV construct, it could become tempting to use the
excess funds for current generation's needs. He stated that
legislatures of the past had placed the excess funds into
principal and removed the temptation to spend, which
resulted in the net impact of money flowing out of the ERA.
Mr. Mitchell discussed the difficulty of the construct in a
negative market experience where the state could face the
danger of not having enough funds. He emphasized that the
board had the goal of moving away from the two-account
system and have only one principal account with a true POMV
payout embedded in the construct of the fund itself. He
felt that this could be the most impactful change that
could be made to the fund. He pointed to the bottom of the
chart, which had the effective POMV rates. He said that the
historical fund value for determining the POMV had been
increasing, which had resulted in the draw being less than
the 5 percent minimum between 3.79 and 4.52 percent. He
stated that as the fund value stabilized or decreased in a
less robust market the percentages would increase to closer
to 5 percent. He noted that if there were a longer time
when the fund did not ascend in value the numbers would be
greater than 5 percent.
10:14:40 AM
Mr. Mitchell addressed slide 20, which showed the total
funds value of $74,455,800,000, unaudited as if December
31, 2022; the total value on the slide included the
permanent savings and the unrealized gains of both the
principal and the ERA. The principal contained $52.0
billion in royalties and appropriations and $9.0 billion in
unrealized gains. The ERA had $3.8 billion available for
appropriation and included the statutory net income
received by December 31, 2022. He noted that the ERA also
contained $3.5 in FY24 POMV draw, $4.2 billion in inflation
proofing, and $2.0 billion in unrealized gains. He opined
that when money left the ERA, the unrealized gains
associated that proportional piece of the fund piece of the
fund moved to the principal because of the smaller balance.
He said that there was a proportional allocation between
principal and the ERA for distributing the unrealized
gains, which meant that there was approximately $11.5
billion available for appropriation, and as those funds
were appropriated the $2 billion in unrealized gains flowed
up to the principal portion of the fund. He noted that the
unrealized gains could still be realized and transferred
back to the ERA, but the funds portfolio was comprised of
a mix of liquid and illiquid assets and 90 percent of the
unrealized gains were in illiquid assets. He thought that
these unrealized gains might not flow back to the ERA so
easily.
10:17:47 AM
Co-Chair Stedman asked for Mr. Mitchell to clarify if 90
percent of the $2 billion was illiquid.
Mr. Mitchell affirmed that was correct. He said that there
was an evolution; January was a strong month in the
equities market, but the current case could be different.
Co-Chair Stedman asked for more detail on a projection for
the risk exposure of crippling the ERA to the point where
inflation proofing and the POMV were difficult. He
suggested that if a choice needed to be made, inflation
proofing would be deferred into future years when
performance improved. He queried what kind of market
conditions would put the state a precarious position.
Mr. Mitchell relayed that it was difficult to predict.
Co-Chair Stedman recognized that a lot of the fund's
portfolio was illiquid and static with quarterly
appraisals. He asked what a broad market at 5 or 3 percent
on average over the next few years would do to the
financial goals of the fund.
Mr. Mitchell replied that he would provide the information
to the committee.
Co-Chair Stedman asked for the information to include a
bugle chart that reflected the information in dollars. He
understood that the numbers would be estimates but thought
the exercise could be helpful.
Mr. Mitchell asked whether Co-Chair Stedman was referring
to statutory net income rather than general market
performance.
Co-Chair Stedman clarified he was interested in the general
market performance and then the mechanical boiling down to
the statutory calculation relative to the POMV. He hoped to
get an idea of the financial impacts that the committee
would face mediocre markets versus strong markets.
10:21:49 AM
Mr. Mitchell pointed out that the first line of the lower
portion of the table on slide 19 showed statutory net
income. He cited that there was a range of transfers from a
low in FY16 of $2.2 billion to $8 billion in FY21. He
viewed that the durability of two accounts was
questionable.
Co-Chair Stedman thought the range of expectations under
certain market assumptions would be helpful to the
committee.
10:22:45 AM
Senator Kiehl looked at slide 20 and considered keeping the
ERA four times the amount that would be drawn out for the
POMV. He asked about inflation proofing needing more than a
full years POMV draw. He wondered how precarious the
situation was.
Mr. Mitchell relayed that the APFC did not have a robust
model such as the one used by LFD, since predicting future
outcomes was not part of the corporation's charge. He
continued that if there were high inflation at 5 percent
and the fund assumed the low band for Callan's return
expectations, there would be an inability to inflation
proof in FY25 due to an insufficient balance in the ERA. He
said that the POMV would still be possible. He did not
think the potential for difficult decisions was that far in
the future.
Co-Chair Stedman announced that many presentations on the
issue before the committee would be done by LFD as they
would be working with AFPC and collecting data. He thought
that this would stabilize the accuracy of the information
and reduce question redundancy.
10:25:54 AM
Mr. Mitchell advanced to slide 21, which was a flow chart
designed to show the construct of the current two-part
account system. He noted the complexity of the structure
and walked through the illustration.
10:27:35 AM
Mr. Mitchell showed slide 22, "Constitutionalize Annual
Fund Draw":
Board Resolutions 03-05, 04-09
Percent of Market Value (POMV)
• Supporting a constitutional amendment to limit the
annual Fund payout to not more than a 5% POMV averaged
over a period of 5 years.
• Implementation of a constitutional POMV spending
limit for the Fund, has the accompanying benefit of
assuring permanent inflation proofing of the Fund.
Mr. Mitchell expanded on the benefits to
constitutionalizing the draw. Slide 23 showed the flow
chart illustrating the proposed classic endowment
structure.
10:28:35 AM
Mr. Mitchell showed slide 24, which showed other proposed
board resolutions listed on APFC's website:
00-13, 03-05, 04-09: Constitutionalize annual Fund
Draw. Limit the annual Fund payout to not more than a
5 percent averaged over a period of 5 years. Assures
permanent inflation proofing.
17-01: Identify and pursue legislation or legislative
support for some form of inflation-proofing that will
preserve the purchasing power of the principal of the
permanent fund for all generations.
18-01: Supporting a Rules Based Legal Framework to
govern Fund inflows, outflows, and internal transfers.
A holistic framework rationalized by policymakers
regarding the rules for savings, withdrawals, and
growing the real value of the Fund results in a
consistent approach to transfers and sustainability of
the Fund over the long-term.
18-04: Affirming the importance of formulaic
management of transfers into and out of the ERA to
ensure sustainability and long-term growth of the
Fund, by identifying four key principals: Adherence to
Rules, Ensuring Sustainability, Automatic Inflation
Proofing, Promoting Real Growth.
20-01: Additional measures to enhance the sustainable
use of the Fund include restructuring the Fund from
its current two account system into a single Fund as
well as periodic review of Fund Return Assumption and
ERA Balance Buffer (4xBuffer).
10:28:57 AM
Mr. Mitchell turned to slide 25, which showed a snapshot of
the APFC's web page. The slide provided a list of the
information available to the public.
10:29:19 AM
Senator Merrick mentioned the classic endowment structure,
which had been an issue of discussion for decades. She
asked why the change to the classic structure had not
occurred.
Mr. Mitchell relayed that such a change was a heavy lift
and required a constitutional amendment to have an enduring
endowment structure. He thought that there had been an
inability to look at protecting the fund first without
talking about a permanent fund dividend transfer. He noted
that the PFD was an emotional issue for Alaskans, which
would make it difficult to reach the majorities required
for the constitutional change.
Senator Merrick asked why when the POMV was passed the old
statutory PFD formula was not repealed.
Mr. Mitchell replied in the negative.
Co-Chair Stedman recalled that when the POMV legislation
had left committee the split had been 75/25, with 25
percent going to the PFD. The discussion since that time
had been having the PFD substantially above the 25
percentage. He thought the matter of the split and the
endowment construct were separate discussions. He said that
the concern that the rate would be set at a too high
percentage.
Co-Chair Stedman thanked Mr. Mitchell and Mr. Frampton for
their testimony. He reiterated that the LFD would be
working with APFC to create other models and projections.
He stressed that the market was not linear.
Co-Chair Stedman discussed housekeeping.
ADJOURNMENT
10:33:55 AM
The meeting was adjourned at 10:33 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 021323 APFC SFC Presentation.pdf |
SFIN 2/13/2023 9:00:00 AM |