Legislature(2023 - 2024)SENATE FINANCE 532
01/19/2024 09:00 AM Senate FINANCE
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| Audio | Topic |
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| Start | |
| Savings, Reserves, and Investments: Department of Revenue | |
| 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 19, 2024
9:01 a.m.
9:01:51 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:01 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Donny Olson, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Jesse Kiehl
Senator Kelly Merrick
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Adam Crum, Commissioner, Department of Revenue; Zach Hanna,
Chief Investment Officer, Commissioner Crum; Pam Leary,
Director, Treasury Division, Department of Revenue.
SUMMARY
^SAVINGS, RESERVES, and INVESTMENTS: DEPARTMENT OF REVENUE
9:02:57 AM
ADAM CRUM, COMMISSIONER, DEPARTMENT OF REVENUE, (DOR)
discussed the presentation, "Update on the State's
Investment Funds and Cash Flows" (copy on file). He
addressed slide 2, "Agenda":
Meet the Treasury
State Investment Funds
State Cash Flows
Commissioner Crum highlighted slide 4, "Department of
Revenue Treasury Division":
The Treasury Division is managed by 40 experienced
professionals in portfolio management, accounting,
operations, compliance, and cash management. Treasury
staff average tenure is over 10 years and includes
CFA's, CPA's, CTP's and other advanced degrees and
designations.
Managing numerous funds and cash flows is complex and
requires understanding investment management and
banking systems which are highly integrated into the
State accounting system.
In FY2023, there were 57,000 trades made on
behalf of hundreds of state accounts that roll
into 48 investment funds, utilizing 32 investment
pools, supported by 150 of external and internal
investment managers and 600 private equity funds.
Accounting ensures that all trades and costs are
directed and accounted for in the correct
accounts/funds.
The Middle office performs 160 compliance tests
on trades daily and calculates daily performance
for 30 state funds internally.
Cash Management processes roughly 100,000
transactions annually for departments to realize
revenue and expenditures in the accounting
system. There are over $15 billion in cash
inflows and cash outflows annually.
It takes a unique set of skills to manage these
complex systems with strong results.
9:05:15 AM
Commissioner Crum pointed to slide 5, "Treasury Manages
Complex Funds for Multiple Fiduciaries":
Treasury manages $50 billion in assets for funds
across the risk spectrum from lower risk cash-
equivalent investments through higher risk endowment
and retirement funds.
Over 50 percent of 12/31/2023 assets were directed or
traded internally by Treasury staff.
Staff meet with state fiduciaries regularly to review
investment performance and set investment policy and
asset allocations.
Quarterly Alaska Retirement Management Board (ARMB)
and State Investment Review meetings include
additional oversight by an independent investment
advisory committee and other experts and materials are
publicly available on the Treasury website.
The Treasury Division's work is mission critical, and
the benefits provided in the form of excess returns,
external cost savings, and error prevention are
significant.
Co-Chair Stedman requested some footnotes on the slides
about the background and description of the funds.
Commissioner Crum agreed to provide that information.
9:08:10 AM
ZACH HANNA, CHIEF INVESTMENT OFFICER, COMMISSIONER CRUM,
displayed slide 6, "Treasury Results are Strong":
Investment returns for the State's defined benefit
retirement systems have been in the top-quartile of
peer performance and have exceeded benchmarks
materially. This has resulted in $2+ billion in excess
returns over the past 10 years, ahead of over 80
percent of peer public pensions.
FY23 investment returns for state funds surpassed
benchmarks, ranging from 4 percent to 11.6 percent and
were even stronger for the 1-year period ending
12/31/23 from 5 percent to 17 percent.
Treasury uses low-cost internal investment management
where appropriate.
For FY23, internal investing resulted in investment
management fee savings of $30 million and excess
returns of $90 million.
The Treasury's cost structure is materially lower than
its peers. FY23 fees for the defined benefit
retirement systems were 38 bps compared with a median
of 56 bps for large plans a difference of over $50
million per year.
Professional and institutional knowledge is critical
to maintaining strong results since the investment and
retirement systems are complex.
Co-Chair Stedman asked for an explanation of the tables on
slide 6.
Mr. Hanna replied that those were the returns as reported
by Callan through September 30, 2023.
9:10:10 AM
Co-Chair Stedman wondered whether the employees, teachers,
and Judiciary employees were co-mingled.
Mr. Hanna replied that the employees and teachers had the
same asset allocation, and the Judiciary had a separate
asset allocation.
Mr. Hanna looked to slide 8, "Capital Market Performance
Update":
After a challenging 2022, calendar year 2023
performance was strong, but volatile across most asset
classes.
Capital markets have been focused on the interplay of
inflation, interest rates, and economic growth.
To combat inflation, the Federal Reserve increased
short-term interest rates 5.25 percent, which led to a
decrease in annualized inflation from 9.1 percent in
June of 2022 to 3.4 percent in December of 2023.
As inflation has moderated, the potential for further
interest rate increases and the associated drag on
economic growth has decreased.
As a result, equity markets recovered strongly from
the correction of 2022 and both core U.S. fixed income
and cash equivalents benefited from high yields.
Mr. Hanna pointed to slide 9, "Treasury Asset Class
Performance":
State funds invest in commingled asset class
investments managed by Treasury staff and external
managers.
These asset class investments are used in different
proportions to meet fund investment policies.
State asset class performance for calendar year 2023
was strong across asset classes.
Most asset classes also exceeded benchmark performance
for the year and longer time periods adding additional
value.
9:13:29 AM
PAM LEARY, DIRECTOR, TREASURY DIVISION, DEPARTMENT OF
REVENUE, addressed slide 10, "Constitutional Budget Reserve
Fund (CBRF) Historical Invested Assets (in billions)":
In 1990, voters of Alaska adopted an amendment to the
constitution creating the CBRF.
The CBRF has been used to fund temporary cash flow
expense/revenue mismatches and to cover budget revenue
shortfalls through appropriation. Appropriations from
the CBRF must be repaid.
In 2000, the legislature created a subaccount in the
CBRF to be used for funds that will not be needed for
at least 5 years.
9:16:08 AM
Co-Chair Stedman surmised that the sub-account was targeted
at a longer holding period and a higher rate of return
target. He queried the level of the main account would be
needed to move money into the sub-account.
Commissioner Crum replied that the statutory discretion
resided within the commissioner of DOR. He stated that
there was no set target. He shared that it was an item that
was only recently examined to determine the appropriate
levels.
Co-Chair Stedman stressed that the budget would be examined
with the chance to see what was not included in the budget.
He remarked that there would be revenue projections based
on oil price and volume, with specific sensitivity levels.
He remarked that there would be a focus on the moving the
target. He stated that there would be discussions around
adjusting that benchmark, with analysis on whether to call
on the subaccount. He stressed that the CBR could be
drained, so wanted to ensure that the exercises were run
for the health of the fund.
Commissioner Crum agreed that there was not more than $2
billion in the CBR for a few years, and agreed to run
various analyses.
Co-Chair Stedman felt that there were more conservative
forecasts required examination.
9:20:25 AM
Mr. Hanna highlighted slide 11, "Constitutional Budget
Reserve Fund (CBRF) Fiduciary oversight: Commissioner of
Revenue." He summarized the policy used for state asset
allocation. He shared that there was a formal state
investment review and an independent investment advisory
committee.
Co-Chair Stedman wanted more information about the review
committee.
Commissioner Crum stated that there were regular quarterly
meetings with investment advisors to advise on public
funds.
Co-Chair Stedman stated that the board gave the
commissioner some counseling from professionals on complex
decisions. He felt that the board was an important internal
mechanism to help minimize errors.
9:25:17 AM
Ms. Leary pointed to slide 12, "General Fund and Other Non-
Segregated Investments (GeFONSI) Historical Invested Assets
(in billions)":
GeFONSI includes the General Fund and Other Non
segregated funds invested in a pooled environment (GF
proper carries a minimum balance of $400 million to
pay our bills).
Mr. Hanna looked at slide 13, "General Fund and Other Non-
Segregated Investments (GeFONSI I and II) Fiduciary
oversight: Commissioner of Revenue."
Co-Chair Stedman wondered whether the reason for no
benchmark was because the state always beat the benchmark.
Mr. Hanna replied that there was no benchmark. He explained
that the benchmarks were approved by the consultants, and
were universally used for the asset classes. He stated that
the long-term investor in the asset classes with an
experienced team, there was a belief that producing
consistent excess returns were the focus.
Commissioner Crum explained that there was internal
monitoring with a benchmark that would be the request from
the consultants.
Ms. Leary addressed slide 14, "Alaska Higher Education
Investment Fund (AHEIF) Historical Invested Assets (in
millions)":
On September 1, 2012, the AHEIF was capitalized with a
$400 million deposit from receipts of the Alaska
Housing Capital Corporation for use in paying Alaska
Performance Scholarship Awards and Alaska Advantage
Education Grants.
9:30:25 AM
Mr. Hanna pointed to slide 15, "Alaska Higher Education
Investment Fund (AHEIF) Fiduciary oversight: Commissioner
of Revenue."
Ms. Leary highlighted slide 16, "Public School Trust Fund
(PSTF) Historical Invested Assets (in millions)":
The PSTF was established in 1978, replacing the
territorial era public school land grant originally
created by congress in 1915, by a transfer of the
balance from the permanent school trust.
Following passage of HB 213 in 2018, the fund is now
managed as one fund, under a percentage of market
value method (5 percent of the average market value
for the 5 years preceding the last previous fiscal
year).
Co-Chair Stedman looked at the Higher Education Fund, and
noted the allocation of 70/30, which was a standard balance
portfolio. He, however, noted the 7 percent payout. He
queried the expectation out of the balance portfolio over
time.
Mr. Hanna replied that the projected return was 6.83
percent. He remarked that there was a hope that there was
an emergence out of a fairly low return environment. He
stressed that a 70/30 portfolio would be considered highly
prudent.
9:35:39 AM
Co-Chair Stedman wondered how to protect the fund in
perpetuity from purchasing power.
Mr. Hanna replied that, in the abstract, the spending rate
was low at around 4 percent. He stated that there would be
less than full inflation proofing if the fund was spent
beyond 7 percent.
Co-Chair Stedman felt that the committee should take that
into consideration.
Mr. Hanna discussed slide 17, "Public School Trust Fund
(PSTF) Fiduciary oversight: Commissioner of Revenue." He
stated that the fund had the same risk profile as the
Higher Education Fund, and the performance was also similar
to the Higher Education Fund.
Ms. Leary looked at slide 18, "Power Cost Equalization
(PCE) Historical Invested Assets (in millions)":
The purpose of the PCE Endowment fund is to provide a
long-term stable financing source that provides
affordable levels of electric utility costs in
otherwise high-cost service areas of the state.
SB 98 transferred the investment management of the
fund to the Alaska Permanent Fund Corporation July 1,
2023.
Mr. Hanna addressed slide 19, "Power Cost Equalization
(PCE) Fiduciary oversight: Changed from Commissioner of
Revenue to APFC." He stated that the fund was liquidated to
cash to transfer at the end of the fiscal year.
Co-Chair Stedman surmised that the cash was moved to APFC.
Mr. Hanna replied in the affirmative.
Commissioner Crum furthered that the fund was monitored
with a strategic plan.
9:40:03 AM
Senator Wilson queried the projected 10-year return for the
fund.
Mr. Hanna replied it had the same asset allocation as the
prior discussed funds. He stated that 6.83 percent would
have been the projected return
Senator Kiehl wondered why it was preferable to only
liquidate and transfer only cash rather than securities and
bonds.
Mr. Hanna replied that it was operational complex, and
legally challenging to transfer securities between
entities.
Co-Chair Hoffman wondered whether the decision was in
compliance with the law.
Commissioner Crum replied in the affirmative.
Co-Chair Hoffman stated that the asset allocation was "very
happy in its new home."
Ms. Leary discussed slide 20, "Public Employees Retirement
System (PERS) and Teachers Retirement System (TRS) Pension
and Health Defined Benefit Plans Historical Invested Assets
(in billions)":
The Alaska Retirement Management Board (ARMB) is a 9-
person board and fiduciary of the state's pension and
health systems.
Mr. Hanna highlighted slide 21, "Public Employees
Retirement System and Teachers Retirement System Fiduciary
oversight: Alaska Retirement Management Board."
9:45:12 AM
Co-Chair Stedman asked why the two dates were not the same.
Mr. Hanna replied that the presence of alternative
investments took time to provide the returns.
Co-Chair Stedman requested an update of the data set after
the returns.
Mr. Hanna agreed to provide that information.
Ms. Leary looked to slide 23, "SOA Treasury Cash Flow":
Cash Inflows
Tax Revenues
Oil and Gas, Excise, Other
Federal Dollars
Grants, Medicaid, FHWA, Education, Other
Earnings Reserve Funds
Agency Receipts
Fees, Licenses, Permits, Fines, Other
Cash Outflows
School Education Payments
Payroll and Pension Payments
Vendor Payments
Medicaid Payments
External Program Grant Payments
Debt Service Payments
Co-Chair Stedman queried the reason why "credits" was not
in the "out flow" list.
Ms. Leary replied that it would be included in the
following year's presentation.
Ms. Leary pointed to slide 24, "Revenue":
Commodity Volatility
Petroleum revenues are projected to be 37
percent of FY24 unrestricted general fund
revenues.
Uncertainty exists "in-year" for FY24 and
beyond.
Will always have in-year uncertainty because the
budget is based on in-year oil collections.
Investment Return Volatility
Investment earnings are projected to be 56
percent of FY24 unrestricted general fund
revenues.
Certainty exists today for FY24 and FY25 due to
a lagging Percent of Market Value (POMV) formula.
Uncertainty exists for FY26 and beyond.
Co-Chair Stedman looked at slide 23, and noted that the
Permanent Fund Dividend (PFD) payments were not included in
the slide as an expenditure.
Commissioner Crum agreed to include PFDs in the list, and
stated that the list was not intended to be inclusive.
Co-Chair Stedman felt that large items should be included
in the lists.
9:49:50 AM
Ms. Leary looked at slide 25, "Expenditures":
Expenditures can occur prior to receipt of revenue,
resulting in cash flow timing mismatches:
Federal programs require expenditures before
reimbursement.
•i.e. Medicaid, Transportation, etc.
Beginning of year appropriation transfers do not
match incoming revenue.
•i.e. State pension payments, transfers to
sub funds for programs.
Seasonal Cash Flow needs.
•i.e. Summer is the peak season for
construction projects and seasonal workers.
9:51:00 AM
Senator Bishop wondered whether payroll for contractors was
every two weeks.
Ms. Leary replied that she did not know the payment
schedule.
Senator Bishop wondered who would write the checks to the
contractors.
Ms. Leary replied that the money would flow through the
general fund to pay contractors through the departments.
Senator Bishop wondered whether there were relationships
with the departments to ensure that cash was available for
checks.
Ms. Leary replied in the affirmative.
Co-Chair Stedman asked about how the Permanent Fund
transfer was handled to ensure cash flow.
Ms. Leary replied that there was a transfer schedule
drafted and redrafted to ensure the money was available for
expected needs.
Co-Chair Stedman queried the schedule of the transfer.
Ms. Leary replied that it was about every two months, with
some changes in the schedule based on need.
9:55:15 AM
Co-Chair Stedman felt that there had been improvements over
time on that scheduling.
Commissioner Crum furthered that there was work with the
Permanent Fund to ensure maximization of returns, before
transferring the money.
Ms. Leary addressed slide 26, "Cash Flow Deficiencies":
Prior to 1985, most unrestricted revenues flowed into
and stayed in the General Fund for expenditure.
Over time, the legislature established many sub-funds
of the general fund to segregate cash for budgeting
purposes, resulting in less cash available to pay day-
to-day operating costs.
Cash Flow Deficiencies are common and managed by:
Adjusting timing of Earnings Reserve Account
transfers to the General Fund.
Borrowing from Budget Reserves or Other Funds.
Managing timing of expenditures.
Ms. Leary pointed to slide 27, "Revenue Shortfalls":
A revenue shortfall differs from a cash flow timing
deficiency. A revenue shortfall occurs when revenue is
insufficient to cover general fund appropriations in
any given fiscal year.
The legislature includes language annually in the
operating budget appropriating budget reserve funds
for revenue shortfalls.
• Treasury has relied on this appropriation to
authorize use of budget reserve funds to address
both revenue shortfalls and cash flow timing
mismatches.
The Constitutional Budget Reserve fund (CBR) has been
used to cover revenue shortfalls historically. The CBR
was fully repaid by FY2010 with no borrowing activity
from the CBR until FY2015.
Co-Chair Stedman questioned the benchmarks to ensure that
money was not spent more than the appropriation.
Ms. Leary replied that the state accounting system had
appropriation limits.
10:00:40 AM
Ms. Leary discussed slide 28, "Cash Deficiency Memorandum
of Understanding":
Developed in 1994 between DOR, DOA, OMB and LAW.
Updated as needed.
Targets $400 million minimum cash threshold in the
General Fund proper.
Outlines procedures for addressing cash flow timing
mismatches:
Develop monthly cash projections.
Monitor daily general fund cash balances. Update
forecasts based on new cash flows.
Execute appropriated transfers from ERA, CBR, or
others.
Perform temporary fund borrowing (CBR, ERA, sub-
funds) to be repaid by fiscal year end.
In the event of forecasted revenue shortfall:
• Seek legislative action through the
Governor to access additional funds through
appropriation from other Reserve Funds
discussed above.
• Prioritize disbursements, restrict
expenditures.
Co-Chair Stedman wondered when the restriction of
expenditure almost occurred.
Ms. Leary replied that it was in the 1990s.
Commissioner Crum stated that possible federal shutdowns
were also considered shortfalls, and there was continual
examinations about those possibilities.
Co-Chair Stedman agreed that it was a significant cash flow
issue.
Ms. Leary looked at slide 29, "Cash Flow Summary":
Cash flow forecasting changes due to amount and timing
of revenues and expenditures.
Even with balanced budgets, cash flow timing
mismatches will occur.
Revenue shortfalls may occur if forecasted assumptions
are wrong.
Co-Chair Stedman wanted to ensure that there was not a cash
flow problem, but the presentation was an examination of
the possibilities around processing and accessibility to
that cash. He stressed that the role of the committee was
to ensure that DOR had ample liquidity to make the
payments. He also pointed out that the credit rating would
improve with timely payments.
10:05:58 AM
Commissioner Crum appreciated the discussion, and stated
that there were robust processes to maintain the operations
of the state. He pointed out that the threat of federal
shutdown was continually analyzed, and plans around that
possibility.
Co-Chair Stedman thanked the presenters and discussed
housekeeping.
ADJOURNMENT
10:09:00 AM
The meeting was adjourned at 10:08 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 011924 GeFONSI I and II - CBRF - SBRF.pdf |
SFIN 1/19/2024 9:00:00 AM |
|
| S.FIN Savings Accounts and Cash Flow Presentation 01.19.24.pdf |
SFIN 1/19/2024 9:00:00 AM |