Legislature(2023 - 2024)SENATE FINANCE 532
01/26/2024 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| 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 | ||
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
January 26, 2024
9:01 a.m.
9:01:32 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
Ethan Shutt, Board Chair, Alaska Permanent Fund
Corporation; Deven Mitchel, Executive Director, Alaska
Permanent Fund Corporation; Marcus Frampton, Chief
Investment Officer, Alaska Permanent Fund Corporation;
Senator Cathy Giessel.
SUMMARY
^ALASKA PERMANENT FUND CORPORATION
9:03:05 AM
ETHAN SHUTT, BOARD CHAIR, ALASKA PERMANENT FUND
CORPORATION, (APFC) introduced himself.
DEVEN MITCHEL, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, discussed the presentation, "Senate Finance
Committee Alaska Permanent Fund January 2024" (copy on
file). He highlighted slide 2, "Assets Under Management":
Mission
To manage and invest the assets of the Permanent Fund
and other funds designated by law in accordance with
AS 37.13.
Vision
To deliver outstanding returns for the benefit of all
current and future generations of Alaskans.
Fiduciaries
The Board of Trustees has a duty to ensure that the
Fund is managed and invested in a manner consistent
with constitutional and statutory mandates, including
the Prudent Investor Rule.
Invested Under the Same Asset Allocation
Total Fund Portfolio Performance
Monthly Financial Reconciliation of Accounts
Alaska Permanent Fund
Principal - Constitution and AS 37.13.010
Earnings Reserve Account - AS 37.13.145 (a)
Savings - Income Producing Investments - Annual Value-
Based Distribution
Amerada Hess Settlement - AS 37.13.145 (d)
$424.4 million from 1977 royalty disputes, ring-fenced
within Principal
Earnings for appropriation to the AK Capital Income
Fund AS 37.05.565
Alaska Mental Health Trust Fund - AS 37.13.300
$727.3 million invested on behalf of the Alaska Mental
Health Trust Authority
Deposits and Withdrawals managed by AMHTA
Power Cost Equalization Endowment - AS 42.45.080 (a)
$957.1 million invested on behalf of the Power Cost
Equalization Program
Annual value and earnings-based distributions by
appropriation with program management through the
Alaska Energy Authority
Mr. Shutt pointed to slide 3, "Legacy Of Intergenerational
Resource Contribution":
As a public endowment, the wealth of the Permanent
Fund is the responsibility of every Alaskan.
Together, we are obligated to protect it for both
today and tomorrow.
Alaska Constitution Article IX, Section 15
Alaska Permanent Fund
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.
Mr. Shutt addressed slide 4, "Fiduciary Duties":
AS 37.13.120
Duty of Prudence
Duty of Loyalty
Duty to Diversify
Duty of Impartiality
APFC operates as a separate state entity under the
oversight of an independent Board of Trustees who
serve as the Fund fiduciaries.
Honoring The Past
Upholding the vision and sacrifices of the Alaskans
who created the Fund with enduring leadership
committed to intergenerational benefit.
Renewable Financial Resources from Mineral Royalties
Stewardship
Protecting the Principal and maximizing investment
returns for the benefit of current and future
generations of Alaskans.
Through Dynamic Market Conditions
With A Long-term Investment Horizon
Public Accountability
Continuously earning the public's trust through a
commitment to accountability by demonstrating
competence, reliability, and honesty in open and
responsive communication.
Financial Controls and Regular Reporting
Open Meeting Act and Records Disclosures
9:10:52 AM
Mr. Shutt displayed slide 5, "Updated Strategic Plan":
Building an Organization that Sets the Standard for
Endowment-Style Sovereign Wealth Funds
Grow the Fund to $100 Billion Consideration of Limited
Leverage, Alpha Outperformance, Asset Class Goal
Alignment
Improve Corporate Functionality Executive Director and
Chief Investment Officer Recruitment, Key Person Risk
and Incentive Compensation, Evaluation of Location
Expansion, Data Management Capability
Advance Comprehensive Communications Plan Instate
Education and Awareness, Nationwide and Global Focus
In Support of Investment Management
Review and Assess the Optimal Structure of the Alaska
Permanent Fund Rules-based Endowment Practices and
Modernization
9:17:40 AM
Senator Kiehl asked about the perceived split between the
team was improving the problem.
Mr. Shutt replied that it was a focus of the leadership to
do things to ensure that the employees were considered a
member of one team.
Senator Kiehl wanted to learn more about the positive
impact on the change, because history showed a very low
employee turnover.
Mr. Shutt noted that the evaluation had not occurred on the
impact. He remarked that he was skeptical about an outside
office, and felt that there would be real consequences.
9:25:53 AM
Senator Bishop wondered whether there was a timeline with
benchmarks on the office decision.
Mr. Shutt replied that letting the structure run for a few
years would impact the decision, but there was not a
current timeline on the decision.
Co-Chair Stedman noted that there were some inquiries to
committee members, which resulted in some caution because
there was a lack of process in the decision making process.
He wondered whether there would be a salary reduction for
those that were moving to Anchorage.
Mr. Shutt replied that he did not believe so.
9:30:51 AM
Co-Chair Stedman made a frying fish analogy. He expressed
appreciation that added leverage had not been pursued and
highlighted the committee's concern for cash flow. He
feared underperformance of the fund. He lamented
constraints on the revenue side of the scale.
9:34:53 AM
Mr. Schutt addressed slide 6, "Proposed Legislation;
Seeking Amendments to Improve Corporate Functionality":
Amend Existing Law to
Protect from public records disclosure the identity of
all candidates who would like to be considered for the
positions of Executive Director and Chief Investment
Officer;
Provide the Board with the authority to interview the
finalists for the positions of Executive Director and
Chief Investment Officer in an executive session;
Provide for the confidentiality of personnel records
of all APFC staff.
Sec. 37.13.100 Corporation Staff.
The board may employ and determine the salary of the
executive director. The list of applicants and
information regarding the applicants for the position
of executive director is confidential and is not a
public record, and the board may meet in executive
session for the purpose of interviewing candidates for
the position of executive director notwithstanding any
other provision of law to the contrary. The executive
director may, with the approval of the board, select
and employ additional staff as necessary. An employee
of the corporation, including the executive director,
may not be a member of the board. The executive
director and the other employees of the board are in
the exempt service under AS 39.25. Except for the
information described in AS 39.25.080(b)(1) (7), the
personnel records of the executive director and other
employees of the corporation, including employment
applications and examinations and other assessment
materials, are confidential and are not open for
public inspection.
Mr. Schutt expressed that conducting interviews in
executive session would lead to more honest and meaningful
interviews because people could speak freely.
Senator Kiehl questioned the interviewing and evaluation of
chief staff. He expressed concern with the secrecy of the
board as of late. He believed that the public fund should
have transparency. He posited that the board might hold
meetings out of state to avoid the public meetings act.
Co-Chair Stedman
Mr. Schutt did not believe that the board would behave as
Senator Kiehl had suggested.
Co-Chair Stedman
Mr. Schutt pointed to slide 7, "Investing for Long Term":
Legislature's findings for the purpose of the
Permanent Fund in AS 37.13.020,
.notdefthe fund should provide a means of conserving a
portion of the state's revenue from mineral
resources to benefit all generations of Alaskans;
.notdefthe fund's goal should be to maintain safety of
principal while maximizing total return;
.notdefthe 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,
.notdefAchieve the highest level of performance within
the investment responsibilities of AS 37.13.120
and a long-term investment perspective based on
Investment Performance
Ability to generate an annualized return of inflation
(CPI) + 5 percent 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.
9:40:55 AM
Mr. Mitchell pointed to slide 9, "Diversification":
APFC seeks to balance the goals of maximizing returns
and minimizing risks.
Risk Management
The goal of risk management is not to avoid risk but
to identify, understand, and manage it to acceptable
levels.
Mr. Mitchell suggested that Alaska had the most
Co-Chair Stedman discussed the different structure of the 5
percent draw rate.
Mr. Mitchell spoke of modern endowments and the percent of
market value based on structure. He said that the
underlying framework created a cash crunch that led to
liquidity issues.
9:45:13 AM
Mr. Mitchell addressed slide 10, "Renewable Financial
Resource inception through December 2023":
Savings
Since the First Royalty Deposit of $734 thousand
The Principal has grown to $56.7 billion of permanent
deposits.
Income Producing
Realized Earnings have totaled more than $85.4
billion.
Earnings
Dividend Draws through FY18 $24.4 B
Percent of Market Value Draws FY19-FY24 $19.0 B
Inflation Proofing Principal $23.6 B
ERA Special Appropriations to Principal $12.3 B
Alaska Capital Income Amerada Hess $0.5B
Mr. Mitchell discussed the enhanced use of the fund by the
state.
Mr. Mitchell highlighted slide 11, "Savings, Principal
Contributions - Inception through FY 24 Projected":
$19.5 Billion Royalty Deposits
AS 37.13.010 (a) (1) and (a) (2)
25 percent of constitutionally dedicated royalty
proceeds and 50 percent of statutorily mandated
deposits for leases after 1979.
$15.0 Billion Special Appropriations
AS 37.13.010 (a) (3)
Legislative deposits from the General Fund $2.7 B and
the ERA $12.3 B.
$23.6 Billion Inflation Proofing
AS 37.13.145 (c)
Principal deposits are adjusted annually by the
inflation rate as calculated per statute and based on
appropriation.
Inflation Proofing FY 16-24
Owed = $12.6 B
Appropriated $11.3 B*
*includes the FY20 special appropriation of $4.0 B per
intent language, but not FY22.
9:49:12 AM
Co-Chair Stedman remarked that inflation did not erode the
state's purchasing power.
Mr. Mitchell highlighted slide 12, "Producing Income, Two-
Account Fund Structure":
The Principal is constitutionally established for
permanent savings to be used only for income-producing
investments.
The Earnings Reserve Account is statutorily
established to hold investment net income and be
available for appropriation.
Co-Chair Stedman wondered about the real estate sales.
Mr. Mitchell remarked that the real estate portfolio was
growing, but was not a strong generator of statutory
incomes.
Mr. Mitchell discussed slide 13, "Earnings Reserve Account
(ERA), Deposits and Withdrawals, in millions, Fiscal Year
2014- 2023."
9:56:03 AM
Mr. Mitchell pointed to slide 14, "Revenue Stability
Supporting the State's General Fund Revenue."
Mr. Mitchell discussed slide 15, "FUND Values as of
December 31, 2023."
Mr. Mitchell displayed 16, "10 Year Annualized Returns."
10:02:45 AM
Co-Chair Stedman asked about the impact of a potential
decrease in oil prices, and how to assist the state in its
financial obligations.
Mr. Mitchell responded that the state had fewer options
that it did in 2014. He remarked that there were also
concerns about the Permanent Fund's ability to provide for
the state's needs.
10:05:49 AM
Co-Chair Stedman surmised that an overdraw would result in
more risk exposure.
Mr. Mitchell recalled that the state does not often allow
for a drain effect. He stated that it was reliant on the
leadership to recognize the deficiencies. He stressed that
overdrawing would result in an eventual elimination of the
fund.
Co-Chair Stedman surmised that it would cease to exist.
Mr. Mitchell agreed.
10:07:58 AM
MARCUS FRAMPTON, CHIEF INVESTMENT OFFICER, ALASKA PERMANENT
FUND CORPORATION, continued to highlight slide 16.
Mr. Frampton highlighted slide 18, "Fund Performance vs
Benchmarks."
Mr. Frampton addressed slide 19, "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
•2023 In-process International Equities
10:14:51 AM
Senator Kiehl wondered where the private equities were in
the timeframe.
Mr. Frampton replied that private equity had a mix of
internal and external managers.
Mr. Frampton discussed slide 20, "APFC Performance Relative
to Large Public Funds."
Mr. Frampton pointed to slide 21, "Tenured and Seasoned
Investment Leadership Leaders of APFC's major asset classes
have substantial industry experience and tenure with APFC."
10:19:32 AM
Senator Bishop wondered whether there was trend on the
exit surveys.
Mr. Mitchell replied that there was a variety of reasons of
those that left the firm.
Mr. Frampton discussed slide 22, "Permanent Fund Balance
Sheet as of December 31, 2023, in millions."
Mr. Frampton pointed to slide 23, "Statutory Net Income
History and Projections."
10:25:01 AM
Mr. Frampton addressed slide 24, "Baseline Statutory Net
Income."
Mr. Mitchell highlighted slide 25, "Realized Gains by Asset
Class (2012 Present)."
Mr. Frampton displayed slide 26, "How Available Unrealized
Gains Were Realized."
Mr. Frampton discussed slide 27, "Consistent Discipline":
.notdefRecognizing the savings function established in the
Constitution ensures that a portion of our mineral
wealth is saved and invested to benefit all Alaskans,
today and tomorrow.
.notdefProtecting the Principal and maximizing a long-term
risk-adjusted return for intergenerational benefit.
.notdefProviding stewardship to ensure the Fund can provide
for all generations. The Board of Trustees has been on
record for more than 20 years to transition the Fund
from its current two-account system to a one-unified
account system with a constitutional distribution for
enduring sustainability and benefit.
10:30:38 AM
Co-Chair Stedman remarked that the instate investment
issues would be discussed at a later date. He also wanted
to examine the issue of the new board members.
Senator Bishop thanked the testifiers. He pointed out that
the picture on the last slide "started it all." He felt
that there should be a tour of Prudhoe Bay to see the oil
field production that feeds the fund.
Co-Chair Stedman discussed housekeeping.
ADJOURNMENT
10:36:52 AM
The meeting was adjourned at 10:36 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 012624 SFC APFC Presentation.pdf |
SFIN 1/26/2024 9:00:00 AM |
APFC Presentation |