Legislature(2025 - 2026)SENATE FINANCE 532
02/11/2025 09:00 AM Senate FINANCE
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| Alaska Permanent Fund Corporation | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
February 11, 2025
9:02 a.m.
9:02:21 AM
CALL TO ORDER
Co-Chair Hoffman called the Senate Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Mike Cronk
Senator James Kaufman
Senator Jesse Kiehl
Senator Kelly Merrick
MEMBERS ABSENT
Senator Donny Olson, Co-Chair
ALSO PRESENT
Jason Brune, Chair, Alaska Permanent Fund Corporation Board
of Trustees; Deven Mitchell, Executive Director, Alaska
Permanent Fund Corporation; Jim Parise, Deputy Chief
Investment Officer, Alaska Permanent Fund Corporation;
Allen Waldrop, Deputy Chief Investment Officer, Alaska
Permanent Fund Corporation; John Binkley, Member, Alaska
Permanent Fund Corporation Board of Trustees, Senator Cathy
Giessel.
SUMMARY
ALASKA PERMANENT FUND CORPORATION
Co-Chair Hoffman discussed the agenda.
^ALASKA PERMANENT FUND CORPORATION
9:03:17 AM
JASON BRUNE, CHAIR, ALASKA PERMANENT FUND CORPORATION BOARD
OF TRUSTEES, introduced himself.
9:03:30 AM
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, introduced himself.
Mr. Brune relayed that there were six members of the Alaska
Permanent Fund Corporation (APFC) Board of Trustees,
including Vice-Chair Adam Crum, the Commissioner of the
Department of Revenue (DOR). He relayed that two of
the members must be heads of principal departments of state
government, one of whom shall be the commissioner of DOR.
He listed members of the APFC Board of Trustees, which also
included Department of Transportation and Public Facilities
(DOT) Commissioner Ryan Anderson. He clarified that the
board did not make investment decisions like specific
managers but rather set ranges as the APFC set specific
investments and policies. He relayed that he would later
discuss potential legislative and constitutional changes
that he had discussed with Senate President Gary Stevens
and Senate Majority Leader Cathy Giessel.
Co-Chair Hoffman recognized that Senator Cathy Giessel was
in attendance.
Mr. Mitchell discussed a presentation entitled "Senate
Finance Committee Alaska Permanent Fund February 2025"
(copy on file). He relayed that there were senior members
of the investment team present for questions. He mentioned
that Deputy Chief Investment Officer Jim Parise and Deputy
Chief Investment Officer Allan Waldrop were present.
9:06:38 AM
Mr. Mitchell looked at slide 2, "A Legacy of
Intergenerational Resource Contribution":
In 1976 -
Alaskans chose to permanently forgo immediate use of
at least 25% of oil and mineral revenues, saving
instead to create a renewable financial resource for
generations the Alaska Permanent Fund.
Today, the Fund -
• Leads the Nation
The largest U.S. sovereign wealth fund, globally
recognized for converting finite resources into
lasting wealth.
• Supports Alaska
Provides over 50% of the state's unrestricted general
fund revenue for dividends and essential services.
Mr. Mitchell mentioned that the Permanent Fund (PF) was
created out of large revenue received by the state from
sales in Prudhoe Bay. He mentioned the high oil price after
the Trans-Alaska Pipeline System (TAPS) was done. He
emphasized that the fund was not created with a specific
purpose, but as a savings mechanism for the state with 25
percent of the royalty from the North Slope. The vast
majority came from North Slope oil production. He cited
that Alaska had the largest United States (U.S.) sovereign
wealth fund.
Mr. Mitchell spoke to slide 3, "Investing for Alaska,"
which showed the framework the APFC operated under. The
mission was to act as the state's investment house, and
APFC with a professional investment staff and an
institutional investment bent it pursued. The asset classes
were comparable to any world-class institutional investor.
He described a level of sophistication that was not found
at every fund. He referenced the previous ten years and the
management by APFC, which had added close to $5 billion in
value by beating its performance benchmark over the period.
Total nominal dollars that had been generated during the
ten-year time frame was $55 billion in gains. He referenced
a passive benchmark, which was closer to $14 billion over
the ten-year period.
Mr. Mitchell emphasized the long-term vision of APFC. He
referenced the entities that were listed on the right-hand
side of the slide. The Alaska Mental Health Trust Fund
(AMHTF) and the Power Cost Equalization (PCE) Endowment
were co-invested with the Permanent Fund.
9:10:51 AM
Mr. Brune showed slide 4, "Positive Impact."
APFC appreciates the support from the Executive Branch
and the Legislature. Policy & budget resources play a
crucial role in the effective investment management of
the Alaska Permanent Fund.
To maintain a high level of investment management,
budget resources enhance our ability to recruit and
retain top professional talent:
• Fully funded incentive compensation
• Increase due diligence capacity of the internal
investment team
• Continue IT strategic roadmap to ensure security and
architect solutions for data vault implementation
Support has provided the ability to enhance the
capacity of our internal investment team by:
• Bringing the Fixed Income asset class entirely in-
house, which generates performance returns comparable
to those of external managers.
• Developing integrated data and investment systems.
To ensure the Fund's security and protection,
resources and talent have strengthened our IT systems
and business continuity plan.
Mr. Brune thanked members of the legislature for fully
funding APFC's incentive compensation it put forward a
couple of years previously. He acknowledged that there had
been controversy about some actions taken by APFC and
stressed that the organization wanted the best people
possible to maximize returns for the state. He emphasized
that the headquarters of the fund was in Juneau.
Mr. Brune advanced to slide 5, "APFC Related Legislation."
He noted that APFC had forthcoming legislative requests.
Co-Chair Hoffman commented that the percent of market value
(POMV) draw was initiated in 2019 through a piece of
legislation introduced and worked on by the Senate Finance
Committee. Prior to that time, PF earnings were set aside.
The members had taken much time, energy, and courage to
pass the bill. The draw was now the basis for the primary
funding source for state services.
Senator Kiehl commented on slide 4 and made note of the
bottom right bullet related to accountability. He thought
the concept was new.
9:14:43 AM
Mr. Brune agreed that it was wise leadership from the
Senate Finance Committee that started the POMV draw, which
he thought the business community had been asking about for
years. He noted that the business community as well as the
trustees had also been asking for the merging of the
accounts, which would be addressed later in the
presentation. He responded to Senator Kiehl that the APFC
was absolutely accountable to the legislature, valued its
input, and wanted to work collaboratively. He noted that
part of what the staff had done was to bring a lot of the
investment work in-house.
Mr. Brune referenced slide 5 and worries about getting
honest and true feedback in writing to senior leadership
because of the discoverability. He mentioned concerns about
high-level candidates for positions at APFC being exposed
to the public without a level of confidentiality. The slide
discussed potential changes the legislature could make to
bring a level of confidentiality to staff. He thought the
issue was important considering that APFC endeavored to
hire the best and the brightest. He noted that the idea was
not a bill that the administration had put forward, and he
was happy to engage in further discussion on the topic.
Mr. Mitchell displayed slide 7, which showed the statute
describing legislative findings for the purpose of the PF.
The purpose included the creation of a permanent savings
account. He emphasized that the only reason for the
existence of the fund was the actions of past individuals
that made choices to save funds that could have been used.
He referenced a conversation he had with Senator Kaufman
the previous day regarding inflation-proofing and saving in
the fund.
Co-Chair Hoffman thought the magic of the fund was that it
turned a non-renewable resource into a renewable resource,
which he thought Alaskans could be proud of.
9:19:33 AM
Mr. Mitchell highlighted slide 8, "Principal: Savings,"
which showed a bar graph depicting cumulative deposits and
unrealized gains balances by year from FY 19 to FY 25 to-
date. He highlighted $20 billion in mineral royalties
deposited into the fund, $27.6 billion in inflation
proofing, and $11 billion in special appropriations. He
discussed unrealized gains which were allocated to the
principal. He cited $91 billion in realized earnings
generated by the funds' investments over the life of the
fund. With an additional $15 billion in unrealized
earnings, $106 billion in gains that the fund had generated
for the residents of the state. Since FY 19, there had been
$22.6 paid out in the POMV distribution. He mentioned
dividend appropriations of $24.4 billion, and the Alaska
Capital Income Fund. He referenced the Amerada Hess
settlement [related to oil royalty disputes]; funds from
which were deposited into a sub-account of the Permanent
Fund.
Mr. Mitchell mentioned FY 25 inflation-proofing of $1
billion, which was appropriated and would be transferred to
the principal at the end of the fiscal year. He expanded
that the amount was a little under the statutory amount. He
referenced Trustee Paper 10, and the stress the POMV draw
put on the Earnings Reserve Account (ERA).
9:22:40 AM
Co-Chair Stedman asked Mr. Mitchell to use simple terms to
describe extra appropriations and how the state was doing
with inflation-proofing.
Mr. Mitchell noted that over the last ten years, there had
been more variability to the appropriations for inflation-
proofing that started when the price of oil dropped in
2014. The state was experiencing roughly $3 billion
deficits and thought it unwise to segregate money within
the ERA while experiencing the uncertainty of the
timeframe. It was the first time that there had been a
break in historical inflation-proofing based on the
statutory guidance provided.
Mr. Mitchell discussed the makeup of the $4 billion that
paid the current year's inflation proofing as well as
provided for foregone inflation proofing and into the
future. He referenced the two enlarged checks in the
committee room. The $4 billion check dated July of 2021 was
not identified as inflation-proofing. He continued that the
simple language of the appropriation had not identified the
funds as inflation-proofing so the APFC did not identify it
as such, but if the funds were counted as inflation
proofing the funds would change the calculation fairly
drastically. If the amount was not counted the fund was
about $2 billion behind on inflation-proofing, and if the
amount was counted the fund would be $2 billion ahead.
Co-Chair Stedman recounted that he had advocated for the $4
billion, and that the funding was intended for inflation-
proofing even though the language may not have been
present. He thought the funds needed to be counted as
inflation-proofing. He was concerned that the state may be
in a position where it was several billion behind in
inflation-proofing. He referenced the current year's
discussion of funding $1 billion for inflation-proofing, at
which time the committee had looked at total inflation-
proofing over the life of the fund.
Co-Chair Stedman referenced the second check and noted that
the reason it was specifically noted as inflation-proofing
was that the board had ignored the issue on the first
check. He commented that the politics on the first check
was different. He stressed that the intent was to keep
inflation from eroding the value of the fund for future
generations.
Co-Chair Hoffman relayed that he was the chairman of the
operating budget at the time, and suggested the board take
note of Co-Chair Stedman's comment.
9:27:09 AM
Mr. Mitchell relayed that there was strong concurrence with
the sentiments expressed by Co-Chair Stedman throughout the
organization and the state. He appreciated the comment.
Mr. Mitchell looked at slide 9, "Global Investment," which
showed a world map depicting areas of investment. He
referenced Co-Chair Hoffman's comment about shifting a non-
renewable resource to a renewable resource. He commented
that the state had a relatively narrow economy, and
relatively small economy compared with the rest of the
country. He noted that the PF had the ability to rely on
the world's economy through investment of fund proceeds to
provide revenues to the state. He remarked upon the
sophistication of the fund's asset allocation, which had
grown over time. He recounted that in 1980 there was
primarily fixed income exposure, with real estate and some
private equity introduced in the proceeding decade. In 2006
absolute return and private equity were added. Private
income and tactical ops had been added in recent years. He
referenced the current eight asset classes, which were
designed to interact with one another in a way that
minimized risk while maximizing expectation of hitting the
targeted rates of return for the fund.
Mr. Mitchell addressed slide 10, "Investing for the Long
Term," which showed a bar graph depicting real returns with
return objectives and inflation. He thought the graph
showed the target return objectives of the fund were
difficult to achieve. He referenced three benchmarks: a
performance benchmark, a passive benchmark, and the return
objective. The gold dot on the bar graph reflected the
target of the Consumer Price Index (CPI) inflation plus
five percent.
Mr. Mitchell qualified that the target maintained the
purchasing power of the fund while maintaining the outflow
to the state. He pointed out a ten-year period in which the
fund did not achieve the target of CPI plus five percent.
He thought the graph illustrated the cyclicality of markets
and the difficulty of achieving the targeted rate of
return. He thought the year he started at APFC in 2022 the
inflation rate was seven percent, and the fund earned
negative 1.2 percent. The fund had outperformed its
benchmark and the passive benchmark. He commented that
being 13 percent behind in one year was not that
significant of a market event in comparison to other events
such as the global financial crisis of 2008 or other market
experiences in the history of U.S. markets.
9:31:59 AM
Co-Chair Stedman thought there was some concern that the 5
percent draw was too high and took all potential growth out
of the fund. He referenced the performance of the AMHTF
portfolio, which he thought had a 4.25 percent target rate
and had some growth. He thought the matter should be
discussed when restructuring the fund was considered. He
recognized that by taking the POMV payout from 5 percent to
a lower amount would be less revenue for the state. He
thought the inability to grow the fund should not go
unnoticed. He emphasized the benefit to future generations
if the fund was allowed to grow. He had not seen
presentations that referenced drawing over 5 percent. He
referenced SB 26 [2018 legislation that established the
POMV draw] and discussion of 5 percent being the maximum
draw. He thought there needed to be future dialogue about
maximizing the current revenue stream with no fund growth
or work to provide future benefit going forward.
Co-Chair Hoffman thought it should be noted that in SB 26,
the first two years had been 5.25 percent.
Mr. Mitchell noted that he had neglected to introduce his
staff. He listed his staff and referenced Co-Chair
Stedman's comments about the question of whether the 5
percent draw was too high or low. He explained that Chief
Risk and Compliance Officer Sebastian Vadakumcherry had
recently had been examining the mathematical question of
whether 5 percent was achievable over the long term given
the historical performance of markets. The initial takeaway
was that 5 percent was aggressive. He recalled that there
had been a 30 percent probability that there would be a
failure at some point, with a 70 percent chance of not
having a failure if the draw was reduced to around 4.3
percent. He noted that the analysis had not been complete.
He thought it was possible to break down the conversation
to a mathematical question. He stressed that it was not
possible to know the future but thought there was cause for
consideration about the appropriate draw rate. He thought
the chart on slide 10 showed that 5 percent was a high
target.
9:36:41 AM
Mr. Brune clarified that the board believed it was
legislature's job to determine the appropriate level of the
draw. He continued that the board wanted to maximize the
fund's returns. He stated that the board would not take a
position on what the amount should be.
Co-Chair Stedman thought that the POMV draw could be
compared to that of the AMHTF, and take a look at its
performance compared to the PF. He referenced Mr.
Mitchell's comments and discussed concerns pushing asset
allocation into illiquid investments that did not return
cash flow to the state for years resulting in pressure on
the ERA. He recognized that there was greater probability
of return for some illiquid investments, but thought more
weight needed to be given to consideration of the
legislature and the draw. He thought too high an allocation
in liquid investments would threaten the concept of the
endowment.
Mr. Brune acknowledged Co-Chair Stedman's comments and
noted that the board's statutory charge was to maximize the
fund's return for the people of Alaska. He noted that the
board recognized the partnerships with the legislature and
needed to listen as well as provide liquidity. He thought
the statutory charge of maximizing returns as well as the
responsibility to listen to the legislature was difficult.
He noted that the board had a responsibility to follow the
law, and the board and APFC had many discussions on the
topic.
Mr. Mitchell showed slide 11, "Investment Management," and
noted that staff would come to the table to discuss some
specifics about investment strategies.
9:41:17 AM
JIM PARISE, DEPUTY CHIEF INVESTMENT OFFICER, ALASKA
PERMANENT FUND CORPORATION, looked at slide 12, "Asset
Allocation & Callan Projections," which showed a table of
current target asset allocation and a table of Callan
Associates Forecasted 10-year return. He noted that his job
was to manage the fund's fixed income portfolio. He shared
that he would offer the perspective of the investors and
how they worked with and managed benchmarks. He drew
attention to the right hand of the slide, which showed
Callan Associates forecasted 10-year returns. The market
projections were presented to the board, after which the
board set the asset allocations in consultation with staff.
The allocations were set to get the highest return with the
least amount of risk. The allocations were set with a
range. The allocations served as a mandate.
9:43:37 AM
Mr. Parise showed slide 13, "Benchmarks Internal Fixed
Income," which showed a set of graphs with portfolio
components. He emphasized that the investors had the sole
goal of beating the benchmarks. He addressed the $16.6
billion fixed income portfolio that is internally managed.
He noted that three years previously the fund had brought
the management in-house, due to outside managers not
performing as expected and less control than desired. He
noted that there was $8 million in fee savings. He thought
the charts showed that value had been added. The six charts
on the right showed individual portfolios that were managed
in house. He used the example of the U.S. Corporate
portfolio, a $4.5 billion portfolio he managed. He noted
that the portfolio had earned $25 million per year over the
previous five years.
Mr. Parise explained that each of the portfolios were
weighted and bundled to achieve the fixed income composite
on the left. He discussed the portfolio components. He
addressed the fixed income composite chart on the left and
discussed the focus of which portfolio component could beat
the benchmark.
9:47:08 AM
Mr. Parise referenced slide 14, "Recent Performance &
Benchmarks," which showed a graph of fund performance. He
explained that performance benchmarks were based on board
allocations. He described that the fund had beat the
benchmark at three-, five-, and ten-year periods. The fund
had outperformed all benchmarks over a ten-year period and
had added $6 billion in actual dollars due to staff talent
in beating individual benchmarks. He discussed performance
benchmarks, passive benchmarks, and return objectives. He
mentioned achievements through asset mix and other means.
Mr. Parise discussed the challenge of the return objective
of CPI plus five percent. The board focused on the return
objective, but the staff focused on the performance
benchmark beating the passive benchmark.
9:49:53 AM
ALLEN WALDROP, DEPUTY CHIEF INVESTMENT OFFICER, ALASKA
PERMANENT FUND CORPORATION, turned to slide 15, "Private
Markets," which showed a line graph of private equity gain
and loss comparisons with public benchmarks. He relayed
that he spent most of his time overseeing the private
equity portfolio but also oversaw the private income
category, which included private credit and infrastructure
as well as real estate. He noted that APFC had been
investing in the private market since 2004 when it started
in private equity, and it had generated significant value.
He directed attention to the graph on the slide, that
showed the value generated relative to if the same dollars
had been invested in just a public markets index. He
quantified that the private market investment had generated
roughly $9.2 billion of additional value. He commented that
the concern in private markets was liquidity. The fund's
private equity portfolio had been cashflow positive for
fifteen of the past sixteen quarters, and four of the last
five fiscal years. He thought the performance was due to
thoughtful management and allocation.
Mr. Mr. Waldrop described the concern of substantially
higher fees in private markets than public markets. The
trade-off was additional returns on the value capture shown
on the chart. He noted that APFC negotiated the best terms
possible and used the opportunity to co-invest alongside
investment partners on a fee-free basis. He used the
example of a $45 million co-investment in 2023 in a company
in the energy space that generated $55 million in one year.
Mr. Mitchell clarified that APFC was a limited partner with
a general partner in investment opportunities in the
private equity space. The general partner would identify a
company it wanted to acquire, and complete due diligence.
The PF had an opportunity to participate in co-investment
with a reduction of fees.
Mr. Waldrop continued discussing partnering in investment.
While the APFC had earned $55 on the co-investment endeavor
in 2023, it had additionally avoided paying $11 million in
fees on the gain. In the fiscal year to date in the six
months from July to December, APFC had put $250 million in
such investments and thought if the investments performed
as plans the fund would save roughly $65 million.
9:54:39 AM
Senator Kiehl thought slides 14 and 15 were impressive and
showed the possibilities available with a great team. He
referenced private investments and mentioned liquidity
questions. He thought Mr. Waldrop had indicated that
private markets or private equity were unusual to have
consistent cashflow and consistent gains. He asked how it
was possible to calculate the risk the fund was taking. He
asked about the fund's riskiest investments, which he
thought had increased in recent years.
Mr. Waldrop explained that from an asset allocation
perspective, when Callan did modelling and looked at risk,
the private markets were the highest risk. He explained
that there were different risk levels within private
equities and private markets, and there were strategies to
engage in to manage risk. He mentioned elements for
managing risk through choices. He mentioned managing risk
by investing with experienced entities. He acknowledged
that the areas were risky, but APFC endeavored to manage
the risk as much as possible.
Mr. Mitchell thought part of Senator Kiehl's question
related to the fund's account structure. He noted that
unrealized gains within private market portfolios were much
less liquid. He explained that with a growing portfolio
there would be a growing unrealized class of gains that was
not spendable in the two-account structure. He discussed
the age of a portfolio and the illiquidity occurring in the
middle.
9:59:19 AM
Senator Kiehl thought he heard something about private
markets being 18 percent of the portfolio. He understood he
was hearing that the fund was not interested in increasing
the amount.
Mr. Mitchell noted that the asset allocation and investment
policy was set by the board and APFC was in conformance
with the policy. He did not believe staff would be making
recommendations to increase the allocations to private
market asset classes. He mentioned a book by David Rose,
the first director of the PF, who bragged about Tyson's
Corner, APFC's first real estate purchase. The property was
still in the PF portfolio, was purchased for less than $100
million, and had hundreds of millions of unrealized gains
associated with it. It was strong performing asset and had
$130 million in annual revenues. He pondered if the fund
wanted to sell the property to access the unrealized gains
and referenced the two-account structure.
Mr. Parise relayed that the fund had 20 percent allocation
to fixed income, which was a liquidity provider. He
commented on the slow movement of private markets. He
relayed that the bands were there to take advantage of
certain situations. He relayed that Mr. Frampton did not
like to deviate from targets and was very conscious about
the liquidity of the portfolio and how it could be managed.
10:02:49 AM
Mr. Waldrop considered slide 16, "A Peer Comparison: Norges
Bank," which showed a comparison of the PF and the
sovereign wealth fund of Norway. He noted that surface
level comparisons were challenges due to organizational
mandates related to liability management, liquidity
streams, principal preservation, which could drive
different approaches and allocations. He cautioned that
comparisons should only be made with a detailed
understanding of the differences. He noted that Norges Bank
managed the oil and foreign exchange reserves for Norway
and also served as a central bank of Norway. Norges Bank
had much broader responsibilities, including managing
economic stability through monetary policy.
Mr. Waldrop summarized that the main difference between the
fund and Norges Bank was the asset allocation. The bank was
primarily public markets with 70 percent equities and 20
percent fixed income. The bank had different objectives,
different regulations, and a different size. It was very
difficult for Norges Bank to access any illiquid markets
because it was $1.7 trillion. If the bank went into the
private markets, real estate, or anything in size it could
destabilize the markets. He noted that APFC had a much more
diversified portfolio (32 percent equities, 20 percent
fixed income, 12 percent real estate, 27 percent private
equity/private income, 10 percent in hedge funds and
other), with different allocations intended to achieve the
state's targeted return with managed volatility, principal
protection, and generating the needed liquidity.
Mr. Waldrop continued that the comparisons tended to be
made when public markets when up. Because of the
differences in allocations, groups that had a higher
weighting to equities like Norges Bank (at 70 percent)
would outperform more diversified portfolios when public
markets when up, and would underperform when the public
markets went down. He referenced 2022, when there were
significant declines in public markets in the second part
of the year. During that time the PF had a negative return
of minus 1.2 or 1.3 percent while Norges Bank had
experienced a negative 14.1 percent. The bank tended to
experience significantly more volatility, while the PF
tended to avoid volatility due to the payout structure. He
pointed out other differences between the PF and Norges
Bank, related to currency, fees, and time periods.
10:06:22 AM
Co-Chair Hoffman commented that he had visited Norway and
spoken with bank managers. He noted that two of thing
notable items was that Norges Bank was a country and the PF
was a state. The second notable difference was that Norway
kept its income tax.
Co-Chair Stedman did not think the Norges Bank paid a
dividend.
Co-Chair Hoffman agreed.
Senator Kiehl noted that while the Norges Bank home office
in the capital city, there was not another office in
Bergen, which was about 225,000 people.
Mr. Waldrop displayed slide 17, "Investment Committee":
• Approves new investments
• Oversees, monitors, and reviews performance, and
strategic and tactical investment decisions
• Meeting open to all Investment Staff and the Risk
Officer
• Diverse, balanced, and open-minded interaction
• IC voting members: CIO, Deputy CIO-Private Markets,
and Deputy CIO-Public markets
Mr. Waldrop described a weekly internal investment meeting
open to all investment staff. The meeting was typically
head by each asset class, who gave updates and shared
ideas. The meeting was an open forum with diverse
viewpoints and candid discussion which he found to be good
for exchanging ideas.
Mr. Waldrop highlighted slide 18, "Investment Department
Org Chart," which showed an organizational chart for the
investment team at APFC. There were 11 people on the public
market side, 13 people on the private market side, and
others assisting the CIO and covering hedge funds. He made
note of a couple of vacancies on the private side, and
thought APFC was making good progress.
10:08:44 AM
Mr. Mitchell looked at slide 19, "Producing Income," which
showed two graphs. He mentioned the issue of the difference
between statutory net income and gap income. When the PF
was created, there was not a definition of gap income that
included unrealized gains. Now on the PF's financial
statements it reported gap income, which included
securities the fund held that had increased in value. He
pointed out the graph on the left, which showed that
statutory net income was less volatile than gap income.
There had been a trend of growing unrealized gains as Co-
Chair Stedman had noted. He summarized that the unrealized
gains were not spendable in the PF construct, and created
greater volatility but greater earnings over time. He
thought the construct could be seen on the chart on the
right of the slide reflected in a different fashion. He
thought the matter was partly leading to the discussion of
the two-account structure and how it might be modified to
diminish uncertainty in the future.
Mr. Mitchell addressed slide 20, "Statutory Net Income
History and Projections," which showed a graph depicting
the PF's actual statutory net income and what was
projected. He pondered that if there were "extraordinary"
statutory net income years like 2002, 2003, and 2007; there
was an inability to deal with such years in the current
construct. He relayed that there could be issues with the
PF providing the POMV draw in the current construct if
there was a negative market experience. He pointed out the
average statutory net income for the ten-year period from
2015 to 2024 was $4 billion, while the need for the coming
fiscal year was $5.5 billion. The fund had grown during the
time period, and the five-year average was closer to the
target at $4.5 billion.
10:12:16 AM
Co-Chair Stedman asked Mr. Mitchell to review the timing of
transfers of appropriated funding. He thought the
legislature had some flexibility on the decision up until
the last appropriation bill left the committee in May.
Mr. Mitchell responded that inflation-proofing was
appropriated at the end of a fiscal year, and there was
flexibility for the legislature to adjust the timing
through a supplemental process or a budget. He considered
that the accounting practice of the PF had been
conservative. The fund committed the coming year's POMV
transfer on July 1, and at the same time committed the
current year's inflation-proofing of $1 billion. In the
current year, the fund was $400 million short of the
available balance in the ERA to provide for the
conservative structure, and it was the first time it had
happened. He noted that the state had reached the point of
a "shortening runway" between the needs of the state and
the resources available in the ERA.
Co-Chair Stedman clarified that there was a safety valve
through which the appropriation could be zeroed out if
necessary. He did not think the legislature would
intentionally set up a transfer to the corpus from the ERA
for inflation-proofing, knowing it was unattainable. He
emphasized that the legislature knew of the available funds
and had made the decision to transfer $1 billion in
recognition of the liquidity issue the state was facing. He
thought the legislature would review the subject in a
couple of months when addressing the operating budget. He
did not think the committee had any issues with anything in
the presentation. He mentioned the statutory dividend
calculation, and consideration when making policy
decisions.
10:16:07 AM
Mr. Mitchell advanced to slide 21, "Statutory Net Income
Drivers," which showed two graphs and described where
statutory net income was sourced. He explained that
statutory net income was realized income received such as
rent or payment on a bond. The funds averaged about $1.7
billion per year currently. The portfolio churned around 20
percent per year across asset classes. The actual amounts
on unrealized gains were shown in the middle of the chart
on the right. He pointed out $4.6 billion in public
equities, $4.4 billion in private equity, $1.9 billion in
absolute return, $1.4 billion in real estate, $1.6 billion
in private income, while fixed income was negative.
Mr. Mitchell explained that private markets would be less
likely to have chunky disbursements in realized gains
because of the investing/realization cycle that was about
ten years. He mentioned market conditions and potential
market changes. He mentioned a stress test that had been
put on the chart for public equities and pointed out the
impact of a market correction of 25 percent and the
positive unrealized gain turning to a negative unrealized
loss. Conversely there were positive market experiences. He
highlighted the impact of market experience on unrealized
gain.
Mr. Mitchell looked at slide 22, Realized Earnings by
Asset Class which showed a table with earnings by asset
class for FY 23 through the year to date for FY 25. He
identified the largest contributor as public equity
(labeled as "preferred and common stock" as a contributor
to realized earnings. He highlighted the balances at the
bottom of the table and thought the realized earnings
number could have an identified target of the POMV draw
plus inflation. He pointed out that the totals did not
quite meet the target. He thought there was still hope for
FY 25, if there were gains in statutory net income to match
the first part of the year the total would about break
even.
10:20:40 AM
Mr. Mitchell referenced slide 24, Structural Challenge,"
which addressed the issue of collapsing two accounts into
one account. He thought the concept was broadly accepted in
the world he dwelled within. He mentioned the concern of a
negative market experience and an invasion of principal. He
pondered the question of the principal in the current
account construct. He pondered the principal in the current
account construct. He thought arguably the principal was
the $58 billion that was allocated to principal, not
counting the unrealized gains that were allocated to
principal. He pondered that it would not be that difficult
to layer in a floor, which could be inflation-proofed. He
discussed more traditional endowments, which almost always
uniformly had some POMV draw, because the concept resonated
within the investing community for a fund that was designed
to live in perpetuity.
Mr. Mitchell referenced structural challenges in the two-
account system of the PF and thought they were in no small
part due to the POMV. Prior to 2019, the fund was in "build
mode." He recounted that the fund was giving out a
Permanent Fund Dividend, with half of the earnings being
saved in the fund. Currently, the 5 percent draw put the
fund in "harvest mode."
Co-Chair Hoffman noted that previously the PF was known as
the "rainy day fund."
Mr. Mitchell thought FY 15 through FY 18 were tough.
Mr. Mitchell turned to slide 25, "Alaska's Largest Revenue
Source." He referenced the chart on the right entitled
State of Alaska Unrestricted General Fund Revenues in $
millions, 'and pointed out the low state revenue years in
FY 15 to FY 18. The time was difficult for the state and
the POMV came online in 2019, which was the most stable and
largest revenue stream for the state on an Unrestricted
General Fund (UGF) basis. The financial stream had been a
huge resolution to a problem that existed for a long time
for a state that was reliant on volatile revenues.
Mr. Mitchell pointed out the calculations on the left-hand
side of the slide, which showed the previous five fiscal
year's ending balance and POMV draw calculation. The draw
rate for the coming fiscal year FY 27 was projected at $4
billion, while FY 26 was $3.8 billion.
10:26:07 AM
Mr. Mitchell considered slide 26, "Fund Values
Structure," and discussed the fund structure and principal
balance. He cited a total of $79 billion in the principal,
which was technically $58.6 billion if unrealized gains
were carved out. The ERA showed a $9.1 billion balance,
with a budgeted $3.8 billion committed for the POMV draw,
$1 billion for inflation proofing. The unrealized gains
would go to the principal and $2.7 billion in spendable
realized earnings would be for the projected $5.5 billion
need that would appear on July 1.
Co-Chair Stedman referenced slide 26 and referenced
discussion about overdrawing the 5 percent. He pondered the
state's liquidity position if the legislature had overdrawn
the 5 percent (as recommended by the previous DOR
commissioner and others).
Mr. Mitchell thought the most important feature of any
financial construct was discipline, and any time one
deviated it could set you up for failure. He did not have a
calculation of where the fund would be if there had been
larger draws, but thought it was easy to say that it was
likely the current fiscal stress would be exacerbated. He
stressed that financial discipline and limits were
important.
Co-Chair Hoffman referenced Co-Chair Stedman's comments
about overdrawing the five percent, and qualified that it
had never been a recommendation of the committee. He
thought the conservatism of the committee over the last
decade should be well noted.
10:29:23 AM
Mr. Mitchell displayed slide 27, "Spending is Limited to
the ERA," and pointed out the table reflecting ERA balances
from FY 19 through the start of FY 25 going from $12.9
billion to negative $.4 billion. He thought the trend was
concerning and warranted the consideration of change. He
mentioned potentially a different direction on how funds
were deployed to try to match to definitions of what was
revenue, or consideration of one fund that had a draw that
relied on total return. He thought liquidity was not the
problem, but statutory construct.
Mr. Mitchell highlighted slide 28, "Earnings Reserve
Account - Decreasing Availability Impacts. He pointed out
statutory net income in the numbers below the bar chart. He
pointed out volatility of the revenue stream. He noted that
the POMV commitments and inflation-proofing were shown for
each of the years on the table. He pointed out high
inflation in FY 23, which had required a much larger
transfer to keep up. The net impact of the ERA was
reflected on the bottom of the chart. The plurality of the
experiences was the draw on the ERA balance.
10:32:16 AM
Mr. Mitchell looked at slide 29, "Manual Inflation
Proofing," which showed a table of amounts appropriated
from FY 16 to FY 26 estimation. He qualified that the
numbers were how APFC portrayed the amounts based on the
2022 special $4 billion appropriation that did not have the
same inflation language that the 2020 special $4 billion
appropriation had. The result was a reflection of a $2
billion underfunding represented on the chart, and if it
was mischaracterized resulted in a $2 billion overfunding.
Mr. Brune addressed slide 30, "Trustees' Paper Volume 10."
He affirmed that he had heard Co-Chair Hoffman and Co-Chair
Stedman's thoughts related to thoughts of the committee at
the time the $4 billion was appropriated. He pondered that
specific language reminding APFC of the thought with the
budget would be helpful. He thought it was difficult
without specific direction from the legislature. He thought
consistency was needed. He referenced the Trustee paper 10,
distributed the previous year, which was not the first time
the trustees had come forward with the concept of joining
the accounts. He mentioned that the Council of Alaskans had
met in 2023 with a similar recommendation. He highlighted
that the paper showed that the current two-account
structure introduced significant risk to the ability to
fund the annual POMV draw, which supported over half of the
state budget and the PFD. He noted that the following two
slides addressed the topic more in-depth. He affirmed that
copies of the paper would be delivered to new members.
Mr. Brune noted that slide 30 discussed combining the two
accounts to create a permanent endowment model in statute,
which would require a constitutional amendment. He
reiterated that he had conversations with Senate President
Stevens and Senator Giessel, and Senator Stevens had wanted
to ensure any change would be supported by the governor and
the legislature.
10:36:30 AM
Mr. Brune advanced to slide 31, "Potential Long-Term
Stability Approaches," and relayed that he was happy to
help bridge differences and come up with something that was
palatable to both branches of governments. He noted that
the board would not take a position. He noted that Trustee
Paper 10 did focus on the specifics of joining the two
accounts, although many additional items had been
discussed. The board did take a position on joining the two
accounts.
Co-Chair Stedman thoguht it would be nice if the board
reinforced the advantage of the POMV approach blocking
overdraws without a vote of the people. He thought there
was significant concern that the fund would be raided. He
thought it was only a matter of time before there was a
structure within the legislature that resulted in the
easiest course being to loot the fund. He wanted to see the
concept reinforced.
Co-Chair Hoffman relayed that he was chairman of the House
Finance Committee when the language was drafted for the
resolution to create the CBR. There was a constitutional
amendment, which required 27 members of the House and 14
members of the Senate for approval. He noted that it had
taken much time and effort to get the resolution through
the legislature. He thought the benefits of the change were
well-known in the building and in the public. He thought
the change proposed to the structure of the fund would take
He thought more time and attention should be given to
setting up the new account. He thought the change would
take as much or more work but needed to be done.
Mr. Brune showed slide 32, "Current Structure: Two
Accounts," which showed a flow chart.
Co-Chair Hoffman thought the committee would wait for the
resolution to come forward before getting into more detail
on the subject of the account structure.
Mr. Mitchell addressed slide 32, and thought the slide
reflected streamlining and simplification. The change would
not require manually inflation-proofing and would not give
the ability to overdraw without a vote of the people.
Mr. Mitchell advanced to slide 33, Proposed: Classic
Endowment Structure.
10:40:09 AM
Senator Kiehl appreciated the work that went into Trustee
Paper 10 and generally agreed with the reasoning. He
thought that a lot of conversation was needed, and a lot of
modelling should be done with regard to the draw limit. He
thought the legislature would look to the APFC for its
expertise on what was sustainability. He thought slide 33
slightly oversimplified the matter.
Mr. Mitchell noted that Mr. Vadakumcherry had done several
analyses, including why diversification for a fund like the
PF made sense rather than 100 percent equity portfolio
because of volatility and the draw on the fund. In
addition, Mr. Vadakumcherry had done some work on the
success and failure of different potential draw rates.
Mr. Brune wanted to clarify that Trustee Paper 10 was the
position of the independent board trustees but was not the
position of the Dunleavy Administration. He furthered that
each of the trustees were appointed by the governor but had
taken the position independently. Similarly, trustees had
independently taken the position on confidentiality of
personnel records. He appreciated the partnership with the
full process and vetting of the administration. He was
committed to talking with the governor and legislators as
the discussion went forward. He thought the merging of the
two accounts was important and needed to go forward for the
stability of the fund and the draw. He praised the staff at
APFC. He thanked the legislature for its help in recruiting
and retaining valuable staff. He mentioned the in-house
work that was meeting benchmarks and saving money.
10:44:26 AM
Mr. Mitchell thanked the committee for the opportunity,
which he thought was time well spent. He appreciated
constructive criticism, which he viewed as an opportunity
for improvement.
Co-Chair Hoffman thanked Mr. Mitchell and APFC staff for
their professionalism. He thanked the board for its work.
Co-Chair Hoffman welcomed former Senator JOHN BINKLEY,
MEMBER, ALASKA PERMANENT FUND CORPORATION BOARD OF
TRUSTEES.
ADJOURNMENT
10:46:12 AM
The meeting was adjourned at 10:46 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 021125 SFIN Alaska Permanent Fund_Final.pdf |
SFIN 2/11/2025 9:00:00 AM |
APFC |