HOUSE FINANCE COMMITTEE February 15, 2001 8:40 AM TAPE HFC 01 - 27, Side A TAPE HFC 01 - 27, Side B TAPE HFC 01 - 28, Side A TAPE HFC 01 - 28, Side B CALL TO ORDER Co-Chair Mulder called the House Finance Committee meeting to order at 8:40 AM. MEMBERS PRESENT Representative Eldon Mulder, Co-Chair Representative Bill Williams, Co-Chair Representative Con Bunde, Vice-Chair Representative Eric Croft Representative John Davies Representative Richard Foster Representative John Harris Representative Bill Hudson Representative Ken Lancaster MEMBERS ABSENT Representative Whitaker Representative Moses ALSO PRESENT Representative Sharon Cissna; Clarke Gruening, Chair, Alaska Permanent Fund Corporation (APFC) Board of Trustees; Wilson Condon, Commissioner, Department of Revenue; Michael O'Leary, Executive Vice President, Callan Associates, Chicago; Robert Storer, Executive Director, Alaska Permanent Fund Corporation, Department of Revenue; Chris Phillips, Chief Financial Officer, Alaska Permanent Fund Corporation, Department of Revenue; Terry Brown, Chief Investment Officer, Alaska Permanent Fund Corporation, Department of Revenue; Jim Kelly, Research & Liaison Officer, Alaska Permanent Fund Corporation, Department of Revenue; Bob Bartholomew, Administrative Officer, Alaska Permanent Fund Corporation, Department of Revenue; Allan Moore, Chief Investment Officer, Alaska Permanent Fund Corporation; Robert Maynard, Chief Investment Office, Public Employees Investment System of Idaho, Permanent Fund Investment Advisor; Jerrold Mitchell, Retired Partner, Wellington Management Company, Permanent Fund Investment Advisor; Allan Bufferd, Treasurer, Massachusetts Institute of Technology, Permanent Fund Investment Advisor. GENERAL SUBJECT(S): ALASKA PERMANENT FUND CORPORATION PRESENTATION:  2001 CAPITAL MARKETS OUTLOOK  The following overview was taken in log note format. Tapes and handouts will be on file with the House Finance Committee through the 22nd Legislative Session, contact 465- 2156. After the 22nd Legislative Session they will be available through the Legislative Library at 465-3808.   LOG SPEAKER DISCUSSION    TAPE HFC 00 - 28  SIDE A  000 Co-Chair Mulder Opened the meeting, noting that there would be a presentation provided by the Alaska Permanent Fund Corporation and board members regarding the 2001 Capital Market Outlook.  068 CLARKE GRUENING, Introduced members of his cabinet, the CHAIR, APFC BOARD OF executive director, Bob Storer and the TRUSTEES, ALASKA presenters for the discussion, Michael PERMANENT FUND O'Leary, Allan Moore, Chris Phillips, CORPORATION Allan Bufferd, Robert Maynard, & Jerrold Mitchell.  166 ROBERT STORER, Commented on the intent of the meeting EXECUTIVE DIRECTOR, and the caliber of the staff that would ALASKA PERMANENT be testifying before the Committee. He FUND CORPORATION, pointed out that this year, three special DEPARTMENT OF advisors had been added. Robert Maynard, REVENUE Jerrold Mitchell and Allan Bufferd. He emphasized the amount of experience having them on the Board would bring to the State of Alaska.  315 MICHAEL O'LEARY, Referenced the handout-Capital Markets EXECUTIVE VICE Outlook 2001. [Copy on File]. He stated PRESIDENT, CALLAN that he would provide an overview of the ASSOCIATES, INC., · Long term capital market history CHICAGO including stocks, bonds and 60/40 combination with systematic spending; · Economic setting; · Recent market performance; and · Callan's 5-year projections.  453 Mr. O'Leary Addressed the "real rate of return" as indicated in the handout. He pointed out that the data on the bond returns is not as thorough as the data on the stock returns. He provided some hypothetical  scenarios of combination spending/cost returns.  609 Mr. O'Leary Commented that type of analysis could be done by anyone and indicates a real base. There could be higher equity exposures.  647 Mr. O'Leary Spoke to the current economic environment occurring nationally. He emphasized that the changes have been dramatic in the market.  679 Co-Chair Mulder Inquired if Mr. O'Leary anticipated that the charts would continue to look like the one on Page 3. He believed that it could not keep up with inflation.  709 Mr. O'Leary Explained that the chart included an inflation adjustment rather than just a fixed number. In 1930, there was a deflation. All the variations are captured within the graph. In a period of deflation, bonds are the best performing asset to own. In a period of inflation, stocks are a good place to put the assets. During a period of acceleration, there is no place to hide.  845 Representative Inquired how far back do the trusts go Hudson back to.  897 Mr. O'Leary Replied that the bond market continues to change, however, the characteristics are more reliable these days than they were in previous years.  940 Vice-Chair Bunde Suggested that plotting the life of the permanent fund would provide better information.  963 Mr. O'Leary He explained that these numbers are correct. From 1991-2000, the S&P 500 return amounted to 12%. He emphasized that 12% was an extraordinary amount of return. He noted that his tendency was to average all years, providing a reasonable long-term projection. He added that 6%, 7%, or 8% would be a reasonable long-term expectation for moving forward.  1077 Mr. O'Leary Interjected that: · Consumers are scared; · The stock market is down; · The savings rate has fallen from 8% to -1%; · Consumer debt has risen from 76% to 94% of disposable income; · Energy prices are up; · The trade gap is hitting records;  · Investment is slipping; and · Some manufacturing is already in recession.  1175 Mr. O'Leary Referenced the fall-off, which is happened quickly in the second half of 2000.  1195 Mr. O'Leary He noted that the savings rate has gone declined, however, consumer wealth has increased. Consumer spending and debt has risen, and that consumer wealth is in better shape. He recommended that it is important to keep on eye on the stock market as it is in decline.  1269 Vice-Chair Bunde Commented that what we have is "paper" wealth.  1285 Mr. O'Leary Suggested that the balance sheets still show a lot of unrealized gains and that home prices have not softened. There is a lot of equity build up in that area, which is a significant portion of many consumers' wealth.  1326 Representative Commented that the credit industry is not Hudson screening their debtors.  1364 Mr. O'Leary Added that the credit debt is growing from those from 18-30 years old.  1385 Representative Asked the definition of savings.  Davies 1393 Mr. O'Leary Advised that retirement is generally not included in that number. He offered to forward that information to Committee members, as he was uncomfortable "guessing".  1418 Mr. Storer Mentioned the reinvesting of profits and the cash flow implications on savings.  1435 Mr. O'Leary Noted the inflation, which should decelerate as the economy softens. He referenced Page 11 of the handout, illustrating the movement of the Consumer Price Index (CPI) over the past five years.  1489 Mr. O'Leary Core CPI eliminates the more volatile inflation such as food and energy. He acknowledged that health care costs have risen as have housing costs.  1521 Mr. O'Leary Referenced Page 12, which indicates oil prices, which are still low in real terms. He commented that the price peak might already be behind us.  1553 Mr. O'Leary Page 13 - the Federal government should "loosen" quickly; the question is "when".  1571 Mr. O'Leary Page 14 - Capital markets are confronting the law of gravity. Smaller cap stocks  did better than the large ones. The NASDAQ declined a lot. It was a good year for bonds.  1649 Mr. O'Leary Page 15 - Listed the returns by the price/earnings ratio decile. The table demonstrates how radically the world changed in 2000.  1692 Mr. O'Leary Summarized the capital market projection process.  1707 Representative Croft Referenced page 15 - The middle column, 1998-1999 annualized %.  1719 Mr. O'Leary Explained that column represents the extraordinary growth in the past two years. There was a huge inversion. A value-oriented manager would suggest that substantiated long-term value in stocks. He acknowledged that there is a "craziness" going on in the market place. The average stock did not do nearly as well as it did in the past.  1825 Co-Chair Mulder Made comments on the need to be conservative when dealing with the stock market.  1843 Mr. O'Leary Referenced Page 17 & 18 graphs. He spoke to the importance of examining stock fundamentals. The P/E ratios hit astounding heights, being inconsistent with long-term interest rates. At the beginning of 2000, the projections were very conservation; however, by the end of the year, were overly optimistic.  1920 Mr. O'Leary Commented that all projections are strategic projections. By not plotting a particular rate of return, makes for looking at the range of possibilities.  1945 Mr. O'Leary He noted that they would be able to shift the long-range average around by determining where the State rests in the long-range market at this time.  1982 Representative Croft Noticed the disconnect between price/earnings in the turnover time.  1993 Mr. O'Leary Agreed. Some of the best investment returns are achieved in companies long before they have earnings, and then they make a quantum jump in earnings. Many large funds are currently investing in venture capital ideas. He advised that could be a prudent investment.  2053 Representative Croft Referenced Page 19 and the re-connect to their underlying value.  2069 Mr. O'Leary Clarified that the average stock is historically selling at price value right  now. He questioned if the future outlook was sufficient and superior to warrant the high price earnings ratio.  2108 Representative Croft Asked if that could be two different markets.  2118 Mr. O'Leary Replied that could be high price.  2146 Mr. O'Leary Referenced Page 18 - A graph representing the dividend yield around the stock average. He noted that corporate behavior has changed and companies are buying back shares to increase dividends. Big companies have a higher P/E ratio.  2205 Mr. O'Leary Page 19 - A graph which looks at the earnings yield on the S&P 500 and then forecasts the rate of yield of future returns. There could be a 3% increase before inflation. He did not know if that could be a good projection technique.  2257 Mr. O'Leary He pointed out that there had been recommendations to add inflation possibilities to that number.    TAPE HFC 01 - 27,  Side B  000 Mr. O'Leary Page 20 - Provides an outlined graph of the domestic fixed income. The graph indicates the Lehman Aggregate Index 5 year return versus the lagged yield to maturity. The five-year forecast is developed from that information.  085 Mr. O'Leary Page 21 - Indicates the 2001 Capital Market Projections, breaking it down by equities, fixed income, other income sources and the inflation inclusion. He noted that the bond estimates declined, whereas the stock estimates remained the same. That resulted from the decline last year.  205 Co-Chair Mulder Asked if it could be expected that the difference from last year and next year would be the same.  223 Mr. O'Leary Thought so. He believed that there would be more confidence in the equity market.  278 Mr. O'Leary Noted that equities are less expensive than they were than last year.  385 Mr. O'Leary Mentioned that the forecasters are predicting a "range of return" including standard deviations. Last years result was within the expected range.  442 Representative Croft Asked about "shape".  458 Mr. O'Leary Replied that would be a risk adjustment measure. He commented on the risk free  rate divided by the actual risk, thus providing the base. Mr. O'Leary noted that the sharp ratio becomes greater as one invests in more volatile assets.  530 Mr. O'Leary Page 22 - Spoke to the risks on the horizon. · Energy shortage worsens and forces large-scale lay-offs. · Consumers have difficult paying for past extravagance. · The dollar falls sharply as capital inflows shrink. · Long-term interest rates rise with the passage of large tax cuts.  546 Mr. O'Leary Page 23 - Equities constrained to 60% and the current limit by statute, which is 55%, & with a 5% basket clause. The risk level is 10.6%. The annual return is projected to be 8.2%. He claimed that the odds were significantly greater that there would be two good years in succession. Mr. O'Leary commented that things tend to move more toward the middle.  654 Mr. O'Leary Page 25 - Lists the range of returns over a 1-year period.  687 Mr. O'Leary Page 26 - Indicates the range of returns over a 5-year period with the annual rate of return.  712 Mr. O'Leary Reiterated the target mix and the annual rates of returns to be expected. Mr. O'Leary noted the importance of the rate of consistency.  774 Representative Croft Asked about the expected "basket" rate of return.  791 Mr. O'Leary Commented that the "basket" is not being used at this time. There exists a band around it up to 56%, -1% of the basket. He noted that the Board was investigating "private equity" to help with the basket equability. There was a decision not to proceed at this time.  851 Mr. Gruening Spoke to the idea of "holding the course" of action and the longer term expected investments. He noted that idea had not yet been abandoned. He added that the State pension funds have ventured into that area with success.  895 Mr. Storer Pointed out that the basket clause would give the ability to invest in very sophisticated options.  925 Mr. Storer Invited his investment officers to the  table to speak.  967 ALLAN MOORE, CHIEF Spoke about data previously introduced. INVESTMENT OFFICIER, He commented on the fund asset allocation ALASKA PERMANENT and the outlook for stocks, bonds and FUND CORPORATION real estate (in the handout) - Page 1.  1059 Mr. Moore Referenced Page 1.  1119 Vice-Chair Bunde Noted the dividend distribution and asked the source.  1146 Mr. Moore Advised that the policy was to keep all funds actively invested. He commented that interest costs could be a market calculation and that specifically would depend on what the market is doing at that time. He elaborated on that information.  1293 Vice-Chair Bunde Pointed out that whatever is happens, there potentially could be a cost of earnings.  1309 Mr. Storer Unless there is some unforeseen market force, there would be maintained exposure. He noted that his team works closely with Department of Revenue for guaranteeing a higher earning class.  1348 Vice-Chair Bunde Asked if earnings would be reduced, when that was disbursed.  1364 Mr. Storer Agreed that there are some irresponsible times. He stressed that the two organization work closely together.  1390 Vice-Chair Bunde Suggested that the annual reports should include other investment options.  1414 Representative Expounded on the possibility of splitting Hudson the dividend in half.  1452 Mr. Storer Commented that theoretically, the longer it is held the more it will make.  1475 JIM KELLY, RESEARCH Interjected that if the fund is making $7 & LIAISON OFFICIER, million dollars a year, the dividend ALASKA PERMANENT would be as that. He addressed the daily FUND CORPORATION, cost for transferring the funds.  DEPARTMENT OF REVENUE 1515 Mr. Moore Page 2 - Spoke to the equity portfolio distribution. He pointed out that it was broken down by domestic active, international passive, domestic passive, and international active. International performance last year was the worst that it has been in the last 20 years.  1581 Mr. Moore Page 3 - Capitalization size - dividing all stocks by the size of the company. Large cap, mid cap, small cap all produce differently. The policy mix intends to have 80% in large cap funds and 18% in  the smaller cap.  1639 Mr. Moore Last year, the smaller cap indexes produced more. He emphasized that segment of the market is more volatile now and less efficient. The results will be more extreme.  1686 Co-Chair Mulder Believed that was inconsistent with the market portfolio.  1697 Mr. Storer Noted that they like to rebalance as little as possible. He pointed out that the fund is rebalanced in September. The graph indicates a "snap shot" from st December 31.  1723 Mr. Moore Page 4 - The international equities. 61% in the active passive, 11% in the emerging markets, and 28% in the passive managed. Mr. Moore indicated that the emerging markets are countries such as Mexico, Korea, and Taiwan.  1771 Mr. Moore Page 5 - Graphs equities by country  1785 Mr. Moore Page 6 - APFC versus MSCI world index. He noted that Alaska has 65% in the U.S. market and 45% in other markets.  1847 Mr. Moore Page 1 - [Same handout] Moving to new bond benchmarks graph, which indicates treasuries, agencies, corporate, and mortgage-backed. The two colors highlight the government/credit and the aggregate market.  1936 Mr. Moore Page 2 - The graph demonstrates the Movement to new bond benchmarks and further diversification. He pointed out how it avoids concentration with too much in corporate debt.  1969 Mr. Moore Page 3 provides a sketch of where the APFD has real estate holdings throughout the country. He reminded members that real estate values change more slowly than the other holdings.  2002 Mr. Moore Pointed out the number of retail, residential, office and industrial spaces included in the real estate holdings graph. He noted that they make up 60% of the real estate holdings portfolio.  2060 CHRIS PHILLIPS, Provided an overview of where the fund is CHIEF FINANCIAL at present time. Ms. Phillips provides OFFICIER, ALASKA members a financial outlook for the fund PERMANENT FUND and the expected growth and income. She CORPORATION, referenced Page 2 [same handout] - The DEPARTMENT OF Permanent Fund market value graph, REVENUE indicating the market value of the fund, which currently amounts to $26.2 billion  dollars.  2103 Co-Chair Mulder Asked if that was considered part of the General Fund.  2109 Mr. Storer Replied that it was, unless otherwise indicated by law.  2118 Mr. Gruening Interjected that the fund does include the earnings reserve. He reiterated that it was available to appropriate the earnings reserve.  2138 Co-Chair Mulder Pointed out the confusion that exists in the public eye regarding the appropriation of the Alaska Permanent Fund.  2144 Representative Asked of the $6 billion dollars, was the Hudson large part to be used for the inflation proofing of the corpus. He thought that the difference would be the inflated value. He interjected that this is not real money.    TAPE HFC 01 - 28,  Side A  000 Ms. Phillips Page 3 - the Permanent Fund principal earnings with the fund principal as protected by the Alaska Constitution and that which the Legislature may not spend.  092 Ms. Phillips Page 4 - Referenced the Permanent Fund income as provided by lay, all income from the fund's investments deposited into the Earnings Reserve Account in the permanent fund. The graph also indicates that which is retained there until appropriated by the legislature.  130 Ms. Phillips Page 5 - Graphs the Permanent Fund projections - indicating the principle dedicated, the income earnings & statutory, realized and unrealized income.  234 Vice-Chair Bunde Asked about the dividends.  262 Ms. Phillips Explained that would be the dividends transferred to the Department of Revenue.  282 Ms. Phillips Added that the Department projects the balance to be about $21 million dollars.  301 Ms. Phillips Discussed net income. She noted that the level was below its historic level. Total return of $1.6 billion net income. She noted that the dividend was $9 million dollars less.  408 Vice-Chair Bunde Projected that the dividend would be lower for one of the first times in a while.  429 Mr. Storer Noted that it had declined slightly in the 1980's.  466 Co-Chair Mulder Advised that it had been over projected last year.  301 Ms. Phillips Review Page 5. She stated that the estimates were based on 8 and 1/4 percent interest.  589 Ms. Phillips Page 6 - Indicates the volatility estimates and the range of market value. She pointed out that 50% of the time; the expectations would be $27.7 and $34.5 billion dollars.  707 Ms. Phillips Page 10 - She noted that the per capita dividend from FY01 - FY06 would be between $2,850 and $1,560 dollars. She advised that the chart was based on the forecast from June 30, 2000. Given the current year projection, the dividend would be at the lower quartile.  821 Co-Chair Mulder Agreed that it appeared that the 2001 dividend would be lower than last year. He suggested that was the result of the markets not producing.  854 Ms. Phillips Concluded that the Department of Revenue's financial statements are accessible on the Division's website.  896 ROBERT MAYNARD, Stated that the number one strength of CHIEF INVESTMENT the Permanent Fund is the Board of OFFICE, PUBLIC Trustees. These are long-term policies EMPLOYEES INVESTMENT made by "bright" people. He acknowledged SYSTEM, IDAHO, that there are a few problems, which need PERMANENT FUND to be faced. He noted that the business INVESTMENT ADVISOR is not to pick the best stocks, but rather to met obligations. Mr. Maynard stressed that the investment strategies are different.  1212 Mr. Maynard Advised that the accumulations phase of the Permanent Fund is over. Now is the time to make choices in investing that fund.  1254 Vice-Chair Bunde Understood that the mission of the fund was to provide the maximum sustained yield. He asked what made falls into that formula for disbursement.  1286 Mr. Maynard Countered that if more was needed, there should be more investment in stocks. If it were shorter in, then the fund would invest more in bonds. At this time, there is not a goal that must be reached. To double the fund in 10 years, the fund would need to make 10% per year.  1343 Vice-Chair Bunde Thought that could inhibit the corporation.  1357 Co-Chair Mulder Addressed the clarity of focus. He asked  the time frame which could negatively impact the Permanent Fund.  1379 Mr. Maynard Stressed that clear guidance from the Legislature is needed. He added that to date, it has been inconsistent. He stated that the issue had been devalued to the Board, which makes it much more difficult.  1412 Representative questioned the distribution on the market Hudson value and then splitting the average of the earnings for government and then some for dividends. He asked if that was possible.  1450 Mr. Maynard Noted the clear spending rule. He added that the distribution was difficult to understand. The realized and unrealized gains are no longer being used, but rather funds are poured back into the pool. He reiterated that the system makes little sense. It is not that the percentage of market value does not make a sense. The payout rule is NOT transparent, however, it is confusing. He spoke to the sort of things that the fund could do.  1529 Mr. Maynard Commented that the Legislature needs to face the issue of giving more direction. He stressed that it is important to continually look at that issue in order to create more clarity. He agreed that the pride that Alaskan's take in the Permanent Fund is well placed; however, he warned that if the respect were lost even once, it would never come back. He reiterated that it should not be taken for granted.  1603 JERROLD MITCHELL, Commented that he had reviewed the RETIRED PARTNER, assumptions and financial outlook. Like WELLINGTON all assumptions, he noted that they are MANAGEMENT COMPANY, not sure prospects. Investment PERMANENT FUND management is an art and science. He INVESTMENT ADVISOR noted that the process of the Permanent Fund is a sound process. He encouraged that the Fund's investment will become better over the next few years. He noted that his role would be see if the ideas are implemented, that they are translated into action. He noted that it was the execution and planning that made the difference. He suggested that the Permanent Fund's plans could be implemented with support. He added that the payout rates are a good idea and have  been adopted in all endowment funds providing a greater measure of security and predictability.  1761 ALLAN BUFFERD, Requested that the Legislature have TREASURER, patience. Investment policy is MASSACHUSETTS formulated with multi-level understanding INSTITUTE OF of investment strengths. Issues that TECHNOLOGY, cannot be tolerated within the system PERMANENT FUND would be that the dividend could go down INVESTMENT ADVISOR from year to year. If the distribution were made available, there would need to be a new treasurer. A policy mandate is that the fund does not decrease. He stated that would relate in part to the Consumer Price Index (CPI) discussion. The purchasing power of the capital must be protected. He asked the appropriate inflation index number that could be used.  1884 Mr. Bufferd Noted that labor costs rise at a quicker rate than the CPR. He suggested that protection of the purchasing power of the Permanent Fund needs examination. Also, he emphasized the need for definition of the liability strength. Mr. Bufferd stated that there is a constraint by eliminating equity exposure of the fund, which is not a flexible construct. He stressed that a reward cannot be achieved without risk. Mr. Bufferd listed the key liabilities.  1965 Co-Chair Mulder Asked if the constraints placed by the Legislature have been preventing greater returns.  1991 Mr. Bufferd Replied that in the context of understanding of the objectives, the policy is too constrained. He noted that if the liability issue were a short-term issue, then the fund, even if it had flexibility, could not do so because of the short-term risk. He hesitated to take the view that it would be the proper allocation outcome for the fund. The sequence must start with the liability.  2080 Mr. Bufferd Questioned how are the distributions made from the endowment. He acknowledged that it is handled by making the payouts on a smoothing formula, while keeping the accounting with those numbers. He noted that payouts were made on the averaging measure used by the MIT value. He recommended that it would help to make the payout over a 36-month period. Mr.  Bufferd suggested that would dampen the market volatility.  2143 Mr. Bufferd Commented on the liability definition, the opening up of boundaries, and smoothing the payout formula.  2168 Representative Asked about the percent of market value Davies payout.  2195 Mr. Bufferd Responded that the analogy of how money comes into the Permanent Fund is clearly different from how it comes to MIT. He noted that there are three sources of revenue, the first being tuition.    TAPE HFC 01 - 28,  Side B  018 Mr. Bufferd Make comments on the MIT operation procedures.  066 Mr. Bufferd Referenced gifts and earnings on the assets and defined an objective with those funds. He pointed out that there has been few times in history with a strong decapitalization.  199 Co-Chair Mulder He asked if the 5% had been driven by development and/or gifts so to continue that performance.  232 Mr. Bufferd Explained that the 5% came from a study done by the Ford Foundation. He commented that the long-term track of the real return from financial assets was on the order of 5%, however, some suggest that it is around 6.5%.  317 Mr. Maynard Commented on the system that he used. The 5% real should have at least 70% in equities. He stated that there are artificial constraints placed on the market, which could prohibit the 5% real. He noted that no successful market timers could be used.  416 Vice-Chair Bunde Voiced caution with the key liabilities. He stated that the PFD is "found" money and that there are no key liabilities in the publics mind.  479 Mr. Maynard Interjected that liability does not always mean State money.  501 Vice-Chair Bunde Did not believe that the Legislature would want that. At some time, those funds will need to pay the expenses of State government.  526 Mr. Bufferd Reiterated that their roles were as investment advisers.  542 Mr. Maynard Understand that idea and requested that the Legislature seriously consider the key issues proposed. He emphasized that  there is a "serious hole" in the heart of the long-term liability of the Permanent Fund. He concurred that the fund has been lucky so far.  591 Vice-Chair Bunde Interjected that the more successful that the Fund is, the less flexibility that the public will allow.  615 Representative Stated that the key is to think in Davies establishing the liabilities, and people of Alaska agree that this has been an accumulation phase. The Legislature is now in the transition phase trying to determine how to benefit the future. He acknowledged that it is now being determined "how that should look" and the timing with that.  698 Mr. Bufferd Recommended that one approach would be to address the benefit received by individual residents and define the core liability. To have it grow, an important liability would be to have it fixed. Define the context of long-term realistic investment objectives. He commented that the losses are about consumption. He stressed the need to define the target, minus the liability and then formulate the policy in that context. He acknowledged that idea was simplistic.  843 Co-Chair Mulder Spoke to integrating the constraints on the management team, noting that, however, it does allow for political protection. He reminded members that initially, there were potential danger when the Board was formed.  917 Co-Chair Mulder Made comments on protection of the national security interests with the Chinese entering into the stock market. He noted that the push was to protect our national defense and asked how difficult it would be.  984 Mr. Maynard Replied that it could be very difficult if the intend was to be very thorough and that source restrictions could be limited.  1028 Co-Chair Mulder Referenced the peer pressure on the required restrictions.  1041 Mr. Bufferd Commented that when there are concerns like these, it is difficult in terms of analyzing. He noted that It was clear about the opportunity established. He pointed out that at 1/3 of the S&P 500, the opportunity set was created.  1149 Co-Chair Mulder Understood the balance, however, wanted  to protect the earnings.  1169 Mr. Moore Addressed managing roles for that concern.  1190 Mr. Storer Agreed that there are groups like that and that it would not be a quick fix.  1207 Co-Chair Mulder Advised that he was attempting to develop legislation to address this concern. He noted that he wanted it to be an effective tool for the Fund managers.  1239 Co-Chair Mulder Lamented that the entire Legislature was not hearing the comment made at today's meeting. He voiced his gratitude for the time and energy given by the presenters.  1269 Representative Interjected that there are many Davies legislators and staff that were watching the presentation through the "camera". He echoed his appreciation for the work of the presenters.  1300 Mr. Storer Voice his appreciation for the time and opportunity to present to the House Finance Committee.  1313 Co-Chair Mulder ADJOURNMENT The meeting was adjourned at 11:15 a.m.