M I N U T E S
SELECT COMMITTEE ON CAPITAL FINANCING AND INVESTMENTS
State Capitol Building June 2, 1999
Room 204 Cheyenne, Wyoming
PRESENT: Senators Hank Coe, Rae Lynn Job, April Brimmer Kunz,
Jayne Mockler and Robert Peck;
Representatives Jim Anderson, Doug Osborn, Robert
Tanner and Rick Tempest.
Legislative Service Office: Richard Miller,
Director.
Others: See Attachment A.
ABSENT: Senator Bill Hawks and Representatives Mac MacGraw
and Louise Ryckman.
* * * * *
The meeting convened at 9:05 a.m. Senator Kunz moved and Senator
Mockler seconded Representative Tempest be elected chairman and
Senator Coe be elected as vice chairman. The motion passed
unanimously. Senator Mockler moved and Senator Coe seconded the
minutes from the December 1998 meeting of the Select Committee be
approved as distributed (see Attachment B). The motion passed
unanimously.
At the direction of Chairman Tempest, Mr. Miller provided an
overview of the history of the Select Committee, and the new
legislation enacted making the Select Committee permanent. He
noted the contents of this new legislation were patterned closely
after that of the Select Water Committee. The Select Water
Committee increased in membership from 10 to 12 members. The
Select Committee on Capital Financing and Investments was
established at a size of 10 members in the codified law, but in a
noncodified provision of the "feed bill" (legislative
appropriations bill) two additional members were designated. It
was suggested the Select Committee may wish to consider
sponsoring legislation in the next legislative session formally
establishing the Select Committee at 12 members. The materials
regarding the history of the Select Committee, the state statutes
and constitutional provisions related to investment of state
funds, and the overview of state funds to be invested and
legislatively designated investments, were briefly reviewed. A
copy of the materials are on file at LSO.
Mr. Miller noted the existing statutes regarding the Select
Committee on Capital Financing and Investments require the State
Loan and Investment Board to provide notice of its meetings and a
copy of its minutes to all members of the Select Committee.
Given the press of business since the adjournment of the Session,
that has not been accomplished. Ms. Sharon Garland, staff of the
State Loan and Investment Board, provided copies of the minutes
and Mr. Miller and Ms. Garland indicated on a monthly basis LSO
will be provided copies of the meeting notice and meeting
minutes, and those will automatically be distributed to the
members of the Select Committee on Capital Financing and
Investments. (Attachment B)
Ms. Garland, State Treasurer Cynthia Lummis, Deputy State
Treasurer Glenn Shaffer, and Russell Kuhns and Becky Gratsinger
of R.V. Kuhns, the state's investment advisor, made a
presentation to the Select Committee. Attachment C is a May 3,
1999, version of the master investment policy and subpolicies for
the State of Wyoming. Ms. Gratsinger provided an overview of the
various components, and stressed the key is asset allocation.
Specifically, it is essential the policy include specific
provisions to determine the appropriate mix of equities and fixed
income investments, as well as cash or cash equivalents,
depending upon the objectives of the various account or pool of
funds being invested.
It was noted the investment policy is a fluid document that is
constantly changing, as necessary, to respond to the needs of the
state's portfolio and good investment practice.
In response to questions from members of the Select Committee, it
was noted R. V. Kuhns is under contract to the State of Wyoming
for a fixed amount to serve as investment advisor. Investment
managers receive fees based on the volume of assets they manage,
and receive a certain floating fee which is competitive. In
fact, the fees for the state's equity managers are less than
those paid by the Retirement System for their equity managers.
In response to questions from the Select Committee, it was noted
equity managers are limited to keeping not more than five percent
of their portfolio in cash. It was noted there is a separate
allocation that is separately managed for cash or cash
equivalents. As such, it is inappropriate for equity managers to
be heavily into cash. R.V. Kuhns distributed Attachment D,
entitled "Spending Policy Review for the State Land and
Investment Board presented to the Select Committee" and dated
June 2, 1999.
Mr. Kuhns provided an overview of the various classifications of
investments. He discussed the standard deviations of expected
rates of return. It was noted there are varying degrees of risk
with each investment category, the key is asset allocation and
diversification of investments.
Ms. Gratsinger reviewed Tab 2 of the handout. It was stressed
the state had policy choices to make. It could increase its
return on investments, but if it expended all that rate of
return, the value of the corpus would decline dramatically and
that level of revenue could not be sustained. Similarly, the
state could elect to "inflation proof" the corpus or it could
attempt to "inflation proof" the revenues derived from state
investments. All of those have consequences and choices have to
be made. R. V. Kuhns handed out Attachment E, a document
entitled "Spending Policy Objectives and Discussion." The three
objectives listed were dependent upon the state adopting a
"spending policy" with respect to its investments.
It was stressed that spending policy in this context is not
related to the Legislature's decision to spend a certain amount
of money for certain public purposes. Rather, it is a technical
term related to trust investments or portfolio investments. In
that context, spending policy is determining the amount of total
return on the portfolio that will be available to be expended for
any purpose in a particular year. There is currently a 25
percent statutory limit on investments and equities. The state
currently has about 9 percent of its permanent funds in equity
investments, and that will be increased over time using the
method of dollar cost averaging. The rate of return on fixed
income investments has been decreasing in recent years. As such,
it is important to move to some type of spending limitation on
earnings, including realized capital gains. It was noted there
is essentially a "spending policy" in effect. The permanent
mineral trust fund requires all earnings, including all realized
capital gains, must be deposited in the general fund. Once in
the general fund they are profiled as available for expenditure
and, given the state's needs, are generally expended. Similarly,
the earnings, including realized capital gains from investments
of the common school account, are distributed to Wyoming schools
on a monthly basis so these funds are not placed into the corpus
to "inflation proof" it.
State Treasurer Lummis stressed she supported the spending policy
and had a working group of people from a variety of backgrounds
working with her, including bankers, investment professionals and
other interested persons. She distributed a memo to the Select
Committee dated June 2, 1999 (Attachment F). This memo states
her goal of increasing the return on permanent funds by one
percent annually, i.e., $26 million. That goal has three
components, and some statutory action is needed to achieve those.
In discussing the R.V. Kuhns presentation, it was noted the
permanent funds are a long-term investment with an investment
horizon of 50 to 100 years. Inflation proofing the corpus is a
way to ensure the investments will be available for returns on a
sustainable basis during the long term. It was noted
international securities are tending to move more and more in
correlation with U.S. equities, though it is certainly not
identical. After extensive discussion, the Select Committee
asked that R.V. Kuhns prepare several additional scenarios.
Those are:
ú Compute the additional dollar amount that would have to be
added to the corpus of the permanent funds on a regular basis
to
maintain the $266 million projected revenue level but also
inflation proof the portfolio.
ú Determine the figure under which the portfolio would be
inflation proofed, but the rate of return would also be
adjusted
for inflation up from the $266 million level. Under this
scenario, not only the corpus but the revenues available would
keep pace with inflation.
ú Where along the continuum the returns would be if an amount
equal to the current mineral severance tax flow to the budget
reserve account were placed into the corpus of the permanent
mineral trust fund. It was noted only that dollar amount would
be used, and the Legislature would be free to direct monies
from
a variety of sources if it sought to do so to inflation proof
the
account.
The Select Committee discussed the possibility of future training
sessions regarding the various technical components of the
investment policy and its implementation.
The Select Committee also received basic information regarding
the investment managers. There are currently three equity
managers, two of which are on board and one of which is just
coming on board. Each of them have various styles and funds
allocated to them to be invested in accordance with that style,
i.e., growth, value, enhanced core, etc. In response to a
question, R.V. Kuhns indicated it had no opinion on the propriety
of the state borrowing to the issuance of lease revenue bonds to
finance the prison as opposed to paying cash.
R.V. Kuhns distributed an attachment regarding the Wyoming
Retirement System allocation (Attachment G). Recently the
Retirement System was roughly 60 percent in equities and 40
percent in fixed incomes, and the rate of return has increased
significantly in recent years. It was noted the Retirement
System also happens to be heavily invested in large growth
companies, which have been the principal participants in the
economic boom in equities.
Mr. Eric Palen discussed the Family College Savings Program and
provided an outline (see Attachment H). Mr. Palen described the
basic points of the outline, and some of the issues that need to
be addressed. Mr. Miller advised that the law, as written,
technically requires the Select Committee to issue proposals and
make recommendations to the State Treasurer. Informal
discussions with the State Treasurer indicated the State
Treasurer is receptive to doing most of that work and then
getting input from the Select Committee, as appropriate. With
respect to rules and regulations, the Select Committee agreed the
State Treasurer would take the lead and ask for guidance and
input from the Select Committee to ensure the law was complied.
Mr. John Reardon, and other representatives of the Wyoming
Business Council, provided an attachment regarding potential use
of industrial development bonds (see Attachment I). It was noted
the old allocations for legislatively designated investments and
industrial development bonds were repealed and replaced by new
legislation authorizing up to $35 million in those industrial
development bonds. There have been a number of in-state and out-
of-state firms expressing interest in those bonds. Mr. Reardon
also distributed a handout on capital formation and provided an
overview (see Attachment J). He noted additional financing was
needed to fill a niche of commercial gap business financing, and
a state small business investment corporation could leverage up
to an additional $30 million in SBA authority. Mr. Reardon
suggested some of the state's legislatively designated investment
capability could be allocated through legislation authorizing
investments of this type. He provided a brief overview of the
Challenge Loan Program and its limitations. The enterprise fund
approach could be used with smaller firms, whereas industrial
revenue bonds are generally used for larger firms.
The Select Committee agreed to schedule a meeting sometime in
August. Since there is a competition underway for the new
contract for the investment advisor, it is necessary to meet to
determine whether R.V. Kuhns or some other entity will be
selected. Once the selection process is complete, the successful
firm can be contacted about providing training.
It was noted the public purchase of tax exempt bonds under the
new legislation authorizing purchases up to $35 million in total
were at tax exempt rates. The rate of return to the state was
lower than what could otherwise be earned. However, this is an
important economic development tool.
The Select Committee adjourned at approximately 3:00 p.m.
Respectfully submitted,
Representative Rick Tempest
Chairman
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