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October 27, 2004
Room 302, Capitol Building
Cheyenne, Wyoming
Chair April Brimmer Kunz
Vice-chair Randall Luthi
Senator Bill Hawks
Senator Grant Larson (by telephone)
Senator Mike Massie
Senator Jayne Mockler
Representative Roy Cohee
Representative Fred Parady
Representative Ed Prosser
Representative Wayne Reese
Representative Jane Warren
Senator Henry “Hank” Coe
Dave Gruver and Steve Sommers
Please refer to
Appendix 1 to review the Committee Sign-in Sheet
for a list of other individuals who attended the meeting.
Chairman Kunz called the meeting to order at 9:30 a.m. The following sections summarize the Committee proceedings by topic. Please refer to Appendix 2 to review the Committee Meeting Agenda.
State Building Commission
The Governor addressed the Committee and the issue of the State Building Commission. He suggested that the Commission should be allowed to work under the new staffing. One change he suggested would be to remove the general services administrator as Secretary of the Commission and replace that position with the capital construction manager, the position now held by former Senator Cathcart.
Secretary of State Joe Meyer, addressed the issue. He stated that it is not usually the structure of an agency which creates or solves problems. In the past few months he has recognized a change in the way state capital construction is being accomplished and the improvement has been noticeable. The State Building Commission's recommendations will now be included in the Governor's budget recommendations. That is a positive change. In the Secretary of State's view, the focus of Administration and Information on capital construction was lost in part with the abolition of the facilities management division in 1996.
State Treasurer Cynthia Lummis agreed that the Commission has experienced positive actions the last few months. She suggested that the Secretary to the Commission should be appointed by the Commission. While the Commission has been functioning well since former Senator Cathcart has been in place, she noted that is also due to the "good graces" of the Governor's Office and that situation can change. The State Treasurer noted that it would be helpful to have in statute that the recommendations of the Commission are to be included in the budget request of the Governor.
State Auditor Max Maxfield suggested that the structure should be changed in order to ensure that the process works independent of the personnel in place. The Secretary should be appointed by the Commission in his view.
State Superintendent Trent Blankenship also urged that the relationship with the Secretary should be codified and that statutory changes be made placing the Secretary under the Commission.
Secretary of State Meyer stated that if the division is located in the Department of Administration and Information and yet is answerable to the Commission, that makes the process difficult. The entire division should be answerable to the Commission if that is the Committee's determination. He reiterated that Commission functions are limited; neither it nor the construction manager are in charge of leasing property. That is a function of A&I. He also noted that he has no need to be a part of a state building commission or that the Commission necessarily needs to exist.
The Governor suggested that the division should be left in A&I, since determining agency space needs is a typical A&I function on a day to day basis. That determination sometimes then evolves into a policy function for elected officials. He suggested moving the capital construction function back to a separate division within A&I. He did not support establishing a new separate agency for the function. He also stated that the rearrangement of structure is not as important and is subject to those persons working in the system.
Representative Luthi moved that the Committee have for its next meeting draft legislation encompassing three items:
The Construction Management should be the Commission Secretary, appointed by the Commission and an employee of the Commission;
The Commission recommendations for capital construction shall be forwarded to the legislature;
The designation of the administrator of the general services division as secretary of the Commission should be removed.
Mr. Cathcart suggested the Committee might wish to reestablish the facilities management division.
Representative Luthi's motion was seconded by Senator Mockler.
Senator Kunz suggested that another draft could be the abolition of the State Building Commission with the powers moved to the office of the Governor.
LSO staff asked for clarification of the motion. It was clarified to mean that one person, in the position of Mr. Cathcart will be a single employee of the Commission, acting as the Secretary to the Commission. No other staff are to be assigned to the Commission. The recommendations of the Commission are to be included in the Governor's recommendations to the JAC through the normal budget process.
The Committee discussed the motion. Senator Mockler and Mr. Cathcart expressed concerns regarding the placement of one person under the Commission while the remaining staff were to remain under A&I.
Representative Luthi's motion passed 7-4, with Senators Massie and Mockler and Representatives Reese and Warren voting "no".
Chair Kunz moved that a bill be drafted to abolish the State Building Commission and transfer its functions to the governor's office. Speaker Parady seconded the motion. Kunz explained that the spirit of the motion was to allow full discussion of all the possible solutions to the issue. The motion passed with Speaker Parady voting "no".
Representative Reese moved that a bill be drafted moving the entire division to the State Building Commission. The motion was seconded by Representative Luthi. The Committee discussed the motion. LSO staff asked that the motion be clarified - it is to include the other aspects of Representative Luthi's earlier motion concerning appointment of the Secretary and inclusion of the recommendations of the Commission, plus all of the functions overseen by the construction management administrator are to be moved to the state building commission. The motion passed 9-2, with Senator Larson and Representative Prosser voting "no".
Senator Larson asked that Mr. Cathcart and LSO staff provide the Committee with a flow chart showing the division's current functions, duties, responsibilities and lines of authority.
Review of state investment earnings
State Treasurer Lummis introduced staff of her Office, Michael Walden-Newman, Deputy Treasurer Sharon Garland, Diana Walter, Betsy Anderson, Karla Semler, Erica Legerski, Barbara Patterson and Ryan McGuffey. The Treasurer explained that the Office is taking a different approach to investments. She provided three written items on the issue of state investments; a review of estimated and actual income, investment performance through June, 2004 and assets under management and fees paid. (Appendices 3 through 5).
The Treasurer testified her office had three goals they are trying to achieve at the same time, clean-up the fixed income internally managed asset category, change the asset allocation, and protect the corpus from losses. These changes will have a short term negative impact on investment earnings, including selling some investments at a loss. Since the asset allocation was so heavily weighted to bonds versus equities, the State's portfolio did much better than most institutional investors during the current flat market. Now that the bond market is also flat, her Office is attempting to change the asset allocations. Generally the asset allocation will be moved to more equity investments from fixed investments. She explained that in the materials provided market value is based upon current markets, book value or total asset value is that at which the asset was purchased. The Committee also discussed the average maturity of fixed incomes held by the state. Diana Walter addressed income projections presented to the CREG this past month. No gains were projected for the equities held; while gains are anticipated, the timing of those gains is unknown. For convertibles, a projection of 4% on half of the amount allocated to that class was made (since about half of the convertibles are equities). LDI's are projected at 6%, cash equivalents at 1.75%. She suggested that projections for investment earnings for CREG could well be revised upwards. A number of bonds currently held are now below investment grade and some will be sold in order to protect corpus based upon the potential of further decreases in the value of those bonds.
Mr. Walden-Newman, stated that the Office viewed this period as a good time for the state to "clean-up" its portfolio with a large amount of unanticipated income. Ms. Martin stated that purchases currently being made are for bonds with maturities in the range of 2 to 5 years.
Prudent investor rule
State Treasurer Lummis addressed the Committee regarding the prudent investor rule. Some state investments are made pursuant to that standard adopted in 1999, but not all are subject to that standard. The prudent investor standard is applied to State investments only when the investment is in an equity and is not otherwise authorized by statute. Her suggestion was to consider changing the law so that the prudent investor standard is applied as the overarching principle for investments.
The State Treasurer also noted that there were also references to investment managers and registered investment managers which are used interchangeably and sometimes incorrectly in current statutes and they should be amended.
The Treasurer provided written background material on the adoption of the prudent investor standard. (Appendices 6 and 7). She asked for the Committee's direction to work with the LSO in determining which of the statutes are needed to be changed to implement that standard overall.
In response to Committee questions, the Treasurer stated that the adoption of the standard would allow the State to engage in a wider range of investments. The rule will be applied differently depending on the rate of return sought for the corpus. It would be the Committee's and ultimately the Legislature's policy decision as to which funds and which entities would be under the prudent investor standard.
Senator Larson, questioned whether the adoption of the prudent investor standard would allow different investments based upon the setting of different investment return goals. The Treasurer noted that it could be imprudent to initially set the return goal too high or too low to begin with. The differences would be based upon the type of fund and the need for returns. She noted she would ask her investment advisors the same question. Senator Larson questioned who sets the investment goals. The State Treasurer stated that the setting of the goal is somewhat subjective and explained that the state loan and investment board (SLIB) and state's investment advisors are consulted in setting the goals. She noted that given the processes in place it is unlikely that imprudent standards would be set. She reiterated that she was not advocating the repeal of all standards in place of the simple adoption of the prudent investor rule. Master investment policies would still be set by the SLIB, other standards listed in the current statutes would remain in place. She acknowledged there could be concerns that the SLIB would be given too much discretion regarding investments with the adoption of this standard. She reiterated that she was not advocating the adoption of the prudent investor rule only; she also noted that while she was suggesting a two step process, it does not have to be a two step process (the steps being the overlay of the prudent investor standard in 2005, with the follow-up year being the review of statutes which should be repealed with the adoption of that standard overall).
Chair Kunz reviewed the history of the adoption of the prudent investor standard in Wyoming and stated that the standard was intentionally limited at that time in order for the State to "walk before it ran"; in acknowledgment that the standard gave the SLIB greater discretion in investments. Senator Kunz also questioned whether the hospitals or other groups should be in the initial discussion of adopting that standard for all State investments.
Robert Kidd, Wyoming Hospital Association, and Charles Harm, CEO United Medical Center addressed the Committee. The Association has been reviewing the investments for governmental hospitals. They noted that those hospitals are limited in their investments and are averaging now between two and three percent return, since most are based upon bonds. They requested that the Committee support legislation authorizing government hospitals to invest under the prudent investor standard. The State Treasurer suggested that should the Committee develop legislation allowing the governmental hospitals to invest under the prudent investor standard, that legislation should be separate from the "overlay" bill being suggested by the State Treasurer.
Senator Mockler moved that a bill be drafted overlaying the prudent investor rule over the State Treasurer's investments. A second draft would allow government hospitals to operate under the same standard. Both motions passed. There was also a request for a listing of other governmental entities which follow the State Treasurer's permissible investments.
State spending policy
Deputy Treasurer Garland addressed the recommendations for the state spending policy. The Office has no recommendations for changes to the policy this year. She had earlier provided a letter to that effect to the Committee (Appendix 8). She also provided information as to the past and anticipated effect of the adoption of amendments to the spending policy for FY2000 through 2009. (Appendix 9)
Legislatively designated investments
Ms. Garland and Treasurer Lummis addressed suggested changes to legislatively designated investments. Again, a letter had been provided to the Committee regarding the recommendations. (Appendix 10) They recommended removal of the clean coal project investment authorization from the statutes since that investment has been repaid and no further investments were authorized after 1999 under current law. Speaker Parady moved that a bill be drafted to implement the recommendation. The motion passed.
College savings program
Ms. Garland and Ms. Anderson addressed the Committee. They provided a packet of written materials regarding the program. (Appendix 11) Those materials show the size of the program, the number of assets under the program and the number of investors. The history of the program is that with more and more states sponsoring programs, participation in the Wyoming program has decreased. The Treasurer's Office has selected a consultant to help the Office through the process of determining what can and should be done with the program. The current program manager has agreed to pay up to $75,000 for the consultant. The Office is determining whether the hiring of the consultant requires an RFP. Ms. Anderson explained how the process will work after the retention of a consultant.
University securities law
Rick Miller, University of Wyoming, addressed proposed draft legislation regarding the University Securities Law 05 LSO 219.W2. (Appendix 12). The draft makes two substantive changes. The first explicitly authorizes bonds to be issued at variable rates. That is connected with authority to allow the use of interest rate exchanges, which can be used to reduce bond costs. The second substantive change allows the investment of bonds proceeds in items other than federal securities. The change would allow investments in any investment authorized under W.S. 9-4-831.
Senator Larson questioned whether that change would allow investment as per the prudent investor rule. Senator Mockler clarified that her last motion was to pertain to State Treasurer investments only, not other governmental entities.
Representative Luthi moved that the bill be presented to the Committee at the next meeting for consideration. The motion passed.
Chair Kunz suggested that for continuity Senator Larson should be elected Chairman of the Committee for the remainder of the interim. Representative Luthi so moved. Senator Kunz seconded the motion. The motion passed.
There being no further business, Chairman Kunz adjourned the meeting at 3:00 p.m.
Respectfully submitted,
Senator Grant Larson, Chairman