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September 13, 2007
Room 302, Capitol Building
Cheyenne, Wyoming
Senators Jim Anderson, Hank Coe, Bob Fecht, Jayne Mockler and Kathryn Sessions;
Representatives Ross Diercks, Alan Jones, Jack Landon, Colin Simpson and Mary Throne.
Representative Lisa Shepperson
Senator Drew Perkins
Other legislators present:
Senator John Schiffer
Dave Gruver
Steve Sommers
Please refer to Appendix 1 to review the Committee Sign-in Sheet for a list of other individuals who attended the meeting.
All meeting materials and handouts provided to the Committee by the Legislative Service Office (LSO), public officials, lobbyists, and the public are referenced in the Meeting Materials Index, attached to the minutes. These materials are on file at the LSO and are part of the official record of the meeting.
Chairman Anderson called the meeting to order at 9:00 a.m. The agenda which was followed is appendix 2.
State Treasurer Meyer addressed the Committee. He provided a directory of the Office and Deputy Treasurer Sharon Garland introduced the Treasurer’s Office staff. (Appendix 3)
Treasurer Meyer reviewed a report provided by his Office to the Committee (appendix 4) and stated that he was providing options to the Committee and to the Legislature regarding the various recommendations in the report and a subsequent mailing to the Committee. (Appendix 5) In the State's more mature portfolio there are more stocks, and thus more capital gains, and less fixed income investments. The Treasurer explained the difference in total return and yield and referenced graphs found on pages 2 and 26 of the report. "Market value" was explained to be a “snapshot” of value of an asset at any particular point in time, "book value" is the price paid by the State for the asset. Treasurer Meyer reviewed legislative deposits to the permanent Wyoming mineral trust fund (PWMTF) and common school permanent land fund (CSPLF). The market value of the PWMTF has increased from $1.755 billion in FY02 to $3.704 billion in FY07; which value includes $302 million in ad hoc legislative deposits during that time. Those additional cash deposits have been roughly comparable to a 2.5% inflation factor if applied to the PWMTF during that time, but much lesser additional cash deposits have been made to the CSPLF. While the CSPLF has increased from $899.2 million market value in FY02 to $1.676.7 billion in FY07, only $4.9 million in additional "ad hoc" legislative deposits have been made to that fund during that time period. A 2.5% "inflation rate" applied to that fund would have called for $161 million in deposits during that time.
The Treasurer addressed the spending policy and reserve accounts created for those two funds. He stated that the spending policy and reserve accounts are “high maintenance” efforts to accomplish the goals of inflation proofing the corpus and saving money for subsequent expenditures. He suggested the Legislature review what the objectives were when the spending policies and reserve accounts were established and consider whether the accounts accomplish those goals.
The Committee discussed the PWMTF and the CSPLF and additions to each. Representative Simpson noted that he would like the chart on page 26 of the report to include an item 3c, showing deposits based upon the spending policy and reserve fund overflows as well other legislative deposits. Deputy Treasurer Sharon Garland provided FY 08 projections for the PWMTF and the CSPLF and spending policy amount calculations based upon the increased corpuses for those funds. (Appendices 6 and 7) State Treasurer Meyer noted that the Attorney General has ruled that reserve fund accounts for the PWMTF are to be treated as permanent funds for purposes of income i.e., that the earnings must go to the general fund.
Michael Walden-Newman, chief financial officer with the Treasurer's Office, addressed the Committee regarding the Treasurer’s report. He explained the portfolio held by the State and the various funds created by the Constitution and statute. (See pages 3 and 4 of appendix 4). He also provided a chart of annual asset class performance. (Appendix 8). The performance of each asset allocation was reviewed, with Mr. Walden-Newman noting that the fixed income portion of the portfolio provided the steady income from the investments. With increased stock in the portfolio, there will be additional capital gains realized, with a concomitant decrease in the steady income flows from the fixed income investments. This is reflected on page 26 of appendix 4. It was noted that the return of principal is not income, but gains are income which must, under the Constitution, be deposited to the general fund. The statutes comply with that requirement but also provide for a continuous appropriation of that income to the PWMTF reserve account to the extent the income exceeds the spending policy amount for the PWMTF. Mr. Walden-Newman noted that the Treasurer’s Office will be rebalancing asset allocations more frequently now that asset allocation goals have been reached. That will call for a monthly review of the asset allocations and the market value of assets.
Mr. Walden-Newman provided an update to the June portfolio, comparing it with the August portfolio. (Appendix 9) The Treasurer stated that the chart showed there needs to be further review of the active managers in order to ensure they are taking gains at appropriate times. Committee members questioned whether there are set targets for when the gains will be taken and how much will be taken at pre-established points. Treasurer Meyer stated that currently there are none in place, but he intends to review the issue with the State Loan and Investment Board, and there needs to be a balance between too frequent rebalancing and taking gains when they are available. He noted that the State, as the investor, must set its goals and give investment managers guidance. Mr. Walden-Newman stated the Treasurer's Office is bringing the Hathaway and Higher Education Endowment funds to a 50% stock allocation in the portfolio. That will not be done immediately, but over a two year period.
In reply to Committee questions, it was stated that the income from the PWMTF is deposited to the general fund once per year. While the income is not deposited until after the fiscal year, the earnings are reinvested during that period. The CSPLF income is transferred monthly.
Becky Gratsinger and Josh Kevan with RV Kuhns (the State's investment manager) addressed the Committee. They reviewed the June 30 performance summary (pages 13 through 20 of appendix 4). The PWMTF quarterly return was 4.32%, fiscal year to date was 14.83%; three year return was 9.89%; and five year return 9.18%. ("Return" being realized and unrealized gains as well as interest and dividend earnings). The returns for the Permanent Land Fund, the University Permanent Land Fund, Common School Permanent Land Fund, Worker’s Compensation Fund, Tobacco Settlement Account and State Agency Pool also appear on pages 17 and 18 and were discussed. Ms. Gratsinger noted that it might be appropriate to consider whether the spending policy amount should be reviewed given a potential reduction in market returns. The performance of each manager and the type of asset managed by each manager was reviewed. (Page 19 of appendix 4)
The State Treasurer addressed the issue of private equity funds and the amount of the portfolio which will be invested in private equities. He noted that contracts with current private equity managers have been reviewed and reworked and there will be a review of whether the target of 4% asset allocation for private equity investment is appropriate. The Treasurer noted the returns on private equity investments overall are now not much higher than other equity investments and questioned whether the additional returns which might be provided by private equity investment are worth the increased risk. He noted that with private equity the State loses liquidity for a long time period. There was discussion regarding the pros and cons on private equity investments. The Treasurer stated that he invests the State’s portfolio based upon returns to the State, not benefit to businesses in the State.
The discussion focused on whether there would be a complete review of asset allocation and investment managers. The State Treasurer stated that the current statutes provide for investments based upon statute restrictions and the State Loan and Investment Board policies. The Committee discussed the setting of investment policy and how that is implemented. RV Kuhns oversees the retention of investment managers and provides recommendations to the State Loan and Investment Board.
The Committee discussed the retirement system portfolio. There were questions regarding whether there is duplication of fees being paid for investment managers for that fund and Wyoming’s other funds. There were also questions regarding the oversight of the retirement system, with the Treasurer noting he is on the retirement investment board and has raised some questions regarding investment oversight by that board.
The Treasurer next addressed interfund borrowing and the timing for distributions to the school foundation program. He noted that there is a surplus in the school foundation program account and that the Legislature might wish to review the issue as there might be more federal mineral royalties flowing to that program than are necessary. Ms. Garland addressed interfund borrowing and flows to and from the school foundation program account. In the past few years the Treasurer’s Office issued tax revenue anticipation notes (TRANS) to borrow in order to meet immediate cash flow needs. In October through February, there is a cash flow deficit due to the timing of when funds must be distributed to school districts under current statute. (See pages 45-47 of appendix 4) Rather that issuing TRANS in the future, the Office plans to use interfund borrowing, as authorized by statute. Ms. Garland provided a flow chart which demonstrated how the interfund borrowing is accomplished. (Appendix 10). Mr. Walden-Newman noted that interfund borrowing does affect investment options. The needed amount will be invested as "cash" in order to meet cash flow needs, ("cash" being liquid fixed income investments rather than equities). The Treasurer stated that the State is fronting money to school districts before the funds have been received. The policy question for the Legislature is whether the State or the school districts should borrow money for that cash flow need. The Treasurer noted that there is nothing "wrong" with the current system, the point is that there is a lost opportunity cost to the State by the interfund borrowing.
Betsy Anderson, Staff Attorney with the Treasurer's Office, addressed the need to amend current investment statutes. She provided a summary of proposed legislation. (Appendix 11). More detailed suggestions are found in appendix 4 pages 48 to 78. The three major changes she presented are the need to adjust the statutes to the previously enacted broader prudent investor rule; adjustments to the list of legislatively designated investments; and limitations on commingled funds. Representative Simpson moved that LSO be directed to work with the Treasurer's Office to draft the proposed legislation summarized on appendix 11. The motion was seconded by Senator Coe. It was clarified that the motion was to draft only the three items listed on the summary of the proposed legislation (prudent investor rule reconciliation, legislative designated investments, commingled funds). The motion passed.
After lunch the Committee reconvened and set its next meeting for October 24, in Casper.
Committee discussion next focused on other state models for managing investments. Ms. Gratsinger noted that quite prevalent is a board making ultimate decisions, with a subcommittee of the board working more closely with investment managers. Ms. Gratsinger noted that "inflation proofing" is often used in connection with spending or income goals. Representative Landon suggested taking earnings first and placing an "inflation amount" back to the corpus. Treasurer Meyer noted that was his original recommendation as shown in appendix 4. His later recommendation was to reinvest capital gains to inflation proof. He noted that the amount will change depending on the market conditions, and that an average does not reflect the true current market value. Ms. Gratsinger stated that most investors have automatic rebalancing requirements, forcing the investor to take gains. Senator Coe noted that a problem with automatic triggers for capturing gains is that it removes discretion from money managers who are being paid to manage the funds on a day to day basis. The Committee discussed the issue of rebalancing and asset allocation.
In response to Committee questions as to how to review the retirement system investment program, the Treasurer suggested that Management Council might hire an independent investment manager firm to review the investment policy of the retirement system if it chooses to do so. The timing for taking capital gains could be reviewed. He noted that the Legislature could take such action in view of the retirement system calling upon the Legislature for additional funding of the system.
Discussion turned to general investment overview and policy decisions. Committee members questioned whether the State should retain a chief investment officer for the various permanent funds. Senator Mockler noted that the time value of money needs to be considered and that it might be better to spend now on certain projects because the inflation amount for that particular project might well outstrip investment earnings. Representative Simpson noted that the use of the first earnings to “inflation proof” would be a simpler approach and would avoid debate each year on additional amounts to deposit to the permanent funds. The Treasurer noted that he was not stating that the Legislature must inflation proof first. He was presenting options and noting different policy choices affect liquidity of the investments of the portfolio. He noted that interfund borrowing could be used to accomplish both the goals of inflation proofing and spending on current needs.
Chairman Anderson asked for motions on the suggestions presented to the Committee. Representative Landon moved to direct the LSO to draft a bill to change the spending policy to one where the first income from the PWMTF 2.5% is returned to the corpus at the end of the fiscal year. Representative Simpson moved to amend the motion so that the 2.5% should reflect the book value at the end of the fiscal year and that the remaining income be handled as per the spending policy and reserve accounts in the current law. The amendment failed. Representative Landon restated his motion to be as stated on page 38 of the Treasurer's proposed language except that the 2.5% be of market value, rather than book value for inflation proofing. The motion failed. No additional motions were made.
Ms. Garland reviewed two reports previously provided to the Committee. Appendices 12 and 13. The first concerned the Hathaway reserve account. There was a need to transfer $1.7 million from the reserve account to the expenditure account to fund Hathaway scholarships for this first semester of the school year. The Committee questioned if there were projections regarding the amount of use and whether it was known if there are sufficient funds for scholarships. There were no figures immediately available. The second report concerned the college savings plan. That report stated that the Wyoming "529" plan had been terminated due to its small size, with plan participants being able to move accounts to the Colorado plan, all as permitted under 2006 legislation. Plan participant, account and fee data were provided. (Appendix 14)
LSO staff presented a matrix of reports due to the Committee, noting that Management Council had authorized a review of all annual reports for Committees to modify, repeal or make no changes to reports due. (Appendix 15). Representative Landon asked if the SLIB would report to the Committee by email those meetings of the SLIB at which the issue of capital financing was discussed. State Treasurer Meyer stated the SLIB would do so. No other changes were requested to be made to the requirements.
The Treasurer thanked the Committee for its attention to the matters he raised. The meeting adjourned at 3:35 p.m.
Respectfully submitted,
Senator Jim Anderson, Chairman