Tuesday, December 8, 2015 JAC Agency Hearings –Agenda - 8 am 004 State Treasurer – 10 am 006 A and I – 1 pm 006A/006B Boards and Commission - 2 pm 077 ETS (Times subject to change) 12/8/2015 8:00:40 AM – Chairman for the day is Chairman Ross 12/8/2015 8:02:54 AM Call to order, Roll Call, All present Ross: Minutes from October JAC meeting approved and adopted. 12/8/2015 8:04:29 AM Director Mark Gordon: introductions of Pat Arp and Darla Conn, Erica Legerski Historical information for last year- record income to the state in spite of 3 departures from the staff: Garland, Newman ,Russell. Patrick Fleming is new CIO. He is not here today. Exit interview information included that predecessor never went to bat for his staff. Slow process to reengineer the office. Opportunities opened up because of the departure of personnel. I wanted a full review of salaries, to break down 3 silos that impeded efficiency and work on the metrics to show performance was up to peer. Opportunities exist even in a down market. One is to bring fees in house. We have more assets under management which costs more. Salary review comes at an awkward time. We are approaching with a modest, thoughtful approach so office performs better 12/8/2015 8:11:41 AM Arp – page 3 of budget book – Veterans’ tax exemption, Indian motor vehicle exemption, manager payments has a large exception budget 11M is easiest to explain. Crested 1 billion in investment income last year. Small exception in unclaimed property. 26 staff. Frozen at 22 staff. Business analyst, director of unclaimed property, claims specialist, investment analyst. Page 4 and 5 – statutory authority Page 5 and 6 – general information about goals and agency. We are a high dollar agency in some sense. Only 4 million is for agency operations of which about half is banking fees. Operating is at about 2 million Page 8 – most important page – has listing of all the exceptions Priority 1 – Manager fees, consulting payments approx. 10 m. gave breakdown of amount. More diversified in investments so need more unique consulting Priority 2 – Banking fees. .5 million We expect the fees to go up this biennium. Sweet contract with custody bank. Negotiated at a 2% interest rate. Going rate is .02 at that moment. Contract will be renegotiated. 12/8/2015 8:17:06 AM Ross: How do you select the bank? Arp: We have one or two custody banks. There are limited banks that can respond to RFP because of the size of our funds. We use a consultant to look through the respondents. We have a custody bank and a bank locally for deposits. Currently that is Wells Fargo 12/8/2015 8:18:41 AM Greear: GF item? Are we paying fees on top? Arp: We about breakeven between interest and the fees. Going forward we will not be able to offset the fees. This is the amount we will not offset. 12/8/2015 8:19:51 AM Burns: Feds will increase the prime in the next week or two which should positively impact our investment. Is there an impact positively on the fees? Gordon: If you look back, taper tantrum, have just started easing on the markets. The Federal Reserve will be sensitive about each increment. The world economy is fragile enough. The feds will be slow in raising the rate. It will possibly be a quarter percent. Markets are volatile. Lift off will be painful for fixed assets. In near term, will not see much of an impact. Over time it will be positive. Burns: is there a link between fed rate and fees? Gordon: yes, there is and will be 12/8/2015 8:22:36 AM Harshman: Management fees – these aren’t the only ones, correct? There are built in fees. What is the total amount? Gordon: Between 65 and 75 million Harshman: We profile returns. Should we profile reduced returns? Wasserburger: Manager fees and the cost. Why is it a good deal for the state of Wyoming? Gordon: This is an area we can make direct impact on in the coming year. Wyoming is a large client. Contracts have service fees and other aspects that we negotiate. We deal with firms larger than we are. There are favored nations clauses, etc. As we negotiate better fees, other clients receive better fees. There is a floor to the fees. In some cases, an active manger charges more because of a higher skill level. One with a passive approach has lower fees. Would the state be able to build out its own shop to bring in house some of its capacity? Range – 45 basis points being charged by one manager. We think we can bring it down to 10 points. There are costs part of the business, like trading costs. We are among the best of our peer set for our total fees. NC is plus 50 points on about a 30 billion portfolio. We report net of fees result. We will still do so to give accurate amount. Ross: Profiled that way? Gordon: I believe we profile them both net of fees and gross of fees. Harshman: 11 m is fees on how much investment? Gordon: The fees are on the 20 B we have and are roughly half..ones we pay out of GF. Ross: The question was, we have 20 B portfolio, exception request . What is the portion of the portfolio the management fee is for? Harshman: 65 M with an additional request. Gordon: Refer to Legerski Legerski: 20 B across 40 investment managers, split 50/50 between normal equity billed and invoic3ed. Alternative investments are net of fees and for fund fees. They are usually higher fees. Of the 20 Billion, half is invoiced and half is net of fees. As our pool increases, the fees go across all of that. We have the 20 B invested across those funds. Harshman: 50/50 invoiced and non-invoiced. Total fees will be brought up to about 75 million invoiced? Legerski: Invoiced are about 30 M, so about 45 M. Harshman: Unit 1101? Legerski: it will be the 52 plus the 11. Perkins: the fees are not reflected in the GF because they come out of the income stream Legerski: Correct Perkins: Obviously does reduce the amount going into GF. Banking fees are for checks, deposits, etc. They are not investment fees. Legerski: Correct. Gordon: Reason for increase is because the assets under management are increasing. The larger the asset pool, the larger the cost. Ross: Control on managers to prevent churning? Gordon: yes we do. They are professionals. OSLI retains a consultant to evaluate performance on a quarterly basis, as per statute. CIO and staff continually monitor this. There are challenges at our size of assets: Fees because of trade, put on a trade think about transaction expense (we can move the market, must consider execution) Burns: Net of fees, invoiced fees. Which for equity, and which for GF Legerski: Invoiced combination of fixed and equity. Net of fees is also a mixture. Depends on active or passive which tend to be invoiced. Funds are net. Burns: why exception request? Legerski: it is for spending authority 12/8/2015 8:38:35 AM Connolly: desire to bring in house. Do we see it in this budget? Gordon: Not in this budget. It is not a capacity we have built in. We have just moved and had significant change in the staff. Connolly: In next few years, what do you think about decrease in fees vs. additional staff Gordon: significant is the term if we have in house capacity. Looking out 5 or 6 years is difficult to see. I can see two parallel courses: stay as you go and do better job vs having a more significant trading force on the floor. If we can go from 45 basis points to 10, that is significant. I do not want to promise those. 12/8/2015 8:41:50 AM Nicholas: How much is in the custody accounts? Legerski: 20 Nicholas: holding account? Gordon: Custody account holds securities Nicholas: Fees others are paying for custody acct Gordon: Custody contract will be amended. It is set out for RFP, significantly different terms. Nicholas: low or high estimate Legerski: We have two bids out, custody for 20 B with Morgan chase. Second one is for custody service, which currently is wells fargo and they are giving us 2%. 559 is for depository services, not custody services. Nicholas: Avg. basis points for passive and active accts? Legerski: about 25 points on investments Gordon: NC at 50 points. We are below most of our peers. It is on a gross fee calculation. Patrick Fleming will be working through manger by manger to get a precise number Nicholas: Conservative component set by statute? Do you choose the model? Gordon: Passive management has outperformed but active could be beneficial. We make sure we have the most efficient approach to investing. Being conservative does not give us the performance on the upside of the market but is better on the downside. Nicholas ROR Gordon: favorable with peers, about 2% across portfolio, down by year, reflects the mkt, still up on a f5 and 10 yr cycle. Nicholas: what are you anticipating for reasonable returns for mid and long term cycle 3 to 7 years Gordon: 4 to 5 % return, subject to turmoil in the mkt. We are under water a little bit 12/8/2015 8:49:14 AM Wasserburger: Is an active manger a person or corporation? What is the fee range or avg? Gordon: It may be a person, clause in contract, that if person leaves, contract is void. Example of Schlumberger. Contract defines call rates, when money returns. Private equity managers are varied in performance so highest skilled have high fees. Legerski: lowest around 300,000, highest around 900,000, keeping in mind the value of assets. 12/8/2015 8:53:02 AM Greer: Fees. Do we have bond funds or bonds we are turning in coupons? If we have an uptick in fed rate, it will impact bonds. Gordon: Internally managed bond funds are legacy of agency. We have been anticipating the change. Hedge funds, tips, bonds with different durations. Strategies designed to mitigate against issues you brought up. Bonds currently held will have lower interest rate as fed rate increases. Constitutional amendment A will allow diversification into equities. Perkins: Complimented Gordon 12/8/2015 8:56:16 AM Burns: Before your tenure, criticism of lack of transparency. What percentage are we in private equity? Gordon: Target is 4%. We are below it by 3%. Problem is transparency and lack of liquidity. It helps smooth volatility in the other mkits. Burns: Do we have preferred stocks? Gordon: We will check on that. 12/8/2015 8:58:27 AM Stubson: Constitutional amendment. Plans to promote it or discussion on broader basis for promotion of it? Gordon: I travel around the state and speak on that topic. Purpose is education, not lobbying. Stubson: Constitutional amendment Nicholas: Footnote to create funding to create subcommittee to travel and do the public education. Gains in terms of monetary improvement by enacting the amendment? Gordon: Dependent on mkts. We have a cap on equity exposure of 55% in mineral fund, have performed about 3x better than fixed over 5 yr time. I think we can do double. There has been discussion on Yale Model, which is an endowment. Yale has a 4% fixed income. Harshman: 55% is a statutory limit? What are the peers? Gordon: Not as many peers have the challenge of sovereign funds that we do. AK, AL, ND, have different allocations and have a higher degree of equity. Harshman: Number? Gordon: Mkt info. Wy funds – legislatures have responsibility so cap is important. 55% may be low. State loan and investment board and treasurer’s office. I do not know right number. Volatility in stock mkt allocation. Appetite to absorb volatility if you have longer term. Harshman: 55% put on a long time ago. 65 or 70? Gordon: 65 or 70 are good, understanding we have safeguards. We have challenges this year but have a longer term horizon to consider. 12/8/2015 9:06:43 AM Ross: page 8 priorities Arp: priority 3 is wyo star fees, which are funds held for counties. We are asking for spending authority only. Priority 4 – asked for increase in salaries for key positions and those below mid. We are managing a lot of funds. It would be a detriment if our agency had more turn-over. We have personnel with experience between 10 and 25 years and not being paid at mid-range. I looked at salary structure in comparison with other agencies and with the mid-range. Mid is what you can hire in at for people with some experience. Agency in precarious position in this regard. Treasurer and I had this discussion. Looked at where we had vulnerability. This is a conservative number. This amount will not keep us bullet proof from being poached by another dept. or outside agency Nicholas: What positions and what is the change in salary? What are you relying on for you mid? History of mangers, job position, Hague report data. Arp: We can provide the background information used to build this. Mid is within the state system. No comparatives with private mkt. 12/8/2015 9:13:45 AM Burkhart: request for increases last session. What has been done with that and how has it worked out? Gordon: We requested 4 positions. You denied 1. We have hired CIO at upper limit allowed. We have not filled the first analyst as it is frozen and no action on third position. Burns: Governor passed along without a recommendation. What does that mean? Arp: Elected officials budgets, Governor believes elected official should have discussion with JAC. He is giving it a pass to bring it forward to committee Connolly: Where were you at in terms of hiring position, which is now frozen? Gordon: We hired a UW professor. He needs to finish his term there. He is actively getting up to speed on the managers we have. 12/8/2015 9:17:11 AM Ross: It equipment Arp: Priority 5 is IT equipment and hardware. Pattern is every other biennium request for replacement. We trimmed down after working with budget dept. Agency is on 4 to 5 year roll out. We will roll in new units as needed. Robust system vs. simple systems. Priority 6 – IT communication is routine 400 series work for telecommunications with Aand I Priority 7 – Veterans and Native American exemption, flow through monies to counties. Counties request reimbursement from us. Priority 7 only because information received in fall, so shortfall projection became priority 7, would be a 3. 12/8/2015 9:20:42 AM Harshman: effective immediately request? Arp: Yes Harshman: Governor said agencies directed to prioritize, elected were not so we will ask about that Ross: GF request for reimbursement to counties? Arp: Shortfall for next biennium, asking some to be approved immediately. Page 18, 20. Veterans Ross: Percentage reimbursed by state. All of it? Gordon: It is all pass through. 12/8/2015 9:22:40 AM Arp: Page 9 – organizational chart, discussion of model and efficiency, fees. We can have further discussion later. Realigned positions in agency Pg 13 – Operations budget – banking fees, salary requests Pg 14 – IT requests Pg 15 – Telecom Pg 16 and 17 – 12/8/2015 9:24:53 AM Arp: pg 18 Veteran’s exemption Harshman: how long in statute? Burns: Has been there a long time but had a 3 to 5 year restriction. Widow could get it forever. Bill to restrict it for widows was defeated. 8 years ago expanded to lifetime for veterans and widows. Harshman: No combat or wounded, any branch of service, Burns: DD 214 Harshman: No service requirement Burns: Expanded in IRAQ war Gordon: Growth is due to number of veterans Ross; Amount Arp: pg 18 10.5m Harshman: provision in statue that it goes out pro rata if not fully funded Burns; County would take the shortage in their property tax collection 12/8/2015 9:28:38 AM Arp: page 25 – manager payment, exception request. Investment manager and consultant fees. The consultant fees pay for QED system, which helps track and distribute the funds. We hired Deloite to help with international tax work last year. Greater the funds, tougher the mkt, greater the diversification. We use consultants to help us look at the mangers. Page 27 Management payment for IT and Telecom Page 29, 30 breakdown Page 30 Wyo Star, page 32 is spending authority only Page 35 unclaimed property program, funded with interest off of that property. Budget for salaries and IT equipment Burns: unclaimed property = 1.6 million, cost of operation? Arp: page 34, biennial amount for operation of that program, 8 staff, 200 series, 400 series, contractual svcs. None is GF. Funds are generated from the investment of the funds we have in holding. Burns: How much is in holding? Arp: approx. 45 M Burns: Where does the excess go? Arp: Designated date for excess to roll to the GF Burns: Statutory – involitate – funds may never be claimed Arp: I was tasked to look into that. Baldridge program. Funds could be claimed by the state. Would like to push that. It is the purpose of the program. There are funds we know will not be claimed or will likely not to be claimed, held for long periods of time. We hope to report back this time next year to the committee about that. Burns: income generated now? Arp: will get back to you on return to the GF Burns: Staff handling it, interface with the public? Arp: yes Gordon: top to bottom look at this dept. Perkins: Client had an experience with the office. Matter of course to check website. There was unclaimed property. Stubson Burns: Constituent with 40,000 addressed to wrong box so automatically sent to unclaimed. Ross: Held forever Gordon: forever, at this point. Other states have different permutations. 12/8/2015 9:38:39 AM Arp: Native American exemption on page 40. Page 42 effectively immediately is 42,465. Burns: Make sense to defer this salary increase until after the review Arp: staff is there. I will make note in an explanation around those. Ross: Governor did not profile this in the 159 M shortfall, the native American and the veteran. Harshman: Total 165,000 more. Ross: So if this is approved the shortfall will be greater Richards: 5 issues by fiscal year 15-16. Executive branch took out effective immediately of public defender twice, two issues relating to revenue. I think the shortfall is slight less than the governor profile. Harshman: Veterans tax exemption – any veteran who moves to Wyoming and becomes a citizen or Wyoming natives? Gordon: I do not know the answer. I will let you know. Burns; Any, ever Harshman: Native American exemption historical information. Burns: state program or federal program, what are the qualifications, Fremont County only or other counties impacted. Arp: will check statutes and talk to county treasurers. 12/8/2015 9:44:23 AM Burkhart: why the increase in the tax exemption? Gordon: Speaking about both programs, this happens every few bienniums. Notable increase in veterans is number of veterans. Burkhart: tribal members exemption? Are counties letting this build until they need it? Arp: Flow through money. Question addressed to county treasurers will follow up. Burns: which tribes, Shoshone, Arapahoe, northern Cheyenne, or any registered member of any tribe Gordon: will get that info. 12/8/2015 9:46:28 AM Ross: Reduction for 15/16. What is that? Arp: 100 series reduction due to vacancies – amount between now and the end of this biennium Ross: one time? Arp: correct Ross: 900 series handout-17000 in temporary services Arp: used for unclaimed property division, holders have Nov 1 due date to submit so historically agency has hired temporary help to process those claims and enter it into the system. Notification to the public. Ross: Anticipate that is ongoing Arp: yes, think it is the most efficient way to do it. Ross: Thanks to the staff. 12/8/2015 9:51:01 AM Meeting closed. 12/8/2015 10:09:37 AM 006 Department of Administration and Information Dean Fausset, Director Russ Noel, Deputy Rory Horsley, Accounting Administrator Page 5, summary of agency budget. $85M exception request; 239 employees with 2 part time employees. Stubson: submitted cuts, Horsley: FY 16 cuts carried thru to FY17-18. Fausset: page 11, director’s office. Reorganization of fiscal services to director’s office. Harshman: 11 positions relocated to one area? Fausset: Yes Fausset: Transfer of position from public defender office to A&I for HR services. Harshman: 5 positions currently filled? Fausset: Yes Fausset: Tracking with time and attendance system could help save money. Burns: Independent boards pay for payroll and human services? Horsley: Yes Wasserburger: Public defender’s office transfer? Fausset: wide variety of human resource duties. Connolly: HR people reside where? Fausset: Primary office in AandI, but can rotate out to former agency. Moniz: Payroll system Fausset: does not interface with payroll system in AandI. Fausset: page 14, safety needs requests. $63,176. Priority 4 Burkhart: 108 employees have received 8 hours training for OSHA compliance, why not more? Fausset: Training offered for other groups also Fausset: page 15, request for $55,000 for general training of AandI employees Fausset: page 16, equipment purchases of computers, monitors, printers and laptops. Governor recommendation of funding by LSRA. Fausset: page 20, professional licensing board. 17 boards are provided services by AandI. 6 employees who provide services to the 17 boards. Equipment purchase replacements. Maintenance and support of GL system needed as advised by ETS; on-going expense. Fausset: Unit 2302. Legal services to 17 boards, train new board members and reimburse AG for legal services. Fausset: Page 29, budget division, 8 positions Fausset: page 33, general services division. 127 positions, 1 part time. Stubson: Reduction for fuel costs in budget? Fausset: Reduction to agencies in costs charged to various agencies in next year. Hibbard: Statewide Cost allocation plan is computed for the goods and services being provided by one agency to another and associated costs. 300 object class reflects the cost allocation plan in every state budget. Fausset: unit 301, procurement. Fausset: surplus property Fausset: page 38, risk management. 1 fiscal position moved to director’s office Fausset: page 43, central mail, 10 positions Hibbard: health insurance pool, target cash balance. Fausset: page 45, vehicle replacement reserve account. Each agency must purchase original vehicle, but then pay into reserve account, chose depreciation cycle. Request for extra $$ to purchase 239 replacement vehicles. Nicholas: Balance of depreciation account? Fausset: $7.5M Fausset: GPS on units and result of pilot program indicated better efficiencies, expanding GPS installation to all vehicles; costs borne by risk management pool. Data can be used by individual agencies for employee monitoring. Nicholas: Assess costs of GPS installation to agencies instead…. Perkins: 28% ability to verify employees’ attendance at work. Fausset: Every agency manages leave differently. Coordination between employee and supervisor should effectively account for employee attendance. Lunch 12/8/2015 12:14:42 PM Return at 1:15 p.m.