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August 25, 2003
Room 302, Capitol Building
Cheyenne, Wyoming
Senator April Brimmer Kunz, Chair
Representative Randall Luthi, Vice-chair
Senators Hank Coe, Bill Hawks, Grant Larson, Mike Massie and Jayne Mockler;
Representatives Roy Cohee, Fred Parady, Wayne Reese and Jane Warren.
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.
Representative Ed Prosser
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.
State fiscal profile
Steve Sommers, Legislative Service Office, addressed projected state revenues. Mr. Sommers had previously provided the Committee with a written summary. (Appendix 3). He explained that material and noted potential additional changes to the state revenue projections. In response to Committee questions, Mr. Sommers explained that the spending policy reserve account contained no money at this time. Regarding the increased Medicaid match rate, Mr. Sommers noted that the federal dollars are not "cash" payments. Rather the increased match will occur over a period of time and that if the Department is held to its current general fund appropriation, the result should be an increased general fund reversion. If the Department does not hold its spending, it could spend the "additional" federal dollars.
School capital construction
LSO staff Dave Nelson and Mary Byrnes addressed the issue of school capital construction. They provided written materials addressing the preliminary estimates for school capital construction spending based upon the five year planning process under statute. (Appendix 4). Mr. Nelson explained the construction planning process, including the meetings taking place throughout the state this year. The total spending would be approximately $896 million based solely upon the districts' five year plans.
Ms. Byrnes provided materials addressing the school capital construction account. (Appendix 5). The materials also include a history of major maintenance payments. Mr. Nelson noted the major maintenance formula would be subject to recommendations from the school facilities planning committee. Ms. Byrnes noted that the Commission budget increase is based upon planned construction and a percentage of Commission needs for schematic diagrams and other planning needs for the projected construction.
Mr. Sommers addressed the issue of coal lease bonuses. There are expected large scale coal sales. He provided rough estimates of anticipated sales and the state's share of coal lease bonuses. The timing of the sales will determine whether the funds to the state are projected in the CREG profile. The projected $230 million dollar school capcon shortfall shown at this time could be wiped out by coal lease bonuses.
The Committee discussed the interplay of the coal lease bonus sales and the business ready community account. Mr. Sommers explained that funding of the business ready community bill is dependent on a projected positive balance in the school capital construction account. That may or may not occur depending on the timing of coal sales and the appropriations from the school capital construction account. Representative Parady stated that he would like LSO to draft language to ensure funding of the business ready community account.
Representative Luthi questioned the firmness of the $230 million projected deficit and the projected needs for school capital construction. Mrs. Byrnes explained that the needs are not completely known but the projection is perhaps a good placeholder. Senator Larson requested information showing spending on a dollar per ADM basis for both capital construction and major maintenance. Ms. Byrnes provided that information later in the meeting. (Appendix 6)
Ms. Byrnes noted that the materials did not include any "enhancements" that would be paid by local school districts. Senator Massie reemphasized that the chart lists only school district proposals, not final action of the Commission.
Family College Savings Program
Sharon Garland, Deputy State Treasurer, provided three items addressing the College Savings Program. (Appendices 7 through 9) The current plan is experiencing very slow growth and discussions have been held with the program manager regarding options – including stopping the state plan and rolling over the participants to another state plan; terminating the plan and disbursing participants funds; and continuing the current plan with or without a change of program manager. Ms. Garland addressed the reasons for the low participation rates. Ms. Garland discussed the plans in other states and the participation in and size of those plans.
The State Treasurer reviewed the history of the plan and program manager selection. The managers of the state plan have also entered into agreements to market other state plans. Because the program manager can receive more fees for marketing other plans, those plans are being marketed more aggressively than the Wyoming plan. States with income taxes also have the advantage of providing for state income tax advantages for their plans.
The State Treasurer noted at this time, she does not have a recommendation as to which of the options would be best for the state. After she has discussed the issue with the program manager and with other states in the same circumstances, she will return with a recommendation. The Committee discussed the advantages of the 529 plans generally, options available to the State, the State's responsibilities under the program and the usefulness of the plan for Wyoming residents and the State generally. The State of Wyoming receives a small fee for participation in the plan, and has received approximately $26,000 in fees from the program since its inception. Committee members suggested that a regional plan might be an approach, while others commented that they saw little advantage of continuing the program. The State Treasurer stated that while there is additional research to be done, at this time she would be inclined to agree with that latter assessment.
Spending policy changes
Treasurer Lummis addressed the issue of spending policies for state investments. She explained the history of and the intent behind the establishment of the spending policy limits and the creation of the reserve accounts. She suggested that with the unanticipated spike in state revenues, there is an opportunity to immediately drop to the more sustainable 5% spending policy amount being proposed (versus the current law's step-down to 5% over the next seven years). The State Treasurer provided her recommendation in writing, along with supporting documents from the state investment advisor and the State Loan and Investment Board (SLIB). (Appendix 10) She noted that the Alaskan permanent fund has $22 billion – comprised of three revenue streams, mineral taxes, return of investment income and direct appropriations from the Legislature. Only one-third of the Alaskan fund has come from mineral severance taxes. Alaska is debating placing the 5% spending policy in the Alaskan Constitution.
Becky Gratsinger, R.V. Kuhns, the SLIB's Investment Advisor, stated that the expectation of lower stock market returns is a reason to move the spending policy to a lower amount. The State Treasurer noted that the 7.5% anticipated earnings is only when fully invested and at this time the state is not fully invested in stocks; but heavily weighted to bonds. The rate of return above the 5% spending policy limit would allow for inflation proofing of the corpus of the permanent funds, by depositing excess returns to the reserve account and then depositing from the reserve account back to the corpus once the reserve account maximums are met.
Senator Larson noted the difference between the Alaskan fund and Wyoming's is that Alaska pays a direct amount to the citizens, while Wyoming uses the Permanent Mineral Trust Fund to fund State government.
The Committee discussed the projected earnings and the functioning of the spending policy and reserve accounts. Representative Reese asked for projected earnings and the difference to the general fund resulting from changing to the 5% spending policy amounts. He noted that the "surplus" really should not be characterized as such, since such discussion ignores the need for large expenditures such as schools, state construction and other needs. The State Treasurer noted that placing the money in the reserve accounts does not remove the funds from the Legislature's appropriation abilities.
Representative Parody moved that a bill be drafted as suggested by the State Treasurer to a 5% spending policy amount. The motion was seconded by Senator Coe. Representative Warren asked for the projections of revenue changes that would occur if the recommendation were implemented. The State Treasure agreed to do so. Senator Coe asked for the growth in the corpus and reserve accounts with the projected deposits under the proposed changes. Representative Reese suggested an accelerated step down to the 5% level, instead, but the main motion was not amended. The main motion passed with Representative Reese voting "no".
Asset allocation
Ms. Gratsinger addressed the issue of allocation of State investments. She discussed the State's investment strategy, including the investment policies of the SLIB, asset allocation and specific asset categories. She provided written summaries of her comments and an outline of the topics covered. (Appendix 11). Ms. Gratsinger also provided an investment performance analysis for the quarter ending June 30, 2003. (Appendix 12).
Josh Kevan, R.V. Kuhns, addressed the issue of asset allocation in more detail. He provided anticipated returns of various asset categories, including bonds and stocks, and reviewed the correlation of the various asset classes. The point of studying the correlation of the asset classes is so investments can be properly diversified to spread the risk of poor investments. Mr. Kevan reviewed the best mix of assets for the State, using the model developed and the limitations imposed under the Constitution.
Committee members questioned why the State would invest in private equities if the prime goal is income when private trusts would normally not do so. Mr. Kevan stated that the reason is primarily one of timing; the State's assets are intended to be perpetual, thus the State can wait for the return on private equity investments while many small investors cannot. Mr. Kevan also reviewed the recommendation for the State to invest in real estate. Ms. Gratsinger noted that the goal of diversification has been slowed by market conditions and the need to produce income.
Ms. Gratsinger addressed alternative assets. Those include venture capital, private equity/buyouts and hedge funds, among others. Ms. Gratsinger reviewed the implementation of alternative asset investments. Also reviewed were covered call strategies and investment manager oversight. Current projects include the covered call option, the funding of the private equity investment and evaluation of real estate for inclusion in the state program. Senator Coe questioned whether today's market is the right time for implementing a covered call option if the market is indeed creeping upward. Senator Mockler questioned whether R.V. Kuhns has attorneys review the recommendations as the State's registered investment advisor. Ms. Gratsinger stated that her company had reviewed the State strategies and determined that private equities were covered under the prudent investor standard. From her perspective the concerns raised regarding the private equity investment by Wyoming seemed to be caused in part by the lack of familiarity with the structure of private equity investments, including the use of a partnership and limited partnership as the investment vehicle.
Chairwoman Kunz questioned why the allowable risk was increased in the model for asset allocation. Ms. Gratsinger stated that the private equity class provided for the state's need in investment return for a small investment amount. She noted the suggestion is a firm-wide approach for R.V. Kuhns. Chairwoman Kunz questioned whether the instant opportunity for the investment in private equity was a contributing factor. Ms. Gratsinger stated that it was not the driving force.
The Committee discussed the overall investment strategy for permanent funds, including the conflicting goals of income producing and guaranteed return, the assumptions underlying real estate and other projected returns. Vice-chairman Luthi inquired about direct deposits into the permanent mineral trust fund. Ms. Gratsinger noted that her company can model deposits into the corpus of the permanent funds and the reserve accounts (the reserve account monies cannot be invested in stocks, the permanent funds can). Senator Mockler asked for review of the investment in the permanent fund versus the use of the funds by building state capital construction needs.
Private equities
Treasurer Lummis, and attorneys John Fitzgerald, Corky Messner and Jim Belcher, addressed the Committee regarding private equities. The State Treasurer began by noting that the Attorney General had opined that the state cannot purchase and manage land under the State investment statutes. That opinion has raised questions in the Treasurer's mind regarding the ability of the SLIB to invest in real estate.
Mr. Fitzgerald, a member of Cheyenne Equity Partners, LLC, addressed the Committee regarding private equity investments and the State's investment in the Cheyenne Equity fund. The State is a limited partner in the Cheyenne Equity Fund, while Cheyenne Equity Partners, LLC is the general partner and will manage the fund. Mr. Fitzgerald discussed the background of private equity and noted that venture capital is but one form of private equity. (See appendix 13, provided by Mr. Fitzgerald.) He discussed the usual uses of private equity investments and stated that the use of private equity as a financing tool for businesses has increased significantly in the last twenty years. In response to questions regarding the criteria used to determine the viability of private equity investments, Mr. Fitzgerald stated there is information available to evaluate private equity investments.
Mr. Fitzgerald then spoke to the specific investment by the State with Cheyenne Equity Partners. He provided appendix 14, which shows the potential investments and the workings of the investment. He noted there were a number of terms within the agreement that were negotiated to the State's advantage. Committee members questioned how the investments would take place, including the exercise of due diligence. Mr. Fitzgerald stated that as an attorney he has conducted due diligence on over 200 companies and can bring that expertise to the State. He noted that overall, the Cheyenne Capital Fund has been directed to invest in very conservative investments; 90 percent of most investments through Cheyenne Capital Fund will be invested in those investments on the conservative side of the spectrum.
State Treasurer Lummis, Mr. Belcher and Mr. Messner addressed the Committee regarding the need to amend current law to allow for state investments in real estate. The Attorney General's memorandum on the issue was distributed to the Committee and is attached as appendix 15. The State Treasurer is concerned that the position of the Attorney General would restrict the ability of the SLIB to invest in a partnership which in turn invests in a pooled investment vehicle. Senator Coe questioned why the use of the term "security" was not broad enough to allow such investments. Mr. Messner stated that there was no Wyoming case directly on point. Senator Coe suggested that redefining "security" could address many of the problems.
Representative Parady moved that staff develop a bill in conjunction with the State Treasurer's Office to broaden W.S. 9-4-711 to ensure that the asset classes discussed were covered and could be invested in by the SLIB. The motion was seconded by Vice chairman Luthi and passed. The State Treasurer noted that the Attorney General opinion might not be as broad as she feared. Senator Mockler suggested that the question be asked again in the context of state investments including real estate. No motion was made on that suggestion.
Chairwoman Kunz questioned whether the State Treasurer's Office should retain a securities attorney within that Office to advise the Treasurer, independently of the Attorney General's Office. The State Treasurer stated that given the complexity of the contracts and types of investments the position could be very useful. Ms. Gratsinger stated that it is very common in the case of institutional investors to have in-house counsel. The Committee discussed the Attorney General's representation of the State Treasurer's Office. Representative Parady asked that staff be directed to develop ideas and outline in memo form the choices concerning representation from attorneys other than the Attorney General's Office, including a survey of other State Treasurers' Offices. Also to be summarized was the recent LSO study regarding the Attorney General's Office's use of outside counsel.
Chairwoman Kunz noted the issue was not a political question but a question of how the elected officials can be represented when there is the potential conflict. The Treasurer noted that there could be times when it would be helpful to retain outside counsel. Representative Parady asked that the issue of retaining outside counsel be added to the motion, and the second (Senator Mockler) consented. The Committee discussed the issue. The motion, as amended, passed.
Senator Larson asked for a comparison of investment return versus delaying construction costs. The State Treasurer stated that if the Committee were to seek assistance from the State's previous consultant on bonding and other similar issues (PFM), that the Committee provide a letter to that effect. The State Treasurer asked whether the Committee was requesting that she contract with PFM for the analysis. Senator Larson asked for a memo regarding the issue. Representative Parady asked that the Committee send a letter to the Treasurer asking for the comparison. Chairman Kunz asked that the Committee first send a letter asking for the cost of the analysis. It was clarified that it would only be an investment analysis – i.e. where would the money be better spent – investment in the PWMTF or immediate spending on capital construction, using the assumptions of R.V. Kuhns as to the amount of return on state investments. Senator Larson, noted that the request was not limited to schools. The Committee discussed the specifics of the request. Representative Parady noted that by October 1, there should be a more defined amount of school and other state capital construction needs. A timeframe for response was discussed. The Treasurer was authorized to enter into the contract if the response to the letter of inquiry was deemed appropriate by the State Treasurer. R.V. Kuhns was asked to proceed with their part of the analysis. The Committee discussed whether it would be best to wait for the school capcon figures in October or to begin the analysis immediately. Chairwoman Kunz asked that staff draft a letter to the State Treasurer, provide it to the Committee and that it be provided to the Treasurer upon the Chair's approval.
Senator Kunz addressed the issue of bonding and the background of the issue. Senator Mockler and Representative Parady asked that the issue be continued at the next meeting.
No date for the next meeting was set.
The meeting adjourned at 3:45 p.m.
Respectfully submitted,
Senator April Brimmer Kunz, Chair