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Wyoming Legislature

Committee Meeting Summary of Proceedings

Select Committee on Capital Financing and Investments

 

October 9, 2008

Room 302, Capitol Building

Cheyenne, Wyoming

 

Meeting Attendance

 

Committee Members (Present)

Senators Jim Anderson, Bob Fecht, Drew Perkins and Kathryn Sessions;

Representatives Ross Diercks, Alan Jones, Jack Landon, Colin Simpson and Mary Throne.

 

Committee Members (Absent)

Senators Hank Coe and Jayne Mockler (attended the last portion of the meeting)

Representative Lisa Shepperson

 

Other legislators in attendance

            Senator Tony Ross

 

Legislative Service Office

Dave Gruver

 

            Others in attendance

            Please see appendix 1

 

Written Meeting Materials and Handouts

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.

 

Summary of meeting

The Committee discussed State investments for the past fiscal year, the current stock market uncertainties and the Treasurer’s Office’s actions in response to those uncertainties.  The Committee also reviewed current State spending policy amounts and reserve accounts and reports from the State Treasurer regarding the same.  The Committee also received and reviewed reports from the Treasurer’s Office on the Hathaway scholarship reserve account, investments for public purposes and the College Savings Program (529 plan).  The Committee took no action and expects to meet one additional time this interim. 

 

Call To Order

Chairman Anderson called the meeting to order at 1:00 p.m.  The agenda which was followed is appendix 2.  The duties of the Committee were briefly reviewed.

 

State investments

 

Michael Walden-Newman, the State Treasurer’s chief financial officer and Becky Gratsinger and Josh Kevan of RV Kuhns and Associates, the State Treasurer’s investment manager, addressed the Committee regarding State investments.  Mr. Walden-Newman provided and reviewed written materials concerning State investments. (Appendix 3).  The materials included unrealized gains/losses as of September 30, 2008: the portfolio contained investments at a cost of $10.9 billion, with an unaudited market value of $10.6 billion, an unrealized loss of approximately $274 million.   The materials also included a June 30 report on investments, which Mr. Kevan noted was out of date as there had been a decade of market movement in the past month; but it was too early for the September quarterly report.  Also discussed by Mr. Kevan and included in the materials was a report from RV Kuhns regarding the current market crisis, dated September 2008.  For the most recent quarter he stated the overall returns will be down approximately 7%.   Mr. Kevan noted that while the overall portfolio is down, the Wyoming portfolio is not suffering as severe of a negative effect as other institutional investment portfolios nationally. 

 

Mr. Walden-Newman briefly addressed other items within the written materials, including the FY 08 investment report, an investment primer, an alternative investment disclosure statement and other reports required of the State Treasurer’s Office to the Committee, which were subsequently discussed by Deputy Treasurer Sharon Garland.

 

Mr. Kevan reviewed individual manager performances and performances of various sectors of the market over the past year.  He stated that there was minimal exposure to Lehman Brothers and other financial entities which suffered severe losses or failed completely.  Active fixed income managers (those who take greater risks, i.e., investing in corporate bonds rather than government bonds) have not done as well as those fixed income managers who basically invest in government bonds.  Overall the State’s financial adviser recommends not to abandon the allocation strategy established over the years and to maintain liquidity within the allocation strategy set.  In response to Committee questions on the balance between emerging and developed markets for international fund investments Mr. Kevan stated the State’s portfolio is biased toward developed markets with some flexibility to change the balance. 

 

Committee members questioned the State’s exposure to mortgage backed securities.  Mr. Kevan noted those investments are included in the fixed income category with agency backed securities (Freddie Mac and Fannie Mae) performing better and not as exposed as non-agency backed securities.  While the mortgage backed investments are still performing there are questions of future performance for those that do not carry a super priority position, i.e., whether invested money will be returned.  Overall the State’s managers have avoided heavy reliance on non-agency backed mortgage securities.  In reply to Committee questions Mr. Walden-Newman addressed the investment advice of the UW student allocation.  He emphasized that the students make recommendations to the State Treasurer’s Office and the Office has final say as to whether an investment should be made. 

 

The materials provided included an October 9, 2008 letter from State Treasurer Meyer  to the Governor, and the Treasurer addressed the Committee.  The letter noted the “red alert” mode the Office was in and would be working under until the national financial situation stabilized.  That Office has increased monitoring with continued adherence to the asset allocations developed over the years and the need to review those allocations and rebalance the portfolio as required.  The Office is also avoiding over concentration in specific industries and unreasonable use of leverage.  The investment portfolio has also been intentionally positioned over the past several months to have a larger cash position.  The liquid nature of the portfolio may allow additional opportunities in the immediate future. 

 

In reply to questions from the Committee Mr. Walden-Newman stated that the private equity investment is treated like other investment income as far as distribution being considered a return of capital and not being treated as income.  As a return of capital it is returned to the manager to meet any required calls for capital.  Three items are  treated as income - capital gains, interest earnings and dividends.  The basis is separated from the gain and the basis is reinvested.  Losses are netted against realized capital gains.   Committee members questioned whether there were going to be greater capital gains in the future with additional rebalancing.  Mr. Walden-Newman said that was not known and that capital gains are not projected for the CREG report.

 

Committee members asked RV Kuhns representatives their opinion on increasing the amount for the spending policy reserve accounts.  Ms. Gratsinger noted the reserve accounts cannot be invested as permanent funds (in stocks) therefore a lower return would be expected.  With the State enjoying currently high revenues the need for extra reserves does not appear as necessary.  In reply to whether other states allow private investment in state funds, Ms. Gratsinger believed there were co-investment funds in other states.  The advantage would be to spread the risks and lower fees. 

 

In response to Committee questions of whether a five percent return (or spending policy amount) is too aggressive under current market conditions, Ms. Gratsinger noted it is a typical endowment strategy amount.  At the same time there has been a reduction in spending policy amounts by a number of institutional investors.  RV Kuhns would not recommend any increase, but if there is a desire to lower the spending policy amount based upon a policy choice of spending less and saving more for the corpus that would be appropriate.

 

Treasurer Meyer reviewed an October 10, 2008 letter he wrote to the other state elected officials concerning capital construction needs.  He offered three options to fund the projects, general funds, use of funds which would otherwise be deposited from the PWMTF reserve account to the PWMTF or loans from PWMTF invested as debentures with repayment from biennial appropriations, as has been done in the past.  (See appendix 4).

 

 State spending policy review

 

Regarding State spending policy, Treasurer Meyer noted there were options before the Legislature.  Setting a spending policy amount is a policy decision as to where the Legislature wishes the money to flow.  His point in previously suggesting changes to the spending policy provisions was to allow the Legislature to make an explicit choice.  In this year’s report he made no recommendations for modifications to the spending policy as the Legislature was presented the issue last session and chose to make no modifications.

 

LSO staff then reviewed the spending policy flow charts.  Appendices 9(a), (b) and (c).  Using the report and data provided by the Treasurer’s Office, staff compared the January 2008 CREG projected earnings and flows of funds with actual FY 08 revenues.  Overall for the permanent Wyoming mineral trust, fund earnings were projected at $239.6 million and were actually $321.4 million.  The spending policy amount was $136.3 million, this thus resulted in nearly an additional $82 million being deposited into the PWMTF reserve account than expected ($185.1 million versus $103.3 million).  Since the reserve account met its maximum account balance (75% of the spending policy amount of $239.6 million), $171.1 million flowed from that account to the PWMTF corpus ($89.4 million had been projected to be deposited in the corpus from the reserve account).  For the common school account, $101 million was the projected amount to be earned, actual earnings were $133.9; $38.6 million was the projected deposit to the reserve account, with $71.4 million being the actual deposit.  The flow to the common school account within the permanent land fund (the corpus) was $55.1 million as compared to a projected $22.3 million.  Staff noted that the Committee had recommended and the Legislature passed a bill last session which changed the funding of the common school reserve account from general fund monies to “over the cap” federal mineral royalties which would have otherwise been deposited to the school foundation program account.  The final spending policy reviewed was the excellence in higher education endowment fund.  Earnings from this fund (up to the spending policy amount) are distributed to the University (2/3) and the seven community colleges (1/3).  Projected earnings were $3.65 million, actual earnings were $4.5 million.  This exceeded the spending policy amount and thus $1.3 million was deposited to the reserve account ($.47 million had been projected.  Since the reserve account balance did not exceed the maximum set by statute (75% of the spending policy amount) no funds were deposited to the endowment account from the reserve account.

 

Deputy Treasurer Garland reviewed the spending policy report from the Treasurer’s Office and gave a more detailed review of the spending policy amounts and deposits for the last fiscal year and for the time period commencing with the establishment of the spending policies and reserve accounts for each fund.  See appendix 5. 

 

Ms. Garland also reviewed the Treasurer’s report on earnings for the Hathaway scholarship endowment and transfers from the reserve account to fund expenditures in excess of earnings for the 08 and to date 09 fiscal years.  (Appendix 6).  Last fiscal year $1.7 million was drawn from the reserve account to the expenditure account, with $19.2 million being deposited from the reserve account to the endowment corpus.  In addition, the Legislature appropriated $50 million in coal lease bonus funds to the original $400 million endowment.  For FY09, to date $846,086 has been drawn from the reserve account for the expenditure account, leaving a reserve account balance of a bit over $11.1 million.  LSO staff reported that a group consisting of the higher education institutions, the Department of Education and the Treasurer’s Office had formed to developed expenditure and revenue estimates for the Hathaway program.   Chairman Anderson questioned whether the reports showed a need to adjust the reserve account at this time.  LSO staff replied that based upon the expenditure data provided, the increases in the endowment corpus and the size of the reserve account, should earnings approximate the 4% anticipated in establishing the program, there is no need to adjust the reserve account.  Changes in program eligibility or scholarship amounts could affect that determination, as could lower than initially anticipated earnings.  Chairman Anderson noted the importance to adhere to the “promises made, promises kept” motto and noted the Select Committee’s charge was review of the reserve account functions.

 

Deputy Treasurer Garland reviewed the report on investments for a public purpose (previously known as LDIs or legislatively designated investments).  (Appendix 7)  The current statutory limit on such investments is $500 million.  The Office has $83 million in those investments and does not recommend any modification to the statutes.

 

Finally, Ms. Garland reviewed the report on the college savings program.  (Appendix 8)  Established in 2000 and modified in 2006 to allow (but not mandate) the program to be undertaken by the Treasurer’s Office, the program was closed in Wyoming, with an agreement with Colorado to accept Wyoming citizens into the Colorado plan on the same basis as Colorado residents.  This was the first partnership of a 529 savings plan in the nation and has subsequently been followed by Tennessee and Georgia.  As of June 2008, there were 744 Wyoming accounts with over $5 million in average net assets invested.

 

Vice-chairman Simpson stated that the spending policy amount should be on the agenda for the next meeting.  The consensus was that a one day meeting would be held in late November or thereafter. 

 

The Committee adjourned at approximately 3:30 p.m.

 

Respectfully submitted,

 

 

 

Senator Jim Anderson, Chairman

 

 

 

 

 

 

 

Appendix			Appendix Topic		Appendix Description		Appendix Provider
1			List of attendees		List attendees		LSO
2			Committee Meeting Agenda		Provides an outline of the topics the Committee planned to address at meeting		LSO
3			State investments		Materials covering all topics discussed by the Treasurer’s Office – including investment performance and other statutorily required reports		State Treasurer’s Office
4			State investments		October 10 letter from Treasurer Meyer to other state elected officials concerning capital construction financing		State Treasurer’s Office
5			State spending policy review		State spending policy report and recommendations from the State Treasurer’s Office		State Treasurer’s Office
6			Hathaway reserve account		Report from the State Treasurer on the Hathaway reserve account		State Treasurer’s Office
7			Legislatively designated investments		Report from the State Treasurer on investments for a public purpose		State Treasurer’s Office
8			College savings plan		Report from the State Treasurer on the college savings plan purpose		State Treasurer’s Office
9			Spending policy		Flow charts on the various spending policies and reserve accounts		LSO
	Capital Finance and Investments Committee  Summary of Proceedings

Wyoming Legislative Service Office • 213 State Capitol • Cheyenne, Wyoming 82002

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