DRAFT ONLY - APPROVAL PENDIN

Wyoming Legislature

Committee Meeting Summary of Proceedings

Select Committee on Capital Financing and Investments

 

December 16, 2008

Room 302, Capitol Building

Cheyenne, Wyoming

 

Meeting Attendance

 

Committee Members (Present)

Senators Jim Anderson, Bob Fecht, Jayne Mockler and Kathryn Sessions;

Representatives Ross Diercks, Jack Landon (by telephone) and Colin Simpson.

 

Committee Members (Absent)

Senators Hank Coe

Representatives Alan Jones, Lisa Shepperson and Mary Throne

 

Other legislators in attendance

            Senator Curt Meier

            Representative Floyd Esquibel

 

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 quarter, current stock market uncertainties and actions of the State Loan and Investment Board and Treasurer’s Office in response to those uncertainties.  The Committee also reviewed current State spending policy amounts and reserve accounts.  The Committee reviewed a draft spending policy report to the Legislature and voted to adopt and forward the report, as amended to reflect the most current information to be made available by the State Treasurer’s Office for State investment earnings projections. 

 

Call To Order

Chairman Anderson called the meeting to order at 2:25 p.m.  The agenda which was followed is appendix 2.

 

State investments

 

Joe Meyer, State Treasurer, and Michael Walden-Newman, the State Treasurer’s chief financial officer, addressed the Committee.  Mr. Walden-Newman reviewed the quarterly earnings report and other materials previously supplied to the Committee concerning State investments. (Appendix 3).  These materials were supplemented by charts reviewing the financial markets performance as of November, 2008 (appendix 4) and a summary of investment income for FY 2009 (appendix 5).  For the quarter ending September 30, 2008, the current market value of the State’s total investments was $10.6 billion (for FY 08 end it was $11.2 billion).  As of October 31, 2008, the audited market value was $9.8 billion, with a cost of $10.8 billion, resulting in unrealized losses of approximately $1 billion.  

 

Mr. Walden-Newman reviewed the investment portfolio for the last quarter in more detail.  Treasurer Meyer noted that although there was a bit over one billion dollars in decreased value, there had not been sales of assets below cost through the month of October.  In November there were.   The Treasurer emphasized he has been in contact with the investment managers to determine their strategies for selling assets below cost. 

 

The Treasurer also noted that historic information is not a very useful to predict income for any one month, since what can occur in any particular month is especially difficult to predict in this market environment.  For the past month the losses in the Permanent Wyoming Mineral Trust Fund and Common School Permanent Land Fund as well as other funds of the State were reviewed by the Treasurer.  The cumulative management costs also appear in appendix 3.  Net income for the various funds was also reviewed.  (See appendix 3).

 

The Committee discussed the strategies in place for determining whether to sell at a loss.  Mr. Walden-Newman stated the Office conducts its due diligence on the “front-end” when retaining managers based upon the manager’s style and strategy.  Once the manager is hired the Treasurer’s Office does not intercede in the management of the funds allocated to the manager.  The Treasurer’s Office does not dictate to the managers when to buy and sell and what to buy and sell.  Treasurer Meyer noted the same due diligence was done for the active managers when they were first hired; after that the Treasurer’s Office does ask their strategy for the sell and buy discipline.  He noted that for certain funds the Constitution dictates that when investments are sold or bought the gains and losses must be turned over to the Treasurer’s Office.  He further stated that the Office has twenty-six managers and oversees but does not direct their investment decisions.  Nor does RV Kuhns (the state investment manager) do so.  

 

Mr. Walden-Newman noted that the manager’s performance is measured against  a benchmark and over a market cycle period of five years.  Overall active management has been the recommended approach for most of the portfolio.   Over a longer period of time the State’s managers have outperformed the index.  Treasurer Meyer referenced the chart of manager performances in appendix 3.  He noted that there has been debate as to whether the higher fees for active managers is justified and the experience has been that they are. 

 

Senator Sessions questioned how active managers determine when to sell.  Mr. Walden-Newman stated they have a sell price both as a high and low. 

 

He noted there is a long term asset allocation for each of the funds, which do not change much from year to year although they are reviewed each year.  They are set in consultation with the State’s investment manager based upon acceptable risks for anticipated return.  In light of today’s market uncertainties the Treasurer’s Office has reviewed the asset allocation and both long and short term assumptions.  RV Kuhns is currently reviewing the assumptions.  In the interim, the Treasurer’s Office over the next several months is going to overweigh allocations to internationals.  On fixed income they will overweigh to core investments.   The adjustments are itemized in appendix 3.  While there will be some minor adjustments, they are not major deviations from the overall current investment policies and allocations.

 

Mr. Walden-Newman discussed the financial markets performance materials provided. (Appendix 4).  The performance of the State funds still compares well with other institutional investors.  Treasurer Meyer noted that other states’ funds are much more aggressive and risk tolerant than Wyoming has been.  In reply to questions concerning investment performance projections for the January CREG, Mr. Walden-Newman stated for the October CREG the Treasurer’s Office had cut projections earlier in half as compared to last January.  Likely that will change again.  He also confirmed that the review of income for FY 09 included total dividends, interest and realized gains/losses.  The November income figure shows a $20 million plus loss, which is likely the first time ever, at least that Mr. Walden-Newman could recall. 

 

State spending policy

 

In addressing the State spending policy report and investment income numbers provided, the Treasurer’s Office noted the projections will be updated, but otherwise the proposed report appeared complete and accurate.

 

Interfund borrowing

 

The Treasurer noted that appendix 3 contained information on interfund borrowing and that for the past fiscal year the liquidity in the common school permanent land income fund did not require much interfund borrowing.  In response to Committee questions, Steve Sommers LSO budget and fiscal manager, opined there was no need to adjust the statutes authorizing interfund borrowing and that under the current fiscal situation there has been little need to borrow for cash flow purposes.

 

 

State investment discussion

 

Representative Landon noted concerns with the change in target allocations and questioned why it was being undertaken in the middle of the market’s uncertainty although the net result in his view was close to the earlier allocation.  He questioned if this might be a good time to purchase equities at low prices.  Treasurer Meyer offered that RV Kuhns could provide an investment allocation education clinic (with the caveat that RV Kuhns is contractually retained by the State Loan and Investment Board) not by the Treasurer, nor the Legislature, and they are paid to advise the SLIB.  

 

Spending policy report

 

LSO staff reviewed the draft spending policy report. (Appendix 6)  The Committee is required by statute to report annually to the Legislature with recommendations for modifications to the spending policy.  Staff noted the report was updated from last year with the most recent CREG projections and with recommendations for no modifications to the current spending policy.  Senator Mockler moved to adopt the report with updated numbers from the Treasurer, when provided.  Representative Landon suggested a change on page 1 eight lines from the bottom, deleting “This” and inserting “A similar”, if staff believed it to be appropriate.  LSO staff acknowledged the change was an improvement.  The motion passed 7-0.

 

Representative Landon suggested the Committee should review a change to a four percent spending policy next interim.  He also questioned the priorities of preserving capital and liquidity and whether the Committee should consider putting an amount equal to the inflation factor amount back into the corpus each year, rather than placing monies in a reserve fund with a subsequent potential spillover to the corpus. Senator Mockler noted the policy took considerable time to put in place and there are constitutional considerations in regard to automatically putting funds back to the PWMTF corpus.  She encouraged that the issue be reviewed as suggested with those considerations in mind.

 

The Committee adjourned at approximately 4:00 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 – focusing on investment performance.		State Treasurer’s Office
4			State investments		Review of various financial markets performances as of November 2008		State Treasurer’s Office
5			State investments		Overview of state investments by fund and by type for FY 2009		State Treasurer’s Office
6			Spending policy		Draft spending policy report including flow charts and spreadsheets 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

Telephone (307) 777-7881 • Fax 307-777-5466 • E-mail lso@state.wy.us • Web site http://legisweb.state.wy.us