"Draft Only - Approval Pending"

Summary of Proceedings

of the

Select Committee on Capital Financing and Investments

Capitol Building                                                                                                            August 8, 2001

Room 302                                                                                                            Cheyenne, Wyoming

PRESENT:            Representative Fred Parady, Chairman;

                              Senators Bill Hawks, April Brimmer Kunz, Curt Meier and Jayne Mockler;

                              Representatives Chris Boswell, Roger Huckfeldt, Doug Osborn and Wayne Reese.

                              Legislative Service Office:  Dave Gruver, Assistant Director; Steve Sommers and Dean Temte, LSO Staff.

                              Others:  Please see Appendix 1.

ABSENT:             Senators Hank Coe and Keith Goodenough

                             Representative Mike Baker

AGENDA:    Please see Appendix 2.

*  *  *  *  *  *  *  *  *  *

Chairman Parady called the meeting to order at 8:30 a.m.  Representative Boswell moved the minutes from the April meeting be approved.  The motion was seconded by Senator Hawks and passed.

Tax and revenue anticipation notes

State Treasurer Lummis and Representative Nicholas, bond co-counsel, addressed the latest tax and revenue anticipation notes (TRANS) issued by the State Treasurer.  Treasurer Lummis provided copies of the official statement cover page for both the general and education fund issuance.  (Appendices 3 and 4).  Representative Nicholas provided a summary of issues related to the issuance of TRANS and estimated cash flows of the two pertinent funds with and without the issuance of the notes.  (Appendices 5 and 6). 

The enabling legislation for the TRANS issuance is sufficient.  Representative Nicholas stated there must be a legitimate business reason for having funds, but not having them available in order to issue a TRANS.  The state does have such reasons, but the language of the budget balancer, retaining funds in the budget reserve account, should be reviewed in order to ensure the State Treasurer has restricted access to the funds within the account.  Without adequate language and a legitimate business reason, the state is susceptible to a claim that it is engaging in arbitrage, which would result in penalties being assessed by the Internal Revenue Service. He suggested that he confer with the LSO and the Education Department to ensure that the language for the general fund and school foundation program fund is correct and access to the funds restricted for the state's legitimate business reasons.

After the Committee discussed the dollar ceiling for the TRANS issuance, Chairman Parady directed the State Treasurer and Representative Nicholas to work with the LSO on the exact recommendation for the next Committee meeting.

Consensus revenue estimation group

LSO staff, Steve Sommers, addressed revenue projections.  He provided appendix 7, providing a revenue update for general fund sources and a breakdown for mineral severance taxes, federal mineral royalties and coal lease bonus projections.  Overall actual revenue receipts are above projections through June 2001.  Details of projected and received revenues are shown on appendix 7.

State investment policy

The State Treasurer and Becky Gratsinger, of RV Kuhns (the State's investment advisor) discussed the State's investment strategy.  Ms. Gratsinger provided written materials. (Appendix 8)  Those materials define investment terms, outline criteria for selecting investment managers, describe characteristics of the different investment options, investment management styles, alternative asset investments and how investment managers are monitored.  The materials also provided an abbreviated performance review of Wyoming's investments as of June 2001.  Asset allocation scenarios were also presented in the materials.  Ms. Gratsinger noted the State may consider adding below investment grade bonds and non-U.S. bonds, but only with an investment manager who has managed those investments.  The State Treasurer noted the State was looking at being fully invested in equities (limit of 55%) by the end of 2003.  No legislative change is needed to meet the proposed asset allocation, it would be within the prudent investor rule.

In response to Senator Kunz' question on whether the additional $100 million to be deposited in the permanent mineral trust fund next year should be so deposited, Ms. Gratsinger opined that at least 50% and up to 100% should be deposited in the trust fund.  She noted that only the corpus of the trust fund, not funds in the reserve account created statutorily could be invested in equities.  Chairman Parady requested that LSO provide the spending policy legislation and a chart explaining how the funds flow to the corpus of the PWMTF, the Common School Account and their reserve funds to the Committee.

The State Treasurer discussed the meeting of state investment managers this past July.  She noted that this upcoming legislative session would see a push for various loan programs.  It is her view that the Legislature should resist those suggestions, place the funding with the Permanent Mineral Trust Fund and allow investment managers, rather than the Legislature to make decisions as to what projects receive State funds.  If a loan program is a solid investment, the supporters can so convince the State's investment managers.

Chairman Parady had discussed with the State Treasurer and Ms. Gratsinger the possibility of making the PWMTF managed more like an endowment.  Ms. Gratsinger addressed a proposed change for the spending policy limits for the permanent mineral trust fund and common school account.  The proposals would change the current statutory dollar amounts to a percentage of the corpus and decrease the percentage over a number of years until the limit equals 5% of the corpus.  The Legislature would need to decide how quickly the percentage should be dropped and whether the current "inflation proofing" provision for the common school account should be repealed.  She recommended a ½% drop annually and a repeal of the current "inflation proofing" provision.

Governor Geringer, Secretary of State Meyer, State Auditor Maxfield and State Superintendent Catchpole joined the meeting.  Governor Geringer noted the spending policy limits have more than an inflation proofing function, they also "smooth" out the up and down "spikes" of annual revenues from the state's investments.  Senator Mockler moved that legislation be drafted for the next Committee meeting, changing both the PWMTF and CSA spending policy limits from a dollar amount to a percentage, lower the percentage by ½% a year until a level equal to 5% of the corpus is reached, and lower the reserve accounts maximum from 75% to 40%.  The current "inflation proofing" provision for the Common School Account should also be repealed.  The motion was seconded and passed.

Senator Meier moved that a bill be drafted amending the Constitution, to take effect in 2010, which would limit the distribution of interest or other income to the general fund from the common school account within the permanent land fund and the permanent mineral trust fund to that amount less inflation.  The inflation rate to be determined by the Legislature.  The motion was seconded and passed.

Governor Geringer stated the Legislature should also establish policy spending limits for sales tax and other revenues to the general fund, other than simply the state's investment revenues.  The State Treasurer noted bills had been drafted last session for policy spending limits for some of those revenue streams and that she could provide information on those to the Committee.  Chairman Parady asked that she do so.

Bonding

Keith Curry, the state's investment consultant recently retained by the State Treasurer, addressed the Committee.  Mr. Curry's presentation is outlined in appendix 9.  He reviewed the State expenditures required under the most recent school lawsuit decision, the issues which must be addressed in the decision, questions to resolve in meeting the financial requirement, other possible state resources to leverage to fund the school finance requirements and other state capital construction needs.  Mr. Curry was not prepared at this time to make any recommendations to the Committee.  The Committee, along with the five elected officials discussed capital funding issues.  Governor Geringer noted that the five elected officials, sitting as the Capitol Building Commission had addressed these issues previously.  Secretary Meyer noted the underlying problem was the lack of a coherent state process to fund capital construction needs.

Mary Keating Scott and Alex Brown, with George K. Baum, and Jeff Panger, with Standard & Poor's next addressed the Committee.  Mr. Panger described the factors used by Standard & Poor's to develop bond ratings.  He provided his review of Wyoming's issuer credit rating.  (Appendix 10).  Mr. Panger reviewed typical ratings for different types of issuances, noting that the security pledged is the single biggest rating determining factor.  Other factors included the economy, finances, management, debt levels, maturity levels in comparison to the life of the project and the issuer's revenue raising flexibility.  Wyoming as a state issuer has a AA rating.  The Wyoming Building Corporation (the nonprofit corporation used for the prison bonds) now has a AA- rating, which reflects a recent upgrade.

Alex Brown and Mary Keating Scott presented information concerning the tax exempt market generally, types of debt, (general obligation bonds, revenue bonds, lease revenue bonds and private purpose bonds) and provided information as to how the different types of debt vary. They also provided information concerning the State's financing authorization currently in statute, school district capital construction financing alternatives, and financing alternatives for other state projects.  They reviewed the authority of the Wyoming Building Corporation to issue revenue bonds and the State's authority to lease the improvements from the Corporation without incurring debt under the Constitution.  They also noted the State may wish to consider using other State revenue sources, such as federal highway funds to secure bonds.  Steps in a bond issue and participants in a bond issue were both covered in the written material provided.  (Appendix 11).

The Committee discussed funding options.  Chairman Parady noted the Attorney General had opined that selling participations in the State's Farm Loan Mortgages could not be done absent legislative authorization.  The State Treasurer asked that the Committee not reject the possibility until she could discuss it with Mr. Curry.  Senator Mockler asked that staff contact the Attorney General's Office to reconcile previous opinions regarding the leasing of facilities from the Wyoming Building Corporation.  Senator Kunz asked that former Senator Applegate be invited to the next meeting of the Committee.  Chairman Parady asked that staff meet with the State Treasurer and develop a short list of funding options for the Committee with a description of each. 

College Savings Plan

Bob Doll, Mercury Funds, addressed the Committee by conference call. Mr. Doll presented his outlook for the financial markets, which is that the bear market of 2001 has hit its low and will begin a "U" shaped recovery after several months.  (Appendix 12 was provided in connection with this presentation.)

Deputy Treasurer Sharon Garland and Darren Massey of Mercury Funds-Merrill Lynch, addressed the College Savings Plan.  Mr. Massey provided written materials attached as appendix 13.  Those materials outline the history of the plan, participant numbers, investment returns and changes in governing federal law.  Mr. Massey also provided information regarding college tuition trends generally.  (Appendix 14).  Ms. Garland noted that with recent federal changes, the State should consider removing the State penalty provision from its program.  Senator Kunz moved that staff work with the Treasurer's Office to draft a bill doing so and to discuss whether the federal penalty should be incorporated in Wyoming's law.  The motion was seconded by Senator Hawks and passed.

Severance tax distributions

Chairman Parady announced the severance tax distribution bill requested by the Committee at its last meeting was being incorporated in a Minerals Committee bill, with some variations.  He suggested the issue be addressed by the Minerals Committee and the Committee agreed.

Michael Walden-Newman, Wyoming Taxpayer's Association, presented a proposal for the establishment of a legislative/executive policy group to set capital construction priorities over a five-year period, in parallel with the process used by CREG to estimate revenues.  His proposal is attached as appendix 15.  He also provided written materials addressing "one-time" and "recurring" funds.  (Appendix 16)

The meeting adjourned at 4:45 p.m.

Respectfully submitted,

Representative Fred Parady

Chairman

All appendices referenced are on file at the Legislative Service Office.