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Wyoming Legislature

Committee Meeting Summary of Proceedings

Select Committee on Capital Financing and Investments

 

April 9, 2009

Room 302, Capitol Building

Cheyenne, Wyoming

 

Meeting Attendance

 

Committee Members (Present)

Senators Jim Anderson, Hank Coe, Floyd Esquibel, Rick Hunnicutt, Drew Perkins and Kathryn Sessions;

Representatives Roy Cohee, Ross Diercks, Jack Landon, Bryan Pedersen and Frank Philp.

 

Committee Members (Not Present)

Representative Mary Throne

 

Legislative Service Office

Dave Gruver and Alex Kean

 

            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 investment strategy, including asset allocations, performance and management oversight.  The Committee was addressed by the State Treasurer’s Office and the State's investment advisor, R.V. Kuhns.  The Committee took no action but agreed that LSO should work with the Treasurer's Office to review current investment statutes, policies and goals of various State funds and prepare an overview and summary of those for the Committee's further consideration.  A firm date for a subsequent meeting was not set.

 

Call To Order

Senator Anderson called the meeting to order at 1:00 p.m.  The agenda which was followed is appendix 2.  Representative Philp nominated Representative Cohee as chairman and the Committee cast an unanimous ballot accordingly.  Senator Coe nominated Senator Perkins as vice chairman and the Committee cast a unanimous ballot accordingly.

 

Committee duties

LSO staff reviewed the Committee's duties and summarized how the Committee has historically executed those duties.  See appendix 3.

 

State investments

 

State Treasurer Joe Meyer addressed the committee.  His office had previously provided a set of written materials addressing State investments, including a memo to the State Loan and Investment Board addressing asset allocation, a memo from RV Kuhns providing an executive summary of asset allocation materials, spreadsheets showing the State's investment portfolio dated January 31, 2009, and June 30, 2008, spreadsheets showing asset allocations and returns by categories and managers, asset allocation assumptions dated December 31, 2008, suggested changes to the State's master investment policies updated as of April 9, 2009 and a bound booklet used for discussing asset allocations.  (Appendix 4).  The Treasurer supplemented those materials with updated spreadsheets showing the State's investment portfolio as of March 31, 2009 and a number of investment managers' performances in terms of total returns and fees, including Friess Associates, from FY 05 through December of FY 09.  (Appendices 5 and 6).  Most Committee members had earlier attended a State Loan and Investment Board meeting at which those materials were discussed and at which the Board adopted the proposed changes to the State's master investment policy.

 

The Treasurer also provided a memo from himself to members of his Office discussing a planned modified approach to account for realized capital losses in the permanent Wyoming Mineral Trust Fund.  Under the planned approach whenever the PWMTF portfolio ends up with more realized capital losses than capital gains, those losses will be credited against former capital gains placed in the corpus of the PWMTF through the spending policy thereby reducing the book value of the PWMTF due to capital gains.  This would be in lieu of netting capital losses against interest and dividends earned from PWMTF investments as had been done in the past.  (See appendix 7).  The Treasurer noted he would be implementing the new policy in July after discussing the matter internally and with the Attorney General and Auditor.

 

The Committee discussed the issue of netting of capital gains and losses against income.  Representative Pedersen expressed concern with netting income against capital losses and with removing managers who realize losses while retaining managers who hold assets which have lost value.  The Treasurer noted his Office had extensive discussions on the matter and reviewed performance over a number of years.  The Treasurer’s Office also had discussions with various investment managers to determine their investment strategies and did so in the most recent case of Friess.  Overall the Treasurer believed that their investment style was not aligned with Wyoming’s investment goals.

 

In response to questions why an index fund was a better choice than Friess when measured against the benchmarks on pages 50 through 53 of RV Kuhns' materials, the Treasurer noted there are two different measurements – one against the manager’s benchmark and the other against what actually happens to the assets.  In the last year Friess’ actual performance was a realized loss of over $70 million.  If the PWMTF were like the state retirement system and compared only against a benchmark there would be different considerations in the Treasurer's view.  But the governing statute requires that income production be considered.  The Treasurer noted the Legislature can change the statute if it wishes.

 

In reply to questions concerning how annual income is computed, the Treasurer stated that growth funds are bought in order to develop capital gains.  Value increases and decreases are not included in the income calculation.  Interest, dividends and realized capital gains are included.  Capital losses will not be netted against income this upcoming year as per appendix 7.

 

The Committee discussed the need to review the statutes and develop policies for the future on the income versus total return issue.  The Treasurer agreed that could be done and offered to help the Committee research the issue and develop alternatives.  Committee members generally noted agreement with the need to do so and the opportunity presented.  Committee members suggested that the possible alternatives included accounting for gains and losses over a period longer than a fiscal year or biennium in order to smooth gains and losses.  Committee members also noted there might be a need to separately account for equities versus income from other investments.

 

The Committee and Treasurer discussed the inviolate nature of the PWMTF and what to do when capital losses are incurred.  The Treasurer’s noted that an Attorney General's opinion stated "inviolate" does not mean losses must made whole; in the Treasurer's view it means that the corpus cannot be appropriated.

 

The Committee discussed the spending policy amounts and Becky Gratsinger of RV Kuhns briefed the Committee on why the current statutes provide 5% spending policy.   Treasurer Meyer noted the spending policy originally was a hard dollar amount and then switched to 8% and was later adjusted down to 5%.  Only in the last two years has there been a spillover from the reserve account to the permanent mineral trust fund.

 

The Committee discussed the issue of volatility of the market and expectations.  Ms. Gratsinger agreed that the issue of volatility was a major issue the Committee can address.  She stated that other states have enacted laws providing for longer timing so that averages could smooth income and spending.  The Treasurer stated that we may well be in a new situation, there might be a need to rethink some of our past assumptions and that it would be helpful for the Committee to discuss the issues and provide the Legislature’s expectations.  Representative Pedersen requested a recommendation from RV Kuhns of an alternative investment piece to narrow volatility.  RV Kuhns offered to send information about the managers and how they have helped lower volatility.

 

Ms. Gratsinger and Josh Kevan, also of RV Kuhns, discussed policy and noted that legislation might help define whether the goals of investment policy are income or total return.  In RV Kuhns' view if the goal were defined as total return with no income consideration it would be best for the funds in the long term.

 

Mr. Kevan addressed active versus passive management styles.  Large cap equity investments are passively managed and small caps are actively managed.

 

The Committee discussed the issue of prohibiting investments in certain foreign countries.  Ms. Gratsinger noted some states have adopted policies along those lines, but those limitations often raise issues such as do you prohibit investments in certain companies because they invest in or have distribution chains in prohibited countries.

 

In reply to questions of what might be undertaken statutorily.  Ms. Gratsinger stated that the Governor’s proposal of considering income as one component and equities as another could be considered.  Treasurer Meyer cautioned that there might not need to be large changes and the Legislature might not want to be too prescriptive.  He suggested LSO should review the issues with input from his Office as requested and determine what can be done within constitutional limits.  He urged that the policies and theories have to be married with the practicalities and a determination of the risk tolerances the State is willing to accept.

 

Senator Perkins noted there are two competing interests in total return and income.  If there is going to be an income component and total return component, the Committee will need recommendations on how to make the two work if accounted for separately and to resolve the conflict between current and future beneficiaries.  Senator Anderson stated one of the issues is tolerance for risks and whether that can be stated by legislative language.  Representative Landon suggested that PWMTF and the spending policy address a conversion of state’s assets from minerals to cash and one of the questions presented is whether the first goal should be to inflation proof the new asset.  In his view it is the Legislature’s determination as to the goals of the various funds, but the Committee and the Legislature are not competent to determine the allocation of assets.  Senator Coe noted that when the 5% was placed in statute no one envisioned the State could not realize those investment returns.

 

Rick Miller, representing the University noted the PWMTF and CSPLF are subsets of a larger income stream, but Hathaway and Higher Education programs are entirely dependent on investment income.  Thus there is a need to have a steadier income flow for those endowments.  The Treasurer noted the State can slow down equity asset allocations for the Hathaway and Higher Education endowments if that is the Legislature’s decision.

 

The Treasurer stated that if the Committee answers no other question, it should address the spending policy amount and need for spending policy.  The Legislature should question if there really is a need for statutory limits inhibiting the Legislature from spending money.  Ms. Gratsinger stated that RV Kuhns would help the Committee address the questions if asked.

 

Senator Hunnicutt questioned if there were any investments the State is prohibited from investing in should the opportunity appear.  Ms. Gratsinger knew of none as the general investment policy and prudent investor rule addresses most of the opportunities that arise.

 

UW bonding

 

Mr. Miller addressed the University bond refunding issue and bonded indebtedness.  He provided a memo on refunding and a chart showing the University's outstanding bonded indebtedness.  (Appendices 8 and 9).  The expected savings by issuing refunding bonds is approximately $100,000 per year.  There also should be about $1.4 million in federal mineral royalties available for subsequent bonding.  As a rule of thumb every dollar freed provides ten dollars in bonding capacity.  Thus there likely will be a proposal for bonding by UW in the upcoming budget request.  Federal mineral royalties are usually used to pay for academic projects.  Other types of projects are debt serviced with funds generated from the project even though all available funds are pledged in order to lower bonding costs.

 

In reply to Chairman Cohee's inquiry on fee increases, Mr. Miller stated the University does not lower tuition and offset that with fees.  Fees are used to pay employees providing the services generating the fees and also for cost of goods such as increased utility fees.  Calculation of fees are based upon actual costs.

 

The Committee discussed the issues to be considered, which Chairman Cohee noted included the spending policy and possible different treatment of the Hathaway, Higher Education and Worker’s Compensation as income funds.  The State's overall fiscal picture in order to help determinations on income and spending policy was also noted as an item of concern by Senator Sessions.  Vice-chairman Perkins noted the breakdown of income in capital losses and gains after the fiscal year would be helpful for the income versus total return debate.

 

The Committee discussed but did not set a future meeting date.  The Committee adjourned at approximately 4:30 p.m.

 

Respectfully submitted,

 

 

 

Representative Roy Cohee, 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			Committee duties		Memo on committee duties and past practices		LSO
4			State investments		Materials covering all topics discussed by the Treasurer’s Office – focusing on asset allocation and investment performance.		State Treasurer’s Office and RV Kuhns
5			State investments		Spreadsheet of investment performance as of March 31, 2009		State Treasurer’s Office
6			State investments		Selected investment managers' performances from FY 2005 to 2009		State Treasurer’s Office
7			State investments		Memo from Treasurer regarding handling of capital losses		State Treasurer's Office
8			University of Wyoming refunding bonds		Memo from Rick Miller dated April 7, 2009 to Committee		Rick Miller, UW
9			University of Wyoming refunding bonds		Chart of UW outstanding bonded debt as of 4/09		Rick Miller, UW
	Capital Finance and Investments Committee  Summary of Proceedings

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

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