Wyoming Legislature
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Committee Meeting Summary of Proceedings
Select Committee on Capital Financing and Investments
September 10, 2009
Oil and Gas Commission Building
Casper, Wyoming
Meeting Attendance
Committee Members (Present)
Senators Hank Coe, Floyd Esquibel, Rick Hunnicutt and Drew Perkins; Representatives Roy Cohee, Ross Diercks, Jack Landon, Bryan Pedersen and Mary Throne.
Committee Members (Not Present)
Senators Jim Anderson and Kathryn Sessions;
Representative Frank Philp
Legislative Service Office
Dave Gruver and Bill Mai
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 including performance and management oversight. The Committee was addressed by the State Treasurer and members of his Office and by the LSO staff. The Committee requested that three bills be drafted affecting State investment statutes for the Committee's further consideration. The Committee will meet again this interim, but a firm date for a subsequent meeting was not set.
Call To Order
Chairman Cohee called the meeting to order at 9:30 a.m. The agenda which was followed is appendix 2. Senator Coe moved the minutes from the April 9 meeting be approved without amendment, Representative Esquibel seconded the motion and it passed unanimously.
State investment goals/performance/spending policy recommendations
State Treasurer Meyer addressed the Committee. He provided a one page summary on personal money management in which he drew the analogy to the State's various accounts. (Appendix 3). The Treasurer likened the general fund to a checking account, the spending policy reserve accounts were the State's savings accounts and the permanent mineral trust fund and common school permanent land fund were 401(k) retirement plans. The issue before the Legislature in his view is what to do when investments go up and go down. In 2008 the Legislature had the greatest amount of investment returns to work with and in 2009 it had substantial losses. Setting aside any legal constraints, the Legislature should determine how it wants to handle realized capital gains and losses in each year by moving funds between the various accounts. He noted that under current law the Legislature has concluded it does not trust itself and thus has dedicated a certain percentage of the 401(k) earnings to the checking account and placed the remainder in savings. Now with the substantial loss in 2009, the Legislature can choose to cut expenditures from the checking account to match the decrease in fixed income earnings and let actual capital losses and decreased value of the 401(k) be recouped over a period of years. Another choice would be for the Legislature to conclude both interest and capital gains and losses should be deposited to the checking account so that the deposits will be about 5% of what they were the year before, which would require moving money from savings to checking.
Treasurer Meyer also distributed a one page summary of the options to address the policy decision he made on capital gains and losses, focusing on the CSPLF and PWMTF. (Appendix 4) An outline of those options is to:
1. Do nothing and rely on the statutory interpretation of the Treasurer or statutorily confirm that approach. That would mean income consists of interest, real estate rents and dividends. Capital gains and losses will be reconciled in the corpus until losses are recouped from gains;
2. Reenact the 1986 statute that stated that income consists of every source of earnings, including capital gains;
3. Increase the amount to be retained in the reserve funds by either setting a higher dollar amount before excess savings are credited to corpus or increasing the reserve account balance before it flows back to corpus;
4. Put all investment earnings into the general fund and provide that capital gains be returned to the corpus of each account;
5. A mix of variations as to how to account for permanent fund revenues depending on the permanent fund.
The Treasurer also addressed managers and various strategies for the holding and sale of investments. He is not "a fan" of active management chasing returns and selling at the bottom of a market. In FY 2009 his office was surprised that State investment managers had investment strategies that sold at a considerable loss. The October losses of $80 million taken by one manager particularly surprised the Treasurer’s Office.
Michael Walden-Newman, the State's Chief Financial Officer addressed the Treasurer’s Office oversight of the investment managers. He spoke to the due diligence of the Office, and gave anecdotal evidence to support the statement that Wyoming’s oversight is the best in the nation. The Treasurer's Office will speak with investment managers as often as daily and often weekly. When contacting investment managers, his Office had been told that their contacts with managers are longer and occur more frequently than other States'. Representative Pedersen noted that in his experience, the Treasurer’s Office due diligence is second to none if it is contacting investment managers weekly, as often managers will only hear from beneficiaries on a quarterly basis. He did question the decision to release an investment manager who sold poor performers and realized losses. Drawing an analogy to livestock, if there is a sick animal it should be culled in order that it not drag down the remainder of the herd and a manager should not be penalized for such culling. Doing so will provide a disincentive to managers to appropriately cull stocks. The Treasurer noted his Office never tells a manager to sell or not to sell. In his view the issue is whether the animal sold was sick and the Manager did not know. Representative Landon noted that as the State's objective is based upon total return, the value of the asset whether realized or not is a real number.
The Treasurer also reviewed a document provided to the Committee prior to the meeting, “Wyoming Investment Update”. (Appendix 5) Concentrating on pages 3 and 7, he explained the effect of his policy change. The result of the accounting policy is shown in column 1. The losses are retained in the account and will be paid back from future capital gains. Under his choice the Legislature has the ability this session to return the "deferred losses" to the corpus of each account. If he had not made the choice, in the Treasurer's view, the general fund would have been underfunded under the CREG projections. He is reasonably comfortable that the decision is supportable as it is not prohibited.
Treasurer Meyer addressed the spending policy recommendations. He does not have enough information to make a recommendation different than 5%, even though his best prediction of return will be less than 5%. The Treasurer's written recommendation was provided in writing to the Committee. (Appendix 6)
The Treasurer addressed the history of the "sales at a loss" statute. He agreed with LSO's memorandum that there is a range of choices and some flexibility for the Legislature. In reply to Committee members' questions, the Treasurer stated that investment policy is not a function of the need for income, the decision is made by the State Loan and Investment Board and is independent of income considerations and instead based on the risk willing to be taken. Responding to Representative Throne, he confirmed that option 4 in his materials was to remove the various spending policies. In reply to Chairman Cohee, the Treasurer reiterated that the firing of the investment manager was not based upon taking losses, but rather upon failure to meet investment performance standards. Also in reply to Chairman Cohee, he stated that last December the Office reduced equity investments and currently the mix is 52% in equities and 48% in fixed income.
Overview of constitutional and statutory parameters concerning investment provisions
Dave Gruver, LSO, reviewed a memo and related matrix previously sent to the Committee regarding state investment statutes and capital gains and losses. (Appendices 7 and 9). He noted that the issue is complex in that each of the permanent fund governing provisions, Constitutional, applicable federal law if any, statutory and SLIB policy, needs to be considered separately, together with caselaw interpreting the various provisions. The September 1, memo reviewing the provisions was written in the form of general parameters for the Committee and Legislature to follow, rather than specific options.
Overall, the Committee is confronted with four basic choices as to how to treat capital gains and losses and income generally from the various permanent funds. One choice is the policy which pre-existed the "new policy" interpretation. Under the prior policy all income gains and losses, including realized capital gains and losses were netted, with the net income being distributed. Another option, would be to treat capital gains and losses as increases and decreases to the corpus, regardless of whether they are realized or not. That option would be difficult to reconcile with the higher education permanent funds as discussed more fully below. A third option would be the new policy, in which capital gains and losses are treated as income, but differently from ordinary income. There is some caselaw which could be used to call that policy into question, as noted in more detail below. A fourth option would be to implement the new policy, but to distribute capital gains and retain capital losses in the corpus, which is not what the new policy calls for and would be problematic under Constitutional provisions.
The issue presents some difficulty for the Legislature because statutory enactments calling for a total return policy are difficult to reconcile with Constitutional and other provisions which call for a delineation of principal and income. Further, statutes give conflicting signals in speaking of investing for both maximum income with a recognition of a need for safety.
By way of background, statutes governing investment of State funds have been amended over the past two decades from very prescriptive "laundry listings" of permissible investments, to more generalized authority, with directives to adopt policies governing various types of investments. Investments of public funds in private stock was prohibited by the Constitution until 1984 for the retirement fund and 1996 for permanent funds. While statutes were enacted and have been amended to govern that authority, they do not appear to explicitly answer all questions raised by authorizing investments in stocks. The Constitutional provisions at issue leave some room for interpretation as to what is the "principal," what is required to keep a fund "inviolate" or "permanent" and what is expendable "interest," "income," or "earnings" from investments.
The ultimate interpretation of the Wyoming Constitution lies with the Wyoming Supreme Court, but until that occurs, lacking legislative interpretation by statutory enactment, it falls to the executive department to adopt rules or policies to carry forth their best construction of these constitutional provisions; hence the Treasurer's interpretative policy. Should the Legislature wish to provide more explicit guidance or more prescriptive language, it may enact any law not expressly or inferentially prohibited by the Constitution. Research has disclosed a number of Wyoming Supreme Court interpretations of various provisions that tangentially touch upon the issues presented, but no Wyoming case (nor binding federal authority) was uncovered which definitely answers the questions presented in a manner which would allow for no choice in adopting statutory language on most of these issues.
As to the issue of the inviolate or permanent nature of the various funds the memo noted that some of the permanent land funds do not even contain an “inviolate” corpus but only a restriction that the funds are "inviolably appropriated." As for those funds with an “inviolate” or “permanent” corpus, the protection of the corpus varies from the PWMTF finding the least protection, to certain permanent land funds (Agricultural College) carrying not only the duty to ensure no reduction in the corpus, but an explicit requirement to restore lost corpus. The CSPLF once had such a requirement, but the Wyoming Constitution was amended to remove that explicit requirement. It was suggested that the Legislature might well consider these varying protections in considering and establishing the corresponding safety requirements of permissible investments.
A 1934 case addressing the University permanent land fund and the ability to pledge future revenue for a current project was highlighted as a case which could be read to call into question the new policy relating to capital gains and losses. In that case the Court noted that if "the method sought to be taken .. [was] a partial and temporary destruction of the fund or the income thereof" it was not permissible. Under the new policy, one could argue that the retention of capital losses in the permanent funds was a temporary destruction of the fund. At the same time, in the 1934 case, the Court begrudgingly upheld the legislation: "Taking all of these facts into consideration, and solely in view of these special facts, we have come to the conclusion that we cannot say that the legislature was wrong when it determined, as it must be presumed to have done, that the fund and the income thereof would not, on the whole, inconsistent with all the purposes of the trust, be adversely affected and impaired. Courts will not hold a law invalid, if it can be upheld on any reasonable ground, and we think we should uphold it in this case, leaving the blame for any folly, if folly there is, to rest where it should-- with the legislature and the board of trustees of the university."
Mr. Gruver noted that, at the same time, a proponent of the new policy could argue, as in the 1934 case, the particular facts presented in the current situation and the implementation of the new policy (in that no future capital gains will be distributed until retained losses are made whole) should lead a Court to conclude that the wisdom of the policy is for the Legislature. In any event, clearly such a policy cannot be applied to the Agricultural College PLF, given that federal law requires that all losses be made whole by the State.
As to the definition of "income," "interest," or "earnings," which are all used in the Constitution, Mr. Gruver stated that the terms are not defined by the Constitution, nor by statute, at least not as explicitly applied to state investment statutes. Under caselaw "interest" encompasses the narrowest amount of revenue, while "earnings" encompasses the most. "Income" falls between the two.
For the higher education trust funds, there is little doubt that realized capital gains were intended to be and should be considered earnings, available for expenditure. For the remaining permanent funds, authority can be found supporting treatment of capital gains as income and other authority can be found treating such gains as principal. Arguably adding increased flexibility for the Legislature to define "income" as including or excluding realized capital gains, at least for investments in stocks, is the Constitutional language adopted with the authorization to invest in stocks: " …the permanent funds of the state of Wyoming may be invested in such stock under conditions the legislature prescribes. Adopting legislation defining the terms would give the executive department more guidance.
Finally he noted that the application of various uniform acts (e.g., the Uniform Principal and Income Act, and the Uniform Prudent Management of Institutional Funds Act) to the state investment statutes was not clear. Again, the suggestion was to explicitly state the Legislature's intent.
The Committee discussed the various issues raised and directed LSO to provide the memo and related matrix to the remainder of the Legislature.
Higher education reserve accounts report
Deputy Treasurer Sharon Garland addressed higher education reserve accounts. She provided updated numbers for the various reserve accounts to supplement appendix 5. (See appendix 9). She discussed the reserve accounts and spending policy amounts. For the PWMTF the projected earnings will not reach the 5% spending policy amount and thus there will be no transfer of funds from the general fund to the reserve account. Due to the legislative appropriation of a projected $54,850,000 to the reserve account, there is a projected flow from the reserve account to the corpus of approximately $26,600,000. For the CSPLF projected earnings will fall short of the spending policy amount and thus there will be no flow to the reserve account nor from the reserve account to corpus. For the excellence in higher education funds, projected earnings are short of the spending policy amount, meaning there will be no flow to the reserve account, but again due to legislation appropriating $3.8 million to the reserve account, there is projected to be an overflow to corpus of approximately $645,000.
Ms. Garland addressed the Hathaway program in more depth, providing a cover letter and extended review of the revenue and expenditure flows in the program. (Appendix 10). Approximately $4 million dollars was transferred from the Hathaway reserve account to the expenditure account to fully fund scholarships awarded last fiscal year. At the end of the fiscal year, the full expenditure account balance of $7.8 million was transferred to the reserve, reaching more than the maximum of $12 million, thus $3.8 million was transferred from the reserve to corpus. In the upcoming years expenditures are projected to be greater than earnings, thus requiring use of reserve account funds in FY10 through FY14, ranging from $844,438 to $2,228,191, drawing down the reserve account from $12 million to about $3 million over that time period.
Deputy Treasurer Garland also provided reviews of the projected flows of revenues in the PWMTF, CSPLF and Higher Education fund using a 5% return and a 3.25% amount, which she noted is the more likely return under current market conditions. She also reviewed the projected outcomes resulting from a change in spending policy reserve accounts from 75% of the spending policy to 100% of the spending policy. (Appendix 11)
Representative Landon noted that investment income will never likely meet the spending policy amount if only fixed income is used to calculate projected income (i.e., capital gains are not projected). Mr. Mai, LSO, noted that the CREG accepts the Treasurer’s projections of income for the investment income amount and that the budget is based upon the projected amounts, not the spending policy amounts. He also clarified that there is a difference in projections and actual earnings and that while only the fixed income portion is used for projections, the entire portfolio is used for spending policy returns. Representative Landon suggested that the projected amounts of income should be reflective of the entire portfolio and that the projection process should be more transparent. He also noted that there should be a clear inflation proofing mechanism for the various funds from the income of the funds.
Treasurer Meyer addressed the difference in total return and yield and noted the State cannot spend unrealized gains.
College savings investment plan
Deputy Treasurer Garland also addressed the college savings 529 program. She provided a written summary and discussed it briefly. (Appendix 12) The State currently is part of the Colorado plan and has a five year marketing agreement with College Invest. After this year the fees generated are to pay for marketing.
Committee discussion/directives
Vice-chairman Perkins moved that a bill be drafted along the lines of option 1 of the Treasurer’s handout, in order to put legislative teeth into the policy. His motion also directed that a separate bill should define "income," which would apply to all permanent funds and purposes, with income to include interest, dividends and realized capital gains. The motion was seconded by Representative Landon and passed unanimously.
Representative Landon moved that a separate bill draft deal with inflation proofing. On an annual basis, using the cost basis of the corpus and the consumer price index, income from the appropriate permanent fund from the current year will be deposited back to the corpus of the fund to establish a new cost basis for the fund. LSO staff asked if the intent was to include any additional funds should earnings be short of the CPI inflation rate in any year. Senator Hunnicutt seconded the motion. Representative Pedersen noted that there is a timing issue if implemented on an annual basis. Vice-chairman Perkins agreed there are timing issues and also potential conflicts with reducing earnings in poor return years, but noted that the discussion is worthwhile, although there is potential conflict between the various goals. Senator Coe noted there are inflation proofing provisions in place per page 3 of the matrix. Chairman Cohee asked for clarification as to what is being "inflation proofed." Representative Landon stated that this could be based on the beginning of each fiscal year, with the severance tax monies and other monies that are deposited being the new corpus and being inflation proofed the next year. LSO clarified that the intent was for each year a new cost basis would be established and inflation proofed for that year, looking back to the beginning of the fiscal year, without additional deposits from an independent source of funding should earnings be too low. The motion passed with Representative Cohee and Senators Coe and Esquibel voting no.
Additional Committee matters
Chairman Cohee noted he had received a letter from Matt Potter and had told Mr. Potter he would make it a matter of record. (Appendix 13) Chairman Cohee summarized the letter, which addressed state investments in countries supporting terrorism, and asked for discussion. Representative Pedersen noted the problem is there is no centralized location to recognize what is and is not a country which sponsors terrorism. No motion was made on the issue.
Future meetings
The Committee discussed future meetings. Chairman Cohee noted that with the Committee's acquiescence he would seek a date for the next Committee meeting in conjunction with other Committee meetings and sometime after October CREG report.
The Committee adjourned at 3:45 p.m.
Respectfully submitted,
Representative Roy Cohee, Chairman
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Appendix |
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Appendix Topic |
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Appendix Description |
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Appendix Provider |
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1 |
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List of attendees |
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List attendees |
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LSO |
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2 |
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Committee Meeting Agenda |
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Outline of topics the Committee planned to address at meeting |
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LSO |
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3 |
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State investment goals/performance/spending policy recommendations |
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Personal money management analogy to state accounts |
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Joe Meyer, State Treasurer |
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4 |
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State investment goals/performance/spending policy recommendations |
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Options to address capital gains and losses policy |
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Joe Meyer, State Treasurer |
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5 |
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State investment goals/performance/spending policy recommendations |
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Investment update for FY2009, including effect of implementation of capital gains and losses policy |
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Joe Meyer, State Treasurer |
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6 |
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State investment goals/performance/spending policy recommendations |
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Spending policy recommendations |
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Joe Meyer, State Treasurer |
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7 |
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Overview of constitutional and statutory parameters concerning investment provisions |
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Memo (9/01/09) addressing state investment constitutional and statutory provisions |
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LSO |
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8 |
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Overview of constitutional and statutory parameters concerning investment provisions |
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Matrix showing statutory and constitutional provisions regarding various aspects of State permanent funds |
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LSO |
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9 |
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Reserve accounts report |
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Updated (9/4/09) calculations on reserve accounts |
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Sharon Garland, Deputy Treasurer |
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10 |
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Reserve accounts report |
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Current status and projections for Hathaway scholarship reserve account |
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Sharon Garland, Deputy Treasurer |
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11 |
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Reserve account reports |
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Comparison of spending policy reserve accounts at 75% and 100% of spending policy amounts |
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Sharon Garland, Deputy Treasurer |
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12 |
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College savings investment plan |
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Summary of current status of Wyoming's college savings (529) program |
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Sharon Garland, Deputy Treasurer |
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13 |
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Additional Committee matters |
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Letter from Matt Potter to Committee concerning investments in countries supporting terrorism |
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Matt Potter |
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