Meeting Minutes) Is Prepared by the Legislative Service Office (LSO) and Is the Official Record of the Proceedings of a Legislative Committee Meeting

D r a f t O n l y A p p r o v a l P e n d i n g SUMMARY of PROCEEDINGS S E L E C T C O M M I T T E E O N C A P I T A L F I N A N C I N G & I N V E S T M E N T S

COMMITTEE MEETING INFORMATION September 19, 2018 | 8:00 AM Hampton Inn (Morning)/ Bomber Mountain Civic Center (Afternoon) 85 U.S. Highway 16 East (Morning)/63 N. Burritt Ave. (Afternoon) Buffalo, Wyoming

COMMITTEE MEMBERS PRESENT Representative Mike Madden, Chairman Senator Ray Peterson, Vice Chairman Senator Leland Christensen Senator Dave Kinskey Senator Drew Perkins Senator Chris Rothfuss (via phone) Representative Tom Walters Representative Sue Wilson

COMMITTEE MEMBERS NOT PRESENT Senator Wyatt Agar Representative James Byrd Representative Dan Furphy Representative Mike Greear

OTHER LEGISLATORS PRESENT Senator Curt Meier

LEGISLATIVE SERVICE OFFICE STAFF Don Richards, Budget and Fiscal Administrator Tamara Rivale, Senior Staff Attorney

OTHERS PRESENT AT MEETING Please refer to Appendix 1-02 to review the Committee Sign-in Sheet for a list of other individuals who attended the meeting.

The Committee Meeting Summary of Proceedings (meeting minutes) is prepared by the Legislative Service Office (LSO) and is the official record of the proceedings of a legislative committee meeting. This document does not represent a transcript of the meeting; it is a digest of the meeting and provides a record of official actions taken by the Committee. All meeting materials and handouts provided to the Committee by the Legislative Service Office, public officials, lobbyists, and the public are on file at the Legislative Service Office and are part of the official record of the meeting. An index of these materials is provided at the end of this document and these materials are on file at the Legislative Service Office. For more information or to review meeting materials, please contact the Legislative Service Office at (307) 777-7881 or by e-mail at [email protected]. The Summary of Proceedings for each legislative committee meeting can be found on the Wyoming Legislature’s website at www.wyoleg.gov. PAGE 2 OF 9

EXECUTIVE SUMMARY The Select Committee on Capital Financing and Investments (Committee) met for one day in Buffalo. The Committee met during the morning of September 19 to review legislation adopted in the 2018 Budget Session related to investment earnings and to receive updates on the State’s investment performance and fees. The Committee also received information on the State Treasurer's interpretive policy related to capital gains and losses, the Investment Funds Committee, public purpose investment programs administered by the State Treasurer's Office, spending policies for various funds, and the State Treasurer's internal investment team buildout.

The Committee met jointly with the Joint Appropriations Committee during the afternoon of September 19 to receive a report from the Joint Appropriations Subcommittee on Investments and Incentive Compensation and to receive testimony from the State Treasurer's Office and the Wyoming Retirement System on performance compensation. The Select Committee will meet one additional time this interim.

CALL TO ORDER Representative Mike Madden called the meeting to order at 8:00 AM. The following sections summarize the Committee proceedings by topic. Please refer to Appendix 1-01 to review the Committee Meeting Agenda.

REVIEW OF PERTINENT LEGISLATION ADOPTED IN THE 2018 BUDGET SESSION AND FY 2018 INVESTMENT EARNINGS

Legislation adopted in the 2018 Budget Session Tamara Rivale, Senior Staff Attorney, LSO presented an overview of 2018 Wyo. Sess. Laws, Ch. 28 (HB 4). (Appendix 2-01). Ms. Rivale explained the legislation clarified conditions for the investment of permanent and Pool A account funds. Ms. Rivale next explained 2018 Wyo. Sess. Laws Ch. 62 (SF 63), which amended interfund loan provisions. (Appendix 2-02).

Don Richards, LSO Budget and Fiscal Administrator, discussed provisions in the Budget Bill, 2018 Wyo. Sess. Laws, Chapter 134, related to the State's investments. Mr. Richards summarized the following provisions in the bill: Section 2, Section 004, Footnote 3; Section 300(c), (d), (e), (g), (h); Section 301; Section 302; Section 309; Section 322, and Section 334. (Appendix 2-03). The provisions relate to the State Treasurer's internal investment team buildout, redirection of State investment earnings and revenues, borrowing authority for State funds, the Wyoming State Penitentiary Capital Construction Account, and changes to distribution of income from the Permanent Wyoming Mineral Trust Fund for Fiscal Year (FY) 2019.

Mr. Richards next discussed provisions in the Capital Construction Bill, 2018 Laws, Chapter 28, Sections 1, 2, 8, and 11. (Appendix 2-04). He explained the new public purpose investment programs created in the bill that authorize loans to political subdivisions for infrastructure, street, and road projects and to community college districts for student dormitories. The Committee requested LSO provide the Committee the proposed administrative rules for the public purpose investment programs.

Mr. Richards explained Section 8 of the bill conditionally appropriated 2018 investment earnings from the Strategic Investments and Projects Account for school capital construction. He indicated investment earnings were sufficient to fully fund these appropriations. Mr. Richards also noted Section 11 of the bill appropriated matching funds for a county road construction project impacted by coal extraction.

SELECT COMMITTEE ON CAPITAL FINANCING & INVESTMENTS Summary of Proceedings

WYOMING LEGISLATIVE SERVICE OFFICE • 200 West 24th Street • Cheyenne, Wyoming 82002 TELEPHONE (307) 777-7881 • FAX 307-777-5466 • E-MAIL [email protected] • WEBSITE www.wyoleg.gov PAGE 3 OF 9

FY 2018 investment revenue amounts and distributions. Mr. Richards presented a visual illustration of the Permanent Wyoming Mineral Trust Fund spending policy and revenue distributions under W.S. 9-4-719 for FY 2018. (Appendix 2-05).

Historical investment revenue distributions. Mr. Richards summarized the Permanent Wyoming Mineral Trust Fund earnings from FY 2004 through 2018. (Appendix 2-06). He compared the amount of funds deposited into the corpus of the fund under the State's spending policies to the capital gains realized each year and illustrated the annual investment earnings, by type: interest, dividends, and net realized capital gains.

REPORT ON INVESTMENT PERFORMANCE AND FEES, FY 2018 CAPITAL GAINS Mark Gordon, State Treasurer, Patrick Fleming, CIO, and Becky Gratsinger, CEO, RVK addressed the Committee. Ms. Gratsinger presented a quarterly investment performance analysis covering a review of capital markets, the State's asset allocation structure, and the State's investment performance. (Appendix 3-02). The Committee and the presenters also discussed the rising interest rate environment and the State's response.

Mr. Fleming presented information on the FY 2018 unrealized and realized capital gains and losses across all the State's accounts. (Page 2, Appendix 3-01). Mr. Fleming indicated at the end of FY 2018 there were $780,417,474 of unrealized gains, $497,004,591 in dividends and interest, and $439,633,249 of realized capital gains.

STATE TREASURER'S INTERPRETATIVE POLICY Mr. Richards provided an introduction on the history of the State Treasurer's interpretative policy on capital gains and losses. He explained the policy was adopted by Former State Treasurer Joe Meyer in 2009 and it allows interest and dividends earned on the State's investments to be distributed each fiscal year, while holding capital losses which are then netted against future capital gains. The policy has been applied to permanent and non-permanent funds since inception. Mr. Richards stated there are challenges in generating capital gains to offset losses in a timely manner for the non-permanent funds, such as with the State Agency Pool in FY 2017.

Treasurer Gordon addressed the history of the interpretative policy and evolution of Article 15, Section 19 of the Wyoming Constitution that created the Permanent Wyoming Mineral Trust Fund. He presented the original and the amended and restated interpretative policy adopted in August of 2018. (Appendix 4-02 and Appendix 4-01). For non-permanent funds, the amended and restated policy provides that if there are capital losses in a fiscal year in excess of capital gains for that fiscal year from the individual funds that comprise the non-permanent funds, the losses will be applied to each applicable account.

Erika Legerski, Finance Director, State Treasurer's Office, addressed the Committee and explained how capital gains and losses were addressed prior to 2009. She noted a large distinction between permanent funds and non-permanent funds is that the permanent funds have income accounts and corpus accounts. The corpus of the permanent funds may hold capital losses while the non-permanent funds are "destination funds" and must reflect the losses in the fund, as a reduction to the available cash.

Chairman Madden requested the State Treasurer's Office or LSO apply the amended and restated interpretive policy to FY 2016, 2017, and 2018 to illustrate how the changes would vary from the existing policy.

SELECT COMMITTEE ON CAPITAL FINANCING & INVESTMENTS Summary of Proceedings

UPDATE AND STATUS OF THE INVESTMENT FUNDS COMMITTEE Mr. Fleming provided an update on the Investment Funds Committee (IFC). He described the make-up of the IFC and stated that it meets quarterly. Chairman Madden and Treasurer Gordon expressed support for the next State Treasurer to continue utilization of the Investment Funds Committee.

PUBLIC PURPOSE INVESTMENTS Betsy Anderson, General Counsel and Treasurer Gordon provided an update on the Industrial Development Bond program that was repealed in 2016. The State has one outstanding bond issued for Ur-Energy, which is current on its payments. Ms. Anderson presented information on the recent closure of a $15,000,000 loan to Atlas Carbon under the Economic Development Large Project Loan Program. (Appendix 7-01).

Lisa Jerde Spillman, State Treasurer's Office, described the security that was pledged on the Atlas Carbon loan including real property, a stock pledge certificate, security agreements, personal and corporate guarantees, and intellectual property. The interest rate charged by the State on the loan is 150 basis points over the 15-year treasury bond rate, with adjustments every three years, a floor of two percent, and a maximum cap of eight percent annually. Treasurer Gordon indicated loans such as this require significant staff resources and that it may be beneficial to revise processes to allow banks to underwrite public purpose investment programs or to look at alternate transactional structures.

Ms. Rivale noted in August the Joint Minerals, Business and Economic Development Committee voted to sponsor legislation for introduction in the 2019 General Session to repeal and combine several existing public purpose investment programs.

SPENDING POLICY, FUNDING NEEDS, AND FUTURE DISTRIBUTIONS

Staff background Mr. Richards, summarized the FY 2019 spending policy for the Permanent Wyoming Mineral Trust Fund and the Common School Permanent Land Fund. (Appendix 8-01). In response to Committee inquiries, Mr. Richards explained the impact on the State's fiscal profile of using reserve funds to guarantee other distributions of revenue in FY 2019. He noted that the Consensus Revenue Estimating Group's (CREG) projections do not include a forecast of capital gains and LSO assumes all appropriations will be expended. Additionally, Mr. Richards noted that the Joint Appropriations Committee requested a bill draft to modify the State's spending policies.

STO comments Treasurer Gordon and Ms. Anderson addressed the FY 2019 spending policy, funding needs, and future revenue distributions. Treasurer Gordon stated he will provide a recommendation in consultation with the State Loan and Investment Board by November 1 to the Committee regarding modifications to the state spending policy amounts pursuant to W.S. 9-4-719(p).

UPDATE ON INTERNAL INVESTMENT TEAMS AND REDUCTION IN EXTERNAL MANAGER FEES Mr. Fleming presented an update on the internal investment team buildout and efforts to reduce external manager fees. (Appendix 3-01). He also distributed information comparing the State's investment management fees with various other funds. (Appendix 9-02). Mr. Fleming explained how the State

SELECT COMMITTEE ON CAPITAL FINANCING & INVESTMENTS Summary of Proceedings

Treasurer's Office is trying to increase its performance by focusing on increasing returns above benchmarks, asset allocation, and reduction in management fees.

Pat Arp, Deputy State Treasurer, presented an overview of the report on the internal investment program submitted to the Select Committee on Capital Financing and Investments and the Joint Appropriations Committee. (Appendix 9-03). Deputy Treasurer Arp summarized areas of the report related to documented savings, expenditures, hiring new positions, technology, internal management, standards objectives and investment policies, and performance. She noted that the State Treasurer's Office is still working to find solutions for its technological needs.

PUBLIC COMMENT Senator Meier provided general comment on the need to increase efficiencies in investment management and other recommendations to streamline investment processes.

JOINT SESSION OF JAC AND SELECT COMMITTEE ON CAPITAL FINANCING AND INVESTMENTS Representative Mike Madden called the joint meeting to order at 1:30 PM.

Report/Recommendations from JAC Subcommittee #2, Investments and Incentive Compensation Don Richards, LSO Budget/Fiscal Administrator, briefed the two committees on the work of the subcommittee and presented its recommendations (Appendix 13-01) as well as a summary matrix of the recommendations. (Appendix 13-04)

Rebecca Gratsinger, RVK Chief Executive Officer, offered her observations of each of the recommendations of the subcommittee.(Appendix 13-03) Mark Gordon, State Treasurer, and Patrick Fleming, Chief Investment Officer, shared their suggestions to avoid pitfalls of incentive compensation. They also commented on the subcommittee recommendations, stressing the importance of team incentives and how delayed compensation is a disincentive. Treasurer Gordon emphasized that the goal is to build a resilient program.

Wyoming Retirement System (WRS) Ruth Ryerson, WRS Executive Director, Sam Masoudi, WRS Chief Investment Officer, Laura Ladd, WRS Board Chair and Tom Chapman, WRS Board Member and Investments Committee Chair, responded to the subcommittee recommendations.

Committee directives Due to absence of a quorum of members from the Select Committee on Capital Financing and Investments, Chairman Madden directed LSO staff to send an email ballot to all Select Committee members on the question of forwarding a letter, under the direction of the Chairman, to the Joint Appropriations Committee supporting the initiation of a performance compensation for investment staff.

The Joint Appropriations Committee directed LSO staff to work with the JAC Subcommittee #2 and other interested legislators to prepare a bill draft encompassing the recommendations of the subcommittee and additional input from today’s meeting for the next meeting of the Joint Appropriations Committee in October.

SELECT COMMITTEE ON CAPITAL FINANCING & INVESTMENTS Summary of Proceedings

MEETING ADJOURNMENT There being no further business, Representative Madden adjourned the meeting at 5:00 P.M.

Respectfully submitted,

Representative Mike Madden

SELECT COMMITTEE ON CAPITAL FINANCING & INVESTMENTS Summary of Proceedings

Index Agenda Item Document Description Document Provider Number

1-01 Agenda LSO

1-02 Call to order Sign-in Sheet LSO

Review of pertinent legislation adopted in the 2-01 2018 Budget Session and 2018 Laws, Ch. 28 LSO FY 2018 investment earnings

Review of pertinent legislation adopted in the 2-02 2018 Budget Session and 2018 Laws, Ch. 62 LSO FY 2018 investment earnings

Review of pertinent legislation adopted in the 2-03 2018 Budget Session and Excerpts from 2018 Laws, Ch. 134 LSO FY 2018 investment earnings

Review of pertinent legislation adopted in the 2-04 2018 Budget Session and Excerpts from 2018 Laws, Ch. 136 LSO FY 2018 investment earnings

Review of pertinent legislation adopted in the 2-05 2018 Budget Session and FY18 PWMTF Spending Policy LSO FY 2018 investment earnings

Review of pertinent legislation adopted in the 2-06 2018 Budget Session and History of Investment Earnings LSO FY 2018 investment earnings

SELECT COMMITTEE ON CAPITAL FINANCING & INVESTMENTS Summary of Proceedings

Report on investment Report on Capital Gains, Fees, and Investment 3-01 performance and fees, FY STO Performance 2018 capital gains

Report on investment Quarterly Investment Performance Analysis 3-02 performance and fees, FY STO (Preliminary) 2018 capital gains

State Treasurer's Amended and Restated Treasurer's Interpretive 4-01 STO interpretive policy Policy

State Treasurer's 4-02 2009 STO Interpretive Policy LSO interpretive policy

State Treasurer's 4-03 Portfolio Status as of 06.30.18 LSO interpretive policy

7-01 Public Purpose Investments Economic Development Large Project Loan STO

Spending Policy, funding 8-01 needs, and future Spending Policy LSO distributions

Update on internal investment teams and Potential Changes to the Wyoming Public 9-01 STO reduction in external Records Act manager fees

Update on internal investment teams and 9-02 Sovereign Wealth Fund Fee Comparison STO reduction in external manager fees

Update on internal investment teams and 9-03 Internal Investment Report STO reduction in external manager fees

Joint Session of JAC and Select Committee on JAC Subcommittee No. 2 Final 13-01 LSO Capital Financing and Recommendations Investments

Joint Session of JAC and Select Committee on 13-02 Response to JAC Subcommittee No. 2 Questions STO Capital Financing and Investments

Joint Session of JAC and Select Committee on RVK Investments and Performance 13-03 STO Capital Financing and Compensation Investments

SELECT COMMITTEE ON CAPITAL FINANCING & INVESTMENTS Summary of Proceedings

Joint Session of JAC and Select Committee on JAC Subcommittee No. 2 Recommendations 13-04 LSO Capital Financing and Matrix Investments

Joint Session of JAC and Select Committee on Wyoming Retirement 13-05 Responses to Subcommittee No. 2 Questions Capital Financing and System Investments

SELECT COMMITTEE ON CAPITAL FINANCING & INVESTMENTS Summary of Proceedings

WYOMING LEGISLATIVE SERVICE OFFICE • 200 West 24th Street • Cheyenne, Wyoming 82002 TELEPHONE (307) 777-7881 • FAX 307-777-5466 • E-MAIL [email protected] • WEBSITE www.wyoleg.gov