D r a f t O n l y

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PP RROOCCEEEEDDIINNGGSS SELECT COMMITTEE ON CAPITAL FINANCING & INVESTMENTS

C OMMITTE E MEE TING INFORM ATIO N November 25, 2013 Oil and Gas Conservation Commission Casper, Wyoming

C OMMITTE E ME MBE RS PRE S E NT Senator Hank Coe Senator Fred Emerich Senator Floyd Esquibel Senator Senator Representative James Byrd Representative Steve Harshman Representative Representative Representative John Patton

C OMMITTE E ME MBE RS N OT PRES ENT Senator John Schiffer Representative Robert McKim

LEGISL ATIV E SE RV ICE OFFICE ST AFF Dave Gruver

OTHERS PRE S E NT AT ME E TING Please refer to Appendix 1 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 ’s website at http://legisweb.state.wy.us. EXECUTIVE SUMMARY The Committee received statutorily required and other reports from the State Treasurer's Office and discussed those reports and public purpose investments. A draft spending policy report was reviewed and approved by the Committee. The Committee did not schedule any additional meetings for the interim.

CALL TO ORDER Immediate past chairman Perkins called the meeting to order at 10:00 a.m. Representative Patton was elected chairman and Senator Perkins was elected vice-chairman. Representative Patton asked that vice- chairman Perkins chair the meeting.

The following sections summarize the Committee proceedings by topic. Please refer to Appendix 2 to review the Committee Meeting Agenda.

State Treasurer Reports

State Treasurer thanked the Committee for its assistance the past interim and introduced Michael Walden-Newman of his office. Mr. Walden-Newman reviewed the yearly investment report, excerpts from the quarterly report ending September 30, and the current status of the investment portfolio. (Appendices 3, 4 and 5). He noted each of the nine separate funds constituting the state investment portfolio have their unique asset allocation mix. He discussed the handling of capital gains and losses noting that all capital gains within a fund are netted for the year, and gains are only distributed if there is a net of capital gains for that fund. Under the Treasurer's policy, there could be net losses in capital which are accrued to the fund while interest and dividends are distributed from that fund. Investment managers are given discretion to manage the funds allocated to them as the Treasurer’s Office provides policy and contract limitations at the beginning of the contract period. From that point it is mostly manager discretion, but the Treasurer’s Office does address when rebalancing is needed and contacts Managers to rebalance by taking gains as necessary to keep in accord with the investment policy.

Management fees were discussed with Mr. Walden-Newman noting that fees are deducted in many instances with the distribution to the State on a net basis. He also noted that fixed income investments can be sold for gains and losses and that the State had repositioned itself this past year for fixed income investments with good interest bonds being sold (which produced capital gains in exchange for foregoing those interest payments in later years). That was done in anticipation of rising interest rates and the managers have been allocated funds to allow for investment in higher yielding (junk) bonds and bank loans. Treasurer Gordon noted the bond portfolio long term did not look good currently or in the immediate future, thus the idea was to provide a lower duration risk for that portfolio.

In response to committee questions Mr. Walden-Newman stated that investment benchmarks have been updated and are constantly being reviewed and reset by the Treasurer’s Office. The timeframes and actions taken to readjust the benchmarks were explained. He also responded to questions concerning the risk of prohibiting investment of state agency pool funds (over $5 billion) in equities. In his view there is a downside risk for holding only fixed income, while permanent fund and worker's compensation portfolios can hold equities and thus have a better balanced portfolio under which the equity investments can offset fixed income losses in the sale of fixed income investments. Under the State Constitution only permanent funds, retirement funds (not invested by the State Treasurer) and worker's compensation funds may be invested in equities. By statute up to 55% of permanent funds (PWMTF, Permanent Land Funds, Hathaway and Excellence in Higher Education) and up to 45% of the worker’s compensation fund may be invested in equities.

Public purpose investments

Treasurer Gordon introduced deputy Treasurer, Sharon Garland, who provided the Committee with two lists of public purpose investments, the first showing statutory citations for each public purpose investment and the second showing the authorized amount of investment and the amount actually invested. (Appendices 6 and 7). The Treasurer's Office noted the lists show state funds invested for a specific public purpose, other than permissible investments made in compliance with state investment policy under W.S. 9-4-715 through 9-4-719 and 9-4-831, which are authorized or directed by the legislature in law. Total investments of permanent funds for a specific public purpose are limited to six hundred million dollars excluding investments made pursuant to W.S. 37-5-406 (infrastructure authority bonds). Prior to the convening of each general session of the legislature, the State Treasurer, after consultation with the State Loan and Investment Board, is to recommend to the Select Committee on Capital Financing and Investments whether any adjustment should be made to the limitation. Most of these investments are made from the Permanent Wyoming Mineral Trust Fund.

Ms. Garland noted that on the listing provided six of the investments are administered through the State loan and investment board and the office of state lands and investments. Others are administered by the state water development commission. Others are specifically mandated by legislative direction as one time investment of state funds (e.g., Shoshone Municipal Pipeline, Sheridan Water Treatment Plant and Gillette Madison Pipeline). Finally others are administered by the Treasurer’s Office.

Treasurer Gordon suggested the Committee should review the rates of the various programs. He also discussed the time deposit open account program under which up to 5% of the state agency pool is made available to banks to lend. The Committee and the Treasurer's Office discussed how funds made available to banks under the program are tracked to ensure state funds are used in the state.

The Treasure also identified a number of concerns with the industrial development revenue bond program investments. He noted the business council takes the application and indicates that it takes 15-24 months for the process to be completed. After the council recommends investment in the project, the Governor’s office reviews the application and the Treasurer’s Office must still review the project to determine that it meets the prudent investor rule. He noted that the time lag to review the investment and make the changes necessary to meet statutory requirements can cause problems for the project. The Treasurer’s Office is drafting rules on the process, but has not released those until the projects undertaken before last session's statutory changes are acted upon. The rules are focused on the quality of the investment for the Treasurer’s Office review. The rules are also setting forth collateral requirements. He noted specific problems and that he would insist that there be no premature announcements of approval.

In response to Committee member questions the Treasurer provided examples of requests that would be sent back to the business council and how the delay in approval could affect the project. He also discussed with the Committee the possibility of using private investment managers with expertise in the types of lending envisioned under the industrial development revenue bond program. He believes there should be a business approach to the investment with any aspect of political influence removed. He also noted that there can be a conflict between prudent investments and economic development investments.

Spending Policy Reports

In the 2000 session the Legislature established annual spending policy amounts for earnings from the permanent Wyoming mineral trust fund (PWMTF) and the common school account within the permanent land fund (CSPLF). The spending policy amounts are intended to make the amount of earnings available for expenditure from these permanent funds more consistent year to year and to protect the corpuses from inflation. In the 2007 session, an annual spending policy amount for the excellence in higher education endowment fund was established. Like the PWMTF spending policy and reserve account, to the extent earnings from the excellence in higher education endowment fund exceed the spending policy amount, excess earnings flow to the reserve account for that fund.

Deputy Treasurer Garland reviewed the spending policy reserve accounts for the permanent Wyoming mineral trust fund, the common school permanent land fund and the excellence in higher education endowment fund. She explained the functioning of the reserve accounts and the earnings and projected earnings from each of the corpuses. (Appendix 8). The Treasurer's Office had no recommendations for changes to the spending policy amounts.

Hathaway scholarships

Ms. Garland explained the operation of the Hathaway reserve account and the movement of funds between the expenditure account, the reserve account and the corpus. During fiscal year 2013, a total of $6,584,782 was transferred out of the Hathaway reserve account to the Hathaway expenditure account to fund scholarships awarded. The unencumbered and unobligated money in the expenditure account on 06/30/13 amounted to $24,878,668. This amount was transferred to the reserve account. The cash balance in the reserve account on 06/30/13 was $34,781,468. As this amount was greater than the statutory cap (3.75% of the previous five year average market value of the corpus which was $17,530,270), $17,250,198 was transferred to the corpus of the Hathaway endowment fund in July 2013 leaving this maximum cash balance in the Hathaway reserve account at fiscal year end. (Appendix 9)

Excellence in higher education reserve account

Ms. Garland reviewed the excellence in higher education reserve account, earnings and projections. (Appendix 10) She noted that unlike the PWMTF reserve account and the CSPLF reserve account, if earnings fall short for the excellence in higher education endowment spending policy (5% of the 5 year rolling average of the corpus), the University and colleges receive an automatic flow from the reserve account to make up the shortfall. The spending policy amount for fiscal year 2013 for this account is five percent (5%) of the five-year rolling average market value, which amounted to $5,268,752. This amount was distributed to the University of Wyoming and seven Wyoming community colleges during the fiscal year. Total investment income earned on the account during the fiscal year amounted to $7,791,230 which exceeded the spending policy amount by $2,522,478. This amount flowed into the spending policy reserve account at the end of the fiscal year. This left a balance $6,413,822 in the reserve account which exceeded the cap on the reserve account by $2,462,257. The excess was transferred to corpus at the end of fiscal year 2013. The reserve account balance at the end of fiscal year 2013 was $3,951,564.

College savings program

Ms. Garland reviewed the college savings program, which was initiated by the Legislature in 2000. Legislation was passed during the 2006 legislative session (Senate File 0062, Chapter 46) which now allows, but does not require, the State Treasurer's Office to administer a 529 college savings program. At this time, Wyoming does not offer a state-sponsored 529 college savings program nor does it participate in any other state’s 529 plan. (Appendix 11).

Spending Policy Report

LSO staff reviewed the draft spending policy report. The Committee is required to report to the Legislature annually regarding recommended modifications to the annual spending policy amounts established in law at W.S. 9-4-719. The Committee voted unanimously to approve the draft report, with LSO directed to include that he Committee has no recommended changes to the spending policies for Permanent Wyoming Mineral Trust Fund, the Common School Account within the Permanent Land Fund or the Excellence in Higher Education Fund. (Appendix 12).

ADJOURNMENT

There being no further business, Vice-Chairman Perkins adjourned the meeting at 1:20 p.m.

Respectfully submitted,

Representative John Patton, Chairman

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Appendix Agenda Item Appendix Description Appendix Provider

1 Committee Sign-In Lists meeting attendees Legislative Service Sheet Office

2 Committee Meeting Provides an outline of the topics the Legislative Service Agenda Committee planned to address at Office meeting

3 FY 2013 investment Review of fiscal year earnings Michael Walden- report Newman, State Treasurer's Office

4 FY 2013 investment Review of fiscal year earnings and Michael Walden- report performance commentary by R.V. Newman, State Kuhns, investment manager Treasurer's Office

5 FY 2014 first quarter Review of FY 14 first quarter earnings Michael Walden- investment report and performance commentary by R.V. Newman State Kuhns, investment manager Treasurer's Office

6 Public purpose List of Wyoming investments Sharon Garland, Deputy investments Treasurer

7 Public purpose List of authorized public purpose Sharon Garland, Deputy investments investments with statutory citation Treasurer

8 Spending policy Spending policy modification Sharon Garland, Deputy modifications recommendations Treasurer

9 Hathaway scholarship Hathaway scholarship reserve account Sharon Garland, Deputy reserve account report and spreadsheet Treasurer

10 Excellence in higher Excellence in higher education reserve Sharon Garland, Deputy education endowment account report and spreadsheet Treasurer fund

11 Wyoming family college Report on Wyoming family college Sharon Garland, Deputy savings program savings program Treasurer

12 Spending policy Draft report on spending policy LSO modifications modifications