On August 29 the Sunset Advisory Commission heard testimony related to several issues including the Permanent School Fund (PSF) at the General Land Office (GLO). This report covers public testimony provided by George P. Bush answers to Sen. Watson’s questions regarding the Permanent School Fund & Tom Maynard and David Bradley of the State Board of Education (SBOE) and members of the Permanent School Fund committee.
This report is intended to give you an overview and highlight of the discussions on the various topics the committee took up. It is not a verbatim transcript of the hearing but is based upon what was audible or understandable to the observer and the desire to get details out as quickly as possible with few errors or omissions.
Time stamp 4:47:45 http://tlcsenate.granicus.com/MediaPlayer.php?view_id=44&clip_id=13533
George P. Bush, Commission of General Land Office answers Sen. Watson’s questions
- Watson – School Land Board (SLB) has a different investment structure than SBOE, SLB seems to be reliant on a single investment professional, why do you only have one?
- Bush – Style of investing is different from SBOE, they can only invest in certain assets, goes into further details on how they manage and the process they have in place
- Watson – refers to the separation of funds in 2001 between the School Land Board and the SBOE, asked if there is a good policy reason to keep these funds separate? Why should the PSF be managed by two separate entities?
- Bush – thinks each should be evaluated by which one gets a higher return and they have gotten a higher return, based on their track record they should stand alone, refers to competition
- Watson – why is release less for 2021 when market value for portfolio has increased?
- Bush – under existing law not required to release capital, the body can make that decision
- Watson – you can release to both ASF and SBOE? SBOE has typically puts the funds into the ASF
- Correct
- Watson – HB 1551 didn’t dictate the procedure, just dedicated you start a procedure so asked what about your new procedure has caused you to release less?
- Under law capped with $300 million distribution, when they deliberated they were capped at $600 million to ASF but staff brought forward an algorithm to determine options on who to release to SBOE
- Watson – understand they could release up to $655 million but they only did $600 million, so there was still $55 million they could release but choose not to release anything correct?
- They can re-invest in their portfolio to gain an even higher return
- Watson – can you show me a year where the General Land Board has chosen not to do any release
- GLO staff -that is correct this is the first year they have
- Staff – release sent last biennium was a result of Howard’s bill and it was $490 million and it was made in August of 2016 and the decision to release to the ASF was a much later decision
- Watson – In 2016 put in almost $500 million all to the SBOE but at the end of session and trying to balance a budget there was $300 million made available to the ASF
- GLO Staff – that is correct
- Watson – This time there is $0 dollars, even under the new procedures of having $55 million available, they still put $0 to SBOE which could have been used in the ASF and that has never happened since this separation has occurred
- GLO staff – that is correct
- Watson – from your prospective as a chief investment officer how often you interact with the investment group Townsend
- GLO staff – reviews interaction
- Watson – how many assets classes, real assets and money
- GLO staff – one asset class and it is real asset and at some time it is liquid/cash
- GLO staff – reviews assets and commitments
- Watson – is 100% of your assets committed, are you being provided with sufficient tools
- GLO staff – committed amounts are based on the amounts coming in
- GLO staff – would like to talk to him about this more, what makes issue complicated is that they don’t know when or how the assets will be called and would not suggest they would want to invest in anything other than a fixed income portfolio
- Watson – Poses three questions/issues: 1)in regards to investment and return on investment need to think: what is policy reason we have our portfolio separated and how do we get a return on investment in having it separated into two entities & 2) should explore how they do their investment, are we squeezing every dollar we can safely to get that return for the school children & 3) how they make decisions on putting money in certain places
- Nevirez – asked for clarification on key theme/point
- Watson – uses ESF/RDF as a metaphor and said an amount should be established that will be invested and expected returns, suggesting use this opportunity to make a recommendation to look at what was done to the Comptroller’s office, that might mean more money to the ASF
- Flynn – said this is the same type of discussions having on retirement ERS/TRS and wants to be part of that summit Watson is discussing
David Bradley, SBOE (5:48:48 time stamp)
- Compelled to be present by actions taken last week when they found out they would not receive new income, no new inflows into the PSF – first time in over 164 years
- This decision would have a significant impact both short term and long term
- Since 2001 with new Commissioners there have been changes, for example in 2002 they received less funding than previously, and it has diminished
- GLO wanted to be real estate manager but the SBOE respectfully declined so the SBOE and GLO have mirror programs, identical in size and both working to be fully invested
- The GLO brings in almost $1 billion a year in cash, believes cash flow is available and does not think there needs to be $3.4 billion in cash to fund a cash call
Tom Maynard, SBOE
- For many years SBOE was the investment group and have done that since 1854, changes in 2001 raises concern on redundancy and being duplicative and sees about $1.2 billion left on the table if those funds had been invested by the SBOE
- Try to make a distribution while growing the fund and achieve intergenerational equity
- Challenge when they don’t receive a distribution form the school land board is that it puts SBOE behind
- Points out not all instructional materials adoption are the same, two large adoptions coming up and making a cut to the SBOE ahead of a large allotment is problematic and may require the state to dip into general fund to even it out
Questions to Panel
- Watson – asked land board about differences between the biennium’s and was told they now have a new procedure, but even using that would provide $55 million to SBOE even though no money is being sent, what would you do with that allocation?
- Maynard – send it over to the legislature to appropriate to school system
- Watson – money coming from land board would flow into your investment fund?
- Bradley – would put funding into asset allocation and redistribute it based on targeted allocations, 6-7% is interest rate they get in coming year
- Watson – do you have limitation on asset allocations?
- Bradly – no
- Watson – any indication why GLO has not made an allocation this cycle?
- Bradley – No responses to numerous invitations
- Watson – is there a policy reason to keep these funds divided?
- Bradley – No sir, there is a $1.2 billion loss by allowing another manager into the program
- Maynard – also impacts bond guarantees
- Watson – if the legislature wanted to see a big asset class in real estate?
- Bradley – right now using two duplicative funds, have a 10% asset allocation for real estate so that number is chosen based upon prudent decision of how much to have in that asset
- Watson – PSF of $41 billion and of that $3.3 billion is in real assets in subfund A and $5.3 in subfund B – are we over allocated in real assets by having two funds?
- Watson – this is a time to evaluate how we got here and again states there have been over a billion of dollars we have overallocated in real assets