Senate Finance, 3/23/26, 1:30pm

name a few.

The cash management team is experienced in working with the state's reserves to ensure we have sufficient cash balances to pay our bills.

On slide seven, we have detailed why we have revenue and expenditure uncertainty.

Unrestricted general fund revenue comes from two main sources,

as you heard last week,

oil revenue and investment earnings.

Oil is a commodity and it's quite volatile, both in terms of price and quantity.

The revenue from the permanent fund investments is much less volatile due to the percent of market value formula that provides certainty in the current and next year.

Further, because investments are providing a greater share of unrestricted general fund revenue, we have a bit more certainty with revenues, at least in the short term.

While expenditures are generally planned, there can be uncertainty in terms of amounts and timing. And these fall into a couple of categories. For example, most federal programs require expenditures to be made before reimbursement from the feds. So there's always money going out the door before it comes in. Also, there tends to be larger appropriations at the beginning of every fiscal year, so funds need to be available for those.

Slide eight defines cash flow deficiencies and revenue shortfalls, and how we deal with them. Over time, as more and more sub-funds were created, the general fund proper had less money to pay our bills, resulting in the need to monitor our cash balance even more closely. Cash flow deficiencies are common and can be addressed by managing the timing of receipts and payments.

There is a memorandum of understanding or M_O_U_ between the Departments of Revenue, Administration, uh the Office of Management and Budget, and law that outlines the steps that we follow shown on the shown on the right half of the slide. These are taken if we anticipate a cash deficiency, and currently that's defined as uh forecasted cash dipping below four hundred million dollars for five days. This is remedied by taking or borrowing from the earnings reserve

reserve, or the budget reserves.

The MOU also covers the process for revenue shortfalls, which differ from cash flow timing differences deficiencies.

A revenue shortfall occurs when revenue is insufficient to cover general fund appropriations in any given fiscal year.

The legislature has historically included language to appropriate budget reserve funds for revenue shortfalls,

and Treasury has relied on this appropriation to authorize use of budget reserve funds to address

Address both revenues and shortfal falls, both revenue shortfalls, excuse me, and cash flow timing mismatches in the past.

Mr. Chairman.

Senator Steadman.

Mr. Chairman.

Senator Keel.

Thank you, Mr. Chairman. On the cash flow deficiency borrowing

that was the $400 million level set in '94 when that memo was written, or has that been adjusted since?

Through the Chair Senor Achille. I cannot remember what it was in nineteen ninety four, but it has been set at four hundred million for quite a long time, certainly since the

I think 2014 was the one that I know for a fact it's been 400 million.

And essentially what it is, it's a limit of the maximum of all cash outflows that could really collide on a given day to make sure that we have enough money just in the general fund proper to pay those bills.

We have had instances of it going down below 400 million,

but not.

Many as we look at our forecast, which you'll see on the next page,

because we're looking to see as cash moves in and out on a daily basis what the forecast looks like. And if we start to see it's going to start dipping below four hundred million,

we adjust our cash. We call cash from whatever reserves we have on hand, whether it's the Earnings Reserve Fund or CBR.

SBR.

Senator Keel.

Thank you, Mr. Chair. I guess the question really goes to, I mean certainly in the 90s the $400 million was a much bigger chunk of operating budget than it is today.

2014 the Delta may not be nearly so big.

Is it a sufficient cushion for you,

for Treasury to do what you need to do and be absolutely sure the checks don't bounce?

Through the chair, Senator Keel,

it is right now, and we have been averaging at a higher balance just due to negotiations with or discussions with APFC in terms of how frequently and how even we're taking money from them. It's worked out really well over the last couple of years.

So we've been above the $400 million balance just due to the timing of transfers.

So I feel on a higher level there's been much discussion at this table about what the what an adequate number would be in the constitutional budget reserve for state security.

In the past there's been 10 million billion five billion.

Does the Department of Revenue have any

comment upon what that might be.

Chair Hoffman, I do not. We have seen balances of varying sizes described as sufficient.

I will say that the Pew Institute has done an analysis of rainy day funds across many,

many states and our current balance of $2.9 billion has been, well, was in 2024,

I believe,

the second highest.

balance in terms of what states have in order to cover their expenses in their operating budgets.

So in terms of

How our CBR fares compared to other states? Currently 2.9 seems to be at kind of at the top. I think Wyoming is just higher though, because it

But unlike

by law.

Unlike other states, we have a very volatile situation with our revenue.

We have the draw from the POMV,

which is pretty predictable, but we still have a big gap between that and what our general operations are. So it may be high compared to other states, but because of our volatility, it may not be high enough. Please continue.

Thank you. On to slide nine.

cash management and action.

This shows forecasted and actual cash for the first half of this fiscal year. It's updated daily after cash management works with the departments, analyses all anticipated payments and incoming revenue and any changes they expect to the forecast. For example, if the tax department knows its oil revenue forecast is going to change, they alert us so we can update our cash forecasts as soon as they know.

Another example is when there was a decision to pay a few years back the dividends earlier than what was planned.

So sometimes we are anticipating funds that don't or won't be coming in.

And in situations like that, like for example the federal government announced it was going to shut down certain payments, making sure that we have enough cash to forecast a good period of time to pay for things is important for us to do.

do.

And so the cash management team has to be responsive and able to readily react to any of those situations that arise.

And now that the Earnings Reserve Account is our primary tool in addressing cash deficits at the start of each year,

as I said, we create an expected draw schedule from the Earnings Reserve Account with APFC based on our forecasts and we seek to maximize the amount of money in the Earnings Reserve while maintaining a sufficient balance and to make sure that we don't go below our forecast.

our four hundred million dollar threshold. Again, we've increased the number of draws to provide greater flexibility and known liquidity needs over the years. And we have made sixty draws in twenty twenty five totalling twenty six billion dollars over the last eight years. And we've only had to revise our schedules a couple of times per year due to unknown circumstances.

The last item on this slide highlights the integration of our cash and investment teams. Every day based on the forecast and planned cash flows, cash management projects cash expected to be available for investments and works with the portfolio team to ensure that all of the expected funds are fully invested. So with that if there are no further questions I think I will turn it over to C-I-O Anna to discuss the treasury investment process.

And perform.

Great. Thank you very much. For the record, I am Zach Hanna, Chief Investment Officer for the Treasury.

Returns are, would be very strong.

Okay, could

Let's take a break.

I'd like that.

Yes, sir.

Senator Hoffman, I think it's, you know, when we have really good results, we should talk about it and we always get problems here, you know, they don't come to see the Senate Finance Committee because things are going good.

There's something going on,

or they're asking for money and in this case we've got very good performance, we've got a very good program statewide and we should let people know how successful it is.

Senator

Kiel.

Senator Steadman.

Well I was just going to say it just doesn't happen by happenstance, it happens because we have

folks like it sitting at the end of this table that work all day long trying to ensure that there's performance and people are taken care of.

Just doesn't happen like an apple falling out of a tree.

Thank you, Senator Stedman. Senator Kiel.

Thank you, Mr. Chairman. I'll echo Senator Stedman's applause for the dedicated team and the work they do.

The results are pretty impressive.

Mr.

Hannah,

we're looking back 15 years.

I think there's a lot of value in taking a long-term look, but of the last 15 years,

we've been in a pretty remarkable situation. How many of the last 15 years have been bear market years instead of bull?

Mr. Hanna?

So through the chair,

Senator Kiel,

I'd have to get back to you on that exact number.

It's a low number.

I mean, this is certainly a very strong period of time for equity performance.

The number 15 years wasn't chosen randomly. We didn't cherry pick that number.

That is, you know, that is effectively the life of the DCR systems.

And that's the, there's actually a 16 year number.

but the numbers are very similar to what you see here.

That's as long as we have really data, you know, to calculate some of these returns. But your point, I think, is a well taken one.

This is an extraordinary period from a cumulative perspective in terms of equity performance or in terms of capital market performance.

And so these returns are in excess of what was expected, you know, prior to experiencing this period.

and likely are higher than someone should expect moving forward over long periods of time.

Senator Kiel?

Thank you, Mr. Chairman, and I appreciate that because I think that's important.

think, and you'll know better than I do, I think the first year of the last 15 was a bear market year and then six or seven weeks in 2020.

Yep

Otherwise it's all been on a great tear and thank goodness.

I think we all benefit.

The question that follows from that then is resilience to the next downturn because there's always going to be one.

And can you provide a little sort of comparison or sense of...

Where we are in terms of the various things with with resistance to I guess with the chance to minimize loss as opposed to take a fat loss.

So through the chair, Senator Keele, and so resilience is a great question and it's one that we think about differently for defined contribution than we do for defined benefit and a lot of it has to do with cash flows and asset liability matching and participant behavior at some level and so on the defined benefit side

With strong cash outflows, that again,

when I talk about a 5% kind of average outflow at this point in time,

that's a hard dollar 5%. That's really a dollar figure that in a significant market downturn, that 4% or 5% becomes 7% or 8% pretty quickly.

And so you have to have a portfolio that can accommodate those cash flows and can still

remain, you know, remain

You know remain with its strategic kind of risk exposure to generate returns over time And so that really mandates a lower risk posture And you know and we have some additional diversification in the DB systems as well with those alternative investments That help provide some of that ballast

That's that we believe is necessary to accommodate those cash flows on an annual basis You have a much different situation in the defined contribution

landscape and it has everything to do with those you know cash cash outflow expectations and the time horizon that participants have to compound returns and so you know the the the target date funds are modestly less diversified than the DB systems they don't have some of these more exotic asset classes for a variety of reasons that we could talk about but they don't have them and so those are

volatility reducers that in isolation are quite useful.

um

Mm-hmm.

but are less necessary on the defined contribution um from a defined contribution standpoint since you have such incredibly long compounding periods um with no cash outflows um and and you have participant behaviour um really working um to benefit participants over time in that these default options are incredibly sticky um you know we've there's been observations at the table about the stable value fund and the balanced funds

funds. Why are there such large balances in those now?

When it appears that target date funds are really kind of a better option,

and that is that participant behavior and the stickiness of those investment options at work.

The same thing is expected to accrue to the target date fund participants over time in a downturn.

And so the front end, if we, you know, if you look at that glide path chart,

the front end of these target date funds is very heavily invested.

invested in equities, you know, 90% plus equity exposure early in a participant's

career because they have such a long time horizon and are not likely to trade out of that fund over the short term through a small market downturn.

And so you have that long compounding period and the fact that from a forward expectation standpoint you expect the high volatility of equities to decay over time and ultimately those returns to accrue to beneficiaries.

and them not really to feel the exposure of that volatility of the high expected volatility that occurs at the front end of that glide path.

And as you can kind of see, that glide path does go down pretty materially as you enter kind of that retirement phase and down quite a bit as you move through retirement to reduce that volatility and be more responsive to the expected cash outflows.

was um at that time once once participants are in retirement.

Does that answer your question?

Thank you, Mr. Chairman. It's helpful. It does contain some assumptions about participant behavior that aren't always true. The conservative allocations are very sticky through a downturn because you hear about the market dropping 20% and yours only dropped 10.

The risky allocations tend to drive panic behavior in individuals rather than professional investors. So that's a trade off. Thank you.

Thank you, Senator Kiel.

Thank you for the

accolades that Senator Steadman and Senator Kiel have given the department.

I'd like to say that the power cost equalization is fine and doing well in its new home at the Permanent Fund Corporation,

and I would say that it's thriving.

Just for your information.

Any closing comments?

No, we certainly appreciate everybody's time.

Thank you.

Any final comments or questions from Finance members?

None.

That concludes this afternoon's meeting. Our next meeting is scheduled for tomorrow morning at 9:00 AM. We have five items on the calendar for tomorrow morning. Senate Bill 164, Eliminate Tax Discounts. SJR 29, Constitutional Amendment for Education Fund.

SB 170 Gaming Electronic Pull Tabs, SB 167 Crime Overtures Receipt Pass EFD, Senate Bill 130 Fisheries Product Development Tax Credit.

With that we are adjourned.