Legislature(2019 - 2020)ADAMS ROOM 519
05/11/2019 09:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB139 | |
| HB87 | |
| SB74 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 139 | TELECONFERENCED | |
| + | SB 74 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 87 | TELECONFERENCED | |
HOUSE BILL NO. 139
"An Act providing an exemption from the state
procurement code for the acquisition of investment-
related services for assets managed by the Board of
Trustees of the Alaska Permanent Fund Corporation."
9:00:52 AM
REPRESENTATIVE JENNIFER JOHNSTON, SPONSOR, read from a
prepared statement to introduce the bill:
Thank you for your willingness to consider House Bill
139 this morning. House Bill 139 grants an additional
exemption to the state's procurement code to the
Alaska Permanent Fund Corporation (APFC) for the
purposes of evaluating and managing investments. The
types of investments this exemption would apply to are
often very profitable for our state. Under existing
law, the corporation exempt from the states
procurement code when it requires income producing
assets or delegates its investment authority. However,
they must comply with the state's procurement code
when evaluating and managing the assets in which they
invest. The change proposed in this bill would allow a
timeline that better aligns with the pace of the
market in which APFC works and would result in a more
streamlined process.
9:02:15 AM
Representative Sullivan-Leonard asked for an example of why
changing statute would be important for the Alaska
Permanent Fund Corporation (APFC). Vice-Chair Johnston
answered that the corporation was involved in private
equity investments. She indicated that without the
exemption, the cost of evaluating private equity was paid
to an investment manager that may charge more than the
state would thorough contracts with internal expertise.
ANGELA RODELL, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, agreed that there were numerous private
investments made by APFC that required subject matter
expertise or going through the procurement process to
directly invest. Currently, the corporation hired outside
managers to swiftly move the transaction forward. The bill
would streamline the process and reduce the costs that was
necessary to act on the types of investments.
Representative Sullivan-Leonard asked for verification that
there was a time element involved and by sidestepping the
procurement process the investments were quickly secured.
Ms. Rodell affirmed the statement.
Vice-Chair Ortiz asked how long APFC had been without the
exemption. He wondered if there was any downside to making
the adjustment. Ms. Rodell answered that they had begun
private equity investments in the 2008 to 2009 timeframe
and was a more recent development. Vice-Chair Ortiz asked
if there was any downside to allowing the change. Ms.
Rodell answered in the negative.
9:05:29 AM
Representative Knopp considered how the procurement code
applied to the work done by APFC. He deduced that the
exemption would allow the corporation to enter into short
term contracts with external fund managers. He asked how
the state's procurement code exemption related to sole
source contracts. Ms. Rodell responded that presently the
corporation was fully subject to state's procurement code,
apart from purchasing investments. She exemplified that the
corporation could expend $250 million to buy an office
building but it could not directly hire an engineer to
inspect the building without going through the state
procurement code. She detailed that the code had a timeline
for an open bid process that tended to be 14 to 21 days. In
addition, a committee to evaluate and score the bids along
with a 10-day notice of intent to award was required. The
notice time allowed for grievances by the bidding parties.
She explained that if a building was for sale that had a
30-day open period to complete the inspection the current
procurement process would miss the purchasing window. She
added that that the code included a limited process for
contracts that were less than $100,000, but in many cases
the subject matter requirements were in excess of that
amount, which did not make the limited process feasible for
APFC. Representative Knopp asked whether the APFC was
limited to investments up to $250 million. Ms. Rodell
answered the corporation was permitted to purchase any
investment of any size. Representative Knopp verified that
the exemption was for subject matter analysis with costs
exceeding $100,000. Ms. Rodell answered that the $100,000
limit had just been one example. She furthered that any
type of expertise; i.e. doctors or medical researchers for
a biotech investment - any expertise that was not the
acting fiduciary fund managers were the third-party
outsourcing referred to by Vice-Chair Johnston. She stated
that the exemption was an effort to allow direct
investments while eliminating fund manager fees and having
the expertise at the table to act within a timely manner.
Many investment purchases operated on a short timeframe of
up to 3 months. Representative Knopp asked whether the
investments operated under earnest agreements.
9:09:30 AM
Ms. Rodell replied that earnest agreement features were not
part of private investment transactions.
Co-Chair Wilson asked how much business the APFC had lost
because it lacked the exemption. Ms. Rodell replied that
the answer was difficult to quantify. She shared that APFC
looked at 6 to 10 investment opportunities each year that
required the process and had passed on roughly five to ten
investments each year. Co-Chair Wilson asked whether APFC
had passed on the investments because they did not have the
exemption or if other reasons applied. Ms. Rodell responded
that the reasons varied and when the corporation identified
the process as a problem, they hired a fund manager to
handle the process. Co-Chair Wilson understood that the
APFC could bypass the state's process, but it was more
costly without the exemption. Ms. Rodell replied in the
affirmative and confirmed that it was much more expensive.
Co-Chair Wilson asked for documentation showing the costs.
Ms. Rodell answered that the documentation was difficult to
provide but would comply. She explained that when APFC
sought investments through a fund manager, the manager was
entitled to a share of excess profit and a threshold of
performance was added to the contract. In the case of
excess profit over and above the expected return, the
excess was referred to as "carried interest." The fund was
entitled to a percentage; the industry standard was 20
percent of the excess profit went to the manager and 80
percent to APFC. The exemption would mean APFC captured all
the excess profit through direct investing. She accentuated
that the process made it difficult to quantify to costs.
The corporation had been attempting to make more direct
investments through internal managers. The bill did not ask
for a full procurement code exemption. The bill would
provide expanded authority when considering direct
investments allowing APFC to bring in expertise and return
more excess profit to the state. Co-Chair Wilson asked for
information on the process they used in the past five
years. She wanted to determine how often APFC had to use
the outside process Ms. Rodell just described. Ms. Rodell
agreed to follow up.
9:13:02 AM
Representative Carpenter deduced that the corporation could
do what it wanted to do; it just took longer. Ms. Rodell
affirmed. Representative Carpenter asked whether there was
a higher risk involved in doing things in a shorter time
period. Ms. Rodell answered that when APFC conducted due
diligence on an investment the window was open for a
specific time period - typically 30 to 45 days. The state
procurement code did not enable APFC to act within the
timeframe. She detailed that in terms of risk, the ability
to hire subject matter experts within 10 days and work
closely with them for 30 days versus relying on outside
investors created a different risk profile. There were
risks to both processes, but the effort was to provide more
comfort in the due diligence process, not increase risk.
Representative Josephson construed that APFC paid a fee for
an expert through an investment manager and subsequently
paid them a share of the profits from a successful
investment. He asked for verification. Ms. Rodell responded
affirmatively. She recapped the process she had explained
earlier. Representative Josephson restated his question
whether the manager profited from Alaska's investments. Ms.
Rodell responded in the affirmative. She furthered that the
investment manager acted as the fiduciary and needed to
evaluate the investment and access risk for their
investors. The investor was at risk and did not serve their
interests to "rubber stamp" an investment.
9:17:16 AM
Representative Josephson gave an example of APFC wanting to
purchase a building in Manhattan. He asked whether what the
corporation paid for the investment was a matter of public
record. Ms. Rodell answered in the affirmative and added
that all the expenses associated with investments were
reported quarterly. Representative Josephson asked whether
the process could be taken advantage of. He hypothesized a
situation where the state had always hired the same
architect in Denver. Ms. Rodell thought it was a fair
question. She believed that it was necessary for the
corporation to continue to maintain an internal process
that scrutinized and distributed contracts. The corporation
used a number of outside consultants to weigh in and ensure
a procedure "passed the smell test." She elaborated that
the performance of the funds portfolio was an indicator of
the quality of the due diligence undertaken by APFC. She
expected that the investments would perform well.
Representative LeBon thought the discussion was "mixing
apples and oranges." He elaborated that the issue was about
the global market for venture capital investments and
working with a fund manager to invest in a business. Ms.
Rodell answered that all the issues encompassed in the
entire discussion were relevant and included his example as
well as an engineer evaluation of a building and a market
assessment to sell "widgets in Europe." Representative
LeBon asked for verification that APFC would still have the
fiduciary responsibility to perform diligence and was not
trying to shortcut the process. Ms. Rodell replied in the
affirmative. Representative LeBon surmised that the
corporation was attempting to build a base of expertise in
order to make many types of investments and was seeking the
flexibility to call on the experts quickly in a timeline
that fit the opportunity to make the investment and respond
to market opportunities. He asked whether his statement was
"fair." Ms. Rodell agreed with his summation.
Co-Chair Wilson asked whether it mattered if there was an
in-house versus external manager. Ms. Rodell replied that
if APFC undertook the process they had to operate through
the procurement process versus when the corporation hired
an external manager and invested in a fund the transaction
was exempt from the procurement process. Co-Chair Wilson
asked whether the arrangement was exclusive to buildings.
Ms. Rodell reiterated that the process was for any type of
investment.
9:22:44 AM
Co-Chair Foster believed a similar bill had been before the
legislature in the past. He asked if there were any
negatives that they should be aware of. Ms. Rodell answered
that the prior bill provided a full procurement exemption
like the full exemptions allowed the ARM Board, Alaska
Housing Finance Corporation (AHFC), AIDA, and all other
quasi-agencies like APFC. She elaborated that the current
bill was a compromise and had been developed by the
corporation at the request of the trustees. The change was
a priority of the board. She did not see any negative
aspects to the bill and ideally would prefer a full
exemption. Co-Chair Foster surmised that the answer to the
concern was a more targeted procurement exemption. Ms.
Rodell affirmed.
Representative Carpenter did not want to defend a
procurement process that exceeded 50 days, but he did not
know the process. He asked what parts of the process would
be omitted by the exemption.
Co-Chair Wilson interjected that she was trying to
understand if the overall procurement system was broken.
She felt that it was not the problem of APFC if the whole
system was broken.
9:25:41 AM
Ms. Rodell answered that the state procurement code was in
place to purchase everything state government needed to
operate - from pencils to furniture and all other items.
She observed that the code was written more for commodity
acquisitions than services. The code was designed to give
comfort to the public that a competitive process was in
place. In APFC's case, the code caused the corporation to
pay more for services because they were forced to use an
alternative method for necessary investment related
services. She believed the balance point had to be weighed.
She could not speak to the procurement code and how it
worked for other departments like the Department of
Transportation and Public Facilities (DOT). The board
wanted the corporation in charge of the decision making
process to more align with the fund's investment goals. The
exemption offered an opportunity for APFC to create more
value for the state. She offered that 4 years ago the fund
totaled $52 billion and was currently $66 billion after a
$2.7 billion transfer in FY 19 to the states Treasury. The
corporation took its stewardship seriously and looked for
ways to save costs. She believed that the exemption
provided the tools for APFC to tap into expertise that was
not needed daily and reduced the investment costs thereby,
increasing returns.
9:28:55 AM
Representative Carpenter needed more clarity on what parts
of the process would be eliminated by the exemption. He
thought the person in charge of the procurement process was
better suited to answer the question. He was concerned
there was an "unwieldy" procurement process but did not
favor providing exemptions when the process was
challenging. He felt that the procurement code served a
purpose. He determined that the process needed to be fixed
or improved but was not a justification to make exemptions
from the process. He concluded that without understanding
the process that was being exempted he was unable to
support the legislation.
Co-Chair Wilson noted that the committee could hear from
the Department of Administration (DOA) at a future hearing.
Co-Chair Foster referenced Representative Carpenter's
concern. He suggested a chart illustrating how the
procurement process works.
Ms. Rodell referenced a document provided in members'
packets [titled "APFC Legislative Initiative: Procurement
Streamlining"] (copy on file). She communicated that the
timeframe information was included in a chart format. She
pointed to the timeline information with and without the
procurement code process.
Co-Chair Wilson interjected to reference the document. She
asked Ms. Rodell to speak to what was eliminated via the
exemption. Ms. Rodell responded that the 21 day notice, and
the 10 day protest period would be eliminated. Co-Chair
Wilson asked what would happen if the protest period was
removed. She deemed that the ability to protest a contract
award would be eliminated.
9:33:03 AM
Ms. Rodell confirmed her conclusion. She maintained that
the idea of the exemption was to enable the corporation to
hire a subject matter expert without much bidding. She
delineated that the contracts would not be sole source
contracts but were considered limited source contracts.
Very few individuals had the expertise for much of the
subject matter. Co-Chair Wilson reiterated her concern that
if someone disagreed with the process there would be no
period for protest. She suggested shortening the protest
period.
Vice-Chair Johnston noted that the bill requested a degree
of flexibility. She referenced private equity investment
and the speed at which the market was operating at present.
She pointed to Silicon Valley and the biomedical field as
examples. She observed that in order for APFC to get in on
the "ground floor" of some of the investments without a
fund manager "it was necessary to be good and somewhat
flexible." She provided a historical example of a
biomedical fund investment that had done well for the
Permanent Fund (PF) and the investment manager. The
corporation invested directly before the company went
public on the stock market and garnered large profits for
the state but also the fund manager. The APFC was starting
to get sophisticated enough to do some of the work itself
that would involve hiring a small group of market analysts.
The question to the committee was whether they wanted to
stay with the status quo and be dependent on fund managers
and make less on the investment by following the
procurement code. Alternatively, did they want a process
for APFC to hire someone with strong expertise and bring
the corporation to the private equity table. She asked Ms.
Rodell how often the option would be used annually.
9:37:30 AM
Ms. Rodell answered the fund would use the option
approximately 10 to 12 times per year. She reported that
APFC was spending $1.2 billion or so on private equity
investments per year and guessed the answer based on the
calculation.
Co-Chair Wilson believed that the committee's due diligence
required determining whether the timeframe in the bill was
accurate. She thought everyone wanted the fund to have the
ability to purchase investments but maintained her concern
over relinquishing "checks and balances" that were in
place.
Representative Knopp shared that prior exemptions from the
procurement code with the Department of Corrections (DOC)
and the recent sole source contract issues with the new
administration created concerns over procurement code
exemptions. He wanted to understand the implications. He
remarked that managing assets and acquiring them were two
separate processes. He wondered whether external fund
managers had the discretion to acquire assets or if the
decision was made initially through the APFC board. He
asked who performed the due diligence. Ms. Rodell answered
that external fund managers conducted their own due
diligence. Representative Knopp deduced that the exemption
would apply to investments by APFC and their internal
management. Ms. Rodell replied affirmatively.
Representative LeBon surmised that a venture capital firm
would already have performed its own due diligence before
offering an opportunity to a potential client. Ms. Rodell
agreed with the statement.
9:41:37 AM
Representative LeBon communicated that a venture capital
firm valued its offering and divided the amount into shares
that were purchased by a group of investors. He asked
whether his statement was correct. Ms. Rodell answered in
the affirmative. Representative LeBon stated that when the
opportunities were offered time was of the essence. He
stated that if a ninety day window of opportunity was
offered the bill would be unnecessary. Ms. Rodell affirmed
his conclusion. Representative LeBon stated that the
investor set the clock. Ms. Rodell agreed with the
statement. Representative LeBon was attempting to "frame
the discussion" and pointed out the need for the
legislation.
Representative Josephson noted that there were 50 existing
exemptions to the procurement code. The bill would create
the fifty-first exemption. He asked how to avoid any sort
of long-term "coziness" between the contractor and APFC.
Ms. Rodell answered that if the corporation was fortunate
to get the exemption the process would be imbedded in the
investment policy process that was reviewed frequently by
the APFC board. There was a regular review trustees
conducted on performance and existing investment manager
relationships. The boards reporting requirements extended
to the public. She reassured the committee there would be a
process in place with the intent to avoid "coziness."
9:45:08 AM
Representative Josephson emphasized that along with APFC's
ability to be nimble and act quickly the corporation would
retain more of the profit that currently went to fund
managers. He deduced that the exemption was about
increasing profit for the state. He asked for more
information regarding the increased profitability under the
exemption. Ms. Rodell replied that APFC would report the
size of the investment manager fees in total at its
upcoming board meeting. She detailed that currently, the
carried interest profit sharing piece was in excess of $100
million. The asset class was approximately $9 billion at
present and had returns of almost 33 percent in FY 18. The
entirety of the fund was not invested in the asset class
because it was too high risk and illiquid. She furthered
that the goal was a balanced asset portfolio and the
current discussion included roughly 12 percent of the fund.
When the fees were paid, APFC received 80 percent, but the
corporation would like to capture more of the lucrative
returns. She explained that the method to capture more of
the lucrative returns was to "reduce the levels" - either
directly or through a fund. The corporation had used a fund
called a "fund to funds." The fund to funds encompassed
hiring a fund to choose the funds for APFC that chose the
underlying investments or portfolio companies. The
corporation initially employed the fund to fund method, but
over time APFC had gotten rid of most of the fund to fund
categories to reduce expenses and was additionally
considering how to reduce reliance on fund managers and
allow the corporation to examine portfolio opportunities
and invest more directly. The bill would provide a resource
to engage in the process more directly.
Co-Chair Wilson wondered how the legislature would know
whether the exemption was the wrong way to go. She
trusted Ms. Rodell but inquired how the legislature could
judge whether reinstating the "extra parameters" embedded
in the procurement code was necessary if the exemption was
unsuccessful.
9:49:39 AM
Ms. Rodell answered that she would judge success in the
return metric. She explained that APFC determined its
returns by measuring itself against a passive benchmark; as
if a computer was choosing the investments, and a
performance benchmark that indicated how the active
managers were performing. The two benchmarks indicated how
well the internal staff was performing over and above the
external managers. She added that market influences created
poor performance and the benchmarks eliminated the "market
noise" from the performance to understand where investment
selection was driving value to the fund. She noted that
each asset class had its own performance benchmark that
assessed whether the fund was consistently underperforming.
If the corporation was awarding too much to one contract
that lead to bad investments it would be reflected in the
numbers on a quarterly basis.
Representative Sullivan-Leonard stated her support of the
bill.
9:51:40 AM
Representative Carpenter asked about the value of the
investment decision procurement example on the left side of
the table on page 2 of the APFC document that illustrated
the review process. He noted the inclusion of a Proposal
Evaluation Committee (PEC) under the existing procurement
process and felt that it was indicative a good review
process. He observed that good management of public funds
was not adversarial to flexibility for the corporation. He
wondered whether a partial exemption "may be at odds with
good management." He suggested the committee examine why
the procurement process was necessary and answer the
question of what exactly was going to be exempt.
Co-Chair Wilson noted that an employee from the procurement
office at DOA would address the committee at a future
meeting. She thought it would be interesting to find out
why the procurement steps were initially implemented.
Representative Josephson asked what value came from the RFP
(Request for Proposals) process. He wondered how the
corporation was guided to "names that were predictable" to
the corporation. Ms. Rodell replied that the corporation
had a network of people it interacted with that held a
variety of expertise for the different types of
investments. For example, if APFC was looking to invest in
an Australian infrastructure project it would probably call
for recommendations on expertise from the managers of the
two Australian sovereign wealth funds that APFC invested in
and had experience with. The RFP process would "make it
difficult" to proceed in the manner she just described.
9:55:11 AM
Representative LeBon indicated that the opportunity costs
that were lost if the corporation never had the chance to
follow up on an investment were difficult to measure. Ms.
Rodell agreed with the statement. Representative LeBon
suspected the procurement process had been written before
the inception of APFC. He asked how many other agencies had
asked for the same modification from the procurement
process. He suspected the answer was very few or none. Ms.
Rodell replied that the Alaska Retirement Management Board
(ARMB) was completely exempt from the state procurement
code.
Co-Chair Wilson OPENED public testimony.
9:56:25 AM
MIKE COONS, ASSOCIATION OF MATURE AMERICAN CITIZENS (AMAC),
PALMER (via teleconference), opposed the legislation. He
recounted Ms. Rodells testimony that previous requests for
the exemption was not granted. He stated that his faith in
the Permanent Fund process was extremely low. He thought
once the current Permanent Fund issues were taken care of
and the trust of the public had been regained perhaps, he
could support the bill.
Co-Chair Wilson asked if Mr. Coons would be sending a
letter in from AMAC. Mr. Coons replied that he would try.
Co-Chair Wilson asked what AMAC stood for. Mr. Coons
answered that it stood for the Association of Mature
American Citizens. Co-Chair Wilson asked if he was speaking
on his own behalf or the organization. Mr. Coons indicated
that he was speaking on behalf of the chapter and agreed to
send a letter.
10:00:50 AM
HERMAN MORGAN, SELF, ANIAK (via teleconference), did not
support the bill. He did not trust the legislature. He did
not support using money from the Permanent Fund for a
gasline. He thought the legislature needed to listen to the
people of Alaska.
Co-Chair Wilson clarified that the bill was about
procurement and not the dividend.
Co-Chair Wilson CLOSED public testimony.
Ms. Rodell reviewed the zero fiscal note from the
Department of Revenue, APFC. She believed the legislation
would not increase costs.
Co-Chair Wilson asked if the Department of Administration
would have to write any regulations related to the
proposal. Ms. Rodell answered in the negative.
Co-Chair Wilson noted the bill would be heard again.
HB 139 was HEARD and HELD in committee for further
consideration.