Legislature(1999 - 2000)
04/28/1999 08:30 AM House FIN
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* first hearing in first committee of referral
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HOUSE BILL NO. 156
"An Act relating to investments by the Alaska Permanent
Fund Corporation; and providing for an effective date."
REPRESENTATIVE GAIL PHILLIPS, sponsor spoke in support of HB
156.
The Legislative Budget and Audit Committee is charged
with oversight of the Alaska Permanent Fund
Corporation. Specific to this legislation, AS
24.20.151 reads "holding these agencies (lending or
investment entities) accountable to statutory intent in
their performance by recommending, where appropriate,
changes in policy to the agencies or changes in
legislation to the legislature".
On March 23, the Alaska Permanent Fund Corporation
presented this legislation to the Committee and the
members present agreed unanimously to introduce it,
without revision, in both bodies.
House Bill 156 modernizes the operations of AS
37.13.120, the statutes that set out the "legal list"
of permissible investments of Permanent Fund assets.
The revisions requested in this legislation are aimed
at providing increased investment flexibility, reduced
risk, and hopefully increased returns for the Permanent
Fund.
House Bill 156 allows the trustees to invest up to 5%
of Fund assets to: (1) make or retain greater asset
class commitments than currently allowed; and /or (2)
invest in individual securities or instruments that are
not expressly permitted. However, the legal list
approach is maintained and current asset allocations,
while modestly expanded, remain in place.
The first committee of referral, the House State
Affairs Committee, made one amendment to HB 156. On
page 6, line 20, the limit on owning domestic and
nondomestic entities was raised from 50% to 55%.
We think this is timely legislation - as the Finance
Committees begins to consider various fiscal plans-
making sure we are getting the highest, sustainable,
and safest returns from our assets currently entrusted
with the Permanent Fund is the first step.
I support this legislation as amended in State Affairs.
I ask that the House Finance Committee fully review the
impact of this amendment with Permanent Fund
Corporation Staff.
CLARK GRUENING, VICE CHAIR, ALASKA PERMANENT FUND BOARD,
JUNEAU testified in support of HB 156. The first deposit to
the permanent fund occurred in 1974. It was approximately
$734 thousand dollars. There was no structure other than an
interim bill, which only allowed the Treasury Division to
invest in government security bills. Since then legislators
have made pivotal decisions. The initial decision was made
to make the fund adhere to a prudent investor standard as
opposed to a development bank model. Legislators also
decided to add, on a voluntary basis, to the principle. The
principle is approximately $18 of the $25 million dollars in
the fund. Two-thirds of the principle was voluntarily
deposited by the legislature. Another key area of decision
has been the continuum of incremental and timely changes to
the permissive list. He gave a brief history of the Fund's
investment in the stock market. Many similar funds do not
have a long permissive list. They only have a pure prudent
investor approach. He noted that the Board questioned if
they should be guided only by the prudent investment
approach. They decided that it made sense to ask for modest
improvements.
JIM KELLY, LEGISLATIVE LIAISON, ALASKA PERMANENT FUND
CORPORATION, JUNEAU provided members with a handout (copy on
file). He stressed that the Corporation is asking to
modernize the statutes to be responsive to current market
opportunities and challenges. The requested change is
conservative and maintains the legal list approach. It
allows the fund managers to add incremental value and
improve the total portfolio risk management. The House State
Affairs version increased the equity allocation by 5 percent
to 55 percent. He discussed page 2 of the handout,
demonstrating the growth of the Fund. He noted that the Fund
has been able to take advantage of some of the returns the
stocks and higher risk assets have produced. It has earned
an average of 17.69 percent annually on every dollar.
Mr. Kelly observed that risk can be managed through
distribution of income. He estimated that an increase in
asset allocations to 60 percent in equities would have
earned a 31 percent return on stocks. The permanent fund
earned a 9.52 percent on bonds. This is a difference of $2
billion dollars. Mr. Kelly reviewed the distribution of the
Fund's investment. He stressed that time is a great
protector of assets. He referred to page 4 (chart 8) of the
handout. He emphasized that if there is an income
distribution policy that is stable and continuos then a
long-term investment policy can take advantage of returns
from a risk managed portfolio. He referred to page 7 of the
handout. He noted that a 48 percent investment in stocks
expects a return of 7.75 percent. If assets were invested in
an additional 5 percent of equities the rate of return would
increase to 7.94 percent. A ten-percent increase in equities
could result in an 8.13 percent return. This could be a
difference between $67 and $73 billion dollars over the next
20 years.
Co-Chair Therriault referred to page 7, lines 1 - 5 of CSHB
156 (STA). He asked for examples of other classes of
investments not specifically included in the list.
TERRY BROWN, CHIEF INVESTMENT OFFICER, ALASKA PERMANENT FUND
CORPORATION, JUNEAU explained that alternative investments
include private equity debt, oil or gas, agriculture, high
yield bonds, or adventure capital.
Co-Chair Therriault noted that outlined equities could be up
to 60 percent.
Vice-Chair Bunde noted that he is in general support of the
legislation. He questioned if there is a danger of over
investment. Mr. Brown did not think that there is a danger.
He pointed out that there would be a committee process to
outsource investments. Investments are not done directly.
Ordinarily there would be a manager responsible for
selecting and watching the asset.
Mr. Gruening maintained that the Board would be cautious.
Vice-Chair Bunde pointed out that Alaskan's confidence in
government is tied to the Permanent Fund. He stressed that a
bad market year would affect the public's confidence.
Mr. Kelly reiterated that 8.13 percent is the estimated
growth of the Fund for a portfolio that includes 58 percent
in equities.
Co-Chair Therriault referred to page 6, line 3. He noted
that "own" was changed to "acquire". He questioned why the
change is needed.
Mr. Gruening stated that "acquire" is a more operative word.
"Own" can change as the corporation buys its own stocks.
RON LORENSON, ATTORNEY, SIMPSON, TILLINGHAST, SORENSEN AND
LORENSEN LAW FIRM, JUNEAU explained that it is difficult for
the Corporation, through its managers, to keep track of the
status of a particular holding because more than one manager
may acquire the same stock. A situation could occur where a
corporation that has been invested in could buy and back and
retire some of its own shares, which would increase the
percentage of shares owned by the Permanent Fund
Corporation. This would require the Permanent Fund
Corporation to sell some of its shares to lower the
percentage it owns.
Co-Chair Therriault questioned if another problem is being
created. He pointed out that even if no more than 5 percent
was required at any one time the total acquired could be
greater.
Mr. Gruening observed that of the top ten investments the
actual ownership percentage is two-tenths of one percent.
Mr. Brown stressed that the top holdings are less than one
percent.
Representative Williams questioned if the Board is as
conservative as it was in its conception. Mr. Gruening
stated that the Fund's equity allocation is somewhere in the
middle. He stressed that the Board would not be rushing to
fill the extra 10 percent at this time.
Representative Williams questioned what tools exist to
assure that the Board does not move to high risk. Mr.
Gruening pointed out that the legislature has continuous
oversight and that the Board is audited. He observed that
higher equity allocations have great volatility. He
maintained that the Fund is not moving in that direction.
Co-Chair Mulder observed that the permanent fund is greater
than $26 billion dollars. He asked if there are any other
comparable funds that have as many restrictions. Mr.
Gruening stated that most funds that are of an equal size
are more aggressive. Mr. Brown agreed that most funds of
equal size are more aggressive. He characterized the Fund as
fairly conservative.
Co-Chair Mulder questioned if it would be a better course of
action to free the hands of the managers. Mr. Gruening
stated that it would be an alternative course of action. He
emphasized that public involvement makes such a change
unlikely. He noted that the legislature is involved in
setting the target rate of return and the resulting risk.
Co-Chair Mulder spoke in support of the legislation. He
observed that there are experts in place to manage the Fund.
He spoke in support of maximizing opportunities. Mr.
Gruening emphasized that the Board is concerned with risk.
Co-Chair Mulder stressed that the legislature has the
critical oversight.
Vice-Chair Bunde asked if the Corporation's website has a
high volume of hits. Mr. Kelly stated that it receives a
relatively small number of hits.
In response to a question by Vice-Chair Bunde, Mr. Lorenson
explained that a split in stocks would not affect the
percentage of ownership.
(Tape Change, HFC 99 - 111, Side 2)
Co-Chair Therriault observed that ownership is under one
percent for most holdings. He questioned if there is a
problem with approaching the 5 percent. He observed that the
new classification of (g)(21) was exempted from the 5
percent. He questioned why a long-standing policy was being
changed.
Mr. Brown explained that there are cases where they may own
more than 5 percent due to buy backs. He clarified that the
ownership in the company is not greater than 1 percent.
Co-Chair Therriault asked if there are companies that the
state owns close to 5 percent of the total stock.
MICHEAL BELL, INVESTMENT OFFICERS, ALASKA PERMANENT FUND
CORPORATION, JUNEAU stated that in large corporations
holdings approach a tenth to two-tenths of a percent. He
noted that in small company stocks there have only been one
or two cases where holdings have exceeded more than 1
percent.
Co-Chair Therriault reiterated his belief that the change is
not needed.
Mr. Gruening stated that the more important part of the
change is in relationship to the ownership of real estate
through a single corporation.
Co-Chair Therriault stated that he had not heard a
compelling reason to change the provision.
PETER NAOROZ, MANAGER, REAL ESTATE INVESTMENT, ALASKA
PERMANENT FUND CORPORATION explained that property is bought
and liability reduced by going through holding companies. He
stated that this is used to keep the Fund out of the chain
of title. Holding companies are used to reduce risk and
lower liability. He did not think that the 5 percent clause
was meant to apply to real estate title holding companies.
Co-Chair Therriault questioned if there is a way to clarify
the provision for the purpose of real estate.
Mr. Naoroz stated that they could live with "own".
Representatives Phillips pointed out that chart number six
should have been labeled "Opportunities Lost". She
emphasized the difference that an additional $770 million
dollars would have meant to the state.
Co-Chair Therriault asked the impact of deleted language on
page 4.
Mr. Lorenson explained that the deletion addresses the
limitations that had been placed on real estate buildings.
The language addresses limitations placed by the legislature
on real estate investments in the form of buildings. It
eliminates the restriction that prohibited the Alaska
Permanent Fund Corporation from owning more than 67 percent
of a building that is worth more than $150 million dollars.
The Corporation has found that co-investors have taken
advantage of the limitation in buy-out situations.
Corporation counsel recommended the change. The language
also removes limitations that prohibit the corporation from
buying raw land for the purpose of expanding an existing
property.
Co-Chair Therriault MOVED to delete "acquire" and insert
"own" on page 6, line 3. There being NO OBJECTION, it was so
ordered.
Mr. Kelly discussed the fiscal note. He noted that the
changes made in the House State Affairs Committee would
increase the potential earnings by twice the amount.
Vice-Chair Bunde MOVED to report CSHB 156 (STA) out of
Committee with the accompanying fiscal note. Representative
Grussendorf OBJECTED. He pointed out that there would be a
greater cost for the active management. He WITHDREW his
objection. Representative Williams OBJECTED. He stated that
he was not comfortable with the legislation. He expressed
concern that the investment be watched carefully and be
conservative. He WITHDREW his objection.
Co-Chair Therriault stressed that the earnings would not
have been as high if the legislature had not made changes.
There being NO OBJECTION, CSHB 156 (FIN) was moved from
Committee.
CSHB 156 (FIN) was REPORTED out of Committee with a "do
pass" recommendation and with a fiscal impact note by the
Department of Revenue.
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