Legislature(2005 - 2006)HOUSE FINANCE 519

04/14/2005 01:30 PM FINANCE

Download Mp3. <- Right click and save file as

* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved CSHB 211(FIN) Out of Committee
Moved CSHB 103(FIN) Out of Committee
Moved CSHB 215(FIN) Out of Committee
<Bill Hearing Postponed>
Bills Previously Heard/Scheduled
Moved CSHB 169(FIN) Out of Committee
Bill Postponed To 4/15
Moved CSHB 27(FIN) Out of Committee
HOUSE BILL NO. 215                                                                                                            
     An Act  relating to  the investment responsibilities  of                                                                   
     the  Alaska  Permanent  Fund  Corporation;  relating  to                                                                   
     regulations  proposed  and   adopted  by  the  Board  of                                                                   
     Trustees  of the Alaska  Permanent Fund Corporation  and                                                                   
     providing procedures for  the adoption of regulations by                                                                   
     the board; and providing for an effective date.                                                                            
REPRESENTATIVE NORMAN ROKEBERG,  SPONSOR, noted that the bill                                                                   
was   brought   forward   by  the   Alaska   Permanent   Fund                                                                   
Corporation.    He stated  that  the  bill would  change  the                                                                   
current policy of statutorily  limiting the allocation of the                                                                   
agency's portfolio.                                                                                                             
Representative   Rokeberg  referenced   Amendment  #1,   #24-                                                                   
LS0698\A.1,  Cook, 4/1/405.   (Copy on  File).  He  requested                                                                   
consideration of the amendment,  which would provide that the                                                                   
Board of  Trustees could go  through the rule  adoption prior                                                                   
to  the  effective date  of  the  bill.   He  reiterated  his                                                                   
support of Amendment #1.  The  Board needs authority in order                                                                   
to be  able to  start drafting  regulations and would  happen                                                                   
with passage of the amendment.                                                                                                  
2:47:27 PM                                                                                                                    
Vice-Chair  Stoltze inquired  if the  amendment would  delete                                                                   
the  effective date.   Reprehensive  Rokeberg  said it  would                                                                   
change  the effective  date in  order to allow  for the  rule                                                                   
making authority to move forward.                                                                                               
MICHAEL  BURNS,  CHIEF EXECUTIVE  OFFICER,  ALASKA  PERMANENT                                                                   
FUND CORPORATION,  directed his comments to  the legislation.                                                                   
Initially,  the  fund  was  limited   to  a  bond  portfolio.                                                                   
Overtime,  the   Legislature  loosened  those   restrictions,                                                                   
creating  a statutory  list of permissible  investments.   He                                                                   
noted  that that  45 of  the 50  states  have eliminated  the                                                                   
statutory lists and now use the prudent investor rule.                                                                          
2:49:25 PM                                                                                                                    
Mr.  Burns  provided  a handout  "Reducing  Risk,  Increasing                                                                   
Return", and referenced  Page 4.  (Copy on File).   The chart                                                                   
indicates potential  risk and  return for various  portfolios                                                                   
under the  Fund's current  investment restrictions  and under                                                                   
the prudent investor rule.  The  underlying asset allocations                                                                   
for  the main  points  of the  chart are  shown.   The  chart                                                                   
demonstrates that  under the prudent investor  rule, the Fund                                                                   
could  potentially  earn  the  same  return  as  the  current                                                                   
portfolio with 3% less risk.                                                                                                    
2:52:03 PM                                                                                                                    
LAURA ACHEE,  ALASKA PERMANENT  FUND CORPORATION,  offered to                                                                   
answer questions of the Committee.                                                                                              
Representative Rokeberg requested  that Mr. Burns explain the                                                                   
impacts on  the fixed  income portfolio.   Mr. Burns  advised                                                                   
that in  a raising  rate environment,  the portfolio  is very                                                                   
vulnerable to price declines.                                                                                                   
Representative Rokeberg  added that as interest  rates go up,                                                                   
the principle  balance is actually  loosing money.   He asked                                                                   
how the bill allows managing that  risk.  Mr. Burns responded                                                                   
that  addressing the  value  of the  principle,  there are  a                                                                   
number of "tools" the Corporation might use:                                                                                    
   · Absolute return strategy;                                                                                                  
   · Various hedging; and                                                                                                       
   · Derivatives.                                                                                                               
Mr. Burns  mentioned "hard" assets.   There are a  variety of                                                                   
strategies and  combinations of  assets that can  protect the                                                                   
State against rising rates.                                                                                                     
2:54:54 PM                                                                                                                    
Representative Holm referenced  the prudent investor rule and                                                                   
asked how  it relates to the  current discussion.   Mr. Burns                                                                   
responded that  the prudent investor rule was  established in                                                                   
1994.   The  requirements  are  "not  to be  right",  instead                                                                   
encouraging a process involving questions and standards.                                                                        
Representative  Holm  asked  what  happens if  there  are  no                                                                   
standards.   Mr.  Burns replied  that  it is  the process  in                                                                   
place,  managing  oneself  and  measuring  the  risks.    The                                                                   
prudent investor  rule is about  the diligence placed  on the                                                                   
controls and  how the  fund operates.   He acknowledged  that                                                                   
was vague.                                                                                                                      
2:57:15 PM                                                                                                                    
Representative  Holm commented  that investing  is a  form of                                                                   
art.  He asked  how the Board determines if  the standards of                                                                   
the prudent  investor rule are  being met.  Mr.  Burns stated                                                                   
that the  Board has to measure  how things are  presented and                                                                   
follow-up on those concerns.   The prudent investor rule is a                                                                   
management  process tool  and a  way of doing  business.   He                                                                   
mentioned the legal components.                                                                                                 
3:01:11 PM                                                                                                                    
In response  to Representative  Holm,  Mr. Burns pointed  out                                                                   
the primary decision the Board  makes is determining what the                                                                   
asset  allocations  are  going to  be.    From there,  it  is                                                                   
determined who will  be responsible for implementing  it.  He                                                                   
agreed it is a "term of art".                                                                                                   
Representative  Holm   acknowledged  he  was   nervous  given                                                                   
concerns  managing the  Public  Employment Retirement  System                                                                   
(PERS) and the Teachers Retirement System (TRS).                                                                                
3:02:33 PM                                                                                                                    
Co-Chair  Meyer   asked  if   the  investment  strategy   was                                                                   
conservative.     Mr.   Burns   responded  it   was  a   very                                                                   
conservative managed  fund, consisting of a  balance of asset                                                                   
categories and styles for growth  and equity in the fund.  He                                                                   
emphasized that it is diversified.                                                                                              
Co-Chair Meyer asked if the investment  strategies would stay                                                                   
the  same through  passage  of the  legislation.   Mr.  Burns                                                                   
explained  that some of  the asset  categories would  replace                                                                   
some of the  fixed income categories, which  would remove the                                                                   
price  swing vulnerability.    The private  equity deals  are                                                                   
hopeful and that  the Board would like to expand  the private                                                                   
equity type investments.                                                                                                        
3:06:24 PM                                                                                                                    
Representative  Croft inquired the  expected return  in March                                                                   
2004.  Mr. Burns pointed out that  the historical status is a                                                                   
7.83%  return  of  the  picked   asset  mix.    The  standard                                                                   
deviation is  10.29%.   Representative Croft understood  that                                                                   
is an asset mix used to achieve those goals.                                                                                    
Representative  Croft  referenced  Page  5  of  the  handout,                                                                   
inquiring  about the regulatory  interest.   Mr. Burns  noted                                                                   
those are some category potentials.                                                                                             
Representative Croft asked that  with a little more risk, was                                                                   
it possible that the Fund could  receive higher returns.  Mr.                                                                   
Burns replied it  is such a small draw on the  fund, not like                                                                   
a pension  fund  and the  draw tends  to be around  5%.   The                                                                   
Board has the patience to stay in a fund for a longer term.                                                                     
Representative Croft  inquired about the  relative individual                                                                   
risk.  Mr. Burns responded that  the Permanent Fund functions                                                                   
as an endowment.                                                                                                                
3:10:22 PM                                                                                                                    
Mr.  Burns  spoke to  the  risk  factors and  return  levels.                                                                   
Representative  Croft  asked if  that was  addressed  through                                                                   
switching the  large cap equities.   Mr. Burns  said whatever                                                                   
the combination,  the intent is to accumulate  a portfolio of                                                                   
assets, where  performance is not connected to  each another.                                                                   
He pointed out that some private  equities do not always have                                                                   
a correlation to each another.   It is of no concern how each                                                                   
asset performs but  instead, how the portfolio  performs as a                                                                   
Representative  Rokeberg added that  the asset mix  can lower                                                                   
the risk.                                                                                                                       
3:13:30 PM                                                                                                                    
Representative  Weyhrauch noted  a  new section  of the  bill                                                                   
addressing  regulation adoption.   Mr.  Burns discussed  that                                                                   
the  constitutional amendment,  which  created the  Permanent                                                                   
Fund,  describes  assets  prescribed  by  law  and  that  the                                                                   
Legislature should  grant rule-making authority  to the Board                                                                   
of Trustees.                                                                                                                    
Vice-Chair Stoltze  inquired if  that could alter  the basket                                                                   
requirement  amount.   Mr. Burns responded  that at  present,                                                                   
the basket clause is at 10%.                                                                                                    
Vice-Chair Stoltze  inquired if there was a  statutory amount                                                                   
indicating a  specific dollar  figure.  Mr. Burns  reiterated                                                                   
it was  10%.   The overriding  principle will  always be  the                                                                   
prudent investment rule and one tenant is diversification.                                                                      
3:16:35 PM                                                                                                                    
Representative Croft read from  AS 37.13.121:  "Mortgages are                                                                   
capped at  15%, real  estate investment  capped at  15%, CD's                                                                   
and  other  investments  capped  at 20%;  domestic  and  non-                                                                   
domestic capped at 55%."                                                                                                        
Vice-Chair  Stoltze asked  if  the legislation  provides  for                                                                   
investing in the gas line proposal.   Mr. Burns said that the                                                                   
Permanent  Fund would  need specific  statutory authority  to                                                                   
invest in something  like that.  Vice Chair  Stoltze asked if                                                                   
the language  was broad enough  to allow  for it.   Mr. Burns                                                                   
thought it might be depending on the proposed amount.                                                                           
Representative  Weyhrauch   pointed  out  that   last  year's                                                                   
legislation had an amendment that  allowed the Permanent Fund                                                                   
to  specifically  invest  in the  gas  pipeline.  The  Senate                                                                   
Finance Committee stripped that clause out.                                                                                     
3:19:42 PM                                                                                                                    
Co-Chair  Chenault asked  if  the legislation  would  provide                                                                   
that  hedge  funds   be  used  and  the  1%   Permanent  Fund                                                                   
designation.  (Testimony inaudible).                                                                                            
Mr. Burns replied that a hedge  fund strategy could very well                                                                   
be a  part of  the legislation.   Hedge  funds can provide  a                                                                   
broad handle.   There is no percent at this  time on in-State                                                                   
investments.     The  Board  was  insulated   from  political                                                                   
pressure  last  session  by stripping  out  the  clause  that                                                                   
members  could  be  removed  for   "cause".    The  Board  is                                                                   
independent and members have a  four-year staggered term.  He                                                                   
pointed out  that the  Board would like  to do more  in-State                                                                   
3:22:06 PM                                                                                                                    
Representative Hawker  added comments toward  diversification                                                                   
as mandated by the prudent investor  rule and prohibiting the                                                                   
concentration  of  risk in  small  environments.   Mr.  Burns                                                                   
acknowledged it has been a challenge  attempting to invest in                                                                   
Alaska because  there are  only a few  projects in  the State                                                                   
large enough.                                                                                                                   
3:23:14 PM                                                                                                                    
Representative  Rokeberg  mentioned  investment  in  the  gas                                                                   
pipeline.    He  thought that  a  pipeline  investment  would                                                                   
provide a more fixed income portfolio.   He added it could be                                                                   
limited  by that investment  strategy.   Mr. Burns  mentioned                                                                   
the categories of the prudent investor rule:                                                                                    
   · Diversification,                                                                                                           
   · Concentration, and                                                                                                         
   · Determining if it is of an investment grade.                                                                               
Representative  Rokeberg maintained  that  the only  possible                                                                   
way to  use any funding above  the criteria would  be through                                                                   
passage  of the  proposed  legislation.   Mr.  Burns  thought                                                                   
that,  however,  the  process  could  be  addressed  such  as                                                                   
legislative intent and it would be appropriate.                                                                                 
3:26:02 PM                                                                                                                    
Representative Weyhrauch  interjected that if  the investment                                                                   
meets  the prudent  investment  rule, then  the State  should                                                                   
invest in it.                                                                                                                   
Representative  Croft pointed  out that he  could not  find a                                                                   
provision within statute that  would prevent investing in the                                                                   
pipeline.   He thought  investing would be  limited as  it is                                                                   
currently within the  5% market basket.  He  thought it could                                                                   
be difficult to justify under  the prudent investor rule, but                                                                   
saw  no   restrictions   in  what  could   be  done   through                                                                   
Mr.  Burns informed  members  that  the Trustees  take  their                                                                   
fiduciary role  seriously.  He believed that  the limitations                                                                   
of   the  prudent   investor   rule  could   limit   pipeline                                                                   
Representative  Kelly  stated  the  proposed  legislation  is                                                                   
important  and understood  it would take  the decisions  from                                                                   
the Legislature and place it with the qualified Board.                                                                          
3:29:42 PM                                                                                                                    
Representative  Hawker  MOVED  to ADOPT  Amendment  #1,  #24-                                                                   
LS0698\A.1,  Cook,  4/14/05.   (Copy  on File).    Vice-Chair                                                                   
Stoltze OBJECTED.                                                                                                               
Representative  Rokeberg explained  that Amendment  #1  was a                                                                   
housekeeping measure,  authorizing the Board to  proceed with                                                                   
the regulation  rule making it  prior to the  effective date.                                                                   
Vice-Chair Stoltze  WITHDREW his  OBJECTION.  There  being NO                                                                   
further OBJECTION, it was adopted.                                                                                              
Representative  Weyhrauch MOVED to  ADOPT Amendment  #2, Page                                                                   
3, Line 8, delete "mailing" and insert "providing".  Vice-                                                                      
Chair Stoltze OBJECTED.                                                                                                         
Representative  Weyhrauch  explained  that  current  language                                                                   
does not include  other options such as emailing  and faxing.                                                                   
The  amended  language  will   be  broader.    Representative                                                                   
Rokeberg supported  the change.  Vice-Chair  Stoltze WITHDREW                                                                   
his OBJECTION, Amendment #2 was adopted.                                                                                        
3:32:17 PM                                                                                                                    
Representative Foster MOVED to  REPORT CS HB 215 (FIN) out of                                                                   
Committee  with  individual  recommendations   and  with  the                                                                   
accompanying fiscal  note.  There being NO  OBJECTION, it was                                                                   
so ordered.                                                                                                                     
CS HB  215 (FIN)  was reported  out of  Committee with  a "no                                                                   
recommendation"  and   with  zero  note  #1   by  the  Alaska                                                                   
Permanent Fund Commission.                                                                                                      
3:32:45 PM                                                                                                                    

Document Name Date/Time Subjects