Legislature(1993 - 1994)
03/08/1994 03:00 PM House HES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 234 - UNIVERSITY OF AK ENDOWMENT TRUST FUND TAPE 94-40, SIDE B Number 000 REP. JOHN DAVIES, Prime Sponsor of HB 234, addressed his bill. He stated that the legislation would transfer the management of the University of Alaska endowment trust fund from the Department of Revenue to the University. He said Governor Hickel has charged the University "with managing the ranch." He said the University seeks to have the authority to meet that responsibility. He said, "I would note that the Department of Revenue has said that perhaps the comparisons here are apples and oranges. Being an educational institution, the University chooses apples." Number 051 CHAIR BUNDE called on Brian Rogers for further testimony. Number 053 BRIAN ROGERS, Vice-President for Finance, University of Alaska, testified in support of HB 234. He stated that the bill would increase the University's control over its endowment revenues and potentially increase income to the University. He said the trust fund was established prior to statehood as a trust fund tied to the University's land activities. The net income from the development of the land is placed in the trust fund and the University has access to the revenues annually. He said that as of June 30, 1993, there was a total of $21 million in the trust and expected there to be $26 million by this year end. MR. ROGERS asserted that the concern regarding management by the Department of Revenue was in the area of investment performance. He said the Department does a "spectacular job" of managing fixed income investments; however, their equity funds have lagged significantly. He said there are no international investment opportunities. He indicated that after reviewing the last five years, it was felt that if the University had managed the portfolio under the asset allocation that the Foundation uses, as opposed to the asset allocation the Department uses, the difference would be about $300,000 per year. He said the legislation was introduced by the five members of the University Budget Subcommittee of the House Finance Committee. MR. ROGERS further stated that he had performance comparison numbers comparing the state's and the University's management plans. He said the University may still want to have the state manage portions of the fixed income investment because they have done such a good job. But, he felt that further diversification makes more sense. Number 145 CHAIR BUNDE asked if the University would be at a greater risk managing the money as it would be looking for a greater return. MR. ROGERS explained that because of the kind of diversification the University has been able to do, the risk levels are not being exceeded, while the return levels are being exceeded. He attributed the success to the choice of superior managers that have been in the top 14% in the country for the last five years. He said their fees are lower than comparable commercial managers because they are set up as a nonprofit organization. Number 194 CHAIR BUNDE referred to the zero fiscal note from the University and said there must be a cost for managing the funds. He asked, if additional funds are added to what is already being managed, would there be an additional cost. MR. ROGERS said that there would be a cost, but it would be netted against the investment results. Investment fees are deducted from the net that is received. He said it would be additional income, but the amount could not be predicted. He said he was surprised to see that it would actually cost the Department of Revenue more not to manage the funds. CHAIR BUNDE asked what percentage it costs to manage the funds. Number 223 MR. ROGERS stated that it ranged from 20 to 50 basis points depending on the type of investment. "The state's at 20% on average on theirs. I believe we pay them $52,000... it was last year for managing our funds." CHAIR BUNDE requested testimony from Laraine Derr. Number 230 LARAINE DERR, Deputy Commissioner, Treasury, Department of Revenue, testified in opposition to HB 234. She stated that the Department of Revenue believes that it makes more sense for funds to be in one place. When there are more funds to manage the costs are less expensive. She said it cost the Department about 20 basis points to manage the funds. She explained that 100 basis points is 1%, indicating that the Department charges the University 200ths of a percent to manage the funds which is "as inexpensive as you can get anywhere." MS. DERR stated that in a performance measurement report that she received that week, the fund surpassed $26.7 million in December. She said the Department's strength is in fixed management and the fund earned $2.2 million from September 30, 1993, to December 31, 1994. She further stated that the asset allocation in the Department for the trust fund is relatively risk free at 82% in fixed income and only 8% in domestic equity. She explained that the Department met with the University in December and indicated that if the Department kept the funds and the funds were maintained in the treasury, the Department would be interested in working with an asset allocation. She said it was true that the funds could be further diversified between fixed income and domestic equities. Number 326 CHAIR BUNDE asked Ms. Derr to speak to the fiscal note. MS. DERR said there are no custodial fees because they are "netted out." She said, "In their case, when they're not using state people to manage the funds, they can take them out of fees. We essentially charge them, but it would reduce the earnings. It's portions of people time... monitoring and investing managing the money." CHAIR BUNDE said, "But, you really wouldn't be doing the work. So would you still be losing the income?" MS. DERR said, "The people are still there, so I have to pay their salaries. Right now the fund is charged 22.5 thousand to manage the funds. If the funds go away, I've still got the people there because it's like... 10% of this person's time and 3% of this person's time and counting the assets and investing the fund. It's part of $3 billion in one part and $6 billion in another part that's invested, so it's very minuscule." Number 359 REP. TOOHEY said she was a little nervous and said it would be like changing stock brokers. She asked Ms. Derr if the fund would be in jeopardy if given over to the University. MS. DERR said no. REP. TOOHEY asked if the Department's primary concern is only to be in charge of the fund. MS. DERR said yes. MR. ROGERS said the University managers offer other diversification and better equity management. Number 394 REP. TOOHEY asked what happens if the University takes over the fund and loses money. She asked if the fund would be transferred back to the Department of Revenue. MR. ROGERS said long term relationships must be stressed and that it is not wise to jump from one management team to another. REP. BRICE said, "If University is paying that 22.5 out of its earnings, the $26 million... that wouldn't be considered straight general fund. That should probably be considered program receipts." MS. DERR said the Department of Revenue pays the University interest on the fund quarterly and then they are billed annually for the $22,500. She said the University may take it out of the earnings and interest that the Department is paying them. She stated that the trust account is split amongst several people, and she would not be able to lay off a half-time person. She said, "I would have to pick up the 22.5. I can't lay off a half-time person." Number 460 REP. BRICE asked where the $22,500 was going to as it was not reflected anywhere else in the fiscal notes. MS. DERR said, "...and what Mr. Rogers said was that they would pick it up. But they wouldn't be using University people to manage it. They wouldn't be paying somebody in house. They would be paying an external manager. So, they could net fees on the entire thing, and so it would be just a different form of management." REP. BRICE said it sounds like it is all within the same system. Number 480 REP. VEZEY stated that the Department invests in fixed income and the University invests in equity which has fluctuating principle values. He said there would be higher return potential with the equity investment, but there would be a substantially higher risk involved. MR. DERR said if the University invested all the funds in domestic equity, and the Department invested it all in fixed income, there would certainly be a difference in risk return. REP. TOOHEY asked if the University managers are going to be "willy-nilly" investors. She said the Department has a proven track record. MS. DERR said that the assets are primarily in fixed income investments and indicated that it is relatively risk free. Number 518 REP. BRICE suggested that the business students at UAF could do a great job at managing the funds. REP. G. DAVIS asked Mr. Rogers to explain the comparison of earnings rates that is supplied in the bill packet. Number 525 MR. ROGERS stated that both the state and the University get performance evaluations that are conducted by the state. He indicated that he also had results from an evaluation that ended June 30, 1993, whereby the University endowment fund earned 14.17% under state management. The University of Alaska Foundation Funds earned 16.1% over the same period. He said in 1993 the state earned 14.3% under fixed income versus the University at 13.2% and the Department out- performed the University's fixed income manager. He further stated that the state earned 13.63% on the equity fund and the University earned 24.90%. Number 564 REP. G. DAVIS asked if 1988 was the first year of comparison. MR. ROGERS said yes. REP. DAVIES maintained that the risk is relative to the nature of the particular investment and that most investments would be over a long period of time, thereby reducing the risk. MR. ROGERS noted that Mr. Rassmussen, Chair of the University Investment Committee, has helped to set the guidelines for asset allocation. He further stated that the University's asset allocation does not normally exceed 50% in equities at any given point in time. Approximately 25% of University equity investments will be foreign equities, and approximately 20% of bond investments will be outside the United States. He said the University is taking a very cautious approach to nontraditional investments. MS. DERR asserted that the majority of funds in the Department are diversified in similar ratios to that of the University. She indicated that the Department just recently received returns on the retirement fund that put them in the top seventh and eighth percentile in the United States for fund investments. Number 632 CHAIR BUNDE asked Ms. Derr what the percentage of return was for the Department last year. MS. DERR said 14.3% for the entire funds. CHAIR BUNDE asked what the total percentage of return was for the University's portion. MS. DERR answered 11.5%. CHAIR BUNDE asked for further discussion. MR. ROGERS stated that the Department of Revenue has been paying more attention to the fund since last year when they became aware that the University wanted to take over the management of funds. CHAIR BUNDE interjected and indicated that Rep. B. Davis was leaving for another meeting and for the record welcomed her back to Juneau. MR. ROGERS further stated that it appears that competition does have advantages. Number 669 CHAIR BUNDE said he endorsed competition amongst the three branches of the University. REP. BRICE made a motion to move HB 234 out of committee. CHAIR BUNDE indicated that public testimony had not been closed. He asked for further testimony. Hearing none, he closed public testimony and asked for discussion from the committee. REP. BRICE made a motion to pass HB 234 out of committee with individual recommendations and accompanying fiscal note. REP. VEZEY objected. Number 682 CHAIR BUNDE called for the vote. Representatives Bunde, G. Davis, Nicholia, Brice, and Toohey voted Yea and Rep. Vezey voted Nay. Chair Bunde declared that HB 234 was so moved. Seeing no further business before the committee, CHAIR BUNDE ADJOURNED the meeting at 4:12 p.m
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