Legislature(1997 - 1998)
03/04/1998 01:10 PM House JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HJR 50 - PERMANENT FUND PUBLIC CORPORATION [Contains discussion of HB 81.] Number 0373 CHAIRMAN GREEN announced the next item of business would be HJR 50, proposing amendments to the Constitution of the State of Alaska relating to a public corporation established to manage the permanent fund. Number 0391 PATRICK LOUNSBURY, Legislative Secretary to Representative Jeannette James, Alaska State Legislature, came before the committee to present HJR 50 and the corresponding legislation, HB 81. He explained that HJR 50 more clearly defines the permanent fund board's role inside of the constitution. He explained it also changes the standard for removing the members of the permanent fund. Currently, members serve at the pleasure of the governor. Mr. Lounsbury explained that when Governor Hickel was elected, he replaced the entire permanent fund board. The present Administration replaced everybody except for one member. He stated that he posed the question of whether HJR 50 would be good public policy to one of Governor Hickel's personal aides and he stated it was and that he would be forwarding a letter. Mr. Lounsbury noted in the committee file there is a letter from Mr. John Kelsey, who was the member retained by Governor Knowles, in support of the legislation. Mr. Lounsbury explained that HJR 50 allows the members of the board to be involved in the legislative confirmation process. He stated that would allow another layer of accountability to the board for the citizens of Alaska. MR. LOUNSBURY referred to HB 81, which is the enabling legislation if HJR 50 passes at the next general election. He stated HB 81 is "An Act relating to the members of the board and staff of the Alaska Permanent Fund Corporation." Section 1 increases the board from six members to seven members and the governor would be allowed to appoint an extra public member at his discretion. MR. LOUNSBURY explained that Section 2 requires that at least one member would have confidence and experience in investment portfolio management. Section 3 is a technical change to conform to the increase in the number of public members and that two members would expire in the same year. He pointed out that this provision, over time, would allow the governor to stack the deck in his favor which would allow the board to run with his philosophy of government which was a concern to some members of the committee at the previous hearing. MR. LOUNSBURY explained Section 4 allows the governor to removes the trustees for cause. He explained that in the bill the word "cause" is defined with incompetency, misfeasance or malfeasance in office. He noted it could be fine-tuned if the committee wished. Mr. Lounsbury said it could also include inefficiency, neglect of duty or misconduct in office. MR. LOUNSBURY referred to Section 5 and said it requires that the governor base his decision to appoint new member solely on the best financial interest of the fund, otherwise it is an ethical violation. Number 0595 MR. LOUNSBURY explained Section 6 provides that an executive director serve at the pleasure of the board for a two-year period. MR. LOUNSBURY informed the committee that Section 7 requires that the members have a fiduciary duty to the fund. That runs in concert with the concept of the removal for cause. If a board member breaks a fiduciary, that, in a sense, is a basis for removal. Number 0630 REPRESENTATIVE BUNDE referred to HB 81, Section 4(2), and pointed out that it says, "fails to exercise prudent judgement." He said, "You (indisc.) General Electric and it goes down and we lose money. Is that a failure to exercise prudent judgement?" MR. LOUNSBURY responded that he doesn't believe that the members of the fund would be responsible for market fluctuations. REPRESENTATIVE BUNDE asked Mr. Lounsbury to give an example of failure to exercise prudent judgement or intentionally taking actions that aren't in the best financial interest. MR. LOUNSBURY referred to the tobacco industry and said during tobacco tax debate the previous session, a question was raised in that if it was prudent to invest in tobacco companies even though some people view them as not very nice corporations. He explained that the Alaska Permanent Fund Corporation had invested about $67 million on tobacco stocks and they were rising which was good for the fund. Mr. Lounsbury referred to exercising prudent judgement and said he doesn't feel he is qualified to answer. Number 0727 REPRESENTATIVE BUNDE asked if the section was added to prevent trustees from making investments based on a philosophical or political stand rather than financial judgement. MR. LOUNSBURY responded, "That could be a reading. Another one would be to take any - like ... personal ramifications out of it as well. They go through a full disclosure method instead of investing the fund which might affect his personal portfolio." REPRESENTATIVE BUNDE said, "Intentionally taking actions for other than financial best interest of the corporation, and using tobacco as an example, ... then someone would be guilty of misfeasance, at least, if they recommended that we divest ourselves of tobacco because they're the evil empire even though they're making money." MR. LOUNSBURY responded that his isn't sure if that was the intent of the bill drafter. He noted the definition could be changed. Number 0813 CHAIRMAN GREEN said, "And I would think that if you were going to deviate from essentially secured stocks - I don't mean secured, but blue chip type and go into penny stocks that are extremely high risk with maybe 30, 40 percent of the - 50 percent that you're allowed to do that with, that to me would indicate this sort of thing. It's in the eye of the beholder, I'm sure, but I think there is a pretty easy determination if that's your concern." REPRESENTATIVE BUNDE stated it is for prudent judgement. He referred to the wording, "for intentionally taking action for reasons other than the financial best interest", and said to him that says that they would not be able to make philosophical statements. They must only invest for the best financial return. Number 0855 REPRESENTATIVE ROKEBERG said, "The use of the word 'prudent' and in prudent investment rule, as speculated in the existing statute in the bill, is based on the prudent-man rule concept, which is defined in case law and so forth, and has their standards of prudent investment. And I think the bill indicates that if you have a misfeasance or malfeasance if you reach that prudent judgement relating to the prudent-man rule. And I think what this concept we're talking about is called social investing or socially insensitive type of investments about whether or not you invest in tobacco companies or something that an individual may object to in terms of philosophy. And I think Representative Bunde's comment just a moment ago about the -- lines 18, 19 and 20 is correct because a basis of a prudent judgement for investment has nothing to do with social polities. Therefore, it would be imprudent on the list if you were to not make a judgement like on the investment return versus the policy. However, you can articulate a policy, under certain circumstances, to allow that. That's not what this means. As a matter of fact, there is ... circulating in the halls of this building right know, the Uniform Prudent-Investor Act bill, which has been adopted by a number of other states, will clarify this situation (indisc.). So if that clarify that...". REPRESENTATIVE BERKOWITZ stated prudent investment can and should include social considerations. That is the new evolution of what it means. He stated that it is not all about financial best interest. Representative Berkowitz said it has been done for a long time in this country. The movement began when we divested stocks that we were investing in South Africa and that was done consistently with the prudent-investor rule. We accepted the idea that we could do things with a social purpose. He noted that the Alaska Housing Finance Corporation (AHFC) is allowed to do investments in what many might consider high-risk customers. That is probably not financially the best thing to do, but there is a social purpose to it. Representative Berkowitz pointed out that prudent-investor is a new evolving concept and the committee should be aware of that. Number 1015 MR. LOUNSBURY explained that Section 3 allows the governor, with it's staggered term provisions, to appoint one commissioner and one head of agency. Within those four years of the governor's term, he would appoint four new members. There would be six out seven, hand picked by him, to deal with the philosophical prudent investing. REPRESENTATIVE PORTER said he would think that the exercise of prudent judgement (indisc.) with some specific definition would just not be appropriate in that particular definition. He stated that malfeasance and misfeasance has got a substantial background in case law and most people can figure out what malfeasance and misfeasance are. He said he doesn't believe there is a need to go any further than that unless it's by policy decision. He indicated his likes the wording, "intentionally taking action for reasons other than the financial best interest of the corporation." That is policy and he would support that. Representative Porter noted he doesn't like the wording, "exercise prudent judgement," and he is concerned about what unintentional way of performing duties is in relation to (indisc.). He said he could think of some unintentional actions that wouldn't (indisc.). Number 1130 REPRESENTATIVE JAMES said Section 7 is currently existing law. She read, "The prudent-investor rule shall be applied by the board in the management and investment of fund assets. The prudent-investor rule as applied to investments of the fund means that, in making investments, the board shall exercise the judgement and care under the circumstances then prevailing that an institutional investor of ordinary prudence, discretion, and intelligence exercise in the management of large investments entrusted to it not in regard to speculation but in regard to the permanent disposition of funds, considering probable safety of capital as well as probable income." Representative James pointed out that it is clear the existing law that this is not changing anything. She stated she believes the argument is frivolous. REPRESENTATIVE BERKOWITZ said the definition is a fine definition he accepts it and endorses it, but said there will be a collision between it and "best financial interest." He said that is why, for the sake of consistency, the committee should choose "prudent- investor" throughout the bill. Number 1181 REPRESENTATIVE ROKEBERG said he takes strong exception to Representative Berkowitz. He said he would assure the committee that it's generally accepted in Wall Street and in most other businesses centers of the world. Representative Rokeberg stated that he agrees with Representative Porter that merely underlines that and he doesn't find anything inconsistent in from what he believes would be case law interpretation of prudent-man rule standards and what that is. Representative Rokeberg referred to Section 3, line 6, and asked why two members expire rather than one. MR. LOUNSBURY pointed out that is to conform to the increase of public members. He said the board is also being increased from six members to seven. REPRESENTATIVE ROKEBERG said there are four members and asked why they couldn't be staggered for one-year terms. He said it provides for continuity. Number 1320 REPRESENTATIVE BUNDE referred to Section 4 and asked, "Would unintentional regard - someone who might end up with a mental disability, but is still filling a space, but unable to perform their duties. Is that what that is getting to?" MR. LOUNSBURY said he believes it is a legal definition. Number 1350 REPRESENTATIVE CROFT said he can appreciate why the committee is looking at HB 81 which is to give more of an idea of what the committee is doing with HJR 50, which is actually before the committee. Representative Croft said having a theoretical debate about the prudent-investor rule, which is not before the committee doesn't seem to be productive to him. REPRESENTATIVE BUNDE said before he moves forward on the resolution he wanted to have an idea as to how the resolution would be applied. He made a motion to move HJR 50 out of committee with the attached fiscal note of $3,000. There being no objection, HJR 50 moved out of the House Judiciary Committee.
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