Legislature(1995 - 1996)
04/17/1996 03:10 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 345 - PENSION INVESTMENT BOARD PROCUREMENTS Number 536 CHAIRMAN KOTT announced the committee would hear HB 345, "An Act relating to the procurement of investment and brokerage services by the Alaska State Pension Investment Board." The bill has been heard before and there were some concerns. Chairman Kott said there is a proposed committee substitute. Number 563 REPRESENTATIVE SANDERS made a motion to adopt the proposed committee substitute for CSHB 345(L&C), Version K, Bannister, dated 4/10/96. CHAIRMAN KOTT asked if there was an objection. REPRESENTATIVE NORMAN ROKEBERG objected. He said the 7 percent figure is still included in the bill and he objected to the original bill and will object to the committee substitute. Representative Rokeberg said he sees no reason to conduct further deliberations on the bill. CHAIRMAN KOTT indicated the committee is addressing Version K and the 7 percent figure has been omitted. REPRESENTATIVE ROKEBERG indicated he was looking at the wrong bill. He removed his objection. CHAIRMAN KOTT said Version K was before the committee. Number 624 GEORGE DOZIER, Legislative Assistant to Representative Pete Kott, came before the committee to explain the difference between the State Affairs Committee version of the bill and the proposed committee substitute. He explained the bill, as the Labor and Commerce Committee received it, directed the board to increase brokerage in investment services to the level of 7 percent in the state of Alaska utilizing state of Alaska businesses. Unless the board made a written finding that it was unable to meet this goal because there weren't sufficient individuals present in the state of Alaska with the requisite competency levels. Mr. Dozier said at the last hearing on the bill there was also a committee substitute that was before the committee which was not adopted. It went a little further by adding a subparagraph 11 which required the board to invest funds in the state of Alaska under certain conditions. There was a considerable amount of testimony by individuals who felt that this bill would undermine the fiscal integrity of the trust corpus. Accordingly, a committee substitute, which the committee members currently have before them, was generated. The new committee substitute directs the board to utilize investment and brokerage services in the state of Alaska, but only if the business can provide services without materially sacrificing the level of competency that is available or without materially increasing the cost of utilizing that particular service. It defines an in-state business as a business that is located in the state of Alaska and where the majority of its employees are located in the state of Alaska. MR. DOZIER explained the committee substitute goes further in that it directs the board to invest funds in state of Alaska investments, but only to the extent that these investments would have a risk level that is comparable to or more beneficial to the other beneficiaries of the trust as alternative investments that could be made. He pointed out this would only be to the extent that the in-state investments would have an anticipated yield that is as favorable to or more favorable than other alternative investments that could be made. He said that concludes his presentation. Number 764 REPRESENTATIVE ELTON asked if there is currently anything that stops the state from using an in-state brokerage or investment house if the yields are going to be greater. MR. DOZIER said he couldn't say for certain, but he believes that there is currently nothing in statute that would prevent that. Number 789 JOHN WALSH, Legislative Assistant to Representative Richard Foster, came before the committee. He said he has reviewed the committee substitute that is currently before the committee and has no objections to the changes made. REPRESENTATIVE KUBINA questioned the reason for the bill. He asked if a problem has been identified where the investment board is not investing at all in the state. MR. WALSH said he thinks of it more as more of an opportunity. This is an incentive to take a closer look at investment potential and investment services in the state. He said the tendency, which is understandable, is to go to professional services in some of the larger financial communities such as Chicago, New York, San Francisco and Seattle. While that is understandable in that the professional community and financial markets are there, he said it is less likely that they would look at investments in the state. It is going to be less likely that they package investments to be considered given that they reside out of state. Mr. Walsh said this is not uncommon in pension trusts throughout the nation, yet they have economically targeted investment motive to the pension fund or requirement. There has been testimony from the union in Alaska. This is clearly a requirement in their union trusts. Mr. Walsh said Section 11 is current law in the Alaska permanent fund investment fund, so it isn't unreasonable that it be included in the bill. He said he feels there are opportunities for establishing or utilizing brokerage services in Alaska. Given the age of communication and telecommunications, it is not unreasonable to begin the search for the use of local services and local investments. It is an opportunity to enhance the economy and circulate the money more than it currently is. Mr. Walsh said there is no interest in diminishing the integrity of the funds or unduly compromising the fiduciary responsibilities of the board. Number 923 REPRESENTATIVE KUBINA asked if Section 10 is also in the permanent fund requirements. MR. WALSH said not to his knowledge. REPRESENTATIVE ELTON asked what the meaning is of "without materially sacrificing competency or performance." MR. WALSH said he thinks the intent is, as he understands it, is to avoid what was characterized as a quota system in the 7 percent previous language. He said they didn't want to force the board to meet a minimum test, the 7 percent test, at the expense of signing on to less than competent or less than professional services. He said he thinks it more accurately defines the intent of the legislature. In other words, use it where possible, but don't diminish in any way what you'd normally require. Mr. Walsh said, "That keep you from having to do a quota test - 7 percent of transactions to - you know - looking at proposals before you from Alaskan firms unless otherwise incompetent you would consider using them." Number 1014 REPRESENTATIVE ELTON said in Section 10 it says, "In-state business means a business that is located in this state if the majority of individuals in the business to participate in providing the services to the board or locally in-state...." He said he would read that where Smith Barney could do that if the people who were providing were Smith Barney employees in Juneau or Fairbanks. You would be talking about local firms, but would be talking about national firms. MR. WALSH said he couldn't comment as the integrity of particular individuals and particular firms because Representative Foster's intent. The board defines requirements for the investment. He said he doesn't think they're going to diminish the investment grade just because the transaction is done in-state. If it is done in-state, the likelihood that local investments may be packaged or offered should increase. Mr. Walsh said he believes there are people waiting to testify via teleconference. He referred to Mr. Rose and said he understands that he is a capable investment counselor that could offer these types of services. Mr. Walsh said he doesn't think it is unreasonable to expect down the road that we develop this in-state with the Pacific Rim being the potential client base. This is something that could help anchor financial services in Alaska. Hong Kong has a deadline on its life expectancy with respect to free market operations. It is uncertain at any rate. To encourage this in Alaska is an opportunity that should be seriously looked at. Number 1204 REPRESENTATIVE PORTER referred to the competency language and said most of the businesses have data available on their return on investments and the (indisc.) costs that they take off the top. He commented that is the bottom line of competency. He said he would read it as saying that if that difference is too severe, they wouldn't have to buy into it. Representative Porter said he understands the concern about these kinds of these things, but he finds it interesting that the president of the state AFL-CIO said that their trust funds have these kinds of requirements and they like it fine. Number 1279 REPRESENTATIVE SANDERS said he doesn't understand what the bill accomplishes. He said there is nothing keeping these funds from currently doing these things. We're not telling them they have to do it, it is a suggestion. He asked Mr. Walsh what is being accomplished. MR. WALSH said, "It is possible for them to use these services now. It may be the power of suggestion through statute that helps them-- it--we can't give a bidders preference as you do in vendor services when the state procures computers or different capital needs. We can offer a preference because all parties would be offering the same specifications, a computer with such and such specs. So given that we're gonna get the same equipment, it is reasonable that we can give a preference that does business in Alaska. Professional services don't exactly have that same spec that we're not sure at the end what we will get. In other words, there is variability and so we can't offer, according to Legal, a bidders preference in an RFP package. So the next best thing is sort of incentive without, again, transgressing that fiduciary responsibility in the obligation, which none of us want to do. So I guess it's between moral persuasion an requirement. And we think that as the governor is working different political campaigns for marketing Alaska, we think this is a similar type of local business, persuasion, and we think it should yield, over time, results that help keep the classrooms full which, therefore, employs a teacher, helps keep our community wholesome. And I think, personally, that it helps root a financial community that I think is prime in a global market where it doesn't matter that you're commuting daily to Chicago or New York. You can do it tele-commuting and I think we're wise to suggest that - it is a (indisc.) industry and Anchorage is clearly a hub with this kind of necessary soil, in other words, to grow such crops and I think this is the beginning of our sophistication in the marketplace and I think it's a reasonable challenge for all of us to suggest and to encourage." Number 1433 REPRESENTATIVE ROKEBERG referred to page 3, line 3, "without materially increasing the cost to the board," and asked him to comment on the word "materially." MR. WALSH explained there is a fiscal note attached to the legislation from the Department of Revenue. It is their position that by slowing down the transactions, in other words, by going to a retail outlet or by backing away from block transaction, we could increase the transaction costs. He said "materially" may be a given, but we don't want to go any further than we have to in support of a local hire provision. Number 1485 REPRESENTATIVE ROKEBERG referred to line 13 and said Mr. Walsh mentioned that subsection 11 was similar to language in the permanent fund investment statute. He referred to there being a reference to (2) of this subsection, "are consistent with the investment policies established by the board under (2) of this subsection," and said (2) of this subsection says is the board will establish policies to make investments." Representative Rokeberg then referred wording on page 2, (2) "establish investment policies for the funds for which it is responsible after reviewing recommendations from the investment advisory council and the Department of Revenue." He asked if the permanent fund statute has a similar clause. MR. WALSH said he would check on the permanent fund language. He noted the reference to subsection (2) is unique to this bill because it is a certain statute which is referenced that is not in a permanent fund statute. He said it is arguable that they could have amended Section 2 to say the same thing, but other than the reference to Section 2, the language is identical to the permanent fund language. Mr. Walsh noted they have spoke to Mr. Mallott, Executive Director of the permanent fund and he indicated his is clearly pursuing that persuasion in his statute and is working with the local investment community. He said he is very interested and is looking forward to possibly packaging something with the community to the board for consideration. Number 1780 REPRESENTATIVE MASEK asked Mr. Walsh if he could respond regarding the current work draft, Bannister. MR. WALSH indicated he hasn't seen the current work draft. CHAIRMAN KOTT said what he thinks Ms. Bannister, drafter of the bill, is saying is she isn't sure if there is a problem or not. MR. WALSH said that was probably the hesitation in the first committee substitute, that it be left at 7 percent. He said he doesn't object to the modification. He explained he thinks what Ms. Bannister is raising is the potential for a conflict or repercussion in the definition of "in-state." REPRESENTATIVE MASEK said she would appreciate it if Ms. Bannister could address the committee at the next meeting on the measure. Number 1818 DOUGLAS MERTZ, Attorney, came before the committee to testify on HB 345. He explained he is an attorney in private practice in Juneau. Mr. Mertz told the committee that for the last four years he has represented a client who is a beneficiary of one of the trust funds administered by the state Pension Investment Board. The goal during this period is to educate and to remind the state Pension Investment Board of its duty as a trustee, mainly, its duty to invest solely for the best interest of the beneficiaries of this pension fund and for no other reason. Mr. Mertz said his concern with the previous version of the bill and the current version is that this may be the opening wedge for a classic pension fund raid, the kind of thing we've seen all over the country. Everyone of those raids on a pension fund, whether it is a large or small raid, has been justified on the basis that it's good for the beneficiaries. Mr. Mertz pointed out that even when the real design of the pension fund raid is to divert money from the beneficiaries or from the fund to someone else's pocket, that is the justification that is used. He said he thinks that is the way to fairly characterize this. Mr. Mertz referred to the current version of the bill and said the important thing is to look at the bottom line. If the bill changes the way the Pension Investment Board makes its investments now, and now it invests solely for the best interest of the beneficiaries, if it changes that then it does indeed violate the trust duty because that is the only concern that they are supposed to have which is solely the best interest of the beneficiary, in which case it would be illegal and a violation of the statute and the constitutional provision on public employee pension funds. Mr. Mertz said if it doesn't affect the way they do it, if they still would exercise their complete independent judgement on what investments are in the best interest of the beneficiaries, then it doesn't accomplish anything and you might as will not waste any of your time on it. MR. MERTZ reminded the committee that the last time that the state decided to act as if pension funds in its control were the state's own funds and were available for purposes other than the sole benefit of the benefit of the beneficiary group was with the mental health trust lands litigation. He said you don't want to do something here that is going to create litigation either by the beneficiaries or by people who think that the bill should give them something else out of this, for instance like the brokerage community in Anchorage. Mr. Mertz pointed out there are many beneficiaries of these trust funds and the people know that these pension funds are funds that they have earned and there is a legal duty to invest solely for their own interest. It is highly likely that if the Pension Investment Board is forced, by this bill, to change the way it invests some of those beneficiaries will not accept it and will decide that litigation is in order. He urged the committee to not move the legislation. Number 2085 REPRESENTATIVE ELTON said in listening to Mr. Mertz's testimony, he could almost make an argument that if we're going to do this, not to have a 7 percent cap because at least no more than 7 percent is at risk. MR. MERTZ said in a sense that is correct and in another sense a 7 percent cap would at least give some clarity, whereas in the current version, you can have litigation over what "materially sacrificing" means or some of the other terms. Number 2162 MILT BARKER was the next person to testify on HB 345. He informed the committee he is a public employee retirement system (PERS) beneficiary and a former deputy commissioner of the Department of Revenue. He said he would underscore the comments made by Mr. Mertz about the difference between this fund and other funds. He said we are talking about various funds under the supervision of the Pension Investment Board and these are trust funds. They are different in character from the permanent fund and the standards that apply are different. Mr. Barker said he would like to point out that within the bill there is a difference of standards, even within the proposed amendment to the statutes, that is the standards for brokerages and investment advisory businesses is that the use of such in-state firms must result in no material sacrifice of the interest of the pension fund and the beneficiaries. With respect to investment of funds, you have a different standard in which the criteria is that the investment would provide a performance yield equal to or better than other investment opportunities. Mr. Barker said what is really being said is that the use of in-state investment management services does not have to provide some positive or at least no detriment to the funds. He said he thinks that is the different in standards that should be addressed in the legislation. Mr. Barker said for the reasons Mr. Mertz indicated, he believes that these standards are in conflict with fiduciary obligations. He said with respect to the in-state investment he would like to give an example of what could be in conflict with the fiduciary obligations. Fiduciaries not only have to consider the cash flow from investments, but they need to take into account the cash flow from employer contributions. When you do that, you have to recognize that in-state investments could in their timing of gains and losses tend to produce losses at the same time that employer contributions would be under stress. For that reason, if fiduciaries are going to act in the best interest of the fund they would have to invest in Alaska less than they would in investments elsewhere. Mr. Barker said he thinks the legislation is unnecessary. [End of tape...] TAPE 96-36, SIDE A Number 001 MR. BARKER continued, "...about that could be affected because AHFC has recently initiated a multi-family mortgage program. It's for multi-family housing of five or more units and it does not have any income restrictions on it. This is something that has been a hurdle for many communities and many projects around the state - large or multi-family projects - that now has a potential source of financing. And I would -- I do have some copies of a news article relating to that that I can pass around if the committee is not fully aware of that. Thank you, Mr. Chairman." Number 158 DAVE ROSE, Chairman and Chief Executive Officer, Alaska Permanent Capital Management Company, testified via teleconference from Anchorage. He explained the organization he represents is a money management firm located in Anchorage. He said they deal with institutional investment only and not high network individuals or single individuals of any kind. Mr. Rose stated they only work in Alaska and currently manage a little less than $1 billion of Alaskan money, none of which is PERS/TRS money. He said ordinarily he wouldn't testify in favor of what he would call a compulsive piece of legislation. What we have in this case is a situation where the Alaska purchasing code allows a lot of discretion to the PERS and PERS operatives, with respect to how they bid work and conduct themselves. Unfortunately, what has happened is PERS and TRS folks have not exercised very good common sense. They have not recognized that they have come to realization that some Alaskan funds can be managed, in part, by Alaskans. Both common sense and less realization does not seem to have employed. Clearly, we have an out of balance situation and it cries for solutions in two ways, either the adoption of this bill or a change to the purchasing code which puts Alaskans on a more even playing field. MR. ROSE referred to the last fiscal year and said the PERS/TRS folks in the marketable debt area, the purchasing and sale of bonds, purchased and sold $3,324,418,776 worth of bonds. He said that is $3.3 billion and not one cent of that trade was conducted through Alaska. Mr. Rose said last fiscal year, the PERS/TRS board employed 19 money managers and not one of them was Alaskan. Last fiscal year money management fee by PERS/TRS combined was $11.8 million and none of that was expended in Alaska. Last year they hired special consultants and paid $56,000 and none of them were Alaskans. With respect bank custody, which is a securing of cash and securities, last year the PERS/TRS board spent $1,441,798. Not one cent was spent in Alaska. Mr. Rose informed the committee that currently the PERS/TRS operatives are entering into negotiations for contracts, that if indeed there is a problem in Juneau with respect to physical or personal ability to maintain the fund, those operations would move to San Francisco and nowhere in Alaska. Mr. Rose said he would like to speak to one thing about competence. He explained the firm he works for is a small firm which manages to do about 8 percent to 10 percent of its business in Alaska with Merrill Lynch, who has an institutional desk and does a fine job. He said most of their business is done out of Alaska, but they make it a point to give 8 percent to 10 percent of their business to local competent people can handle it. He said as money managers managing money for other folks in this state other than PERS/TRS, last fiscal year their most representative account earned about 17.25 percent audited. The PERS/TRS return was 15.89 percent. He said last year his firm earned 1.36 percent better than PERS/TRS, and overlaid on a $6 billion fund, his firms strategy would have returned $81.6 million more for PERS/TRS than the firms outside of Alaska. MR. ROSE referred to banks and said nearly all his firm's clients in Alaska use either National Bank of Alaska Trust or Key Trust services. They do an excellent job. They don't have fails on the transactions and they move hundreds of millions of dollars for his firm and probably hundreds of millions of dollars for pension funds (indisc.). MR. ROSE referred to financial consultants and said he thinks that some of the people who made themselves available to the one RFP last year, he and Bill (indisc.) who have handled millions of dollars didn't even make the preliminary cut. Mr. Rose said he believes that what we've had is a realization of a total imbalance and loss of common sense with respect to how you deal in the Alaskan community. There are other agencies that use that common sense. While Alaskans don't get huge amounts of business, they do get tossed a bone. These folks would rather deal outside. Mr. Rose explained the solutions are: (1) Adopt HB 345; (2) amend the purchasing code; or (3) change some attitudes of how these folks operate. We are all Alaskans, we have some real competency and we deserve a shot to at least compete for contracts. He thanked the committee for listening to him. Number 657 STERLING GALLAGHER, President, Sterling Limited, was next to testify via teleconference. He explained he currently does a slightly different service than what is being talked about regarding HB 345, but he has some experience having been the commissioner of the Department of Revenue during 1974 to 1979. Mr. Gallagher explained that 1974 to 1979 was the pipeline construction era. We didn't have any savings in the savings industry in the state at that point in time. We had $100 million in the savings industry and AHFC and AIDA wasn't up and running. Mr. Gallagher said he used up to 25 percent of the pension funds to make investments in the state. He indicated he got political pressure. He said there was losses of $1 million, but it worked out to be a quarter of 1 percent. The overall results of the funds was that we were the number one fund earning in the United States. There were high earnings on fixed income and there was extraordinary high earnings in our stock (indisc.). While you make investments in Alaska, you can also make strategies in other places. One of the failures with investment management in this state over the last 20 years is that we have a tendency to put procedure over responsibility. We make it very cumbersome procedurally, but if someone screws up, we don't ever fire them. Mr. Gallagher said he thinks it is far more important that we turn the clock back and make people more responsible. He said, "Under this sort of arrangement here, you're gonna hire Alaska firms. If they screw up, they're going to be screwing up in their own back yard. It's gonna be very personal for them. They're gonna do you a damn good job. I can assure you of that." MR. GALLAGHER said, "The other reason this hurts me - the whole need for this legislation - I had a financial advisory service in this state who in six years there was two RFPs to bid on with state government. One, I misplaced it and the other one I just wasn't a big enough firm to beat against the outside firms. Since that time, I've been able to be hired by the University of Moscow to -- in Russia -- hired by the government at India, been hired by the City of Socking (Sp.?), I have had to move out some of my operations out of this state all because you don't get an opportunity here and it really hurt. We've come back to Alaska to say, `Wake up guys, there are some competent people here who could provide this service and they should be given an opportunity to work here.'" Number 839 REPRESENTATIVE ROKEBERG said there has been testimony in the past that one of the concerns about hiring local brokerages and money managers is that they have not been able to get large block training discounts on large blocks of stock when you're dealing with security transactions. He said Mr. Rose mentioned that he used the Merrill Lynch institutional desk and so forth. He asked Mr. Rose if his firm is able to get large block trading discounts as far as his direct dealing with member brokers on the New York Exchange. MR. ROSE said his firm is able to get what they consider to be the best possible pricing. He said they look at the same screens that the people on Wall Street look at. He said, "There aren't many cases where we have to go outside to get the very best pricing, but there are cases when we know what we wish to pay or wish to receive for a purchase and sale, which is on the screen, and if you call your local Merrill Lynch institutional folks up here and they can match the screen price, then they get the deal. And that is exactly the kind of deal that we get from anyone else in the country. So that we know the prices and if these folks up here can get into their trader, it should be available." MR. ROSE told Representative Rokeberg he has looked at the fiscal note and almost gagged. He said he thinks it is ridiculous to say you have to spend $125,000 to figure out who you're dealing with and what the costs are. The fact of the matter is that the $3 billion in marketable debt is transacted by two or three people within the treasury. He said he thinks that those people, in dealing with that $3 billion, can spread some of that business around. He said he wouldn't get it because he isn't in brokerage, but if he can find 10 percent of the time to give money to Merrill Lynch locally, PERS/TRS could do the same. Number 973 REPRESENTATIVE ROKEBERG asked Mr. Rose, with the exception of his firm, how many other money managing firms are in the state of Alaska that his company competes with. He noted there is McKinley Capital Management and Mr. Godstein has a firm. MR. ROSE said, "Actually, because I do more fixed income rather than stock, I really compete against National Bank of Alaska and Key Trust. Godstein and Gillum are McKinley both equities folks and while we have about $60 million in equities, we don't offer the same service as they do. So there are essentially five major entities. CHAIRMAN KOTT said the HB 345 would be held until the following day.