Legislature(1995 - 1996)
04/19/1996 03:15 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 954 CHAIRMAN KOTT announced the next order of business would be HB 345, "An Act relating to the procurement of investment and brokerage services by the Alaska State Pension Investment Board." TIM VOLWILER was first to testify on HB 345. He indicated he didn't know what version of the bill the committee was addressing. CHAIRMAN KOTT informed Mr. Volwiler the committee was addressing Version K, Labor and Commerce, dated 04/10/96. MR. VOLWILER informed the committee he anticipates retiring through the teacher's retirement system (TRS) in about ten years. He said he has expressed his reservations about the bill previously. Mr. Volwiler said this is a defined benefit system for retirees, so as an individual, he anticipates receiving the same amount of money regardless of what happens to the pension funds. However, if the pension funds are used, in his view, inappropriately for economic development within the state and the investments perform poorly, then every municipality and the state is going to have to make up the difference in those earnings which didn't happen because it was used for local investments that may have been more risky. Mr. Volwiler said he doesn't like seeing any requirements put on the Pension Investment Board. He said he believes the board is operating fine by itself. Mr. Volwiler said he doesn't know what is meant by materially sacrificing competency or performance. He referred to the risk and expected yield and said he thinks it is hard to predict what the risk of an investment is going to be and what the yield is going to be. MR. VOLWILER referred to AAA municipal bonds and said if you want to buy 50, he doesn't think it is appropriate in the state of Alaska. He stated he would buy one bond from every state and that is diversification. Mr. Volwiler explained he doesn't want to see the legislature use this as a shadow, (AIDEA). If those investments are earning less, it will be the taxpayers of the municipalities and the state who are going to pay the difference. He stated he is strongly opposed to HB 345. Number 1055 WILLIE ANDERSON, NEA - Alaska, was next to address HB 345. He stated he testified against the earlier version of the bill. Mr. Anderson said he appreciates the work the staff to the House Labor and Commerce Committee did to try to mitigate some of the opposition to the bill earlier. He said the bill still needs a lot of work. Mr. Anderson referred to the top of page 2 of the bill, "The board shall (10) increase the board's utilization of brokerage and investment services provided by in-state business," and said the problem with that is the need to increase. When does this increase? He asked if it means that you have one brokerage firm this year, so you must have two next year and three the next year. He referred to testimony given on the bill the previous Wednesday where it was stated that there was only five brokerage firms in the state that deal with any level of quantity like this pension investment addresses. He stated that is a major concern to NEA - Alaska and they still oppose the bill. Additionally, when you look at item (11), based on risk level and expected yield, potentially you could have the total investment of the pension fund invested in the state of Alaska if you have an expected yield of 10 or 12 percent and it is equal to other diversified yields. Once again, this is guess work, you can't guarantee any precise yield. The company puts forth their perspectives and you take your best guess on it. The potential is the entire pension fund could be invested in the state of Alaska using these standards and it isn't very wise investment strategy from their perspective. It is NEA - Alaska's belief that the bill is unnecessary as the Investment Board currently has the authority to make decisions about which firm to and which investments to use. He continued to give testimony against the bill. Number 1346 CHAIRMAN KOTT said Section 11 basically says that the board should invest funds in the state if, in fact, the risk level and expected yield is either equal to or more favorable than alternative investment opportunities. He said if we had AAA bonds in New York and AAA bonds that were available in Alaska, with 6 percent yield in the New York bond and 6 1/4 yield in the Alaska bond, which would be the best bond to invest in that would contribute to the pension fund? MR. ANDERSON said under those circumstances, the Alaska bond would be the best yield to invest in because it causes economic growth to the state and it gives a better yield for the pension fund. If it is expected that all the bond investments should be in Alaska as opposed to diversifying around the country, that could be a major problem. If it is a municipal bond, there is a level of security in that, but if it is corporate bond, there is less security in that and it could have a higher yield but you wouldn't want to put all your bond investment in that corporate bond in the state of Alaska. Number 1432 REPRESENTATIVE ELTON said he agrees with Mr. Anderson's response. He also pointed out the board currently has the ability to do that now. It would be smart to diversify in the bond markets. CHAIRMAN KOTT said he wouldn't believe that the members of the board who are charged with fiduciary responsibility would put all that money in one nest egg in the state of Alaska. REPRESENTATIVE ELTON said with the word "shall" on page 2, line 2, there could be some that could make the argument that it is not a permissive word and "shall" says that you shall do that. CHAIRMAN KOTT said considering the portfolio we're talking about, he doesn't think anyone in Alaska could offer a bond that would be equal in yield and risk. Number 1520 REPRESENTATIVE ROKEBERG said we should do things to encourage investment in the state; however, he does have problems with the bill as it is currently written. Number 1614 JIM SIMEROTH, President, Kenai Peninsula Education Association, testified via teleconference. He stated there are about 700 people who are a little nervous about this bill. Some of them fear it is a possible raid on their pension funds. He noted he didn't have the most current version of the bill and requested it be faxed to him. Mr. Simeroth said there is a lot of concern and there seems to be a bit of micromanaging of the Pension Investment Board and that creates real concern. It has already been expressed that the Pension Investment Board could, if they so choose, make Alaska investments. He said that is appropriate, but it should be left up to the board to utilize those services that they deem are most appropriate in-state or out of state. Mr. Simeroth referred to requisite skills that are required and said he doesn't know what those would be. Again, that seems to be part of what the board would be addressing when they decide where the investments are going. There is concern that this might evolve into something where politically the decisions are made where pension investments are going to be. In addition, some people are concerned that if we're looking for a high rate of return, the risk goes up. We have a pension fund that currently operates very well and he doesn't see the need for tampering with it. Number 1826 CHAIRMAN KOTT indicated there were no further witnesses to testify. He then closed the public hearing. He announced the bill would be held until the following Monday.