Legislature(1993 - 1994)
03/12/1994 08:00 AM House STA
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* first hearing in first committee of referral
+ teleconferenced
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+ teleconferenced
= bill was previously heard/scheduled
HB 494 - ALASKA PENSION INVESTMENT AUTHORITY CHAIRMAN VEZEY opened HB 494 for discussion. Number 099 DAVID HARDING, STAFF, REPRESENTATIVE EILEEN MACLEAN, PRIME SPONSOR, addressed HB 494. He stated HB 494 will lead to greater long-term financial stability, and more appropriate lines of authority for the state's pension investment system. With HB 494, the Alaska State Pension Investment Board (ASPIB) would be moved out of the Department of Revenue (DOR), and reconstituted as a separate authority. This separation will allow employees of the Pension Authority to focus solely on the investment of the $7 billion in PERS, TRS, and SBS funds they manage. The Treasury Division, DOR, will be able to focus on other functions, including the management of cash balances in the general fund. New positions would be created, but the DOR analysis shows the net result would be an annually general fund gain of $10 million or more. He thought the private sector would agree with the gain created by HB 494 and the state should follow suit. MR. HARDING explained there would be a political consideration, in addition to the fiscal consideration. The current ASPIB structure and its' membership has a smooth relationship with the DOR; however, he noted there could be problems in the future. Presently, the ASPIB makes decisions which are carried out solely by people would work for the commissioner of Revenue. He expressed the current structure was not stable and people would be better served if it was improved. (REPRESENTATIVE ULMER arrived at 8:10 a.m.) MR. HARDING outlined an amendment REPRESENTATIVE MACLEAN proposed for HB 494, due to an oversight in drafting. Page 2, line 20, would be amended to read, "council and the executive director," and "Department of Revenue" would be deleted. This amendment would make HB 494 consistent throughout in its separation of the Pension Authority from the DOR. Number 211 CHAIRMAN VEZEY clarified that on page 2, line 20, the "Department of Revenue" would be deleted. He questioned the connection between the expenditures and the revenues in the fiscal note. Number 221 MR. HARDING could not answer and deferred the question to another witness. Number 232 BILL CORBUS, CHAIRMAN, ALASKA STATE PENSION INVESTMENT BOARD, supported HB 494. He stated the ASPIB has approximately $7 billion in assets for which it has fiduciary responsibility. There are approximately 57,000 beneficiaries, retired or current. MR. CORBUS stated the ASPIB was created by the passage of HB 329 in 1992. Trustees consist of two members of the Public Employee's Pension System, two members from the Teacher's Retirement System, three members appointed by the Governor and the commissioner of Revenue. As of December 31, 1993, the ASPIB has $6.8 billion in defined benefits, $150 million in defined contribution moneys, and $900 million dollars in the Supplemental Benefits program. MR. CORBUS stated as of December 31, 1993, the ASPIB had returns in excess of 14 percent, which is greater than that earned by the permanent fund. MR. CORBUS explained HB 494 was proposed because the current structure of the ASPIB maintains that the staff works for the commissioner of Revenue, not the ASPIB. The ASPIB has fiduciary responsibility for these large sums of money, however, they do not have the authority to retain or let go any of the staff. He expressed it was essential, for the future, for the ASPIB to be able to manage their staff. MR. CORBUS stated a separate authority should be created with the same Board of Directors, and they should have the ability to hire an executive director and manage their own staff. MR. CORBUS said the ASPIB unanimously passed a resolution in an effort toward this separation, which has led to the introduction of HB 494. Number 315 GAIL OBA, VICE CHAIRMAN, ALASKA STATE PENSION INVESTMENT BOARD, commented on HB 494. She stated HB 494 merely substitutes the executive director and employees in the proposed authority, for the commissioner of Revenue. She noted there are no increases in benefits for any of the planned beneficiaries, and there would not be any embedded costs for either the employers or the employees. The ASPIB believes this will provide a better structure for managing the funds for which they have fiduciary responsibility. MS. OBA stated the staff of the DOR conducted a survey to confirm the fiduciary responsibility and structure of large public retirement funds. Five questions were asked of 46 participants, and all of these public funds have assets of over $5 billion. The participants were selected from a Pensions & Investments publication. Questions were as follows: 1) In regard to investment of pension funds, who is the fiduciary? 2) If a board is their subcommittee? 3) If an individual is a position elected or appointed? 4) To whom does the chief administrative officer report? 5) To whom do investments staff report? MR. OBA explained the survey indicated that 37 of the 46 pension funds had boards with fiduciary responsibility and staff reporting directly to the administrative officer, hired by the board. Only six had sole fiduciaries, either state treasurers or chief financial officers, with staff reporting directly to them. Of these six, four were elected and two were appointed. The Oregon PERS, New York City, and the ASPIB were the only three of the 36 pension funds which had boards where the staff reported directly to the treasurer or another individual. Number 366 CHAIRMAN VEZEY stated he would like a copy of the ASPIB resolution. Number 370 MR. CORBUS replied he would provide CHAIRMAN VEZEY with one. Number 373 CHAIRMAN VEZEY asked if the term "participants" in relation to 57,000 meant beneficiaries, both currently employed and retired. MR. CORBUS affirmed CHAIRMAN VEZEY. Number 380 CHAIRMAN VEZEY asked the number of people currently retired and receiving benefits. MR. CORBUS did not know. Number 382 CHAIRMAN VEZEY asked MR. CORBUS to explain what would happen in the change from a board to a corporate structure. He believed staff would be transferred without change and questioned why operating costs would increase. MR. CORBUS deferred the question to DARREL REXWINKEL. Number 399 CHAIRMAN VEZEY asked if the current structure allows the commissioner of Revenue to exert undue influence upon his work. Number 409 MR. CORBUS answered the ASPIB feels that potential exists. Number 412 MS. OBA rephrased the commissioner of Revenue did not have undue influence, but a future commissioner might thwart the implementation of ASPIB policies. Number 425 CHAIRMAN VEZEY asked DARREL REXWINKEL to be the next individual to testify. Number 434 DARREL REXWINKEL, COMMISSIONER DEPARTMENT OF REVENUE, commented on HB 494. He stated the separation as proposed in HB 494 was considered in 1991 as SB 18, but it was ultimately vetoed for two reasons; board composition and the cost of creating a separate corporation. In 1992, SB 329 was passed which created a balance investment board which took care the board composition. He noted the cost is still a problem in creating a separate authority; however, both SB 18 and SB 329 passed with a substantial majority. MR. REXWINKEL clarified the resolution passed by the ASPIB was a motion to request legislation to create a separate authority. MR. REXWINKEL addressed the two fiscal notes for HB 494. One was for revenue operations or treasury management, and the other is for the investment board. He explained the discrepancy with the addition of employees without an increase in workload. The ASPIB advisory council deduced the board was very close to being fiduciarily irresponsible due the already low amount of staff they have. He assumed if the ASPIB had more staff they could generate more revenue for the state. He noted HB 494 would force the increase in cost, which would give the DOR the capability to add revenues to the State of Alaska. Currently, staff is divided between different duties. With HB 494, however, the employees would be solely focused on the investment management process. He added with $7 billion, the cost of $497,000 for the investment board, would amply be covered even with 1/100th of a percent increase in earnings, $700,000. He stated the 1993 ASPIB returns, which were in excess of 14 percent, landed them in the top eight percent of an independent performance measurement firm hired by the Pension Board. MR. REXWINKEL stated the ASPIB is concerned because they would like the increased returns to continue. Increasing the funded status of the programs helps reduce the employer contribution rate, thereby providing a cost savings to the state of Alaska and all of the participating employers. MR. REXWINKEL referred to an organizational chart. The Permanent Fund program has 27 positions in their FY 95 budget, therefore the amount of positions required in HB 494 would still be relatively light. He accounted for some of the additional cost in the expansion of work space necessary to accommodate more employees. They are not being charged for the current space in the State Office Building, but new space would have to be acquired by the ASPIB. MR. REXWINKEL agreed with the fiscal note for treasury operations costing $398,000, with a net increase of about seven positions. The Treasury Division would need these positions because the present positions, which are more dedicated toward the pension funds, would go away. Investment officers would also have to be added to focus on the cash flow requirements of Alaska. As these officers coordinate with the agencies, determining the nature of the cash flow, they would be able to invest further out on the yield curve achieving incremental returns. He emphasized an incremental return of one basis point with the $7 billion would equal $700,000. The portfolio staff believes $10 million would be the minimum increase they could return to the nonpension fund moneys. He pointed out the actual figures could run $10-30 million. MR. REXWINKEL stated the ASPIB and the DOR would have reciprocal functions, whereby if one system were to go down, they could share the other operative one. He stated the example of the DOR's reciprocal relationship it shares with the Permanent Fund Division with respect to data processing. Number 565 CHAIRMAN VEZEY assumed some of the current DOR employees would become employees of the new corporation. Number 569 MR. REXWINKEL replied CHAIRMAN VEZEY was correct. Number 570 CHAIRMAN VEZEY clarified the employees would be paid for by the ASPIB out of pension funds. Number 572 MR. REXWINKEL affirmed CHAIRMAN VEZEY, and noted there would be a net increase of about one half of a full-time equivalent position in the Pension Board. The fiscal note, however, states it would increase by one. Number 578 CHAIRMAN VEZEY stated, regarding the ASPIB, DOR, fiscal note, FY 95 operating expenditures would be $497,000 and capital expenditures would be $388,000, to set up the office. He clarified all of the money would come from the pension system. Number 581 MR. REXWINKEL affirmed CHAIRMAN VEZEY, and stated there would be no general fund money. Number 590 CHAIRMAN VEZEY examined the Treasury Management, DOR, fiscal note and made clear MR. REXWINKEL stated positions would be added in the Treasury Division to make up for losing those positions. Number 594 MR. REXWINKEL agreed and clarified a couple of additional positions would be added to the Treasury Division to provide portfolio management individuals. A total of eight positions would be added. Number 598 CHAIRMAN VEZEY asked if under component #1961 a total of eight people would leaving the DOR and transferring to ASPIB. MR. REXWINKEL stated he thought there be more employees leaving, because most employees in the Treasury Division, except in cash management, are allocated between treasury general fund moneys and pension fund moneys. A lot of positions and costs are being divided amongst different program categories so that programs pay for their appropriate share of the function. He clarified the pension funds could not be charged anymore than the services they are receiving. The positions were divided by their percentage of work, therefore; the ASPIB, DOR, fiscal note reads one position would be added because of this analysis. Number 627 CHAIRMAN VEZEY clarified the net result would be eight additional positions. Number 629 MR. REXWINKEL stated yes, but it would really amount to seven full-time equivalent employees. He pointed the added positions to Treasury would provide for better cash management and more positive returns. Number 650 CHAIRMAN VEZEY believed the pension funds should be self supporting. He asked if the new authority would have approximately the equivalent of eight full-time employees. Number 655 MR. REXWINKEL corrected, by referring to the organizational chart, the new authority would have 20 employees. Treasury Division would be left with 17 positions total. He clarified cash management individuals would process warrants, maintain bank accounts, and run the regular treasury functions. Number 663 CHAIRMAN VEZEY examined the $278,000 increase to the DOR for the separation. Number 670 MR. REXWINKEL explained the cost was minor compared to this opportunity to earn more money. The state would not want to invest short-term money "long", need it, and then have to sell the securities and realize the loss. Number 683 CHAIRMAN VEZEY stated general fund moneys definitely need to be short-term. MR. REXWINKEL continued the difference between a 30-day investment compared to a 180-day investment could be substantial with relation to the current interest environment. Number 687 REPRESENTATIVE HARLEY OLBERG clarified at the present time the DOR has 29 employees working on both pensions and treasury. Number 690 MR. REXWINKEL replied REPRESENTATIVE OLBERG was approximately correct. Number 691 REPRESENTATIVE OLBERG clarified 20 of those positions would leave the DOR, and they would add 7 positions to the 8-9 remaining positions after the transfer. Number 694 MR. REXWINKEL responded the exact number would depend upon the decision by the investment board and who they hire as the executive director. The exact transfer amount would depend upon the negotiations. TAPE 94-28, SIDE B Number 000 REPRESENTATIVE OLBERG asked, referring to the Treasury Division within the DOR, if most divisions had a director. Number 011 MR. REXWINKEL responded no, instead a director, the DOR sequentially has a commissioner, deputy commissioner, comptroller, debt manager, cash manager, and portfolio manager. The portfolio manager would go under the cash manager in the revised organization chart. The deputy commissioner also functions in child support. He noted the deputy commissioner is somewhat elevated from a director because of the importance of the treasury function. Those positions just under the deputy commissioner he said could be termed as directors. MR. REXWINKEL pointed out the impressiveness of the FY 93 return of approximately $150 million more than what all the employers in the state paid into the pension fund. Increasing returns will reduce costs two years in the future. REPRESENTATIVE OLBERG clarified Treasury would only manage the general fund. He asked if the basis point values were based only on that amount. Number 071 MR. REXWINKEL responded yes, but on top of the general fund there are more funds within the general investment fund. Number 075 CHAIRMAN VEZEY noted there is a difference between the general fund and the general investment fund. Number 076 MR. REXWINKEL confirmed CHAIRMAN VEZEY. Number 078 REPRESENTATIVE OLBERG clarified the $10 million increment is based on the general investment fund and has nothing to do with pensions. Number 081 MR. REXWINKEL said REPRESENTATIVE OLBERG was correct, the general investment and a few other minor funds. Number 086 REPRESENTATIVE FRAN ULMER commented this change has been worked on for nearly four years. She mentioned, in reference to the veto letter from June 1991, that MR. REXWINKEL's past principle objection dealt with the philosophical concept of shared fiduciary responsibility, as opposed to money. She quoted the Governor as saying, "It appears the real purpose of SB 18 is to create shared fiduciary responsibility. Shared fiduciary boards have been involved in imprudent and questionable actions throughout the country." She asked why he had changed his mind when faced with HB 494. Number 114 MR. REXWINKEL answered, in the past, one of the major concerns was the board composition. The bill that passed in 1992 created an eight member board, four appointed by the Governor and four elected by the beneficiaries. He felt this was a good board composition. He related to the survey MS. OBA outlined, and noticed out of 46 participants, 36 had boards and only 6 still had a sole fiduciary. He noted these funds were operating well. MR. REXWINKEL stated as he has worked with the board and it has been successful, it has become apparent the board needs to have their own staff to prevent their policies from being thwarted by a future commissioner. He is better educated about the board and the cost structure for incremental returns now. Number 168 REPRESENTATIVE ULMER clarified that MR. REXWINKEL is persuaded that the money needed to provide the management is justified in terms of the likely improved result. MR. REXWINKEL said REPRESENTATIVE ULMER was correct, and the money was also for the board to carry out their fiduciary responsibility. Number 177 REPRESENTATIVE ULMER referenced the Governor's 1991 veto letter and how it specified the lack of benefit to the beneficiaries for the amount of money that would be spent. The letter also relates to the imprudent investments as the result of shared fiduciary responsibilities. She understood, however, MR. REXWINKEL's reasoning for his change in opinion. Number 190 MR. REXWINKEL commented there have been public funds which have made inappropriate investments, but the sole fiduciary problem was resolved in 1992 when SB 329 was passed and a board was formed. The situation in 1991, where the commissioner of Revenue was the sole fiduciary, is much different than the current structure. MR. REXWINKEL stated the pension fund has had relatively good returns, and excellent returns over the past two years. The ASPIB fixed income portfolio managers have been in the top 25 percent continuously over the last five years. He pointed out equity management is improving. The benefits from the substantial invested moneys should continue for the beneficiaries. What is good for the beneficiaries, is also good for the state and participating employers. Number 230 REPRESENTATIVE ULMER felt deferred compensation was remaining status quo. She asked if it would continue to be managed by the new corporation. MR. REXWINKEL replied deferred compensation would also be managed by the investment board, so it will be active. He noted there are now 6-7 alternatives for the participating employees to invest in with a substantially reduced cost, by cooperation from the Department of Administration. He felt the lack of education may be a problem because the employees do not know of the risk factors. MR. REXWINKEL did not believe there would be very much opposition to HB 494. He stated some people thought the permanent fund should be separated, instead of the pension authority. He explained the difference between a permanent fund mandate and a pension fund mandate. With a pension mandate, the moneys have to be handled in the best interest of the beneficiaries and there is an obligation for benefits to be paid as they come due. In comparison to the permanent fund, the pension funds have a long-term perspective without a legal list, a prudent expert rule of investment, a different basis of accounting, a different group of constituency and they are able to generate better returns. Number 313 ROBERT STORER, CHIEF INVESTMENT OFFICER DEPARTMENT OF REVENUE, commented on HB 494. He stated the shape in the normal yield curve in fixed income securities, is normally positive, i.e., the longer the maturity, the higher the expected rate of return. Those who can afford to invest in a longer maturity would be served. The benefits of better cash flow analysis, which will add incremental returns, will come in these ways: 1) keeping a minimum amount of cash on hand, which is typically the lowest rate of return in a normal yield curve environment; and 2) the staff will be able take additional maturity risk on the entire portfolio, with their gained information. Number 357 CHAIRMAN VEZEY mentioned the change in their accounting method for evaluating its assets in terms of its fixed income securities, the ASPIB underwent in 1992. He asked if he was correct. MR. REXWINKEL responded the market basis of accounting has always been used for the pension funds. Number 364 MR. STORER stated the procedure of computing income, how the income is distributed into an index, was reevaluated on July 1, 1993. Number 369 CHAIRMAN VEZEY remembered the accounting method was changed in 1993 starting fiscal year 1992. Number 372 MR. REXWINKEL clarified CHAIRMAN VEZEY's information could be found in the Actuarial Evaluation Report. He noted the DOR disagreed with their evaluation of assets. Number 373 CHAIRMAN VEZEY pointed out the two reports did not agree on the amount of assets. Number 374 MR. REXWINKEL made clear the DOR assets are accounted for on a market value basis, compared to the permanent fund's report accounting for cost. The actuarial report is smoothed out so the one year investment performance does not have a tremendous annual effect on the pension contributions made by the participating employers. He said the actuaries changed some of their evaluations because they agreed with the DOR that they were not at the proper market rate in their analysis. Number 389 REPRESENTATIVE OLBERG asked if the DOR could report on any given day the balance and composition of the general fund. Number 391 MR. STORER replied the DOR could report with market yield of every security. REPRESENTATIVE OLBERG inquired if the annual yield of the general investment fund was tracked separately so the rate fluctuations were apparent. Number 397 MR. STORER answered the DOR tracks not only on an annual basis, but also on a monthly basis. Number 400 REPRESENTATIVE OLBERG assured the benefits of HB 494 would be seen in less than a year. Number 402 MR. STORER affirmed the benefits would be apparent in less than a year; however, in incremental portions, not the full $10 million. Number 407 CHAIRMAN VEZEY introduced STEVE MCPHETRES as the next individual to testify. ATEVE MCPHETRES, EXECUTIVE DIRECTOR ALASKA COUNCIL OF SCHOOL ADMINISTRATORS, supported HB 494. He stated the Alaska Council of School Administrators wanted to ensure there will be stable amounts of money for the benefit programs in the future. From their analysis, HB 494 would provide this stability, therefore they are in support. Number 438 REPRESENTATIVE G. DAVIS asked what people the Teachers Retirement System (TRS) included. MR. MCPHETRES answered, from his organization the TRS includes all the principals, business managers, special education directors, district level people and superintendents. Number 445 REPRESENTATIVE OLBERG questioned if a superintendent's retirement varied from a teacher's retirement. MR. MCPHETRES responded the retirement for both superintendents and teachers are based on the same calculation. Number 451 REPRESENTATIVE OLBERG questioned if both groups were lumped into the same plan, or if MR. MCPHETRES was only representing one group. CHAIRMAN VEZEY clarified MR. MCPHETRES was before the committee representing the Alaska Council on School Administrators. He clarified their organization consists of 700 members which are members of the TRS. He believed the TRS has five pension programs covered by the board. CLAUDIA DOUGLAS, PRESIDENT NEA ALASKA, supported HB 494. NEA Alaska, representing both the TRS and the Public Employees Retirement System (PERS), supported changing the ASPIB to the Alaska Pension Investment Authority. She emphasized HB 494 has potential for enhanced financial stability, continuity, better accountability, member confidence and enhanced member economic security. Number 480 CHAIRMAN VEZEY stated there were two separate issues in HB 494; creating the authority and setting the staff level. He recognized REPRESENTATIVE MACLEAN's amendment recommendation, whereby on page 2, line 20, a period would be inserted after "director," and the words "and the Department of Revenue" would be deleted. He stated this amendment did seem to be the original intent of the drafter; however, "and the Department of Revenue" had failed to get deleted. Number 493 REPRESENTATIVE B. DAVIS so moved the amendment. Number 493 CHAIRMAN VEZEY asked the committee secretary to call the roll. IN FAVOR: VEZEY, KOTT, ULMER, B. DAVIS, G. DAVIS, SANDERS, OLBERG. CHAIRMAN VEZEY announced the amendment to HB 494 had passed. Number 501 REPRESENTATIVE ULMER moved HB 494 be passed from committee as amended with individual recommendations, asking unanimous consent. Number 504 CHAIRMAN VEZEY clarified the bill which the committee was acting on would be a committee substitute, reflecting the amendment. He modified REPRESENTATIVE ULMER's motion to reflect the correction. He asked the committee secretary to call the roll. IN FAVOR: VEZEY, KOTT, ULMER, B. DAVIS, G. DAVIS, SANDERS, OLBERG. CHAIRMAN VEZEY announced CSHB 494 passed from the House State Affairs Committee. CHAIRMAN VEZEY called a recess at 9:15 a.m. The meeting reconvened at 9:20 a.m. REPRESENTATIVES G. DAVIS and OLBERG were present.
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