Legislature(1995 - 1996)
04/18/1996 08:08 AM House STA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 89 - PERMANENT FUND BOARD MEMBERS & STAFF The next order of business to come before the House State Affairs Committee was SB 89. CHAIR JAMES called on Senator Steve Rieger, sponsor of SB 89, to present the bill. Number 2366 SENATOR STEVE RIEGER explained SB 89 was an act that was designed to create continuity in the management of the Alaska Permanent Fund Corporation. The bill was prompted last year due to the 100 percent turnover in the top management of the fund within the course of one year. He called that an unhealthy situation for a fund that was worth close to $19 billion. The primary thrust of the bill was aimed at the practice of dismissing the trustees when there was a change in the Administration. He cited Governors Hickel and Knowles both practiced the removal of the trustees during the transition. SENATOR RIEGER explained Section 1 changed the board from an even to an odd number, from six to seven. It changed it to one commissioner and six public members. The Administration did not support that change. Number 2467 SENATOR RIEGER moving forward, explained Section 2 added a small qualification provision that at least one of the public members should have recognized competence and wide experience in investment portfolio management. Number 2479 SENATOR RIEGER moving forward, explained Section 3 was a staggered term provision. Number 2482 SENATOR RIEGER moving forward, explained Section 4 was the heart of the bill. TAPE 96-55, SIDE B Number 0000 SENATOR RIEGER further explained Section 4 spelled out the cause for the removal of a public member. It addressed incompetency, misfeasance and conviction of a crime. Number 0027 SENATOR RIEGER moving forward, explained Section 5 strengthened the fiduciary independence of the board by limiting the influence of the Governor. Number 0038 SENATOR RIEGER moving forward, explained Section 6 clarified that the employees served at the pleasure of the board. The Administration was opposed to this section also. Number 0071 SENATOR RIEGER moving forward, explained Section 7 also strengthened the fiduciary responsibilities of the board. Number 0077 REPRESENTATIVE GREEN wondered if the staggered terms would produce an uneven number of members at a given time. Number 0090 SENATOR RIEGER replied Section 3 stated that no more than two would expire in one year compared to no more than one before. Number 0113 REPRESENTATIVE ROBINSON asked Senator Rieger to comment on the other legislation that gave more power to the incoming Governor regarding the appointment of boards and commissions. Number 0137 SENATOR RIEGER said SB 89 did not affect anybody in office now. It would affect future hypothetical situations. He was concerned about the rapid ability to take control of a $20 billion to $30 billion fund and do something to it that was not in the best long- term interest of the state. The best protection was staggered terms for the members of the board. Number 0193 REPRESENTATIVE WILLIS asked Senator Rieger if he had heard any testimony from Dave Rose on this bill? SENATOR RIEGER replied, "no." REPRESENTATIVE WILLIS said he was curious because Mr. Rose had been so intimately connected with the program for so long. Number 0211 SENATOR RIEGER said he could not speak for Mr. Rose. However, when the Permanent Fund Corporation was established, Mr. Rose was part of that organization. The board of trustees at that time was very emphatic about the staggered term provision. He did not recall if Mr. Rose opposed or supported that provision, however. Number 0243 REPRESENTATIVE ROBINSON asked Senator Rieger if the public members on the board were increased to reach the uneven member number? Number 0254 SENATOR RIEGER replied they were increased to reach the uneven member level. He said it was not a big deal to decrease the commissioner membership to one. He was not sure why another commissioner was needed, however, other than the Commissioner of the Department of Revenue. Others believed that the commissioners were appointed for their various expertise in other areas. He reiterated the Governor was concerned about reducing the appointed commissioners from two to one. Number 0286 REPRESENTATIVE OGAN asked Senator Rieger if the board members were remunerated for their services? Number 0292 SENATOR RIEGER replied they received an honorarium or daily payment of $300 or $400. He could not recall which amount was correct. Number 0304 REPRESENTATIVE OGAN asked Senator Rieger how many days per year did the board meet? Number 0308 SENATOR RIEGER replied approximately 20 to 30 days. CHAIR JAMES called on the first witness in Juneau, James Baldwin, Department of Law. Number 0336 JAMES BALDWIN, Assistant Attorney General, Governmental Affairs Section, Civil Division, Department of Law, explained the Governor's office asked him to come here today to let the committee members know that it did not support the bill in its current form. Certain provisions caused great concern. He explained when the permanent fund was originally established there was concern that it maintained a certain amount of independence, but no so much independence that it was not responsive to the voters. The one way to ensure that it was responsive to the voters was to make it responsive to someone that was elected by the voters statewide, the Governor. Furthermore, it was also important that the Governor had the removal power. According to Alaska Statute, a Governor had to establish in writing the reasons to remove a board member. It was not like cause, it just had to be done publicly and stated in writing. Governor's had used that power in a wholesale fashion, while other had not. It did preserve one important aspect that the board of trustees was responsible to an officer who was responsible to the voters. The proposed senate bill called for the removal due to cause. That would require a trial like proceeding. It would be a long involved process. Furthermore, there was a certain degree of ambiguity within the provision. He read, "the failure of a trustee to exercise prudent judgement in the affairs of the corporation...." A lawyer would have a field day with that clause because it would be hard to prove. He further read, "conviction of a crime that would cause a significant number of reasonably prudent members of the public to distrust the trustee's ability to discharge the duties of the trustee." If the board member was doing something that the voters did not agree with, it would behoove the Governor to remove the member to make it responsive to the will of the people. That was the initial belief of the First Alaska State Legislature. MR. BALDWIN further said that the Governor appointed two principle department heads to the board. The Commissioners were directly appointed by the Governor, therefore, responsive to him and to the voters. He called it a blow to the responsiveness to reduce that number to one. The Governor believed it should remain at two. He stated it was possible to take the position that the bill was perpetuating the appointments of the Governor because it would be his appointees that would be covered by the protections in the bill. However, the Governor did not believe that was the appropriate approach. Furthermore, the philosophy in another bill that was passed out of the House State Affairs Committee, HB 359, went the other direction. He understood it was passed to the House Judiciary Committee where it received most of its consideration, however. MR. BALDWIN further explained the Governor had the appointment power and Section 5 attempted to place limitations on that appointment power. The provisions limited the Governor's decision to be based solely on the financial best interest of the fund. He wondered about appointing a hard working or honest person to the board. These individuals made good board members also. MR. BALDWIN further explained the controversy surrounding the removal of a high ranking investment officer from the board in the past. There were legal implications and he recognized that the provisions in the bill tried to resolve that problem. He believed that it went too far, however. The bill called for the staff to serve at the pleasure of the board to negate at-will employees. The state of Alaska had not been successful at winning these types of law suits. The language "at the pleasure of the board" was not going to help the clerks and the secretaries. It might help the higher ranking policy making employees. Maybe that was all that the language intended to apply to, but it was more broadly stated than that. Number 0677 CHAIR JAMES asked Mr. Baldwin if he gave the same testimony today in the Senate? Number 0684 MR. BALDWIN explained the Administration testified on the bill in the Senate Finance Committee. Unfortunately, the bill was amended and the Administration was not able to testify on the amended version. He took responsibility for that. Number 0693 CHAIR JAMES announced, for the record, that it distressed her a bill could move through the committee process and the Senate without taking the concerns of the Administration into consideration. She understood why the Administration was concerned about some of the provisions. She could not understand why staggered terms were bad, however. Furthermore, she could not find any part of the bill that the Administration supported. She reiterated she wondered if the testimony was considered in the Senate. She recognized that a piece of legislation opposed by the Administration could still progress through the system. That was a political decision. She reiterated she was distressed to hear the opposition today. Number 0762 MR. BALDWIN replied, "I feel properly chastised." It was not intentional "lying in the grass," however. It was more of being divided between too many tasks. Nonetheless, he still agreed with the analysis given earlier. He stated the Governor was not opposed to staggered terms, contrary to the belief of Chair James. The Governor was opposed to taking away the removal of a board member by stating the reasons in writing. The Governor was also opposed to removing the second Commissioner from the board. The Governor would be willing to work with the sponsor. He recognized it would be hard to agree on, however. Number 0827 CHAIR JAMES said she was glad to hear him focus on the major concerns. She initially believed the Administration was opposed to the entire bill. She accepted his apology for being tardy. She was not trying to be harsh. She just wanted to express how she felt for the record. Number 0861 REPRESENTATIVE PORTER explained the same thing happened to HB 359. The bill was heard in the committees in the House for one month to learn afterwards that the Administration had a lot of problems with it. House Bill 359 allowed for the removal of a board member at the time of expiration for cause. Senate Bill 89 also allowed for the removal of a board member for cause. He stated he was surprised that the Governor would be opposed to removal for cause. According to SB 89, and the staggered term provision, a Governor could remove members every year as their terms expired. Number 0921 MR. BALDWIN replied, "yes." REPRESENTATIVE PORTER stated a Governor could remove a member not for cause but for a position, for example. MR. BALDWIN stated a vacancy would be created, and the Governor would fill that vacancy. REPRESENTATIVE PORTER said the Governor would have a lot of latitude in four years to change the composition of the board, but at the same time it would not want turmoil surrounding the management of a $19 billion fund. He reiterated he was surprised of the position of the Governor. The basic foundation of SB 89 was for staggered terms to prevent turmoil. That was a very viable goal. Number 0970 REPRESENTATIVE OGAN said he was impressed by the list of cosponsors. As a freshman legislature, he appreciated the corporate experience of the other legislators. The amount of money involved here alarmed him, therefore, he appreciated the concept of SB 89. Number 1023 CHAIR JAMES wondered if two commissioners were necessary. Senator Rieger stated he did not have a real problem including two commissioners, except that he did not understand why any other commissioner besides the Commissioner of the Department of Revenue was necessary. She further stated the language in the bill did not preclude the average citizen from becoming a member of the board. Number 1090 MR. BALDWIN replied the law mandated that the Governor state a reason for the removal of a board member publicly. The mandate was created during the establishment of the Alaska Permanent Fund Corporation. He wondered how the voters would ever influence the policy making of the board if the members could only be removed for cause and were subject to reappointment on a staggered basis. The board was the policy maker. Therefore, the Administration believed the current law provided for the opportunity to remain responsive to the voters. MR. BALDWIN referred the committee members to page 2, lines 1 - 2, and read, "and at least one of the public members must have recognized competence and wide experience in investment portfolio management." He stated only a handful of people in the state met that criteria. A limited pool existed of which most were located in San Francisco, Los Angeles, New York, and Chicago. Number 1250 CHAIR JAMES replied, if only one had to met that criteria and two existed in Alaska, there were options. She felt strongly that some of the members of the board must have a financial background. She agreed that honest citizens should also be able to be a part of the board. She did not want to fill the entire board with honest citizens, however. A mixture of experiences were necessary to create a good and responsive board. She asked Mr. Baldwin again why two commissioners were necessary? Number 1330 MR. BALDWIN replied it was another safeguard that was created when the Alaska Permanent Fund Corporation was established. A commissioner served as a direct link to the Governor. He explained the second commissioner varied between the Department of Commerce and Economic Development and the Department of Law. At present the second commissioner was from the Department of Commerce and Economic Development, William L. Hensley. Number 1379 CHAIR JAMES said she did not have a problem including two commissioners. She just wanted to hear the arguments from Mr. Baldwin why they were necessary. Number 1384 REPRESENTATIVE PORTER stated according to statute, a Governor may remove a member of the board from office of which the reason must be stated in writing. There was no criteria for the removal, however. A Governor could remove a member for parting his hair on the wrong side, for example. Furthermore, a commissioner would vote according to the wish of the Governor. He said, "you can't have it both ways." Number 1443 MR. BALDWIN replied a Governor that removed a person for parting his hair on the wrong side would not remain the Governor for very long. REPRESENTATIVE PORTER said he stated that example facetiously, but it could be the reason stated more articulately. MR. BALDWIN said in essence it was a removal at pleasure. REPRESENTATIVE PORTER said, "that's what it is exactly." Number 1463 REPRESENTATIVE ROBINSON referred the committee members to page 2, lines 1 - 2. She asked Mr. Baldwin if he would consider language indicating a level of financial background rather than wide experience in investment portfolio management. She stated it was hard at times to find the right people to serve on a board or commission. Number 1546 MR. BALDWIN explained when the Administration first testified on the bill, it was critical of the removal of a board member. The Administration was against the language on page 2, lines 15 - 23, because it broke new ground. The Administration had not spent a lot of time finding additional language, however. It liked the existing law. Furthermore, regarding the limited pool of people with the expertise to serve on the board, he was concerned about a conflict of interest for those in the financial industry in Alaska because the board recently started contracting instate. Number 1672 REPRESENTATIVE IVAN asked Mr. Baldwin if there had been instances where the two commissioners were appointed to look out for the interest of the Governor, or where the Governor tried to influence the investment procedures? Number 1718 MR. BALDWIN replied he was not aware of any such instances. The board had functioned very well within its sphere of activity. The testimony from Senator Rieger was concerned because in the past a couple of Governors removed all of the members to reflect their philosophy of government. He reiterated it was good to have the board responsive to the voters. Number 1764 CHAIR JAMES said the board should be responsive to the voters. However, financial issues usually were not politically motivated. She said people were either knowledgeable or not surrounding financial issues. There was a perception by the public that there were political reasons that were not rationale. Therefore, a plan was necessary to protect the public. She was concerned about the conflict of interest that Mr. Baldwin mentioned. She was amenable to change the language on page 2, lines 1 - 2. Number 1926 CHAIR JAMES announced she wanted to take action on SB 89 today. Number 1958 SENATOR RIEGER explained in the early 1980's there was a candidate for Governor that included the Alaska Permanent Fund Corporation as part of his platform. Therefore, there was the potential for that to happen again. He agreed with Representative Porter that the heart of the bill was staggered terms. He would not object, therefore, if the committee members wanted to change Section 1, Section 4 or Section 6. Number 2076 REPRESENTATIVE ROBINSON asked Senator Rieger if he would like to stay at seven members? SENATOR RIEGER replied, "yes." REPRESENTATIVE ROBINSON asked Senator Rieger if he would shift from six public members and one commissioners, to five public members and two commissioners? SENATOR RIEGER replied he would support that change, if it removed one of the objections from the Governor. It was not worth fighting over. Number 2101 REPRESENTATIVE ROBINSON referred the committee members to page 2, lines 1 - 2. She asked Senator Rieger if there was the possibility to broaden the language to reach out to more Alaskans? Number 2165 SENATOR RIEGER replied he did not think it would be hard to find the qualified individuals to serve on the board according to the language in the bill, therefore, it was not necessary to change the language. He explained there were plenty of banks and financial institutions in Alaska. Furthermore, it was an honor and attractive to individuals in the financial market to serve on the board. Number 2271 REPRESENTATIVE ROBINSON asked Senator Rieger if the bill addressed the conflict-of-interest issue raised earlier by Mr. Baldwin? Number 2309 SENATOR RIEGER replied Section 7 covered that issue. He explained fiduciary responsibility required that a person acted solely in the best interest of a fund. Number 2309 CHAIR JAMES asked Senator Rieger if he would be willing to change the language in Section 1 to reflect "five" members of the public and "two" commissioners? Number 2410 SENATOR RIEGER replied "yes." CHAIR JAMES called for a motion. Number 2426 REPRESENTATIVE PORTER moved that the language in Section 1, page 1, line 6 delete the word "one" and on line 8 change the word "six" to "five." (Amendment 1) Hearing no objection, Amendment 1 was adopted. TAPE 96-56, SIDE A Number 0000 CHAIR JAMES stated she agreed with the opinion of Senator Rieger regarding the language on page 2, lines 1 - 2. Number 0079 REPRESENTATIVE GREEN said $20 billion was at stake here, therefore, financial experience was necessary. He supported the language. Number 0108 REPRESENTATIVE ROBINSON asked Senator Rieger if the staff members had this type of expertise? SENATOR RIEGER replied, "I'm sure the investment staff did." REPRESENTATIVE ROBINSON said she did not want the public to perceive that the expertise was not there. Number 0148 CHAIR JAMES replied the staff members were not the decision makers. The board members were the decision makers. Number 0162 REPRESENTATIVE ROBINSON wondered if there was a difference between the language "investment portfolio management" and "investment management?" The language "investment management" would be a way to expand the qualified pool. Number 0210 REPRESENTATIVE GREEN replied there were restriction on how much money could be invested in growth funds, for example. Therefore, an investment portfolio expert could help a great deal more than an investment counsellor. Number 0248 CHAIR JAMES stated it was important to remember that each member of the board had only one vote so the deliberation was important. Therefore, it was necessary to have a person with that type of expertise. She was comfortable with the language. Number 0336 REPRESENTATIVE ROBINSON stated she was not against the intent of the language in Section 2. She wanted to broaden the ability to seek out more Alaskans that had good investment management skills. She did not have enough expertise to know if it was really a problem, however. Number 0381 SENATOR RIEGER replied the word "portfolio" was key because one of the main duties of the board was asset allocation. Professionals were hired for the investments. He reiterated he was not concerned about finding a person to meet the qualifications. Number 0498 REPRESENTATIVE PORTER said he saw the language in Section 6 as strengthening the notions of "serving at the pleasure of the board," and serving two year contracts. Number 0566 CHAIR JAMES said it was difficult for her to understand how the state got into this type of a problem because employees should understand the terms of their hiring conditions. A person hired from the register should know that he was not subject to the whim of anyone. A person hired by an appointment should know that he was subject to the whim of anyone. She agreed with Representative Porter that Section 6 clarified that issue. Number 0621 REPRESENTATIVE GREEN said upon an appointment it usually indicated in the contract that one "served at the pleasure." Number 0644 REPRESENTATIVE GREEN moved that CSSB 89(STA) move from the committee with individual recommendations and attached fiscal notes. Hearing no objection, it was so moved from the House State Affairs Committee.
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