Legislature(2005 - 2006)CAPITOL 106
02/23/2006 08:00 AM House STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| HB475 | |
| HB403 | |
| HCR27 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 475 | TELECONFERENCED | |
| = | HB 403 | ||
| *+ | HB 45 | TELECONFERENCED | |
| *+ | HB 485 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| = | HCR 27 | ||
HCR 27-DIVEST INVESTMENTS IN IRAN AND N. KOREA [Contains discussion of SB 12.] 9:12:06 AM CHAIR SEATON announced that the last order of business was HOUSE CONCURRENT RESOLUTION NO. 27, Urging the Alaska Retirement Management Board and the Alaska Permanent Fund Corporation to divest all holdings held in companies with business activities or holding investments in Iran and North Korea. 9:12:27 AM EMILY STANCLIFF, Staff to Representative Jay Ramras, Alaska State Legislature, presented HCR 27 on behalf of Representative Ramras, sponsor. She directed attention to a report in the committee packet entitled, "The Terrorism Investments of the 50 States," produced by the Center for Security Policy, August 12, 2004. Ms. Stancliff noted that the U.S. Department of State and the Office of Foreign Assets have identified that Iran and North Korea "are state sponsors of terrorism." She read from the first page of the report: "... this nation's largest and most prominent public pension systems tend to be heavily invested in global publicly traded companies that have business activities in terrorist-sponsoring states." Ms. Stancliff referred to other portions of the report, which read as follows: On average, America's top 100 pension systems invest between 15 and 23 percent of their portfolio in companies that do business in terrorist-sponsoring states. ... The total estimated value of the stock of some 400 companies doing business in terrorist-sponsoring states held by America's leading public pension systems is approximately $188 billion. MS. STANCLIFF said according to the Center of Security Policy, the Alaska Retirement Management (ARM) Board invests 24 percent of its total equity holdings in companies with ties to terrorist-sponsoring nations. The ARM Board, she stated, is linked to 98 companies that have invested a total of $27 billion in terrorist-sponsoring states; of those 98 companies, 68 have dealings in Iran and 8 have dealings in North Korea. Ms. Stancliff said the report lists the "dirty dozen" - [twelve companies with ties to terrorist states], and she said the ARM Board and the Alaska Permanent Fund Corporation hold stocks in those companies. She reported that the holdings of the Permanent Fund Corporation in five of the dirty dozen companies are estimated to value $76 million. She noted that the report includes reasons why the twelve companies have been placed on the dirty dozen list. MS. STANCLIFF relayed that other states across the country have drafted similar legislation, including Pennsylvania, Illinois, and Arizona. Retirement boards in the states of Missouri and California, as well as the New York City Fire Department have hired companies to investigate where their pension funds are being invested. 9:16:31 AM MS. STANCLIFF quoted former President Bill Clinton's Secretary of State, Peter Tarnoff, as having said, "A straight line links Iran's oil income [with] its ability to sponsor terrorism, build weapons of mass destruction, and acquire sophisticated armaments. Any government or private company that helps Iran to expand its oil must accept that it is contributing to this menace." Ms. Stancliff said she believes that the sponsor shares that view, which is one of the reasons behind the proposed resolution. 9:17:25 AM CHAIR SEATON directed attention to a page in the report, entitled, "The Alaska Permanent Fund Stock Holdings," and noted that four of the countries listed had an asterisk drawn next to their names: France, Italy, Norway, and Switzerland. He asked for an explanation. 9:17:58 AM MS. STANCLIFF explained that the sponsor checked off those countries on the stock-holding list that were also countries in which dirty dozen companies were based. 9:20:52 AM MS. STANCLIFF, in response to a question from Chair Seaton, clarified that unlike SB 12, HCR 27 does not take issue with the countries themselves, it only asks that the holdings be divested from the publicly held companies in the countries. 9:21:16 AM REPRESENTATIVE GRUENBERG remarked that the invests in companies, not in countries, which is why he is confused by [SB12]. 9:22:58 AM MS. STANCLIFF, in response to a question from Representative Gruenberg, said she is not familiar with the workings of the Office of Foreign Assets Control. 9:23:28 AM REPRESENTATIVE GRUENBERG asked why the resolution is limited to the aforementioned countries, because "tomorrow they could change regimes and become allies of the United States and then we have another country that becomes the haven for the terrorist." 9:24:17 AM MS. STANCLIFF suggested that other countries could be factored into the resolution if they were of concern to the committee. 9:25:08 AM REPRESENTATIVE RAMRAS proffered that North Korea and Iran are the biggest threats, thus, they are the countries he wants to highlight in the resolution. 9:27:06 AM CHAIR SEATON directed attention to [page 1], line 10, of the resolution, which refers to "the Center for Security Policy". He asked for information regarding the organization. 9:27:36 AM MS. STANCLIFF confirmed that the Center for Security Policy is a private entity whose report was used extensively as a basis for HCR 27. In response to a follow-up response from Chair Seaton, she said she would get more information regarding the Center for Security Policy to the committee. 9:28:36 AM REPRESENTATIVE GATTO, regarding the source of information used to formulate the resolution, said he would like to know where the source is headquartered and something about its history. 9:29:49 AM MS. STANCLIFF said some of that information can be found on page 8 of the report, which lists the Conflict Securities Advisory Group, Inc. (CSAG), as being "an independent and impartial Washington-based risk assessment firm." 9:30:52 AM CHAIR SEATON cited a portion from the first page of a three-page excerpt of the Christian Science Monitor, entitled, "Spotting links to Terrorism, Inc.," which read as follows [original punctuation provided]: But of the 30 or so other companies linked to proliferation issues, some two-thirds hail from the US. CHAIR SEATON interpreted that there may be some "consistency problems with where we're going." 9:31:39 AM REPRESENTATIVE GARDNER said she thinks the next sentence on the aforementioned page is relevant. It read as follows [original punctuation provided]: The reason is that the US government is more likely to identify companies that export high technology with potential military uses than many foreign governments are. REPRESENTATIVE GARDNER suggested, "It may be that other countries might find the same results if they were looking as we are." She emphasized to the sponsor that she thinks the whole issue is interesting, and the question is how to do the right thing when there is so much that is unknown. 9:32:51 AM CHRISTOPHER HOLTON, Vice President for Administration, Marketing & Development, Center for Security Policy, told the committee that he is in charge of the center's Divest Terror Initiative. He relayed that the Center for Security Policy is a national security think tank, founded in 1988 by Frank J. Gaffney, Jr., the center's president and former official of the Reagan Administration Pentagon. He stated that the center is a nonpartisan entity whose mission is to promote peace through strength. He said the center has been involved in national missile defense and in the formation of the Rumsfeld commission through the Institute of the North. MR. HOLTON said the Center for Security Policy has aided in "getting this type of legislation going" in Arizona, Illinois, Louisiana, and Missouri. He said the State Department has identified official state sponsors of terrorism in its annual report, "Patterns of Global Terrorism." He listed the following countries: Iran, Syria, Libya, North Korea, and Sudan. He continued: While U.S. companies are forbidden from doing business in those countries, by virtue of sanctions for the most part, (indisc. - coughing) companies have stepped in and done a tremendous amount of business with those countries - particularly with Iran .... ... We think this a moral issue [and] that state pension system holders around the country need to be informed that their investment dollars are going to companies that are doing business with those that are ... literally killing us. In the case of Iran and Syria, both of those countries are heavily involved in the insurgency in Iraq. And that's not the Center for Security Policy saying that; that is well accepted. In fact, Iran, basically, tacitly admits that they are involved in the insurgency in Iraq. So, right now you have members of the Alaska National Guard ... fighting in Iran and in Iraq against Jihadist insurgents who are armed, trained, equipped, and supported by Iran and Syria. At the same time that this is going on, the Alaska State Pension Board has investments in 68 companies with ties to Iran and 34 companies with ties to Syria. We think that this is information that needs to get out there, and we think that this is something that needs to stop. MR. HOLTON, in response to a question from Chair Seaton, specified that the aforementioned states have actually passed similar legislation. CHAIR SEATON asked, "If a company such as BP, or Exxon, or ConocoPhillips [Alaska, Inc.], ... was buying oil from Iran, would that be a country that was doing business with Iran?" 9:37:52 AM MR. HOLTON answered as follows: I can't accept the premise of your question ..., because those companies cannot [directly do] business with Iran. Someone mentioned the Office of Foreign Assets Control earlier; that is the arm of the treasury department that monitors U.S. sanctions policy. ... ExxonMobil [Corporation] cannot go into Iran and help them with their oil program; however, foreign companies, like Total SA, from France, have come in and do billions of dollars-worth of business in Iran. So, yes, ... theoretically, if one of those companies was doing business directly with Iran, that would be a problem, but the fact is ... that is not going on and that is currently against U.S. law. CHAIR SEATON asked if Mr. Holton means investing in those countries or purchasing oil from those countries. MR. HOLTON replied, "They can't do business with those countries." 9:38:41 AM CHAIR SEATON asked, "Okay, but can they do business with companies that ... have business in those countries?" 9:38:51 AM MR. HOLTON said he imagines that Exxon could do business with Total SA, but it could not buy oil directly from Iran. CHAIR SEATON said, "But they could buy it from somebody else who's buying it from there." MR. HOLTON responded that he does not know that for a fact. 9:39:15 AM REPRESENTATIVE RAMRAS asked how the investment boards in the other states refuted the prudent investor rule, because he predicted that would be the objection that the legislature hears from the ARM Board and the Permanent Fund Corporation during this hearing. 9:39:44 AM MR. HOLTON said the response from the investment community is that it will be too costly, cause portfolio performance to suffer, or will be too difficult. He said the short answer to those objections is that they are not true. He continued: For instance, the Louisiana sheriff's pension system ... has divested from this ... category, and ... in Missouri there was a terrorist-free pension system. They have managed to do this, despite the fact that they were told that it was going to be costly. In fact, the actuarial analysis from the Louisiana State House of Representatives retirement committee found that this was a revenue-neutral initiative; in other words, it did not cost the system a thing. And there is no reason why this has to negatively impact portfolio performance. There are ways of divestment that can mitigate that impact. Divestment can occur in staged amounts over a period of time. Nobody's suggesting that these stocks should be dumped en masses, immediately. The way that it has been done in the past, for instance with South Africa divestment, is that perhaps over a period of three years, portions of the portfolio might be divested. It might not be the easiest thing that money managers have to do, but I would suggest to you that the young men and women of the U.S. military who are fighting in Iraq ... and in Afghanistan today are not doing something that's really easy either, and what we're not doing is supporting them. 9:41:52 AM REPRESENTATIVE GATTO said he thinks what Representative Ramras is trying to do [as co-prime sponsor of HB HCR 27] is important, but he said it is also important to avoid making purchases from Middle East countries. He said, "We have an opportunity right here to take care of that problem." He asked, "[Does] that kind of a message ever leak out into some of these communities that you're familiar with?" 9:42:58 AM MR. HOLTON replied that there is definitely a sense that dependence on Middle East oil is not a good thing, and he offered examples. 9:44:33 AM MEAD TREADWELL, Senior Fellow, Institute of the North, told the committee that he directs the institute's defense and security program. He reviewed that the institute was founded by former Governor Walter Hickel to develop policy on issues strategic to Alaska and its future. For close to 10 years, he noted, the institute has worked with other national, international, and state-based think tanks on the proposition that action at the state level can help improve the security of the United States. He continued as follows: Should state governments be concerned about national security? Absolutely. In Alaska, we understand our geographic position, we understand our role in hosting the military and sending our sons and daughters abroad. We understand we're close to North Korea. We understand the pipeline as a terrorist target, and we understand our energy helps America diversify its supply. But we also need to understand our role as an investor in providing funds to parts of the world that could or would do harm to us. With the Center for Security Policy in Washington, the Claremont Institute in California, the Institute in Foreign Policy Analysis at Tufts [University], ... our program has helped the nation understand Alaska's vital role in U.S. security over the last 10 years, and we've helped Alaskans play a more effective role ourselves. I should say that this Divest Terror campaign is a very interesting coalition of people coming from the left and the right, people coming from business and labor, people concerned about slavery in Sudan, and nuclear proliferation, and that you're working with very ... fine people here .... As far back as 1996, the institute began looking at missile threats to Alaska and the position of the U.S. government then, which was not to include Alaska under the umbrella of a proposed missile defense system. It was a resolution of the Alaska [State] Legislature in 1997 which called for a new intelligence estimate on missile threats to Alaska, and [which] Senator Stevens told us resulted in the Rumsfeld Commission. Over several years, we helped shift U.S. policy to build a system in Alaska, not for our economy, but for our protection. We hosted a continuing series of follow- up conferences on these issues, involving many of your present and former colleagues. ... There's one conclusion we found in every meeting we've had assessing the threats to the United States: terrorism and nuclear threats run on money. Terrorism finds refuge in states with regimes that support terrorists, and money - usually outside money brought in from the world market economy either as investment or trade - is the mother's milk of terrorism. Alaska's major fund, the permanent fund, and our pension funds could find themselves unwitting players in this process. This resolution calls for a stop to that by a simple, inexpensive process that several other states and leading pension funds have taken on to review their portfolios. I was able to see a copy of ... the document circulated by the Permanent Fund Corporation at the last meeting of this committee. ... What I saw there is a kind of a scare tactic; a huge price tag meant to dissuade ... this committee from passing a resolution that would free Alaskans from the concerns that their permanent fund might be supporting terrorism. Between the last meeting and this we were in contact with the Conflict Securities Advisory Group - one that several firms, states, and pension funds have hired to review their portfolios against concerns they unwittingly invest in terrorism or nuclear threats to the United States. The firm has told me that they'd be able to offer the State of Alaska a full screening service for its permanent fund and state pension fund for a discounted rate of $5,000. ... Before this legislature concludes its business this spring, I believe you could be aware of how many stocks and of what value Alaska's portfolio is exposed through investments and terrorism. The term exposure is not one I use lightly. While some investment funds have cautioned that divestment of stocks invested in terrorist states could lose them money, I believe this process reduces risk that the stocks would take a sharp fall. Several firms, such as General Electric and ConocoPhillips [Alaska, Inc.] have, because of concerns raised like those in this resolution, divested activities in Iran to make sure they are not exposed. Shouldn't we be doing the same thing? 9:49:11 AM MR. TREADWELL concluded that the proposed legislation is a resolution, not a law, and it would commit the State of Alaska to a process of moderating its investments in national security and would give the Permanent Fund Board the flexibility to "take this on." He stated, "Governor Hickel likes to remind us we're an owner state, and I think as owners we deserve to give our asset managers a little advise now and then." 9:49:29 AM REPRESENTATIVE GARDNER asked Mr. Treadwell to provide a written copy of his testimony for the committee. 9:49:58 AM LAURA ACHEE, Research and Communications Liaison, Alaska Permanent Fund Corporation, Department of Revenue, said she is pleased to hear that the Council for Security Advisory Groups has given a quote of $5,000 for Divest Terror products, because she had been told the cost would be $15,000 per manager. She stated, "I would like to point out that for the Alaska Permanent Fund Corporation itself to purchase the list does us not as much good; it helps us evaluate what's in our current portfolios, but we don't make any of our purchase or divestment transactions in house, so every one of our managers would also have to purchase this list." Ms. Achee explained the purpose for her presence is to supply "the full range of facts" for the committee to use in deliberating the resolution. She concluded, "The Permanent Fund Board is required to act as fiduciaries, and unfortunately that means that they have to approach every decision from a financial perspective." 9:52:17 AM MICHAEL J. BURNS, Executive Director, Alaska Permanent Fund Corporation, Department of Revenue, had his testimony read by Laura Achee, which read as follows [original punctuation provided]: Mr. Chairman and members of the committee, my name is Mike Burns and I am here on behalf of the Alaska Permanent Fund Corporation Board of Trustees to testify on House Concurrent Resolution 27. We appreciate the reasons that the sponsor would have for bringing this resolution forward. No United States citizen wants to support countries that seek to harm the US, either directly or through the actions of our state and local government. However, I am here today to represent the Permanent Fund's Board of Trustees, and their role as fiduciaries of the Fund. The common law duty that has been termed the most fundamental duty owed by a fiduciary is to administer a fund solely for the financial good of its beneficiaries. Therefore any social investment restriction will raise concerns for the Trustees. These concerns of the Board and the APFC staff can be summarized in three points. First, the Board of Trustees does not believe that any social investment restrictions are compatible with their charge by state statute and the prudent investment rule to act as fiduciaries of the Permanent Fund. Second, the APFC believes that the restrictions suggested by this resolution will have a significant increase in management fees, divestiture costs and potential lost revenues in the future. And finally, while we can appreciate the desire to bring about change through investment guidelines, we believe that the efficacy of these measures has not been proved and is not guaranteed to produce the desired result. (Statutory direction) The statutes are very clear. The Fund must be invested under the guidelines of the Prudent Investor Rule. Statutes also direct that the Fund should: · provide a means of conserving a portion of the state's revenue from mineral resources to benefit all generations of Alaskans; · maintain safety of principal while maximizing total return; · and be used as a savings device managed to allow the maximum use of disposable income from the fund for purposes designated by law. Any directive to invest in or divest of any asset for any reason other than for the financial benefit of the Fund's beneficiaries would run counter to all of the directives in statute. On December 15 of last year, the Board's Corporate Governance Committee met and approved by motion a statement on behalf of the Board of Trustees. This statement reads "The Corporate Governance Committee reaffirms the position that social investment policies do not serve the Fund's statutory mission of investing for maximum return while protecting principal." I believe the Trustees' position on this issue has been made very clear. (The Cost of Implementation) However, if the Trustees were to divest the Fund of companies with ties to Iran and North Korea, it would raise two questions: How do we know which companies to divest from and avoid purchasing in the future, and what will be the cost to the Fund both in manager fees and lost returns? First, how to determine which are the companies in question? The Federal Government via the Securities and Exchange Commission would be a good source of information, however they have declined to produce a list of companies that invest in terror sponsoring states. So we turn to private sector offerors. There are only two firms that could provide the Permanent Fund with this information. Institutional Shareholder Services is a widely recognized firm that primarily offers research for proxy voting issues. They also provide lists on companies that invest in Sudan and more recently in terror sponsoring states. However, ISS has publicly warned that their list should be used for informational purposes and is not intended as a divestment list. Conflict Securities Advisory Group also offers a list of companies invested in terror sponsoring states. CSAG clearly states on their web site that they do not separate companies that are in terror sponsoring states for humanitarian reasons versus those with purely economic motivations, or even the scale of economic involvement. Adam Pener of CSAG has also has cautioned that his list in no way should be used as a divestment list. The New York State Comptroller's office wrote to several companies on CSAG's list last fall to inquire of their specific activities. In one case the company paid half of a local consultant's salary for information on what was occurring on the ground in Sudan. Seimens, another company on CSAG's list, has stated that while they do have a joint venture in Iran, they are in "full compliance with existing international embargoes and sanctions." The APFC has questions regarding the reliability of the information on these lists based on the statements of the firms themselves and the subsequent investigation of the companies named. If the Board of Trustees were to move forward despite the concerns over the information contained in these lists for purchase, the APFC would next have to address cost. One cost would be the cost of the divestment lists. The APFC does not make any internal equities trades, and uses 4 external fixed income managers in addition to our internal fixed income department. Thus the Fund's external managers would all have to purchase one of the lists available in order to properly screen the Fund's current portfolio and any future purchases. We expect that the managers would pass this cost back to the Fund, in part based on information gleaned in our conversations with ISS and C-SAG regarding their current clients. Including our internal fixed income department, we have 39 managers each paying an annual fee. We estimate the annual cost to the Permanent Fund would range from $207 thousand to $585 thousand. This could be affected by the manager's decision to charge the APFC. The next step in the cost analysis would be the cost of divesting the Permanent Fund's portfolios of the companies on the list. One specific portfolio that I would like to mention is our Cap Guardian Emerging Markets portfolio. Currently our portfolio is commingled with the funds from several other large institutional investors providing a significant cost savings. In order to comply with this specific divestment directive we would have to pull out of that common fund to create a custom portfolio, incurring both divestment costs and increased annual fees. The specific details of the divestment costs for our portfolios are broken down for you in the handout we provided. In summary, we estimate the range of divestment costs to be from $19 million to $37 million. These estimated costs don't include the cost of searching for new managers if our existing managers choose to terminate our relationship because of the difficulties associated with these new restrictions. And there will be annual costs to comply with the new restrictions. We estimate our manager fees for the equity portfolio will increase by about $16 million per year, in addition to the annual costs of procuring the divestment list. For comparison, the Permanent Fund has budget $47.6 million for manager fees for FY06. We also believe that while small compared to the other costs, there will be increased costs in necessary staff time to monitor managers' compliance with these restrictions, additional due diligence and additional consultant's fees. Also we must consider the potential loss of revenue to the Fund. While it is difficult to predict what this might be, we have put some rough estimates together of various scenarios and have included the details in the information provided to you. Our rough estimate shows losses of as much as $52 million per year. (Social Investing) Now that I have outlined the specific issues of how this resolution could affect the Fund, I would like to take a few minutes to address the topic of social investment policies in general. One question is whether divesting of the companies would have any affect at all in discouraging them from investing in terror sponsoring states. While the Permanent Fund seems large from the Alaskan point of view, we are very small from the point of view of the companies we invest in. Generally the Fund owns less than 1 percent of any company, and if we were to sell our shares other buyers from around the world would be there to take our place. But if our divestiture were to have the desired effect of encouraging companies to pull out of the countries in question, would it produce the desired result? While aggression against the United States and aggression against a country's own citizens do create slightly different circumstances, there are enough similarities in purpose behind this suggested divestiture from terror sponsoring states and the move to divest from South Africa in the 1980's to draw comparisons on the efficacy of these measures. Conventional wisdom over the years has held that boycotting South Africa was very effective and brought the country to its knees, but this conclusion does not hold up against the facts. In 1999 a group of economic researchers from several organizations collaborated on what is considered to be the definitive review of the South African boycott. Their findings were published in the Journal of business, and the group concluded that "despite the prominence an publicity of the boycott and the multitude of divesting companies, the financial markets' valuation of targeted companies or even the South African financial markets themselves were not easily visibly affected." The conclusion we can draw from this is that even if the companies that the Fund is invested in withdraw from terror sponsoring states, it is not guaranteed to have the desired effect of bringing about change in those countries. Conclusion I am not here to recommend that the committee vote for or against this resolution. The Board of Trustees respects the Legislature's authority to provide direction in how the Permanent Fund is invested. However, I do urge the committee to carefully consider the definite and potential financial consequences of supporting any social investment restriction on the Fund, as well as the probability the restriction has of producing the intended benefit. Thank you for the opportunity to testify on this resolution. 10:00:34 AM CHAIR SEATON, regarding Ms. Achee's breakdown of initial costs, asked if the divestiture would be required of the Standard and Poor's (S&P) 400 and S&P 500 funds. 10:00:52 AM MS. ACHEE answered yes. 10:00:56 AM REPRESENTATIVE RAMRAS asked Ms. Achee, "Do you think we would have saved money with the bus system if Rosa Parks would have just got on the back of the bus instead of the front of the bus?" 10:01:30 AM MS. ACHEE replied, "The Board of Trustees of the Permanent Fund is not in position to debate the relative moral implications of any social investment restriction; their job is to act as fiduciaries of the fund." 10:01:56 AM REPRESENTATIVE LYNN suggested that [only focusing on the fiduciary aspects of the fund] could mean investing with the mafia. MS. ACHEE replied, "I don't know if those are traded on public markets." 10:02:33 AM REPRESENTATIVE LYNN said everyone has his/her own favorite social issue, but what is being discussed in not a social issue, but one of national security. 10:02:36 AM CHAIR SEATON announced that HCR 27 was heard and held.
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