Legislature(1995 - 1996)

03/21/1996 08:00 AM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
 HB 345 - PENSION INVESTMENT BOARD PROCUREMENTS                              
                                                                               
 The first order of business to come before the House State Affairs            
 Committee was HB 345.                                                         
 CHAIR JEANNETTE JAMES called on John Walsh, Legislative Assistant             
 to Representative Richard Foster, to present the sponsor statement.           
                                                                               
 Number 0050                                                                   
                                                                               
 JOHN WALSH, Legislative Assistant to Representative Richard Foster,           
 read the following statement into the record.                                 
                                                                               
 "HB 345; An Act Relating to the Procurement of Investment and                 
 Brokerage Services by the Alaska State Pension Investment Board.              
                                                                               
 "House Bill 345 simply requires that the Alaska Pension Investment            
 Board `increase the utilization of brokerage and investment                   
 services provided by persons located in the state to at least seven           
 percent of the brokerage services procured by the board.'                     
 Additionally, there is a provision to allow the board to `opt' out            
 upon a written finding that the seven percent goal is unattainable.           
                                                                               
 "In support of the bill, I would merely reiterate the findings                
 section of the legislation wherein the case is made for a healthy,            
 competitive private sector; the need to review state procurement              
 practices and support a local procurement process; and most                   
 importantly, the need for all state agencies and state resources to           
 be directed toward improving the statewide economy.                           
                                                                               
 "For the record, it is not the intent of the sponsor to jeopardize            
 in any way the integrity of these investment funds."                          
                                                                               
 MR. WALSH said he would be available for any questions.                       
                                                                               
 CHAIR JAMES called on the first witness in Juneau, Jim Crawford.              
                                                                               
 Number 0341                                                                   
                                                                               
 JIM CRAWFORD, President and Chief Executive Officer, City Commerce            
 Corporation, referred the committee members to a graph titled,                
 "Alaska's Economy since Statehood - Employment."  He explained                
 employment was the best way to judge an economy on a statewide                
 basis.  There were many misconceptions about Alaska's economy,                
 therefore, affecting the stability of instate investments.  The               
 graph indicated employment was a continual plot for Alaska.                   
                                                                               
 MR. CRAWFORD further referred the committee members to a graph                
 titled, "Employment - Trendlines:  1978 - 1994 (Alaska, Texas,                
 California and New York.)"  The trend line for Alaska was more                
 positive compared to the other states.                                        
                                                                               
 MR. CRAWFORD further referred the committee members to a graph                
 titled, "Employment - Actual:  1978 - 1994 (Alaska, Texas,                    
 California and New York.)"  The graph indicated a cyclical economy            
 for all the states.  This was contrary to popular belief that                 
 Alaska's economy was more cyclical than other states.                         
 MR. CRAWFORD further referred the committee members to a graph                
 titled, "Housing - Trendlines:  1985 - 1994 (Anchorage, Dallas, Los           
 Angeles and New York.)"  The graph indicated a greater housing risk           
 in the other cities compared to Anchorage.                                    
                                                                               
 MR. CRAWFORD further referred the committee members to a graph                
 titled, "State of Alaska Permanent Fund - Income and State Oil                
 Revenues."                                                                    
                                                                               
 MR. CRAWFORD referred to a handout titled, "State of Washington -             
 State Investment Board Real Estate Investment Plan."  He explained            
 Washington cut back their allocation of real estate from 78 percent           
 to 44 percent.  The state of Washington invested in its own state             
 and region.  The state of Oregon put mortgage money into the state            
 alone.  The state of Texas put 50 percent of its entire fund into             
 real estate instate.  There was a pattern in other states to                  
 support the local economy with an excellent return.                           
                                                                               
 MR. CRAWFORD further referred to a handout titled, "Apartment                 
 Financing Comparison."  He suggested reducing apartment rates by 15           
 percent to connect Alaska to long-term money.  Alaska's apartments            
 and commercial buildings were financed on short-term loans with               
 short amortization and higher interest rates, by 2.5 percent.                 
                                                                               
 MR. CRAWFORD asked the committee members to pass the bill forward             
 to the House Finance Committee for further consideration.  He                 
 called the bill a critical component to expand the local economy.             
                                                                               
 CHAIR JAMES called on the next witness in Juneau, David Schwantes.            
                                                                               
 Number 0695                                                                   
                                                                               
 DAVID SCHWANTES expressed his opposition to HB 345.  He said                  
 currently, if a person wanted to make a presentation to the board,            
 he was allowed.  Furthermore, to require a 7 percent investment was           
 a disservice.  The board was elected to do the best job that it               
 could do.  Therefore, if a presentation was made and the board felt           
 it was good for the people, it would be adopted.                              
                                                                               
 MR. SCHWANTES referred the committee members to page 2, lines 30 -            
 31; and page 3, lines 1 - 2, and read, "unless the board makes a              
 written finding that the board is unable to meet this goal because            
 there is insufficient number of persons with the requisite skill in           
 the state to perform the service."  He said there were many people            
 in Alaska that had the skill, but he wondered if they provided the            
 best quality.  He reiterated the board would accept a presentation            
 if it was the best quality for the people that it served.  The                
 bill, however, would require the use of that investment, even if              
 there was a better one.  Therefore, he reiterated, he was opposed             
 to HB 345.                                                                    
                                                                               
 Number 0860                                                                   
 CHAIR JAMES stated she was surprised to hear testimony against HB             
 345 because the public expressed dissatisfaction that funds were              
 not being invested in the state.  She wondered, if Mr. Schwantes              
 had any confidence in the state, according to his testimony                   
 regarding the requisite skills.  She commented 7 percent was not              
 very much.                                                                    
                                                                               
 Number 0896                                                                   
                                                                               
 MR. SCHWANTES replied he did have confidence in the board that was            
 elected to invest the funds.  Therefore, if the board made a                  
 decision to invest in the state, that was fine.  The board had the            
 skills to determine if a presentation was of quality and best                 
 represented the people.                                                       
                                                                               
 CHAIR JAMES called on the next witness in Juneau, Dennis Millhouse.           
                                                                               
 Number 0959                                                                   
                                                                               
 DENNIS MILLHOUSE, Owner, Trend Setters School of Beauty, expressed            
 his support of HB 345.  It was time that Alaskan money was                    
 reinvested in Alaska.  He explained he got caught in the economic             
 downturn in the late 1980's and had yet to recover.  He said he               
 hoped the bill passed so that the people who lived in Alaska and              
 made their money in Alaska could reinvest in Alaska.  He did not              
 leave Alaska when he encountered his problems because Alaska was              
 his home.  He asked the state to loosen up and to reinvest its                
 money to make Alaska better.                                                  
                                                                               
 CHAIR JAMES called on the next witness in Juneau, Gayle Harbo.                
                                                                               
 Number 1222                                                                   
                                                                               
 GAYLE HARBO stated it was important that the board be allowed to              
 invest the money in the best way possible to get the best return.             
 Currently, there was not anything that prevented the board from               
 investing 7 percent, or more, in the state of Alaska.  The board              
 was the expert, so let the board decide.  She expressed her                   
 opposition to HB 345.                                                         
                                                                               
 CHAIR JAMES called on the next witness in Juneau, Gary Bader.                 
                                                                               
 Number 1292                                                                   
                                                                               
 GARY BADER, Chairman, Alaska State Pension Investment Board                   
 (ASPIB), explained the board was comprised of eight members - four            
 were elected by the beneficiaries and four were appointed by the              
 Governor.  Two of the current members were appointed by Governor              
 Hickel then reappointed by Governor Knowles.  The board was                   
 interested in serving the best interest of the participants in the            
 system.  The participants were:  for example, retirees, potential             
 beneficiaries, and public entities.  Moreover, the returns of the             
 system were of a vital interest to the employee's level of comfort.           
 It was also important to the political subdivisions that were                 
 assessed based on the earnings of the fund.  If the fund did not              
 earn as it should, the contribution rates of employers tended to go           
 up over time.  Moreover, the board created a mechanism where all of           
 the equity trades were reported to the brokers in Alaska.  It was             
 not up to the board, however, to see that the check went directly             
 to the brokers.  He said there was an interest to invest in Alaska.           
 The board would consider an investment in Alaska that was in the              
 best interest of the fund.  Lastly, he believed there were ways               
 that Alaska benefitted from investments in Alaska.  He cited the              
 Alaska Housing Finance Corporation that ensured investments were              
 placed in areas of general need.                                              
                                                                               
 Number 1435                                                                   
                                                                               
 REPRESENTATIVE BRIAN PORTER said he did not see language in the               
 bill that indicated 7 percent of the investment should go towards             
 improving Alaska.  The language only indicated that 7 percent of              
 the investment services the board procured should be brokeraged               
 through the local brokerage services.                                         
                                                                               
 Number 1453                                                                   
                                                                               
 MR. BADER stated the bill did not require investment in Alaska as             
 Representative Porter indicated.  He was responding to earlier                
 testimony that inferred there was a linkage between investment in             
 Alaska and HB 345.                                                            
                                                                               
 Number 1464                                                                   
                                                                               
 REPRESENTATIVE PORTER said he assumed that there was a linkage.  A            
 local investor would have better knowledge of prudent investments             
 in Alaska compared to an investor in New York, for example.  He               
 reiterated he did not see language in the bill that indicated this            
 would jeopardize money.                                                       
                                                                               
 Number 1481                                                                   
                                                                               
 REPRESENTATIVE JOE GREEN asked Mr. Bader how much of the Alaska               
 State Pension Investment Board's portfolio was invested in Alaska             
 now?                                                                          
                                                                               
 Number 1485                                                                   
                                                                               
 MR. BADER replied a very small amount of the portfolio was invested           
 in Alaska now.                                                                
                                                                               
 Number 1512                                                                   
                                                                               
 REPRESENTATIVE GREEN asked Mr. Bader if investments were not made             
 in Alaska because they were shakier, or the return was not as good,           
 for example?                                                                  
                                                                               
 Number 1522                                                                   
                                                                               
 MR. BADER replied he did not say the ASPIB would not invest                   
 locally.  He explained an investment allocation was based upon the            
 risk characteristics of the fund.  The fund had not called for an             
 increased allocation in real estate or mortgages, therefore, the              
 other investments tended to be stocks and bonds, which were not               
 instate investments.                                                          
                                                                               
 Number 1550                                                                   
                                                                               
 REPRESENTATIVE SCOTT OGAN agreed with the remarks of Representative           
 Porter.  The bill simply increased the board's utilization of                 
 brokerage and investment firms that were based in Alaska or Alaskan           
 owned.  The board could still make the calls to invest wherever it            
 wanted.  He wondered how good the investors were in Alaska.  He               
 asked, are they capable and competent enough to invest properly?              
                                                                               
 Number 1593                                                                   
                                                                               
 MR. BADER stated that question would be better put to the Chief               
 Investment Officer, Robert Storer, who would testify shortly.                 
                                                                               
 Number 1601                                                                   
                                                                               
 CHAIR JAMES asked Mr. Bader, what brokerage firms did the board               
 normally use when looking to invest?                                          
                                                                               
 Number 1608                                                                   
                                                                               
 MR. BADER replied a brokerage firm was normally selected in terms             
 of stocks by the investment manager engaged.  Furthermore, the                
 pension fund had directed a mechanism to recapture some of the                
 commissions back to the fund as opposed to the investment manager,            
 for example.                                                                  
                                                                               
 Number 1635                                                                   
                                                                               
 CHAIR JAMES wondered if the fund was its own broker.                          
                                                                               
 Number 1638                                                                   
                                                                               
 MR. BADER responded the fund was using another broker, but there              
 was an arrangement for discounts.  That did not cover the entire              
 fund, however.                                                                
                                                                               
 CHAIR JAMES asked if that was a local broker or a broker outside of           
 the state?                                                                    
                                                                               
 MR. BADER replied that was a broker outside of the state.                     
 Number 1651                                                                   
                                                                               
 CHAIR JAMES asserted herein lied the problem.  If Alaska could keep           
 the money instate, it would not be having the financial dilemma               
 now.  She never failed to hear the people wonder why the state did            
 not invest its own money in Alaska.  She reiterated the 7 percent             
 brokerage requirement in the bill was not an unreasonable request.            
                                                                               
 CHAIR JAMES called on the next in Juneau, Michael J. Kirk.                    
                                                                               
 Number 1717                                                                   
                                                                               
 MICHAEL J. KIRK said he was here today on behalf of retired                   
 teachers, state employees, municipal employees and the people.  He            
 said, "If I told you how to invest the money in the piggy bank of             
 your children, you'd be outraged."  The tradition in this country             
 was a free economy.  There were no special privileges in the                  
 investment game.  There was, however, in the Alaska State                     
 Constitution a prudent investor clause, of which you, the                     
 legislators, had sworn to uphold.  Furthermore, he explained he had           
 followed approximately 250 to 300 corruption pension fund cases of            
 which the same type of pleading was heard today.  He said he would            
 love to see the money invested in the state, but not somebody                 
 else's money.  "You invest your own money, they invest their own              
 money, and I'll be darned if they tell me how to invest my                    
 savings."  He referred the committee members to his handout on the            
 Robin E. Ward's opinion column in the Anchorage Daily News and              
 urged them to read it.  He reiterated, until the prudent investor             
 clause was changed in the Alaska State Constitution, the committee            
 members would be violating their loyalty to it.                               
                                                                               
 Number 1852                                                                   
                                                                               
 REPRESENTATIVE PORTER stated he understood the position of Mr.                
 Kirk.  However, as a retired municipal employee, he felt Mr. Kirk             
 was not talking on behalf of every retiree.  Furthermore, the state           
 put more than 50 percent of the money into the trust fund.                    
 Moreover, the investment procedures were well within state policy             
 and guidelines.  Imprudent investment was not an issue, and there             
 was nothing in this bill that indicated anyone should make an                 
 imprudent investment.                                                         
                                                                               
 Number 1891                                                                   
                                                                               
 MR. KIRK responded the market would find its own sense of gravity.            
 He would not object, if 100 percent were invested in the fund, for            
 example.  He reiterated the bill violated the law, and the market.            
                                                                               
 REPRESENTATIVE PORTER replied, "I respectfully disagree with you."            
                                                                               
 CHAIR JAMES called on the next witness in Juneau, Robert Storer,              
 Department of Revenue (DOR).                                                  
 Number 1920                                                                   
                                                                               
 ROBERT STORER, Chief Investment Officer, Treasury Division,                   
 Department of Revenue, explained the DOR provided staff for the               
 Alaska State Pension Investment Board.  He said he was here                   
 primarily to answer any questions, but he did have a few                      
 observations to comment on.  He referred the committee members to             
 page 2, line 10, and read "increase the board's utilization of                
 brokerage and investment services provided by persons located in              
 the state to at least seven percent of the brokerage and investment           
 services that the board procures by contract, unless the board                
 makes a written finding that the board is unable to meet this goal            
 because there is an insufficient number of persons with the                   
 requisite skill in the state to perform the services."  He                    
 explained brokerage services were not procured by contracts in                
 Alaska.  Therefore, given the intent of this bill, he suggested               
 changing the language.  Furthermore, the ASPIB accepted fiduciary             
 responsibility on July 1, 1993 for the retirement funds.  The                 
 contract stated that they must consider the status of the funds'              
 investments and liabilities, determine appropriate investment                 
 objectives, establish investment policies to achieve these                    
 objectives, and act only in regard to the best interests of the               
 system's plan and beneficiaries.  Moreover, the pension board was             
 held to the prudent expert rule standard.  He said he could not               
 quiver with the intent of the bill.  However, legislation that                
 defined investment criteria, in effect, defined investment policy.            
 Therein was his problem with the bill.  Moreover, a policy did try            
 to address the commitment that brokerage firms had made in Alaska.            
 He explained the board balanced the Alaskan entities and the best             
 executions through information.  Information was provided on a                
 quarterly basis by the Department of Revenue.  He explained there             
 were two different entities within a brokerage firm - retail and              
 institutional.  The DOR used the institutional entity.  The                   
 institutional market was in jeopardy of downsizing, however.                  
 Furthermore, he explained 30 percent of all equity trades were                
 through firms that had offices located in Alaska which equated to             
 about $764,000 in commission.  "Did all of that money come back to            
 Alaska," he asked?  The answer was, "no."  How much?  He did not              
 know as well.  "It would not be all, however."                                
                                                                               
 Number 2187                                                                   
                                                                               
 REPRESENTATIVE GREEN asked Mr. Storer, if the board were to use a             
 local broker to contact an institutional broker, could the fee be             
 shared?                                                                       
                                                                               
 Number 2206                                                                   
                                                                               
 MR. STORER replied the board had committed to a commission                    
 recapture program which brought dollars back into the plan.  It was           
 intentional to not include the Alaskan firms otherwise all the                
 commissions would come back to the department.  "By excluding them,           
 we are advantaging them in this process," he stated.                          
                                                                               
 REPRESENTATIVE GREEN wondered if this was double talk.                        
                                                                               
 MR. STORER replied, this was a "trust me" scenario.  It was done              
 intentionally so that the maximum dollars were available to firms             
 that had offices located in Alaska.                                           
                                                                               
 Number 2266                                                                   
                                                                               
 REPRESENTATIVE GREEN asked Mr. Storer if it was possible through              
 institutional brokerage to direct the money?  He wondered if there            
 were additional ways to direct the money through the state.                   
                                                                               
 Number 2279                                                                   
                                                                               
 MR. STORER replied, "yes, you can direct money."  There were                  
 implications, however.  There were market impacts, for example.               
 When directing money, it had to be in the best interest of the                
 beneficiaries.  It also had to be in the best interest of Alaska's            
 financial community.  He reiterated the institutional desks were              
 distinctly different than the offices in Alaska.                              
                                                                               
 Number 2319                                                                   
                                                                               
 REPRESENTATIVE PORTER asked Mr. Storer what the current percentage            
 the board was using for local investment brokers?                             
                                                                               
 Number 2324                                                                   
                                                                               
 MR. STORER replied about 30 percent of the commission dollars were            
 executed through firms that had offices located in Alaska.  The               
 execution was not made directly through the offices in Alaska,                
 however.                                                                      
                                                                               
 REPRESENTATIVE PORTER stated that would not mean the board had                
 exceeded the 7 percent goal.                                                  
                                                                               
 MR. STORER replied, according to the language and intent of HB 345,           
 the answer would be 0 percent, because the commissions were not               
 executed in Alaska.                                                           
                                                                               
 Number 2349                                                                   
                                                                               
 CHAIR JAMES stated if a firm such as Merrill Lynch, for example,              
 had an office in Alaska, but the dealings were with the office in             
 New York, she wondered how the money would come back to Alaska.               
                                                                               
 Number 2365                                                                   
                                                                               
 MR. STORER stated money did come back to Alaska.  How much,                   
 however, he could not measure.  It was called the "intermurals" of            
 Merrill Lynch.  He explained as much information was provided to              
 the local firms to receive as much commission dollars as possible             
 in the process.  It depended on the relationship of the firms,                
 however.                                                                      
                                                                               
 Number 2393                                                                   
                                                                               
 CHAIR JAMES stated she was embarrassed and disappointed that the              
 intent of HB 345 was even an issue.  Testimony today indicated to             
 her why it was an issue, however.  She said, "the public doesn't              
 understand."  She wondered if organizations were willing to tell              
 the people why there were not willing to invest in Alaska.  It was            
 hard for her to believe there was not prudent investment available            
 in Alaska.  She reiterated her frustration with the process.                  
                                                                               
 MR. STORER replied, "I understand, Madame Chair."                             
                                                                               
 CHAIR JAMES called on the next witness in Juneau, John Cyr.                   
                                                                               
 Number 2460                                                                   
                                                                               
 JOHN CYR, Vice President, National Education Association - Alaska             
 (NEA - Alaska), said the NEA - Alaska was opposed to HB 345.                  
                                                                               
 TAPE 96-38, SIDE B                                                            
 Number 0000                                                                   
                                                                               
 MR. CYR further said the board was obligated to get the best return           
 that was possible for the fund for the state.  House Bill 345 was             
 the antithesis of faith in Alaska.  If there was faith in Alaskan             
 businesses, brokerage firms, and Alaskans, legislation would not be           
 needed.  Let the free market economy determine the best process.              
                                                                               
 Number 0046                                                                   
                                                                               
 CHAIR JAMES stated she agreed with Mr. Cyr.  However, there were at           
 least eight people today that were concerned about the prudent                
 decisions of the board.  She agreed the market should set the                 
 process.  There was bias, however.  Furthermore, legislators had a            
 fiduciary responsibility as well.  She reiterated, if this was not            
 an issue, the bill would not be before the committee today.                   
                                                                               
 CHAIR JAMES called on the first witness via teleconference in                 
 Anchorage, Ray J. Ellis.                                                      
                                                                               
 Number 0095                                                                   
                                                                               
 RAY J. ELLIS, Certified Public Accountant, Raymond J. Ellis, said             
 he had been practicing in Alaska for over 30 years and during this            
 time he had seen many ups and downs in the economy.  He also worked           
 with many clients to obtain financing.  He explained it had become            
 very difficult to obtain financing in Alaska.  He mentioned his               
 investment in real estate in the 1980's and the problems associated           
 with the banks.  He expressed his support of HB 345 for more                  
 opportunities for financing projects.                                         
                                                                               
 CHAIR JAMES called on the next witness via teleconference in                  
 Anchorage, Scott Johannes.                                                    
                                                                               
 Number 0223                                                                   
                                                                               
 SCOTT JOHANNES, President, Criterion General Inc., explained as a             
 general contractor he practiced business all over the state.  He              
 said the financing process was unique due to the rural communities            
 in Alaska.  It was hard to have comparable pricing for the banks to           
 use for loans, therefore, the banks required stringent cash                   
 requirements.  It was frustrating because the state put a lot of              
 money into the rural communities as state funded projects, but it             
 could not make funds accessible for private development.  There               
 were many individuals that wanted to develop but could not find the           
 financing to get started.                                                     
                                                                               
 CHAIR JAMES called on the next witness via teleconference in                  
 Anchorage, David Gottstein.                                                   
                                                                               
 Number 0290                                                                   
                                                                               
 DAVID GOTTSTEIN, President, Dynamic Capital Management Inc., read             
 the following statement into the record.                                      
                                                                               
 "My name is David Gottstein.  I am the president of Dynamic Capital           
 Management, an Alaskan based investment Advisory firm specializing            
 in large capitalization equities.  I am in the market to manage               
 other peoples' money for a fee.  This includes government pension             
 assets.  On the surface, because I might gain materially from its             
 passage, you might assume that I would favor HB 345 as it is                  
 currently written. You would be very wrong.  I am also a life-long            
 Alaskan, and I do not think the bill as written serves the                    
 residents of Alaska or would accomplish the goals intended.                   
                                                                               
 "Even though the intent of the proposed legislation should gain               
 wide approval within the state, the mechanism used is fundamentally           
 flawed on a number of issues.  With more focused analysis, a much             
 better formula could be devised.                                              
                                                                               
 "As members of the legislature, you are charged with the difficult            
 task of balancing your fiduciary obligations to grow and to protect           
 the pension and other assets of state government with your                    
 obligations, as citizens charged with the general welfare of you              
 constituencies, to seek the growth of employment opportunities for            
 Alaska's residents.  I believe the solution would be to adopt a               
 legitimate prejudice to hire firms that can show that the bulk of             
 their human resources, wherever possible, are located in Alaska,              
 and that services are provided without materially sacrificing                 
 competency, performance,or competitiveness in the area of fees,               
 charges or commissions.  There are several reasons why a quota                
 system would not establish a system of checks and balances to                 
 accomplish the goal of having a legitimate prejudice to hire such             
 Alaskan firms.  For example:                                                  
                                                                               
 "1.  The legislation, currently written establishing a quota                  
 system, could result in disaster.  It is important that the                   
 decision makers assigning contracts feel ownership in the outcome             
 and performance of their decisions.  By focusing the decision                 
 making process on a mandate to hire Alaskans, state decision makers           
 are forced to abdicate their primary responsibility as fund                   
 protectors to become job creators.  If a bad performance ensues               
 from one of the marginally qualified Alaskan contractors,                     
 fiduciaries cannot be held accountable, because they were forced by           
 statute to select from a limited pool.  It would be better for all            
 if competency did not have to take a back seat in the decision-               
 making process.  Can you imagine a standard so low that one is                
 required to hire someone unless they are determined to be                     
 unqualified?  Do you know what one calls the person who graduates             
 last in his or her medical class?  He or she is called Doctor.                
 This path is laced with potential mines.                                      
                                                                               
 "2.  The second flaw lies within the language, not the intent.  The           
 language in part says "services provided by persons located in the            
 state..."  The potential problem here is that legally a "person"              
 can mean a human or an entity.  A company with an office in Alaska,           
 with only an order taker, might qualify, even though personnel in             
 other states were actually getting paid for the services.                     
 Brokerage services might appear to go through an Anchorage or                 
 Fairbanks office, but actually be credited to an institutional New            
 York broker when determining commission income and bonuses.                   
                                                                               
 "3.  There is also a human factor.  It is obvious from the way the            
 legislation is written that the drafters have given up on the state           
 bureaucracy's ability to contract services without a prejudice                
 against local hire.  They have no incentive to do so.  They would             
 rather go to Phoenix to check up on a money manager than Anchorage.           
 Attempting to beat them into submission by expecting them to adopt            
 a new agenda and to perform it appropriately and with enthusiasm              
 is, quite frankly, naive.  Perhaps a better approach would be to              
 convince the procurement officers that Alaskan employment "will" be           
 a secondary, but a legitimate criteria in the selection process.              
 Rather than cramming a process down their throats that they don't             
 believe in, getting input from them on how to accomplish both goals           
 simultaneously would yield better results.                                    
                                                                               
 "4.  I believe the main challenge here is to devise a method                  
 whereby the state does not suffer from using local hire but rather            
 supports and fosters growth in an immature but potentially                    
 significant industry.  Current requirements sometimes preclude the            
 state from nurturing a promising financial services industry.                 
 Therefore, in part, we may have to deal with certain regulatory or            
 policy issues that act to discriminate against local hire because             
 of company size and age, or amount of assets under management.                
 Nascent industries need help most in their early stages of                    
 development.  Let me next suggest two different approaches that may           
 work better than a quota system.                                              
                                                                               
 "Instead of quota standards that set a minimum percentage as a                
 goal, a peer review qualification test could be maintained that               
 requires, at a minimum, above average competency.  This could be              
 done by inserting the language I used previously such as "to                  
 institute a legitimate prejudice policy to hire firms who can show            
 that the bulk of the human resources engaged in providing purchased           
 services are located in Alaska, and that services are provided                
 without materially sacrificing competency, performance, or cost."             
 This does not require Alaskan companies to be the best or the                 
 cheapest, but they would have to be competitive.  Fiduciaries could           
 then be required to manage the execution of the policy.                       
                                                                               
 "Another approach, not dissimilar from that which other                       
 institutions use as a matter of course, would be to craft a farm              
 team program for investment managers with a relatively modest                 
 dollar commitment.  This would require the trustees to engage local           
 hire farm or test teams under guidelines they deem appropriate.               
 The quota system recommendation came as a result of frustration               
 within the industry.  A better approach would be to tell                      
 fiduciaries that they must engage in an affirmative action plan               
 without dictating to them how to do it.  A quota system could                 
 result in significant performance issues with a marginally-                   
 performing service provider, discrediting the whole intent of the             
 legislation.                                                                  
                                                                               
 "These are just a few words on what might be a delicate subject.              
 I would be happy to answer questions from the committee members."             
                                                                               
 CHAIR JAMES called on the next witness via teleconference in                  
 Anchorage, Bob Bell.                                                          
                                                                               
 Number 0519                                                                   
                                                                               
 BOB BELL said he was an Anchorage Assembly Member and Engineer.  He           
 explained the Anchorage Assembly passed a resolution asking the               
 financial officers to use the local brokerage firms as much as                
 possible.  He explained the hard times he experienced in the                  
 1980's.  The local financial institutions stood by him compared to            
 the national financial institutions.  Furthermore, the local                  
 brokers knew how to better invest in Alaska.  He strongly                     
 supporting keeping the profits in Alaska.                                     
                                                                               
 CHAIR JAMES announced HB 383 would no be heard today due to time              
 constraints.  It would be scheduled for to Saturday, March 23,                
 1996.  House Bill 371 would be heard next.                                    
 CHAIR JAMES called on the next witness via teleconference in                  
 Anchorage, Mano Frey.                                                         
                                                                               
 Number 0687                                                                   
                                                                               
 MANO FREY, Trustee, Alaska Laborers - Employers Retirement Fund,              
 explained the fund was a joint trustee comprised of four management           
 trustees, and four union trustees.  The composition provided a                
 balance for decision making.  It was personally repugnant to him to           
 have to be here today to testify to urge the ASPIB to invest in               
 Alaska.  It was beyond his comprehension that it did not meet that            
 standard already.  The Alaska Laborer's Fund had always provided a            
 funding level for investments in Alaska.  He cited the pension fund           
 was about $400 million.  It used investment advisors from outside,            
 but directed them, as long as the investment was prudent, to look             
 at the Alaskan market.  He asserted there were prudent investment             
 opportunities in the state of Alaska.  In conclusion, he encouraged           
 the ASPIB to make a direct investment in the state.                           

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