Legislature(1995 - 1996)

03/26/1996 08:05 AM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
 HB 345 - PENSION INVESTMENT BOARD PROCUREMENTS                              
 CHAIR JEANNETTE JAMES called on John Walsh, Legislative Assistant             
 to Representative Richard Foster, to present the committee                    
 substitute (9-LS1179/C).                                                      
 JOHN WALSH, Legislative Assistant to Representative Richard Foster,           
 explained based on the testimony last week (Thursday, March 21,               
 1996), a committee substitute was drafted (9-LS1179/C).  He                   
 referred the committee members to page 3, and explained the change            
 split the procurement by contract, and the investment and brokerage           
 services.  The testimony indicated last week that the state did not           
 procure brokerage services by contract, therefore, the language               
 needed to be clarified.  He called it a technical change.  He would           
 be glad to answer any questions from the committee members.                   
 Number 0175                                                                   
 REPRESENTATIVE SCOTT OGAN asked Mr. Walsh how much latitude would             
 the board have to determine the requisite skills addressed in the             
 MR. WALSH replied it was the intention of the sponsor to hold any             
 investment to a high standard.  There was no intention to lower the           
 standard in any way.  However, by putting this into statute,                  
 investments in Alaska would be looked at harder.  He explained                
 there were investments in Alaska that would not jeopardize the                
 performance of the fund.  Furthermore, the securities exchange                
 requirements, background checks, or performance bonds, for example,           
 would not be lowered.  He said the bill created a potential for a             
 partnership arrangements with larger firms or joint ventures with             
 Alaskan investment counsellors.  He reiterated the sponsor did not            
 intend to jeopardize or diminish the integrity of the fund.                   
 Number 0322                                                                   
 REPRESENTATIVE BRIAN PORTER asked Mr. Walsh where the 7 percent               
 figure came from?  He further wondered if the committee substitute            
 doubled the brokerage service from 7 percent to 14 percent.  He               
 stated the language was unclear.                                              
 Number 0345                                                                   
 MR. WALSH replied the 7 percent was requested in the beginning as             
 part of the negotiation process.  He could not say if it was high             
 or low figure, however.  He further explained there was procurement           
 by contract for investment advisory service and the actual                    
 acquisition of securities.  The first was a professional management           
 service and the second was the actual acquisition of the security.            
 Therefore, the investment was not doubled.                                    
 Number 0432                                                                   
 REPRESENTATIVE PORTER wondered if the security acquisition ever               
 occurred without the assistance of an investment service.                     
 Number 0439                                                                   
 MR. WALSH asked, in other words, could the board buy directly?  It            
 was possible, he replied.  He did not know if it was or had been              
 done before, however.                                                         
 Number 0454                                                                   
 REPRESENTATIVE OGAN said he also read the new language to indicate            
 that it was doubled to 14 percent.                                            
 Number 0488                                                                   
 MR. WALSH suggested calling on the Department of Revenue for                  
 further clarification.                                                        
 CHAIR JAMES called on Bob Storer, Department of Revenue (DOR).                
 Number 0515                                                                   
 BOB D. STORER, Chief Investment Officer, Treasury Division,                   
 Department of Revenue, said he read the new language as two                   
 separate distinct services.  He did not read it as a double-up.               
 Number 0544                                                                   
 REPRESENTATIVE PORTER further stated he also read it as an "up to"            
 requirement.  He asked Mr. Storer, if it would be easier to                   
 administer, if the language read "up to" 7 percent rather than "at            
 least" 7 percent?                                                             
 Number 0577                                                                   
 MR. STORER replied it was more complicated than that because the              
 money managers transacted for a multitude of plan sponsors                    
 simultaneously.  Therefore, the money managers were obligated to              
 execute their trades first, then the DOR's trades.  He called it a            
 layered process.  The money manager would view this in the                    
 aggregate so that at the end of the year, 7 percent of the volume             
 of trade was through Alaska, rather than 7 percent of the DOR's               
 Number 0648                                                                   
 REPRESENTATIVE JOE GREEN asked Mr. Storer to explain the 7 percent            
 figure.  Why 7 percent and not 10 percent, for example?                       
 Number 0654                                                                   
 MR. STORER replied he did not participate in the discussions                  
 surrounding the figure, so he could not answer that question.                 
 Number 0663                                                                   
 REPRESENTATIVE CAREN ROBINSON stated prior testimony indicated                
 there was a fear that this bill might jeopardize the integrity of             
 the fund.  She asked Mr. Storer if those fears were warranted?                
 Number 0684                                                                   
 MR. STORER explained HB 345 legislated investment policy.                     
 Furthermore, any time an investment policy was legislated, there              
 was a negative, because it defined certain acts.  He explained the            
 dynamics in the investment world had changed over the years.                  
 Legislation, therefore, would inhibit the ability to function in              
 the best interest of the beneficiaries.                                       
 Number 0751                                                                   
 REPRESENTATIVE ED WILLIS asked if it was possible that the state              
 might have to bail out the fund if decisions were mandated?                   
 Number 0780                                                                   
 MR. STORER responded he was not prepared to say if that could                 
 happen.  There were a number of implications as a result of HB 345,           
 however, because it dictated investment policy.                               
 Number 0930                                                                   
 REPRESENTATIVE GREEN wondered if it would be necessary to error               
 above 7 percent because trades could continue right up to the end             
 of the year.                                                                  
 Number 0959                                                                   
 MR. STORER replied it was a moving target.  Representative Green              
 was correct.  The market dictated the activity.  He explained one             
 could front load the activity, or force trades with non-specialty             
 Number 1008                                                                   
 CHAIR JAMES explained she was very familiar with fiduciary                    
 responsibility.  She had taught classes on that very issue because            
 many were not familiar with their responsibilities.  However, she             
 felt uncomfortable forcing a certain percentage.  On the other                
 hand, she was disappointed that this was an issue being discussed             
 today.  The union funds indicated that they invested in Alaska.               
 They were not told to do so, they just did it.  She would be more             
 comfortable if the pension board just listened to the presentations           
 from Alaska.  She did not want to mandate to interfere with the               
 earning power of the fund, however.  Of course, the beneficiaries             
 wanted the board to make the best possible decisions.  If she were            
 on the board, she would be scared to death due to the activity of             
 the stock market right now.  She was afraid some of the funds were            
 in jeopardy.  She called the responsibilities of the board awesome.           
 She reiterated the board needed to be encouraged, as an option, to            
 invest in Alaska.  She reiterated she had strong feeling on both              
 sides of the issue.  She stated there were good investments in                
 Alaska such as the gas line.  On the other hand, she did not want             
 to mandate a certain percentage and potentially jeopardize the                
 fund.  She really wanted a cooperative effort between the fund                
 managers and the state.                                                       
 Number 1227                                                                   
 MR. STORER said he agreed with Chair James.  He explained two-way             
 communication was the main issue involved here.  He said there had            
 been two presenters before the board from Alaska - a fixed income             
 manager, and a mortgage manager.  There was an educational aspect             
 as well.  As-long-as the board was communicating and being educated           
 by the investment professionals in Alaska, that would help form the           
 thinking of the board.                                                        
 Number 1295                                                                   
 REPRESENTATIVE WILLIS said the statutes called for the adoption of            
 a policy for investment education for the trustees.  He asked if              
 this had been accomplished?                                                   
 Number 1304                                                                   
 MR. STORER replied the trustees met formally between 8 to 10 times            
 each year.  A two day meeting was organized in the Spring after the           
 legislative session, devoted purely to education to stay abreast of           
 the investment topics.  Furthermore, last Sunday, a meeting was               
 organized by the board to discuss real estate investments.                    
 Number 1353                                                                   
 REPRESENTATIVE WILLIS further said the statutes called for an                 
 investment advisory council.  He wondered if the council had been             
 Number 1360                                                                   
 MR. STORER replied three members had been appointed to the                    
 investment advisory council.  The board allowed up to five members,           
 however.  There was also a general consultant outside of the                  
 council.  He explained the council was comprised of members with              
 specific type of expertise.  Currently, the council was comprised             
 of experts in the fields of academia, plan sponsorship, and                   
 investment management.                                                        
 Number 1394                                                                   
 CHAIR JAMES stated she would like to see the board encourage the              
 people to bring the opportunities to them.  She said "funds of                
 money are like magnets."  Therefore, if there was an opportunity              
 people would gravitate to it.  The message should be loud and clear           
 that the board should be giving consideration to Alaskan                      
 Number 1458                                                                   
 MR. WALSH stated testimony last week indicated that other funds in            
 other states and some private funds were required to look at the              
 local market prior to looking at the global market.  He said it               
 tied the hands of those board, but it was a commitment.                       
 Number 1505                                                                   
 CHAIR JAMES commented the pension fund would not be here today if             
 it were not for legislation.  Therefore, the legislature did have             
 the right to make specific demands.  It was not out of its                    
 bailiwick.  The legislature needed to decide if it wanted to send             
 a message, or mandate something.  She was not willing to answer               
 that today, however, but was willing to listen.                               
 Number 1548                                                                   
 REPRESENTATIVE WILLIS asked Mr. Walsh if the private union funds              
 had a specific percentage they were bound by?                                 
 Number 1553                                                                   
 MR. WALSH replied he could not remember if they were bound by a               
 specific figure.  However, other states such as Oregon and Texas,             
 were bound by a certain percentage.                                           
 Number 1588                                                                   
 MR. STORER said there was a study done of which about 17 percent of           
 the public funds used this type of investment vehicle.                        
 CHAIR JAMES called on the first witness in Juneau, Tim Volwiler.              
 Number 1618                                                                   
 TIM VOLWILER said he was a teacher with 16 years of service.  He              
 expressed his opposition to HB 345.  He said the economic benefit             
 to the state would come from the retirees actually receiving their            
 money and spending it instate.  A study conducted by the Permanent            
 Fund indicated that local businesses benefited when the fund was              
 distributed.  Furthermore, he was afraid of any change to the                 
 current structure.  He stated the board was working well now.  It             
 had not been in existence for many years so "lets leave it alone."            
 Currently, there was nothing that prohibited the board from using             
 instate services.  He believed in leaving the board to chose as it            
 saw fit.  He was also opposed to joint ventures.  He said let the             
 free market prevail.  The stock market was volatile so any                    
 restrictions placed on the board could present a problem.                     
 Moreover, he suggested targeting specific funds to encourage                  
 economic development rather than the pension fund.  As an employee,           
 he felt he earned his salary and his retirement, therefore, "this             
 pot of money should be for those that would retire."  The board was           
 established because of the massive losses in the junk bonds.  The             
 beneficiaries, therefore, were reluctant to change the board's                
 Number 1840                                                                   
 REPRESENTATIVE GREEN moved that CSHB 345(STA) (9-LS1179/C) be                 
 adopted for consideration.  Hearing no objection, it was so                   
 Number 1860                                                                   
 CHAIR JAMES said the House State Affairs Committee had heard a                
 great deal of testimony on this issue.  The next committee of                 
 referral was the House Labor and Commerce Committee.  The details             
 could be hammered out there, therefore, she was willing to move the           
 bill forward today.                                                           
 Number 1870                                                                   
 REPRESENTATIVE OGAN said he wanted to discuss a possible amendment.           
 He was concerned about the language on page 3, line 1, "investment            
 services that the board procures by contract, and seven percent of          
 the..."  He was concerned it would be read to mean 14 percent                 
 rather than 7 percent.  He suggested changing the word "and" to               
 Number 1895                                                                   
 CHAIR JAMES stated she was more concerned about the language on               
 page 2, line 31, "services provided by persons located in the state           
 to at least seven percent of the...."  She suggested changing the           
 language "at least" to read "up to."  The word "or" as                        
 Representative Ogan suggested could imply less than 7 percent.                
 Number 1945                                                                   
 REPRESENTATIVE OGAN said he brought it up for discussion only.  He            
 agreed with the language "up to" that Chair James suggested.  It              
 would give the board the latitude to invest in Alaska while not               
 being a mandate.                                                              
 Number 1956                                                                   
 CHAIR JAMES said a motion was needed to discuss the specifics.                
 Number 1965                                                                   
 REPRESENTATIVE OGAN moved that on page 2, line 31, delete the                 
 language "at least" and insert the language "up to."  The motion              
 was followed with discussion.                                                 
 Number 2006                                                                   
 REPRESENTATIVE GREEN said he was concerned about micro-managing.              
 He asked what would happen if a good deal came along that did not             
 fit the guidelines?  Therefore, he did not support the amendment.             
 Number 2035                                                                   
 REPRESENTATIVE ROBINSON said the language really did not make a lot           
 of difference.                                                                
 Number 2041                                                                   
 REPRESENTATIVE PORTER suggested a friendly amendment to include the           
 language "to a level up to" rather than "up to."  Furthermore, he             
 did not agree with a mandate but agreed more with encouraging a               
 policy to try to get to reach this level.  The new language would             
 work towards that purpose.                                                    
 CHAIR JAMES called for a roll call vote.  Representatives Ogan,               
 Porter, Robinson, and Willis voted in favor of the friendly                   
 amendment.  Representatives James, Green and Ivan voted against the           
 friendly amendment.  The friendly amendment passed.                           
 Number 2122                                                                   
 REPRESENTATIVE ROBINSON stated she did not agree with a mandate.              
 She suggested a resolution or a letter through the House State                
 Affairs Committee voicing its concerns.  She would not hold the               
 bill, however.                                                                
 Number 2150                                                                   
 CHAIR JAMES agreed with Representative Robinson.  She reiterated              
 she was disappointed that it was even an issue being discussed                
 Number 2156                                                                   
 REPRESENTATIVE IVAN moved that CSHB 345(STA) (9-LS1179/C) move from           
 the committee with individual recommendations and attached fiscal             
 notes as amended.  Representative Willis objected.  A roll call               
 vote was taken.  Representatives James, Ogan, Green, Ivan and                 
 Porter voted in favor of the motion.  Representatives Robinson and            
 Willis voted against the motion.  The bill was moved to the next              
 committee of referral.                                                        

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