Legislature(1995 - 1996)
03/26/1996 08:05 AM STA
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 bill? 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 trades. 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 firms. 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 appointed. 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 investments. 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 direction. Number 1840 REPRESENTATIVE GREEN moved that CSHB 345(STA) (9-LS1179/C) be adopted for consideration. Hearing no objection, it was so adopted. 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 "or." 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 today. 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.