Legislature(1995 - 1996)

04/18/1996 08:08 AM STA

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

Document Name Date/Time Subjects