Legislature(1999 - 2000)
05/12/1999 09:09 AM Senate FIN
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 156
"An Act relating to investments by the Alaska
Permanent Fund Corporation; and providing for an
effective date."
CS FOR HOUSE BILL NO. 156(STA)
"An Act relating to investments by the Alaska
Permanent Fund Corporation; and providing for an
effective date."
CS FOR HOUSE BILL NO. 156(FIN)
"An Act relating to investments by the Alaska
Permanent Fund Corporation; and providing for an
effective date."
REPRESENTATIVE GAIL PHILLIPS was invited to join the
committee. She read her sponsor statement into the record.
Revisions would include more investment possibilities, and
therefore more returns for the Permanent Fund Corporation.
She noted one amendment, page six, lines 26 CSHB 156(FIN)
from the original version.
She reminded the committee that the House passed the bill
out with a 39 yea - 1 nay vote. She urged the Senate
Finance Committee to report this bill out.
In response to a question by Senator P. Kelly she said this
bill would allow more flexibility to increase stock.
JIM KELLY, Research and Liaison Officer, Alaska Permanent
Fund Corporation was invited to join the committee.
CLARK GRUENING, Vice-Chair, Alaska Permanent Fund Board of
Trustees was also invited to join the committee. He gave a
brief history of the Permanent Fund. The Legislature has
made the pivotal decisions to increase the funds in the
Permanent Fund Corporation. They voluntarily made special
appropriations to the principle. Two-thirds of the amount
was voluntarily deposited for inflation proofing. The fund
today is approximately $26 billion. The Legislature has
also helped in investment flexibility. They allowed
investment in stock and real estate. They have also been
successful in allowing foreign investments for the
corporation.
Mr. Kelly said he would not go into the case for investment
flexibility as Representative Phillips had made sufficient
comments. The Permanent Fund was a public fund as they had
funds over $5 million.
Senator Leman commented on requested flexibility last year.
"How have the earnings been affected? Is an incremental
improvement better than none at all?"
Mr. Kelly responded. He said the fund expected to earn
7.75 percent. There is a diminishment of volatility.
Mr. Gruening said volatility also appears in fixed income.
Mitigation of volatility is the mixture of assets.
Co-chair Torgerson asked for an explanation of Section 1 of
the bill. Mr. Kelly indicated that it was sometimes
prudent in real estate investment to borrow money to
protect the particular asset. A limited liability
corporation would be set up. Co-chair Torgerson said he
did not understand that if they were the one hundred
percent owner that they would not be the liable entity.
Mr. Gruening further explained. He said this bill would
protect from increase of risk to the fund. He referred to
line nine on page one, "if the borrowing is without
recourse to the corporation".
Senator Parnell asked how this would work. Would the LLC
handle this? Mr. Gruening explained the necessity to
protect tenants. Senator Parnell said LLC would have the
liability rather than the corporation? Mr. Gruening
indicated that was correct. They wanted to protect any
recourse to the corporation. Senator Parnell asked if the
State was protected in this transaction? Mr. Gruening said
if the paperwork was done properly there should be no
liability to the State. Borrowings are done where the
borrowing entities are corporations. Senator Parnell asked
if the Permanent Fund would be the shareholder with someone
else in these transactions? Mr. Gruening indicated again
that was correct. "We are not talking about tort
liability, we are talking about contracts."
Co-chair Torgerson asked why they did not just take cash
rather than borrowing money? Mr. Gruening said they could
get more out of their assets rather than using cash.
Mr. Kelly indicated they could directly borrow money. Co-
chair Torgerson asked for an explanation. Mr. Gruening
said there was would be a mortgage against the property;
however the lender would know this was going on. Co-chair
Torgerson asked if this would come before the Legislature
again? Mr. Gruening said this was true on all investments.
Co-chair Torgerson asked about page two, lines 19 - 23.
Mr. Gruening said that this offered a broader definition of
entities as opposed to securities.
Co-chair Torgerson asked about page three, lines 17 and 18.
Why do we need the addition of "and other equity interests
in entities organized"?
TERRY A. BROWN, Chief Investment Officer, Alaska Permanent
Fund Corporation was invited to join the corporation. He
responded to the question posed by Co-chair Torgerson. He
said this was a vehicle potential for asset backed
securities. This would allow us to buy into some other
markets and the ability to go into asset backed securities,
which are a form of fixed income investments.
Mr. Kelly said most of the language had been drafted twenty
years ago and therefore they had tried to clean up the
language more to present day. They have looked to increase
investment without increasing risk. Co-chair Torgerson
felt that the language was too broad-based and did not know
if he was in favor of this or not.
Co-chair Torgerson asked for an explanation of the bottom
of page three, top of page four. Mr. Kelly indicated that
this was a substantial portion of the bill granting
increased flexibility. He explained the process of getting
an increase in real estate for the corporation. The
Legislature however, put a dollar limit of $150 million on
a project, which in some cases only allowed them two-thirds
ownership, rather than one hundred percent. They are now
asking for the ability to purchase property and be one
hundred percent owners regardless of the dollar amount. He
explained the difficulties in protecting the permanent fund
interests when partners know there is a specific dollar
amount limit.
Senator Pete Kelly asked for further clarification of this
statement. Mr. Kelly said that someone could set a false
higher price on the property and force the permanent fund
to have to sell. Mr. Gruening also explained the leverage
the other partner can use against them in the selling of
property they may feel they need to get out of.
Senator Wilken asked if by lifting this restriction would
put them more at risk? Mr. Brown explained that on the
contrary they would not be so restricted and therefore this
would enhance any deals they could make.
Co-chair Torgerson referred to the top of page five. "Are
we going to be hiring more individuals?" Mr. Kelly said no
and referred the committee to "Real Estate Policies".
There is a substantial checklist they must conform to and
there is no anticipated increase to staff.
Co-chair Torgerson voiced concern over increase in
employees. Mr. Gruening explained there was sufficient
oversight to prevent this. Mr. Kelly further indicated
that the investment properties would not change; they would
continue to be investing in the same kinds as at present.
Co-chair Torgerson asked for an explanation of "nondomestic
entities" as opposed to "nondomestic corporations". Mr.
Gruening explained that this would include some entities
that were not necessarily corporations. Co-chair Torgerson
asked that further clarification of this be submitted to
his office.
Mr. Kelly went on to explain interests in a titleholding
entity, real estate investment trust, real estate operating
company, or other entity. Sometimes a real estate
investment trust could be purchased without a foreign
investment. However, later a foreign company could be
picked up.
(Tape number 135, Side A switched to Side B at log #591.)
Co-chair Torgerson continued on page six. Mr. Brown said
there might be occasions when they would have to sell
stocks and put them in another asset. This was a mechanism
used by many today for specific asset allocation decisions.
Mr. Kelly commented briefly on the real estate trust.
Co-chair Torgerson continued on page six, line 19. Mr.
Gruening said that this was amended in the House to
increase the allocation an additional five- percent.
Co-chair Torgerson asked for an explanation of Section 6,
page six. Mr. Kelly said this was explained in a letter
from Mr. O'Leary of CALLAN ASSOCIATES.
Mr. Brown explained direct ownership. They have a limited
partnership/ownership. Mr. Gruening said gold was not
available to them as an investment.
Mr. Kelly said a bond, for instance would be available and
could be picked up quickly with this kind of flexibility.
He explained that the Treasury Division has policies for
investments.
Co-chair Torgerson suggested a change on page seven, line 1
for the deletion of "comments" and insertion of "approval".
Mr. Kelly said this would have to be taken up with the
board. They system up until now has worked fine with the
language of the past twenty years.
Co-chair Torgerson suggested that there be a complete cap
on fifty-five percent to anything outside stock. He asked
that they think about this.
Co-chair Torgerson HELD the bill in committee and said he
would try to bring it up again by Friday.
He then called HB 209, noting that it had been schedule
last evening.
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