Legislature(1995 - 1996)
03/01/1996 01:30 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
March 1, 1996
1:30 P.M.
TAPE HFC 96-55, Side 1, #000 - end.
CALL TO ORDER
Co-Chair Mark Hanley called the House Finance Committee
meeting to order at
PRESENT
Co-Chair Hanley Representative Martin
Co-Chair Foster Representative Mulder
Representative Brown Representative Navarre
Representative Grussendorf Representative Parnell
Representative Kelly Representative Therriault
Representative Kohring
ALSO PRESENT
Byron Mallot, Executive Director, Alaska Permanent Fund
Corporation.
SUMMARY
HB 525 An Act designating certain permissible investments
by the Alaska Permanent Fund Corporation in
taxable municipal or state debt securities and
corporate debt securities; changing the allocation
limits on domestic and nondomestic government and
corporate securities, nondomestic corporate
promissory notes, domestic and nondomestic
corporate stocks, and taxable government debt
securities; and providing for an effective date.
HB 525 was reported out of Committee with a "do
pass" recommendation and with a zero fiscal note
by the Department of Revenue.
HOUSE BILL NO. 525
"An Act designating certain permissible investments by
the Alaska Permanent Fund Corporation in taxable
municipal or state debt securities and corporate debt
securities; changing the allocation limits on domestic
and nondomestic government and corporate securities,
nondomestic corporate promissory notes, domestic and
nondomestic corporate stocks, and taxable government
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debt securities; and providing for an effective date."
Representative Martin gave a brief overview of HB 525. He
noted that the legislation is the result of a joint meeting
between the Legislative Budget and Audit Committee and the
Revenue Subcommittee of the House Finance Committee, held on
2/7/96. The meeting examined why the State's PERS, TRS and
SBS funds performed better than the Permanent Fund. He
observed that it was revealed at the hearing that 90 percent
of the performance difference was due to a difference in
portfolio makeup. He stressed that the legislation will
help the Permanent Fund Corporation to make more money. He
observed that a one percent increase or decrease in the
market results in a $152.0 million dollar gain or loss.
BRYON MALLOT, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION explained that the legislation does three
things. House Bill 525 removes the 5 percent allocation to
foreign fixed income instruments from the 50 percent
allocation, which includes the statutory authorization to
invest in stocks. This would allow the Fund to remove
foreign debt to the fixed income asset class. The equity
portfolio could then be taken to a 50 percent asset
allocation. The bill will also remove a limitation on the
ability of the Fund to invest in A-rated corporate
securities. In addition, HB 525 allows the Permanent Fund
Corporation to invest in Baa-rated corporate paper. These
are investment grade securities that are typically held in
prime sponsor portfolios. He observed that the average
asset allocation for stocks is at 50 percent. The Permanent
Fund Corporation's limitation is currently at 45 percent.
He reiterated that the Permanent Fund has under performed.
He maintained that the limitations are principally
responsible for the under performance. He observed that the
Permanent Fund Board of Trustees view the changes as
remedial. He emphasized that the legislation was not
hastily drawn. He added that the entire array of statutory
investment capability of the Fund will be reviewed.
Representative Martin pointed out that the only function of
the Permanent Fund Board of Trustees is to make the State
money.
Representative Kohring noted that the changes will bring
additional risk. He asked if the risk had been quantified.
Mr. Mallot noted that Callan and Associates provided the
Board with a review of the Alaska Permanent Fund
Corporation, "Asset Allocation Considerations" (copy on
file). Callan And Associates quantified the risk associated
with the change on page 4 of their report. The report noted
that if the portfolio is increased to 50 percent that there
would be a modest increase in risk during the first year.
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He added that over a 5 and 10 year period there is no
increase in risk but there is a modest increase in return.
He observed that if A-rated and Baa-rated corporate
securities are added to their percentage in the performance
index there would be some short term risk but returns out
strip the risk in 3 to 4 years.
In response to a question by Representative Mulder, Mr.
Mallot stated that the Board believes that there is upward
pressure toward larger allocation to the equities market, in
order to optimize returns over time. He stated that the
Board may be back to ask for an increase in this aspect.
Representative Brown MOVED to report HB 525 out of Committee
with individual recommendations and with the accompanying
fiscal note. There being NO OBJECTION, it was so ordered.
HB 525 was reported out of Committee with a "do pass"
recommendation and with a zero fiscal note by the Department
of Revenue.
ADJOURNMENT
The meeting adjourned at 1:48 p.m.
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