Legislature(1997 - 1998)
05/01/1998 09:00 AM House 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 FINANCE COMMITTEE
May 1, 1998
9:00 A.M.
TAPE HFC 98 - 139, Side 1.
TAPE HFC 98 - 139, Side 2.
CALL TO ORDER
Co-Chair Therriault called the House Finance Committee
meeting to order at 9:00 A.M.
PRESENT
Co-Chair Therriault Representative Kohring
Representative J. Davies Representative Martin
Representative G. Davis Representative Moses
Representative Kelly Representative Mulder
Representative Grussendorf
Representatives Foster and Hanley were not present for the
meeting.
ALSO PRESENT
James Baldwin, Assistant Attorney General, Department of
Law; Patrick Lounsbury, Staff, Representative Jeannette
James.
SUMMARY
HB 81 An Act relating to the members of the board and
staff of the Alaska Permanent Fund Corporation.
HB 81 was HELD in Committee for further
consideration.
HJR 50 Proposing amendments to the Constitution of the
State of Alaska relating to a public corporation
established to manage the permanent fund.
HJR 50 was HELD in Committee for further
consideration.
HOUSE BILL NO. 81
"An Act relating to the members of the board and staff
of the Alaska Permanent Fund Corporation."
HOUSE JOINT RESOLUTION NO. 50
Proposing amendments to the Constitution of the State
of Alaska relating to a public corporation established
to manage the permanent fund.
PATRICK LOUNSBURY, STAFF, REPRESENTATIVE JEANNETTE JAMES,
spoke to the tremendous turnover in top management of the
Alaska Permanent Fund during both Governor Knowles and
Governor Hickel's administrations. He commented that HB 81
was designed to take politics out of the Permanent Fund
Board of Directors appointment process.
Mr. Lounsbury stated that HB 81 was designed to create
continuity within the board by restricting any governor's
ability to remove board members without cause and also
creating staggered terms. At this time, members serve at
the pleasure of the Governor. HB 81 would allow the
governor to replace members only for cause and the
staggered term provision would allow for continuity. Now
that the fund is breaching $20 billion dollars, it would be
in the State's best interest to protect the fund from the
political whims of each changing administration.
Mr. Lounsbury provided a sectional analysis of the proposed
legislation and noted that Section #4 is the heart of the
bill. It would allow a governor to remove a trustee for a
"cause" of miscompetentcy.
In conclusion, Mr. Lounsbury noted that there had been
identical legislation passed during the 19th Legislature,
and that it had overwhelming partisan support which was
then vetoed by the Governor.
Co-Chair Therriault questioned the intent for increasing
the size of the board. Mr. Lounsbury explained that
addition would guarantee that one member would have the
competence and experience in investment portfolio
management. Co-Chair Therriault asked why that requirement
is not placed on one of the members currently on the board.
Mr. Lounsbury agreed that could work.
Co-Chair Therriault voiced concern with a new governor
having the authority to let the entire board go. Co-Chair
Therriault spoke to the importance of continuity within
that body. He questioned if it was essential to change the
constitution in order to allow for the dismissal cause.
Mr. Lounsbury replied that the Department of Law had
recommended the constitutional amendment. Since the
Permanent Fund Board does not fall under the auspice of
Article 3, Section 26, anyone could be removed for cause.
Co-Chair Therriault asked if the proposal would create a
new section of statute. Mr. Lounsbury understood that
would be based on advice received by the legal department.
Representative Martin pointed out that if the Legislature
did not follow the constitutional amendment, the Governor
would be able to veto the legislation.
JAMES BALDWIN, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF
LAW, advised that HB 81 requires a constitutional amendment
in order to implement it. He added that the constitutional
amendment would not completely resolve the legislation but
it would be a responsible way to achieve the sponsor's
intent.
Mr. Baldwin remarked that when the Permanent Fund
Corporation (PFC) was established, a decision was made that
board members of the corporation would be removable.
Existing law provides that a governor, by specifying his
reasons, can remove board members, which provides a method
of accountability. Whereas, the other side of the issue,
to be able to remove only for cause establishes a
requirement for a trial-like proceeding which would not be
a simple process.
Mr. Baldwin continued, when dealing with an entity that is
as important as the Alaska Permanent Fund Corporation, it
is vital to protect the well being of the State and it
would not be a good idea to keep these policy makers beyond
the reach of someone who is accountable to the governor.
Mr. Baldwin stressed that it is a matter of legal
accountability.
Mr. Baldwin explained that difficulty is established with
the standards imposed in the language, when addressing
"competency". A problem could occur when determining where
the interest of the corporation is above over the interest
of the Permanent Fund, and if that could create an issue
for the taxability of the fund. He recommended that
language be changed in statute.
Mr. Baldwin suggested that the constitutional amendment
would provide a role for the Legislature during the
appointment confirmation process, stressing that all action
must be done in the financial best interest of the State.
Mr. Baldwin addressed the circumstance of board members
being removed only for cause. He pointed out that the
high-level policy makers such as the executive director and
his chief investment officers make important decisions for
the best interest of the corporation. He noted that it has
been determined good policy that these positions be removed
at the governor's "pleasure".
Co-Chair Therriault questioned the validity of discharging
someone because they do not meet the same philosophical
position of the governor. He noted that the "role" of the
fund was to make money and invest that money prudently.
Mr. Baldwin advised that the Permanent Fund Board should
act consistently with the way in which the governor views
the world. He emphasized that this is $27 billion dollars
of the public's assets and that to have the governor and
the Permanent Fund Corporation acting in concert is very
important. Mr. Baldwin advised it could be "frightening"
to have those two entities at odds.
Mr. Baldwin noted that in the House Judiciary Committee,
the Administration had proposed a work draft which would
require more substantive reasons to get a requirement in
law and tying it to the financial best interest of the
fund.
Representative J. Davies requested for a comparison of the
Permanent Fund Board status to the Board of Regents status
and the manner in which members are appointed and removed.
Mr. Baldwin explained that the University was a public
corporation with special status. The members of the Board
of Regents are mentioned in the constitutional text.
Representative J. Davies remarked that there is a rational
reason for that type of stability in management of a huge
public trust and, also, for the management of the Permanent
Fund. Mr. Baldwin commented that his main concern was
removal of members. Confirmation is a different concern.
Mr. Baldwin continued, the Department is "nervous" about
fixing the status of a corporation in the Constitution.
Corporations have had a history of close scrutiny by the
Internal Revenue Service (IRS). At present time, the
corporation is established by law. If it appears that the
federal law is changing in a way that does not favor the
State, then the Legislature can do something about it.
Whereas, if it is placed in the Constitution, it would not
be as easy to change.
Co-Chair Therriault questioned what is done with the
proceeds of the fund and if that was that the purpose of
the fund. Mr. Baldwin agreed that should be a
consideration, although, to determine whether this type of
entity is tax exempt, corporate status plays a prominent
role in the area of disaster relief funds and tuition
assistance funds. He summarized, the Department of Law
prefers that it the Permanent Fund Corporation continues to
be a public agency rather than a public corporation.
Co-Chair Therriault remarked that he did not look at the
role of the Board of Regents and the Permanent Fund
trustees in the same light as the Department of Law would.
One entity generates money, while the other is makes
expenditure decisions on behalf of the State. He commented
that their structure should be different because of their
different charge.
Representative Mulder suggested that candidates should be
chosen for the PFC Board because of their ability to make
good financial decisions, which is not necessarily
consistent with the philosophy of each governor. Mr.
Baldwin replied that language recommended to Representative
James would take the standard in the bill, and state that
the governor "may" remove a member of the Board when he
judges that it is in the best financial interest of the
Permanent Fund and citizens of the State. Representative
Mulder agreed that could work as long as the standard was
not politics.
Representative Grussendorf suggested that the word
"philosophy" is often a way to clock any differences we
might have with another individual or entity.
Representative J. Davies stated that it is important to
remember that the PFC board members are a policy board and
not an executive group. He pointed out that the Committee
had been speaking of them as if they were in charge of
managing the funds, but instead, they set policy for fund
management. They do not make investment decisions.
Representative J. Davies explained that there is a vast
difference between these two groups of people. He
emphasized that it is appropriate that the executive
director and his primary investors serve at the pleasure of
the governor, although, the Board should be more stable.
(Tape Change HFC 98- 139, Side 2).
Co-Chair Therriault MOVED deletion of all material except
Section #4.
Mr. Baldwin pointed out that Section #6 would clarify that
high level people could be removed. He commented that the
Department favored that section remaining in the bill. Co-
Chair Therriault AMENDED the MOTION to retain only Sections
adopted.
Representative J. Davies WITHDREW Amendments #1 & #2.
[Copy on File]. There being NO OBJECTION, the amendments
were withdrawn.
Co-Chair Therriault spoke to a change recommended by Mr.
Baldwin on Page 2, Line 18, adding "permanent fund" after
"affairs of the". Representative J. Davies suggested that
would create the question of the Board being policy versus
executive. Mr. Baldwin noted that at this time, the Board
establishes allocation policy, while others implement that
policy. His suggestion would be to abandon that language
and go to a standard of full cause.
HB 81 and HJR 50 were HELD in Committee for further
consideration.
ADJOURNMENT
The meeting adjourned at 9:50 A.M.
H.F.C. 6 5/01/98 a.m.
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