Legislature(1999 - 2000)

04/28/1999 08:30 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
           HOUSE FINANCE COMMITTEE                                                                                              
              April 28, 1999                                                                                                    
                 8:30 A.M.                                                                                                      
TAPE HFC 99 - 111, Side 1                                                                                                       
TAPE HFC 99 - 111, Side 2                                                                                                       
CALL TO ORDER                                                                                                                   
Co-Chair Therriault called the House Finance Committee                                                                          
meeting to order at 8:30 a.m.                                                                                                   
Co-Chair Therriault   Representative Foster                                                                                     
Co-Chair Mulder    Representative Grussendorf                                                                                   
Vice Chair Bunde     Representative Kohring                                                                                     
Representative Austerman   Representative Moses                                                                                 
Representative J. Davies   Representative Williams                                                                              
Representative G. Davis                                                                                                         
ALSO PRESENT                                                                                                                    
Senator Dave Donley; Representative Gail Phillips; Clark                                                                        
Gruening, Vice Chair, Alaska Permanent Fund Board, Juneau;                                                                      
Jim Kelly, Legislative Liaison, Alaska Permanent Fund                                                                           
Corporation, Juneau; Terry Brown, Chief Investment Officer,                                                                     
Alaska Permanent Fund Corporation, Juneau; Ron Lorenson,                                                                        
Attorney, Simpson, Tillinghast, Sorensen and Lorensen Law                                                                       
Firm, Juneau; Mike Bell, Investment Officers, Alaska                                                                            
Permanent Fund Corporation, Juneau; Peter Naoroz, Manager,                                                                      
Real Estate Investment, Alaska Permanent Fund Corporation;                                                                      
Michael Bell, Investment Officer, Alaska Permanent Fund                                                                         
Corporation, Juneau;                                                                                                            
HB 156 "An Act relating to investments by the Alaska                                                                            
Permanent Fund Corporation; and providing for an                                                                                
effective date."                                                                                                                
 CSHB 156 (FIN) was REPORTED out of Committee with                                                                              
a "do pass" recommendation and with a fiscal                                                                                    
impact note by the Department of Revenue.                                                                                       
CSSJR 11(FIN)                                                                                                                   
Urging the Congress of the United States to                                                                                     
provide federal education funds as a block grant                                                                                
to the state.                                                                                                                   
CSSJR 11 (FIN) was REPORTED out of Committee with                                                                               
a "do pass" recommendation and with a zero fiscal                                                                               
note by the Senate Finance Committee.                                                                                           
CS FOR SENATE JOINT RESOLUTION NO. 11(FIN)                                                                                      
Urging the Congress of the United States to provide                                                                             
federal education funds as a block grant to the state.                                                                          
SENATOR DAVE DONLEY, testified in support of SJR 11.                                                                            
Senate Joint Resolution 11 is a Senate Finance                                                                                  
Committee resolution. It urges Congress to provide                                                                              
federal education funds as block grants to the state of                                                                         
Senate Joint Resolution 11 encourages Congress to give                                                                          
the State of Alaska greater control over the education                                                                          
funds provided by the federal government.  By taking                                                                            
control of funds from an agency thousands of miles away                                                                         
and placing the disbursement responsibility in the                                                                              
hands of the state and communities the funding will                                                                             
directly impact, the money will be put to its most                                                                              
appropriate use.                                                                                                                
Currently, the federal government provides funding for                                                                          
education that is specifically earmarked for education                                                                          
programs within the state.  SJR 11 will encourage                                                                               
Congress to instead disburse the money in the form of a                                                                         
block grant, as they do with welfare funding, directly                                                                          
to the State of Alaska.                                                                                                         
Senate Joint Resolution 11 will give the state                                                                                  
flexibility to maximum the use of federal education                                                                             
funds. In the 105th Congress, the House of                                                                                      
Representatives passed HR 3248, which would have                                                                                
created an education block grant system.                                                                                        
Unfortunately, the bill did not pass the Senate.                                                                                
Congress is considering a similar resolution in the                                                                             
106th Congress.                                                                                                                 
Co-Chair Therriault asked if there is new money coming from                                                                     
Congress or would existing programs be appropriated as a                                                                        
block grant. Senator Donley stated that a battle is being                                                                       
waged in Congress regarding an increase in funding. He noted                                                                    
that the legislation does not take a position on additional                                                                     
funds. The legislation requests that the system of federal                                                                      
education appropriation, with dozens of specifically                                                                            
delineated federal programs and individual requirements be                                                                      
merged into a single block grant.                                                                                               
Vice-Chair Bunde asked what other states support a single                                                                       
block grant system. Senator Donley stated that many states                                                                      
are supporting this system.                                                                                                     
Co-Chair Therriault asked if the Conference of Governor's                                                                       
had taken a position. Senator Donley did not know if the                                                                        
Conference of Governor's had taken a position on the issue.                                                                     
Co-Chair Therriault pointed out that there is a zero fiscal                                                                     
Vice-Chair Bunde MOVED to report CSSJR 11 (FIN) out of                                                                          
Committee with the accompanying fiscal note. There being NO                                                                     
OBJECTION, it was so ordered.                                                                                                   
CSSJR 11 (FIN) was REPORTED out of Committee with a "do                                                                         
pass" recommendation and with a zero fiscal note by the                                                                         
Senate Finance Committee.                                                                                                       
HOUSE BILL NO. 156                                                                                                              
"An Act relating to investments by the Alaska Permanent                                                                         
Fund Corporation; and providing for an effective date."                                                                         
REPRESENTATIVE GAIL PHILLIPS, sponsor spoke in support of HB
The Legislative Budget and Audit Committee is charged                                                                           
with oversight of the Alaska Permanent Fund                                                                                     
Corporation.  Specific to this legislation, AS                                                                                  
24.20.151 reads "holding these agencies (lending or                                                                             
investment entities) accountable to statutory intent in                                                                         
their performance by recommending, where appropriate,                                                                           
changes in policy to the agencies or changes in                                                                                 
legislation to the legislature".                                                                                                
On March 23, the Alaska Permanent Fund Corporation                                                                              
presented this legislation to the Committee and the                                                                             
members present agreed unanimously to introduce it,                                                                             
without revision, in both bodies.                                                                                               
House Bill 156 modernizes the operations of AS                                                                                  
37.13.120, the statutes that set out the "legal list"                                                                           
of permissible investments of Permanent Fund assets.                                                                            
The revisions requested in this legislation are aimed                                                                           
at providing increased investment flexibility, reduced                                                                          
risk, and hopefully increased returns for the Permanent                                                                         
House Bill 156 allows the trustees to invest up to 5%                                                                           
of Fund assets to: (1) make or retain greater asset                                                                             
class commitments than currently allowed; and /or (2)                                                                           
invest in individual securities or instruments that are                                                                         
not expressly permitted.  However, the legal list                                                                               
approach is maintained and current asset allocations,                                                                           
while modestly expanded, remain in place.                                                                                       
The first committee of referral, the House State                                                                                
Affairs Committee, made one amendment to HB 156.  On                                                                            
page 6, line 20, the limit on owning domestic and                                                                               
nondomestic entities was raised from 50% to 55%.                                                                                
We think this is timely legislation - as the Finance                                                                            
Committees begins to consider various fiscal plans-                                                                             
making sure we are getting the highest, sustainable,                                                                            
and safest returns from our assets currently entrusted                                                                          
with the Permanent Fund is the first step.                                                                                      
I support this legislation as amended in State Affairs.                                                                         
I ask that the House Finance Committee fully review the                                                                         
impact of this amendment with Permanent Fund                                                                                    
Corporation Staff.                                                                                                              
CLARK GRUENING, VICE CHAIR, ALASKA PERMANENT FUND BOARD,                                                                        
JUNEAU testified in support of HB 156. The first deposit to                                                                     
the permanent fund occurred in 1974. It was approximately                                                                       
$734 thousand dollars. There was no structure other than an                                                                     
interim bill, which only allowed the Treasury Division to                                                                       
invest in government security bills. Since then legislators                                                                     
have made pivotal decisions. The initial decision was made                                                                      
to make the fund adhere to a prudent investor standard as                                                                       
opposed to a development bank model. Legislators also                                                                           
decided to add, on a voluntary basis, to the principle. The                                                                     
principle is approximately $18 of the $25 million dollars in                                                                    
the fund. Two-thirds of the principle was voluntarily                                                                           
deposited by the legislature. Another key area of decision                                                                      
has been the continuum of incremental and timely changes to                                                                     
the permissive list. He gave a brief history of the Fund's                                                                      
investment in the stock market. Many similar funds do not                                                                       
have a long permissive list. They only have a pure prudent                                                                      
investor approach. He noted that the Board questioned if                                                                        
they should be guided only by the prudent investment                                                                            
approach. They decided that it made sense to ask for modest                                                                     
JIM KELLY, LEGISLATIVE LIAISON, ALASKA PERMANENT FUND                                                                           
CORPORATION, JUNEAU provided members with a handout (copy on                                                                    
file). He stressed that the Corporation is asking to                                                                            
modernize the statutes to be responsive to current market                                                                       
opportunities and challenges. The requested change is                                                                           
conservative and maintains the legal list approach. It                                                                          
allows the fund managers to add incremental value and                                                                           
improve the total portfolio risk management. The House State                                                                    
Affairs version increased the equity allocation by 5 percent                                                                    
to 55 percent. He discussed page 2 of the handout,                                                                              
demonstrating the growth of the Fund. He noted that the Fund                                                                    
has been able to take advantage of some of the returns the                                                                      
stocks and higher risk assets have produced. It has earned                                                                      
an average of 17.69 percent annually on every dollar.                                                                           
Mr. Kelly observed that risk can be managed through                                                                             
distribution of income. He estimated that an increase in                                                                        
asset allocations to 60 percent in equities would have                                                                          
earned a 31 percent return on stocks. The permanent fund                                                                        
earned a 9.52 percent on bonds. This is a difference of $2                                                                      
billion dollars. Mr. Kelly reviewed the distribution of the                                                                     
Fund's investment. He stressed that time is a great                                                                             
protector of assets. He referred to page 4 (chart 8) of the                                                                     
handout. He emphasized that if there is an income                                                                               
distribution policy that is stable and continuos then a                                                                         
long-term investment policy can take advantage of returns                                                                       
from a risk managed portfolio. He referred to page 7 of the                                                                     
handout. He noted that a 48 percent investment in stocks                                                                        
expects a return of 7.75 percent. If assets were invested in                                                                    
an additional 5 percent of equities the rate of return would                                                                    
increase to 7.94 percent. A ten-percent increase in equities                                                                    
could result in an 8.13 percent return. This could be a                                                                         
difference between $67 and $73 billion dollars over the next                                                                    
20 years.                                                                                                                       
Co-Chair Therriault referred to page 7, lines 1 - 5 of CSHB
156 (STA). He asked for examples of other classes of                                                                            
investments not specifically included in the list.                                                                              
TERRY BROWN, CHIEF INVESTMENT OFFICER, ALASKA PERMANENT FUND                                                                    
CORPORATION, JUNEAU explained that alternative investments                                                                      
include private equity debt, oil or gas, agriculture, high                                                                      
yield bonds, or adventure capital.                                                                                              
Co-Chair Therriault noted that outlined equities could be up                                                                    
to 60 percent.                                                                                                                  
Vice-Chair Bunde noted that he is in general support of the                                                                     
legislation. He questioned if there is a danger of over                                                                         
investment. Mr. Brown did not think that there is a danger.                                                                     
He pointed out that there would be a committee process to                                                                       
outsource investments. Investments are not done directly.                                                                       
Ordinarily there would be a manager responsible for                                                                             
selecting and watching the asset.                                                                                               
Mr. Gruening maintained that the Board would be cautious.                                                                       
Vice-Chair Bunde pointed out that Alaskan's confidence in                                                                       
government is tied to the Permanent Fund. He stressed that a                                                                    
bad market year would affect the public's confidence.                                                                           
Mr. Kelly reiterated that 8.13 percent is the estimated                                                                         
growth of the Fund for a portfolio that includes 58 percent                                                                     
in equities.                                                                                                                    
Co-Chair Therriault referred to page 6, line 3. He noted                                                                        
that "own" was changed to "acquire". He questioned why the                                                                      
change is needed.                                                                                                               
Mr. Gruening stated that "acquire" is a more operative word.                                                                    
"Own" can change as the corporation buys its own stocks.                                                                        
RON LORENSON, ATTORNEY, SIMPSON, TILLINGHAST, SORENSEN AND                                                                      
LORENSEN LAW FIRM, JUNEAU explained that it is difficult for                                                                    
the Corporation, through its managers, to keep track of the                                                                     
status of a particular holding because more than one manager                                                                    
may acquire the same stock. A situation could occur where a                                                                     
corporation that has been invested in could buy and back and                                                                    
retire some of its own shares, which would increase the                                                                         
percentage of shares owned by the Permanent Fund                                                                                
Corporation. This would require the Permanent Fund                                                                              
Corporation to sell some of its shares to lower the                                                                             
percentage it owns.                                                                                                             
Co-Chair Therriault questioned if another problem is being                                                                      
created. He pointed out that even if no more than 5 percent                                                                     
was required at any one time the total acquired could be                                                                        
Mr. Gruening observed that of the top ten investments the                                                                       
actual ownership percentage is two-tenths of one percent.                                                                       
Mr. Brown stressed that the top holdings are less than one                                                                      
Representative Williams questioned if the Board is as                                                                           
conservative as it was in its conception. Mr. Gruening                                                                          
stated that the Fund's equity allocation is somewhere in the                                                                    
middle. He stressed that the Board would not be rushing to                                                                      
fill the extra 10 percent at this time.                                                                                         
Representative Williams questioned what tools exist to                                                                          
assure that the Board does not move to high risk. Mr.                                                                           
Gruening pointed out that the legislature has continuous                                                                        
oversight and that the Board is audited. He observed that                                                                       
higher equity allocations have great volatility. He                                                                             
maintained that the Fund is not moving in that direction.                                                                       
Co-Chair Mulder observed that the permanent fund is greater                                                                     
than $26 billion dollars. He asked if there are any other                                                                       
comparable funds that have as many restrictions. Mr.                                                                            
Gruening stated that most funds that are of an equal size                                                                       
are more aggressive. Mr. Brown agreed that most funds of                                                                        
equal size are more aggressive. He characterized the Fund as                                                                    
fairly conservative.                                                                                                            
Co-Chair Mulder questioned if it would be a better course of                                                                    
action to free the hands of the managers. Mr. Gruening                                                                          
stated that it would be an alternative course of action. He                                                                     
emphasized that public involvement makes such a change                                                                          
unlikely. He noted that the legislature is involved in                                                                          
setting the target rate of return and the resulting risk.                                                                       
Co-Chair Mulder spoke in support of the legislation. He                                                                         
observed that there are experts in place to manage the Fund.                                                                    
He spoke in support of maximizing opportunities. Mr.                                                                            
Gruening emphasized that the Board is concerned with risk.                                                                      
Co-Chair Mulder stressed that the legislature has the                                                                           
critical oversight.                                                                                                             
Vice-Chair Bunde asked if the Corporation's website has a                                                                       
high volume of hits. Mr. Kelly stated that it receives a                                                                        
relatively small number of hits.                                                                                                
In response to a question by Vice-Chair Bunde, Mr. Lorenson                                                                     
explained that a split in stocks would not affect the                                                                           
percentage of ownership.                                                                                                        
(Tape Change, HFC 99 - 111, Side 2)                                                                                             
Co-Chair Therriault observed that ownership is under one                                                                        
percent for most holdings. He questioned if there is a                                                                          
problem with approaching the 5 percent. He observed that the                                                                    
new classification of (g)(21) was exempted from the 5                                                                           
percent. He questioned why a long-standing policy was being                                                                     
Mr. Brown explained that there are cases where they may own                                                                     
more than 5 percent due to buy backs. He clarified that the                                                                     
ownership in the company is not greater than 1 percent.                                                                         
Co-Chair Therriault asked if there are companies that the                                                                       
state owns close to 5 percent of the total stock.                                                                               
MICHEAL BELL, INVESTMENT OFFICERS, ALASKA PERMANENT FUND                                                                        
CORPORATION, JUNEAU stated that in large corporations                                                                           
holdings approach a tenth to two-tenths of a percent. He                                                                        
noted that in small company stocks there have only been one                                                                     
or two cases where holdings have exceeded more than 1                                                                           
Co-Chair Therriault reiterated his belief that the change is                                                                    
not needed.                                                                                                                     
Mr. Gruening stated that the more important part of the                                                                         
change is in relationship to the ownership of real estate                                                                       
through a single corporation.                                                                                                   
Co-Chair Therriault stated that he had not heard a                                                                              
compelling reason to change the provision.                                                                                      
PETER NAOROZ, MANAGER, REAL ESTATE INVESTMENT, ALASKA                                                                           
PERMANENT FUND CORPORATION explained that property is bought                                                                    
and liability reduced by going through holding companies. He                                                                    
stated that this is used to keep the Fund out of the chain                                                                      
of title. Holding companies are used to reduce risk and                                                                         
lower liability. He did not think that the 5 percent clause                                                                     
was meant to apply to real estate title holding companies.                                                                      
Co-Chair Therriault questioned if there is a way to clarify                                                                     
the provision for the purpose of real estate.                                                                                   
Mr. Naoroz stated that they could live with "own".                                                                              
Representatives Phillips pointed out that chart number six                                                                      
should have been labeled "Opportunities Lost". She                                                                              
emphasized the difference that an additional $770 million                                                                       
dollars would have meant to the state.                                                                                          
Co-Chair Therriault asked the impact of deleted language on                                                                     
page 4.                                                                                                                         
Mr. Lorenson explained that the deletion addresses the                                                                          
limitations that had been placed on real estate buildings.                                                                      
The language addresses limitations placed by the legislature                                                                    
on real estate investments in the form of buildings. It                                                                         
eliminates the restriction that prohibited the Alaska                                                                           
Permanent Fund Corporation from owning more than 67 percent                                                                     
of a building that is worth more than $150 million dollars.                                                                     
The Corporation has found that co-investors have taken                                                                          
advantage of the limitation in buy-out situations.                                                                              
Corporation counsel recommended the change. The language                                                                        
also removes limitations that prohibit the corporation from                                                                     
buying raw land for the purpose of expanding an existing                                                                        
Co-Chair Therriault MOVED to delete "acquire" and insert                                                                        
"own" on page 6, line 3. There being NO OBJECTION, it was so                                                                    
Mr. Kelly discussed the fiscal note. He noted that the                                                                          
changes made in the House State Affairs Committee would                                                                         
increase the potential earnings by twice the amount.                                                                            
Vice-Chair Bunde MOVED to report CSHB 156 (STA) out of                                                                          
Committee with the accompanying fiscal note. Representative                                                                     
Grussendorf OBJECTED. He pointed out that there would be a                                                                      
greater cost for the active management. He WITHDREW his                                                                         
objection. Representative Williams OBJECTED. He stated that                                                                     
he was not comfortable with the legislation. He expressed                                                                       
concern that the investment be watched carefully and be                                                                         
conservative. He WITHDREW his objection.                                                                                        
Co-Chair Therriault stressed that the earnings would not                                                                        
have been as high if the legislature had not made changes.                                                                      
There being NO OBJECTION, CSHB 156 (FIN) was moved from                                                                         
CSHB 156 (FIN) was REPORTED out of Committee with a "do                                                                         
pass" recommendation and with a fiscal impact note by the                                                                       
Department of Revenue.                                                                                                          
The meeting adjourned at 9:38 a.m.                                                                                              
House Finance Committee 9 4/28/99                                                                                               

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