Legislature(2003 - 2004)
03/02/2004 08:00 AM House STA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE STATE AFFAIRS STANDING COMMITTEE
March 2, 2004
8:00 a.m.
MEMBERS PRESENT
Representative Bruce Weyhrauch, Chair
Representative Jim Holm, Vice Chair
Representative John Coghill
Representative Bob Lynn
Representative Paul Seaton
Representative Ethan Berkowitz
Representative Max Gruenberg
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 422
"An Act repealing the special subaccount established in the
constitutional budget reserve fund; relating to the powers of
the Department of Revenue for the investment of amounts in the
constitutional budget reserve fund; and providing for an
effective date."
- HEARD AND HELD
HOUSE BILL NO. 466
"An Act relating to investments of Alaska permanent fund assets;
and providing for an effective date."
- HEARD AND HELD
HOUSE BILL NO. 423
"An Act relating to accidents involving the vehicle of a person
under the influence of an alcoholic beverage; and providing for
an effective date."
- HEARD AND HELD
OVERVIEW: DEPARTMENT OF PUBLIC SAFETY
- CANCELLED
PREVIOUS COMMITTEE ACTION
BILL: HB 422
SHORT TITLE: BUDGET RESERVE FUND INVESTMENT
SPONSOR(S): FINANCE
02/02/04 (H) READ THE FIRST TIME - REFERRALS
02/02/04 (H) STA, FIN
02/10/04 (H) STA AT 8:00 AM CAPITOL 102
02/10/04 (H) Scheduled But Not Heard
02/26/04 (H) STA AT 8:00 AM CAPITOL 102
02/26/04 (H) Heard & Held
02/26/04 (H) MINUTE(STA)
03/02/04 (H) STA AT 8:00 AM CAPITOL 102
BILL: HB 466
SHORT TITLE: PERMANENT FUND INVESTMENTS
SPONSOR(S): RULES BY REQUEST OF LEG BUDGET & AUDIT
02/16/04 (H) READ THE FIRST TIME - REFERRALS
02/16/04 (H) STA, FIN
02/26/04 (H) STA AT 8:00 AM CAPITOL 102
02/26/04 (H) Scheduled But Not Heard
03/02/04 (H) STA AT 8:00 AM CAPITOL 102
BILL: HB 423
SHORT TITLE: TAXICAB DRIVER LIABILITY
SPONSOR(S): REPRESENTATIVE(S) ANDERSON
02/02/04 (H) READ THE FIRST TIME - REFERRALS
02/02/04 (H) JUD
02/02/04 (H) STA REFERRAL ADDED AFTER JUD
02/09/04 (H) REFERRAL ORDER CHANGED
02/09/04 (H) STA, JUD
02/10/04 (H) STA AT 8:00 AM CAPITOL 102
02/10/04 (H) <Bill Hearing Postponed>
03/02/04 (H) STA AT 8:00 AM CAPITOL 102
WITNESS REGISTER
TOMAS H. BOUTIN, Deputy Commissioner
Office of the Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Answered questions on behalf of the
department during the hearing on HB 422.
JAMES ARMSTRONG, Staff
to Representative Bill Williams
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified on behalf of the House Finance
Committee, sponsor.
ROBERT D. STORER, Executive Director
Alaska Permanent Fund Corporation (APFC)
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Testified on behalf of the department
during the hearing on HB 466.
RONALD W. LORENSEN, Attorney at Law
Simpson, Tillinghast, Sorensen & Longenbaugh, P.C.
Juneau, Alaska
POSITION STATEMENT: Addressed the changes sought in HB 466.
JIM SHINE JR., Staff
to Representative Tom Anderson
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented HB 423 on behalf of
Representative Anderson, sponsor.
DARWIN BIWER, Board Member
Cabaret Hotel Restaurant & Retailers Association
Anchorage, Alaska
POSITION STATEMENT: Spoke in support of HB 423 and answered
questions from the committee.
ACTION NARRATIVE
TAPE 04-25, SIDE A
Number 0001
CHAIR BRUCE WEYHRAUCH called the House State Affairs Standing
Committee meeting to order at 8:00 a.m. Representatives
Weyhrauch, Holm, Seaton, and Lynn were present at the call to
order. Representatives Coghill, Berkowitz, and Gruenberg
arrived while the meeting was in progress.
HB 422-BUDGET RESERVE FUND INVESTMENT
Number 0060
CHAIR WEYHRAUCH announced that the first order of business was
HOUSE BILL NO. 422, "An Act repealing the special subaccount
established in the constitutional budget reserve fund; relating
to the powers of the Department of Revenue for the investment of
amounts in the constitutional budget reserve fund; and providing
for an effective date."
TOMAS H. BOUTIN, Deputy Commissioner, Office of the
Commissioner, Department of Revenue, stated he would address the
four questions about HB 422 that Representative Berkowitz had
emailed to the Department of Revenue. The first question that
he addressed related to the current and projected returns for
the Constitutional Budget Reserve Fund (CBRF), and the returns
for the subaccount that HB 422 would be eliminating. Mr. Boutin
stated that the Department of Revenue usually doesn't get
together and make projections for the funds. He pointed out
that the Department of Revenue does make projections on returns
for the general fund and the CBRF in the Revenue Sources Book.
He said the last time that the Department of Revenue did an
official projection on the CBRF was for the Fall 2003 Revenue
Sources Book. Citing the information on page 7 of the Revenue
Sources Book, Mr. Boutin stated that the three-year return on
the subaccount has been 1.8 percent and has shown "textbook
volatility," which can be expected from an account that has
higher risk. He stated that the three-year annualized report
for the CBRF showed that the account had a 5.9 percent return.
Number 0260
MR. BOUTIN addressed the question regarding when the [CBRF]
account would be completely "down" and require entry into the
subaccount. He noted that the [2003] fall revenue forecast
shows the entire CBRF running out in May 2007. Mr. Boutin
explained that Commissioner [William] Corbus had made a
presentation recently in Fairbanks on [the status of] the entire
CBRF. Mr. Boutin stated that the department prepared the
handout for that presentation and that he had some copies
available. He noted that [the one-page handout included in the
committee packet, which shows two CBR subaccount graphs]
explained in detail how the CBRF is forecasted today to "run
down."
CHAIR WEYHRAUCH stated that the annual return rate for the
subaccount cited in the annual report 2003 seemed aberrant and
he asked why that was.
MR. BOUTIN stated that equities had really taken off recently,
which is reflected in the rate. He cited the subaccount graphs
in the packet and noted that the subaccount went below the
initial investment shortly after its inception and has just
recently recovered and risen above the initial $400 million
investment.
Number 0412
MR. BOUTIN addressed another question, regarding the amount of
money that the Department of Revenue felt was prudent to require
as a minimum balance for the CBRF, and how they derived that
balance. He stated that the number the administration is using
is a $1-billion minimum balance. He explained that $400 million
is required just for cash flow purposes, and the other $600
million is a result of the price volatility of oil. He said
that the Office of Management & Budget (OMB) decided on the
$600-million figure.
Number 0506
MR. BOUTIN addressed the final question previously submitted by
Representative Berkowitz, relating to the state's bond rating
and how it would be affected by the passage of HB 422. He said
that the transfer of funds from the subaccount to the CBRF would
have no impact on the bond rating, especially since this
particular move would have the entire fund at a fixed income,
which suggests more liquidity. He said that he talked with
"government finance associates" and asked them about the credit
rating implications that HB 422 would carry with it. He said
that government finance associates didn't see any impact on the
state's bond rating.
Number 0646
REPRESENTATIVE BERKOWITZ asked for further clarification on the
$1-billion figure that the administration was using as the
minimum amount needed for the CBRF. He said that he had been to
the Conference of Alaskans and he saw no direct relationship
illustrated between the $1-billion figure and anything else. He
stated that at the Fiscal Policy Caucus, it seemed that it was
determined that $1.5 billion was a better number.
Representative Berkowitz said that some people want to link the
minimum balance in the CBRF to general fund spending, so there
would be a cushion that is rationally related to the state's
expenditures.
Number 0702
MR. BOUTIN explained that where there was a zero aggregate draw
from the CBRF throughout the year, there would still be a need
for $400 million for cash flow purposes. He explained further
that early on in the fiscal year, the state borrows from the
CBRF to pay for fire suppression and federal projects. He added
that when the state is reimbursed by the federal government, it
then replenishes the money borrowed. He said that this is a
typical year, except for the recent oil prices, and $100 million
was just reinvested in the CBRF, and there is expected to be
another $100-million deposit made into the CBRF this fiscal
year.
MR. BOUTIN referred to [the second page - entitled, "General
Fund Cash Sufficiency With CBRF Borrowing" - of a seven-page
handout included in the committee packet], which he said was
prepared for the Conference of Alaskans by the Department of
Revenue. He used that graph to illustrate how the account is
drawn from and replenished and why the need for a $400-million
balance for cash flow purposes is a reasonable number. He
further explained that the OMB came up with the $600-million
figure by assessing the 80 percent confidence level for oil
price volatility. He said that it determined that a $600-
million balance was necessary to account for a one-year change
in oil prices and the time necessary for the legislature to deal
with an oil price shock. He said that these factors were the
reasons the $1-billion minimum was set, adding that it wasn't
linear programming or operations research, just pretty simple
calculus that established that number.
Number 0951
REPRESENTATIVE BERKOWITZ asked if there were any statistics
pertaining to the performance of the CBRF or the subaccounts for
the current year.
MR. BOUTIN indicated that the most current figures that he has
are found in the graph with the end date of December 31, 2003.
He stated that the subaccount had earned a 19.17 percent profit
for that year.
REPRESENTATIVE BERKOWITZ asked if Mr. Boutin had the current
balances of each account.
MR. BOUTIN said that he didn't have that information with him.
CHAIR WEYHRAUCH asked if the May 2007 projections mentioned
earlier would be extended, since the account has been getting
such a high return.
Number 1041
MR. BOUTIN estimated that in the upcoming spring forecast, the
rates will look better than the fall forecast, unless there was
a drastic plummet in oil prices. He said that he didn't want to
"forecast a forecast," but he felt that because of that, the May
2007, depletion forecast could potentially be pushed back a
little. He pointed out that the depletion date wasn't that
sensitive to earnings on the CBRF, stating that it is sensitive
to expenditures versus revenues.
Number 1112
CHAIR WEYHRAUCH asked if there were going to be any additional
fees for management of this money.
MR. BOUTIN responded that the Department of Revenue manages
about $18 billion, most of which is pension funds. He stated
that they manage $6 billion of fixed income "in house." He said
that other types of investments, real estate, private equity,
and equity are managed by external sources. He said that the
Department of Revenue will save $125,000 by moving this account
to a fixed income account and keeping it "in house"
CHAIR WEYHRAUCH asked if the Department of Revenue would need to
add more employees to manage the larger amount of money.
MR. BOUTIN stated that the Department of Revenue, Treasury
Division, has recently become the student loan money manager
[for the state] and has looked to add a fixed income analyst
position because of that.
CHAIR WEYHRAUCH explained that he had inquired about hiring
additional staff because, based on his experience, usually when
a bill is passed that takes thousands of dollars to manage there
is a need to hire more people. Chair Weyhrauch said that he
wanted clarification that that wouldn't be the case, although
the Department of Revenue would be dealing with millions of
dollars.
Number 1224
REPRESENTATIVE SEATON commented on what he felt was an
underlying concern from the committee, stating he feels that
because the rate of return was so high this last fiscal year,
the committee is attempting to be "market timers" and assume
that it will continue to do as well. He stated that they
weren't in a position to do that.
MR. BOUTIN agreed and said, "We are not market timers."
Number 1289
REPRESENTATIVE HOLM asked for clarification about the statement
Mr. Boutin made earlier regarding the cash flow needing to be
$400 million and the OMB needing $600 [million]. Citing [the
fourth page of the previously mentioned] packet prepared for the
Conference of Alaskans by the Department of Revenue,
Representative Holm asked why the figures represented there were
different - $700 million from the OMB and $300 million for cash
flow. He stated that he didn't see a reason that the $400-
million figure was needed. Representative Holm backed this
point up further by noting pages 10 and 11, of the same
document, seemed to show that the balance never falls more than
$150 million below zero. He asked why the Department of Revenue
sought $400 million for cash flow purposes, when the information
presented doesn't support that.
MR. BOUTIN responded that he didn't feel that there was a true
science to forecasting the market. He said that if someone was
going to argue that $1 billion wasn't the right minimum balance
amount, but $900 million or $1.1 billion is instead, he doubted
that there would be that much of an argument from the Department
of Revenue.
REPRESENTATIVE HOLM asked, "So its not that critical of a number
then?"
MR. BOUTIN responded that it was critical to have a balance; if
there was no balance it would effect the credit rating that
Representative Berkowitz was inquiring about in earlier
testimony. He said that he didn't think that a transfer like
the one that is suggested in HB 422 would effect the credit
rating, stating that the credit rating agencies are much easier
to predict than oil volatility.
Number 1443
CHAIR WEYHRAUCH asked if June 30, 2004, should be the effective
date of HB 422.
MR. BOUTIN responded that because the Department of Revenue
doesn't have the management fees for the subaccount in the
budget for fiscal year 2005, the sooner that HB 422 can become
effective, the better. He stated that the way a fund is run,
the money is tapered out of the fund; therefore, it will take
some time and there will probably be some costs absorbed in
fiscal year 2005. Those costs will increase the longer HB 422
is not in effect.
CHAIR WEYHRAUCH asked if HB 422 should have an immediate
effective date.
MR. BOUTIN stated that if HB 422 had an immediate effective
date, it would give the Department of Revenue more flexibility.
He stated that flexibility is always a good thing when managing
money.
Number 1510
CHAIR WEYHRAUCH asked if having the title read: "An Act
repealing the special subaccount under the authority of the
Constitutional Budget Reserve Fund." would be more appropriate
than the current title, since the subaccount is not created in
the fund as a constitutional matter.
MR. BOUTIN said that he hadn't looked at the title from that
perspective, but that Chair Weyhrauch was correct. He added
that, during the last hearing on HB 422, Chair Weyhrauch asked
if the effect needed could be done as an executive order. He
stated that he had spoken with Jim Baldwin, the Assistant
Attorney General, and Mr. Baldwin answered that this wasn't an
executive branch management issue, but a fund established by
law, so a change in statute was necessary.
REPRESENTATIVE BERKOWITZ asked if Mr. Boutin was aware of any
analysis that has been done that would project what would occur
if the bulk of the CBRF was deposited into the Permanent Fund.
Number 1640
MR. BOUTIN said he wasn't aware of any analysis done on that
matter.
Number 1652
REPRESENTATIVE GRUENBERG asked if it would give the Department
of Revenue the flexibility it needed if the legislature granted
the department the authority to access the subaccount, without
repealing AS 37.10.430, subsection (c).
Number 1756
MR. BOUTIN stated that the Department of Revenue's motivation
was based on the fact that the CBRF was regularly being drawn
from, which doesn't suggest to the Department of Revenue that
the money should be invested in any other account than fixed
income. He stated that although the subaccount is earning a
higher rate at this time, the Department of Revenue is not a
market timer, and so, based on the use of the fund, it makes
more sense to have that money in a fixed account. He used the
example that the CBRF would never be invested in real estate
because the fund isn't being used in that way. He said that the
Department of Revenue currently has long-term investments, but
he doesn't see the CBRF as a fund where long-term investments
are appropriate.
REPRESENTATIVE GRUENBERG stated that Mr. Boutin's logic was
flawless, if the Department of Revenue proceeds from that
premise. He said that if the department maintains the premise
that they try to maintain a balance in the CBRF, the reasoning
is flawed. He stated that by keeping the statute on the books
but granting the Department of Revenue access to the money, it
would give the Department of Revenue the flexibility it needed.
He stated that he thought the statute should exist if there were
policy changes in the future.
Number 1925
MR. BOUTIN replied that regardless of the balance in the CBRF,
the fact that there are drawdowns from the account suggests that
it has to have high liquidity, and HB 422 allows for that
liquidity.
REPRESENTATIVE GRUENBERG said that he feels that it would be in
the Department of Revenue's best interest to maintain the
flexibility of having the subaccount there, but having access to
it, rather than eliminating it. He asked Mr. Boutin why the
Department of Revenue felt it was necessary to foreclose the
subaccount and eliminate the ability for the department of
Revenue to make discretionary decisions.
MR. BOUTIN said that he didn't see the utility in maintaining
the subaccount, based on the way the fund is used. He said that
he felt that it was better to invest the CBRF in a manner that
is appropriate to how [the state] uses it. He stated that if,
in the future, the CBRF is used differently, it will be another
issue; however, that doesn't seem to be on the horizon right
now.
Number 2117
REPRESENTATIVE BERKOWITZ commented on the statements made about
the need for the CBRF based on the cash flow inequalities
throughout the fiscal year. He said he felt that there wouldn't
be a cash flow problem if there was a balanced fiscal regime.
He followed up that comment by illustrating the three cases that
could come about, involving the CBRF. He stated that the first
case would be where the CBRF has a lot of money and the
subaccount would prove useful. The second case would be where
there is a $1-billion CBRF and the money needed for cash flow
purposes is covered by the $1-billion minimum. The third case
would be where the CBRF was approaching zero and the assets in
the subaccount would be liquidated. He then asked why this
legislation needed to be introduced at all, since the Department
of Revenue was going to manage the entire CBRF in the best
interest [of the state] given the constraints at the time.
Number 2210
MR. BOUTIN responded that, like a private company, the
Department of Revenue has a need for cash. He stated that the
cash inflows and outflows are not balanced, so cash needs to be
available [to cover that imbalance]. He clarified that the $1-
billion minimum would include the subaccount, and he said that
in order to account for the cash flow and the price shocks, that
money should be readily available in fixed income, rather than
in real estate or equities, for example.
REPRESENTATIVE BERKOWITZ stated that it wouldn't be prudent for
the Department of Revenue to manage the fund in liquid assets if
the fund was going to be drawn from. He voiced his opinion that
repealing this statute [as proposed by HB 422] would have no
bearing on how the Department of Revenue manages the fund. He
added that the statute exists for direction of the fund during
flusher times.
Number 2324
REPRESENTATIVE GRUENBERG turned to Section 3 of the bill. He
asked if [the department] would need statutory authority in
order to transfer some of the money out of the fund, or whether
that authority would be inherent.
MR. BOUTIN responded that when language has been carefully
drafted by attorneys, he should not attempt to try to change it
on the spot. He added that he is not certain what problem
Representative Gruenberg is addressing and he would want to read
the language and consider if "it does the same thing under all
circumstances."
CHAIR WEYHRAUCH noted that the bill will have further
consideration in the House Finance Committee.
Number 2435
JAMES ARMSTRONG, Staff to Representative Bill Williams, Alaska
State Legislature, testified on behalf of the House Finance
Committee, sponsor, which is co-chaired by Representative
Williams. Mr. Armstrong suggested having a trigger mechanism
that would "collapse" the subaccount into the main account when
the main account falls below a certain number, such as "$300
million for cash flow purposes." He observed, "I mean, if the
stock market does 10 percent the next four years, it could make
$160 million."
CHAIR WEYHRAUCH said that seems to conflict with what Mr. Boutin
previously indicated, regarding the need to work with money
managers and the efficiencies that may be inherent in the
ability to give notice and react to the state's fiscal
situation. He stated that if this were contained in a longer-
term investment portfolio, then there certainly wouldn't be the
flexibility that Mr. Boutin and the state is looking towards.
He mentioned a trigger mechanism that could happen in an instant
in a catastrophic market situation.
Number 2505
REPRESENTATIVE BERKOWITZ responded that the trigger mechanism is
there. He explained that if prudence dictates that the fund be
drawn to zero, then it will be drawn to zero. If, in the course
of drawing it to zero, the assets of the subaccount have to be
liquidated, then that's what is going to happen. He reiterated
that he does not see the need for HB 422. He expressed his
opinion that this proposed legislation signals a pessimism on
the part of the administration about its ability to solve the
fiscal gap.
CHAIR WEYHRAUCH responded that he doesn't think it signals that
at all. For example, he said, if there is a five-year
investment portfolio with a penalty for early withdrawal, it
does the citizens and the CBR no good to use the early
withdrawal to pay a penalty. He noted that the statute was
passed during flush times and a long bull market. He indicated
that any pessimism is not reflective of the administration but
is reflective of reality.
REPRESENTATIVE BERKOWITZ disagreed. He stated that the reality
of the situation is that [the legislature] is going to solve the
fiscal gap one way or the other. He said that the current
administration has said that it wants a $1-billion minimum in
the CBR. He stated that if the administration wants that
minimum - an amount that he said he thinks is too low - then
there is no need to invade the subaccount. Furthermore, if the
subaccount is not invaded, then it should be invested in a way
that prudence dictates. Representative Berkowitz clarified as
follows:
In a lot of ways, all this subaccount does - and I was
there for the debate - [is it] authorizes prudent
investment rather than simple liquidity. That's what
the change inherent in the subaccount is. And ... it
just seems to me that if there's a need to invade the
principle of the subaccount, that's what's going to
happen. And they don't need the authority that's
inherent in repeal of a statute. But they need ...
the existence of the statute for flusher times, in
order to authorize better yielding investments.
CHAIR WEYHRAUCH said a lot of people have discussed how to
cushion the budget. He said, "It's case by case, person by
person."
Number 2643
REPRESENTATIVE SEATON said:
If we're talking about a five-year investment horizon
for this account, [and] we look back at the last three
years' average return of 1.8 percent, I don't care how
good one year was in that horizon, that has not been a
good investment for us compared to what they've done
with the regular fund. So, we can pick a year and
say, "Oh, it was great - 10.2 percent in one year, "
but when you look at the three-year annualized, it's
terrible. And so, why [would we] say, "Do we want to
maintain that investment?" It's supposed to be in
higher yield, which would mean higher risk generally;
especially it's higher risk if you're saying that at
some point during that time, prudent investing is
going to mean you have to liquidate some of it when
it's not the appropriate time.
So, it seems to me that we have our prudent investor
here from [the] Department of Revenue, that manages
the retirement accounts and everything else, saying
that with the direction that the CBR is used [and]
with the projections of what the CBR is going to there
for, it's easier -- we're listening to our investors
saying its not prudent to have this subaccount
invested in longer-term strategy, because no longer
are we looking at the CBR; we're not looking at
replacing the $5 billion or $7 billion that we owe the
CBR. If we had a structure that was putting that
money back into the CBR, we would be talking about
something quite different. I haven't heard that from
anyone in the legislature - that we are reconstituting
and "re-depositing" money into the CBR in any
significant amount. So, it seems to me that we have
to listen to our prudent investors who are coming to
us and saying that they don't figure a five-year time
horizon when we have a shorter-than-five-year use of
that fund horizon, currently ....
REPRESENTATIVE BERKOWITZ noted that Mr. Boutin is not the
investor - that's not what he does. He noted that the committee
has not seen forward-looking projections. He said, "If we're
here in a fiduciary capacity, looking at what the expectations
are going to be for the subaccount as opposed to the main
account, I think we ought to see what the forward-looking
projections are." He said it is not prudent or fiscally
responsible for the legislature to take a backwards look at the
past three year's biggest bear markets seen in "our lifetime"
and make a determination that that's what the long-term effects
are going to be.
Number 2780
MR. BOUTIN stated that the commissioner of [the Department of
revenue] is the fiduciary for "this account." The projection
that is used to decide how the account will be used is the fall
revenue forecast. He noted that in several weeks there will be
a spring revenue forecast. He said, "The information that we
have, I have shared with you, and I think it's all here."
CHAIR WEYHRAUCH said there has been some indication that an
immediate effective date would be beneficial.
Number 2826
CHAIR WEYHRAUCH moved [Amendment 1], to modify Section 4 [on
page 2, line 3], to make the bill effective immediately.
CHAIR WEYHRAUCH noted that Representative Berkowitz had
objected.
REPRESENTATIVE BERKOWITZ said he doesn't see "the emergency in
an immediate effective date." He strongly suggested that if an
effective date is chosen, it should be to a trigger point in the
CBR, not tied to a "date certain."
Number 2875
CHAIR WEYHRAUCH offered his understanding that if an Act has an
immediate effective date, it takes a two-thirds vote of the
legislature [to pass]; however, if it doesn't have an immediate
effective date, it would take effect 90 days after passage.
REPRESENTATIVE BERKOWITZ said, "After the signature."
CHAIR WEYHRAUCH noted that even if the immediate effective date
failed, "this" effective date would effect sooner than if there
were no effective date.
REPRESENTATIVE BERKOWITZ responded, "If the effective date
prevails on the floor."
Number 2918
REPRESENTATIVE SEATON noted, "Part of what we're trying to do is
... to allow an orderly phase-out of these longer-term
investments." He stated that he is not sure how the effective
date will influence that.
Number 2927
MR. BOUTIN said the department would direct the manager to begin
"getting out as they see appropriate." He indicated that the
management fees for fiscal year (FY) 2005 were not included.
Even if the bill is enacted, he said, the department would still
not be through with its management fee responsibility by July 1
and would have to find the money for approximately 60 days "as
we take her out of it."
CHAIR WEYHRAUCH said it sounds like the department could
implement its management responsibilities, whether the effective
date is immediate or July 1.
MR. BOUTIN concurred.
CHAIR WEYHRAUCH withdrew Amendment 1.
Number 2975
REPRESENTATIVE BERKOWITZ asked, "What precludes you from
directing the fund managers to do just that anyway?"
[Not on tape, but taken from the Gavel to Gavel recording on the
Internet, was Mr. Boutin's response as follows: "Well, as we
understand existing statute, we have this ... sub fund invested
at a five-year time horizon, which suggests to us mostly equity.
And so, we believe that precludes us from doing ... now what
this bill would allow."]
TAPE 04-25, SIDE B
Number 2959
REPRESENTATIVE COGHILL turned to [page 1, line 11, Section 2 of
the bill], which shows that [AS 37.10.430(c)] would be repealed.
AS 37.10.430(c) read as follows:
(c) A special subaccount is established in the
budget reserve fund (art. IX, sec. 17, Constitution of
the State of Alaska). Money in the subaccount shall
be invested to yield higher returns than might be
feasible to obtain with other money in the budget
reserve fund. In establishing or modifying the
investment policy for the subaccount in the
constitutional budget reserve fund, the commissioner
of revenue shall assume that those funds will not be
needed for at least five years. Income earned on
money in the subaccount shall be retained in the
subaccount by the department.
REPRESENTATIVE COGHILL offered his understanding that [that
statute] is a directive that states that the department shall
assume that the funds will not be needed for at least five
years. He noted that if it is not repealed, the directive would
remain. He added, "So, that would definitely change your
management style."
MR. BOUTIN said he believes that's certainly true.
REPRESENTATIVE GRUENBERG turned to a one-page memorandum
included in the committee packet, from Tam Cook [director of
Legislative Legal and Research Services]. It is a legal opinion
[regarding Section 1 of the bill]. He indicated that he had
spoken with Mr. Boutin about the memorandum. Representative
Gruenberg stated that he sees no need for Section 1, because
"you have that authority anyway."
Number 2916
REPRESENTATIVE GRUENBERG moved to adopt Amendment 2, which would
strike Section 1 of the bill [and renumber the other sections
accordingly].
CHAIR WEYHRAUCH note that [Section 1] would be unnecessary if
Section 2 is enacted.
REPRESENTATIVE GRUENBERG responded that it's unnecessary anyway.
MR. BOUTIN concurred.
CHAIR WEYHRAUCH asked if there was any objection to Amendment 2.
He clarified Amendment 2.
Number 2865
CHAIR WEYHRAUCH objected to Amendment 2 for discussion purposes.
REPRESENTATIVE GRUENBERG, in response to a question from
Representative Coghill, clarified that Section 1 is found on
page 1, lines 5-10 of HB 422.
Number 2844
CHAIR WEYHRAUCH withdrew his objection. He asked if there was
further objection.
REPRESENTATIVE SEATON asked if a title change would be required.
Number 2831
REPRESENTATIVE GRUENBERG responded that he would allow the bill
drafter to change the title, if necessary.
CHAIR WEYHRAUCH, in response to Representative Seaton's
question, said, "It may, depending on how discussion goes on
this amendment."
Number 2820
REPRESENTATIVE GRUENBERG said, "Part of my amendment is to
authorize any title change necessary."
Number 2812
CHAIR WEYHRAUCH asked again if there was any objection to
adopting Amendment 2 [with the authorization for a title
change]. There being none, it was so ordered.
Number 2789
CHAIR WEYHRAUCH moved to adopt Amendment 3 [AS 37.10.430(c),
with handwritten changes], as follows:
(c) Money in the budget reserve fund (art. IX, sec.
17, constitution of the State of Alaska) may be
invested to yield higher returns than might be
feasible to obtain with other money in the budget
reserve fund. In establishing or modifying the
investment policy for money in the constitutional
budget reserve fund, the commissioner of revenue shall
assume that those funds may be needed to meet cash
flow needs and prudent financial management of the
state's budget.
Number 2768
REPRESENTATIVE BERKOWITZ objected. He pointed out that the fund
is not all money, but is also made up of equities and bonds, for
example.
CHAIR WEYHRAUCH suggested that the word "fund" could be used
instead of the word "money".
REPRESENTATIVE GRUENBERG said, "Yeah, it would be the CBR fund."
CHAIR WEYHRAUCH read the Amendment 3, as amended, to incorporate
the foregoing suggestion, as follows:
The budget reserve fund (art. IX, sec. 17,
Constitution of the State of Alaska) may be invested
to yield higher returns than might be feasible to
obtain with other money in the budget reserve fund.
In establishing or modifying the investment policy for
the constitutional budget reserve fund, the
commissioner of revenue shall assume that those funds
may be needed to meet cash flow needs and prudent
financial management of the state's budget.
CHAIR WEYHRAUCH stated that that language comes from a letter of
intent from the House Finance Committee sponsor statement.
REPRESENTATIVE GRUENBERG pointed to the part of Amendment 3 that
read, "yield higher returns than might be feasible to obtain
with other money in the budget reserve fund." He suggested that
the word "money" be changed to "assets".
CHAIR WEYHRAUCH agreed. He asked if there was further
discussion on Amendment 3, [as amended].
Number 2699
REPRESENTATIVE BERKOWITZ moved to adopt another amendment to
Amendment 3, to change the words "may be" to "shall be".
REPRESENTATIVE GRUENBERG offered his understanding that that was
the intent of the original [AS 37.10.430(c)].
CHAIR WEYHRAUCH objected for purposes of discussion. He opined,
"I think we want to optimize returns so that we can meet the
state's budget, while getting a reasonable return on investment.
And that leaves us a lot more discretionary with the managers of
the fund and their fiduciary duty, as opposed to tying their
hands by ... giving them a ... specific directive ...."
REPRESENTATIVE HOLM said it seems to him that "we're" not
particularly interested in getting the greatest investment, but
rather in making the fund liquid. He posited that "shall" would
defeat the purpose of what the bill is trying to accomplish.
Number 2614
REPRESENTATIVE SEATON said:
I disagree with agreeing that the shorter-term and
longer-term alignments within the department of the
management of those funds is where that should be;
that if we are in a situation where there is more
money in the CBR and revenues project, say, [an]
eight-year horizon at some time, then it's perfectly
logical of them to do it. So I think the "may" is
(indisc. - overlapping conversation).
CHAIR WEYHRAUCH requested that Representative Berkowitz withdraw
his amendment so that the committee could adopt [Amendment 3, as
amended], at which point, he suggested, Representative Berkowitz
could "amend to add the 'shall'."
REPRESENTATIVE BERKOWITZ said he would do that.
Number 2533
CHAIR WEYHRAUCH asked if there was further objection to
[Amendment 3, as amended].
REPRESENTATIVE BERKOWITZ objected.
CHAIR WEYHRAUCH, in response to a request for clarification from
Representative Seaton, read the second half of [Amendment 3, as
amended].
REPRESENTATIVE GRUENBERG pointed to "the commissioner of revenue
shall assume that those funds". He suggested that "funds"
should be changed to "assets".
CHAIR WEYHRAUCH agreed to the change for purposes of
consistency. He said, "I'll take that as a friendly amendment."
REPRESENTATIVE GRUENBERG asked about Chair Weyhrauch's choice of
the term "cash flow needs". He asked if there might be other
needs, as well as cash flow needs, that the committee should
include. He also remarked that he thinks the "special account"
should be kept.
REPRESENTATIVE SEATON said he agrees with the elimination of the
subaccount and allowing the department to invest prudently. He
mentioned the structure and the time horizon. He said he thinks
the committee needs to "take a look at this and get it
structurally correct."
Number 2451
CHAIR WEYHRAUCH announced that Amendment 3, [as amended], and HB
422 would be set aside.
REPRESENTATIVE BERKOWITZ said it's clear at this point that he
is an advocate of the subaccount, but it seems that the "primary
rub against it has to do with the five-year look forward, and
that's the offending sentence."
CHAIR WEYHRAUCH told Mr. Boutin that although this process seems
frustrating, it will save time on the House floor.
Number 2424
MR. BOUTIN stated that he doesn't see the utility in having a
subaccount in the CBR at this stage. He noted that "all of this
money is invested under the prudent investor rule."
Number 2407
CHAIR WEYHRAUCH announced that HB 422 was heard and held.
HB 466-PERMANENT FUND INVESTMENTS
[Contains discussion of HB 156.]
Number 2383
CHAIR WEYHRAUCH announced that the next order of business was
HOUSE BILL NO. 466, "An Act relating to investments of Alaska
permanent fund assets; and providing for an effective date."
Number 2365
ROBERT D. STORER, Executive Director, Alaska Permanent Fund
Corporation (APFC), Department of Revenue, stated that the
department is held to the prudent investor rule. He said the
permanent fund "has an extra layer"; in addition to the prudent
investor rule, there is a statutory list that defines what may
be invested in. He indicated that the list includes one clause
that "gives a little additional flexibility." He noted that the
modern prudent investor rule started with the enactment of [the
Employee Retirement and Income Security Act of 1974] (ERISA).
He explained that although ERISA has to do with private pension
plans and corporations, everyone uses ERISA where applicable in
regard to public funds. Mr. Storer read selections from [29
U.S.C. 1104 - Fiduciary Duties], which read in part as follows:
(a) Prudent man standard of care
(1)
Subject to sections 1103(c) and (d), 1342, and
1344 of this title, a fiduciary shall discharge his
duties with respect to a plan solely in the interest
of the participants and beneficiaries and
...
(B)
with the care, skill, prudence, and diligence
under the circumstances then prevailing that a prudent
man acting in a like capacity and familiar with such
matters would use in the conduct of an enterprise of a
like character and with like aims;
(C)
by diversifying the investments of the plan so as
to minimize the risk of large losses, unless under the
circumstances it is clearly prudent not to do so;
MR. STORER said that although it was typical in the 70s for a
public fund to have a statutory list defining what investments
can be made, currently virtually all public funds have
eliminated the statutory list and "just follow the prudent
investor guideline."
Number 2186
MR. STORER directed the committee's attention to a [six-page]
handout [included in the committee packet], entitled, "Alaska
Permanent Fund." He noted that pages two and three of the
handout show all the times that the legislature has expanded the
investment flexibility and given the [APFC] more latitude to
achieve its investment goals. He indicated his understanding
that it is a "misstatement" on the bottom of page three that it
reads that HB 156 was sponsored by the Senate Finance Committee
in 1999. Notwithstanding that, he highlighted that paragraph,
which read as follows:
HB 156 allowed the Fund to leverage real estate
investments and increased asset allocation limit for
stocks to 55 percent of the total market value of the
Fund. HB 156 also created the "basket clause" that
allows up to 5 percent of the Fund to be invested in
alternative investments or to be applied to existing
asset allocations to expand their limits. In
addition, HB 156 allowed the Permanent Fund to be the
sole owner of any real estate property, regardless of
value.
MR. STORER noted that page four of the handout shows the history
of the fund's various asset allocations. For example, he noted
that during the early 70s and 80s, the permanent fund was
invested exclusively in fixed income securities, "even though
it's a long term fund." He revealed that he began working with
the APFC in May of 1983, and in June of that year, the [APFC]
funded its first "equity managers." He remarked that as of late
1987 the fund was invested in only about 13 percent in the U.S.
equity market alone and the [APFC] did not have permission to
invest in the international equity market. He stated, "What you
see ... right now in the asset allocation is slightly more
conservative than other public funds, but a mature fund that ...
constructs their portfolios, essentially, the way most public
funds invest their money."
Number 2061
MR. STORER said HB 466 proposes an increase in investment
flexibility. The changes, he noted, will potentially allow the
[APFC] to increase its returns and to meet future needs in terms
of increasing diversification, as well as to implement
strategies more efficiently at a lower cost and address
contemporary needs as they occur.
MR. STORER revealed that next week the [APFC] will propose a
change in its asset allocation, which is something it does every
March after a review of the capital market in the beginning of
the year. He turned to [a one-page handout included in the
committee packet], entitled "Fund's asset allocation and control
bands." He explained that the column of numbers on the left is
the target number - for example, 37 percent U.S. equity market,
while the column of numbers on the right shows bands - for
example, plus or minus 7 percent. He explained that the [APDC]
tries to create targets and then create "bands around those
targets." The corporation does not want to balance "a lot,"
because that can result in creating transaction costs; however,
it does want to "discipline it mechanically," which "forces you
to rebalance."
Number 1922
MR. STORER stated that the September quarter of 2002 was the
worst quarter in the history of the permanent fund, with a
negative 7.5 percent rate of return due primarily to a
plummeting stock market, which forced the [APFC] to add about
$750 million in the equity market to "get back closer to
target." He added, "We got permission from the board around
October 10. I think we missed the bottom of the bear market by
about four days and so we captured very high returns." He noted
that "this was not any special insight on what was going on in
the bear market," but was an example of how a disciplined
approach works. He stated that his point in bringing this up is
that "after four years of study, we're about to implement some
strategies that will use the basket clause."
Number 1861
MR. STORER continued as follows:
We are ... banging up against our statutory
limitations very soon. ... That means if the equity
market continues - if these strategies that we ...
employ using the basket clause work - we will be
forced to liquidate the assets. Not because the
capital markets tell us to do [so], not because our
advisors are saying we need to liquidate or take
profits or redirect that money. We will be forced to
liquidate because statutes will not allow us to gain
the benefits of the ... full rising market. So, there
is a big negative, I believe, to our statutory
limitations, which forces us to take potential gain
off the table, because of statutory limitations, not
what the financial markets are telling us.
Number 1794
MR. STORER turned attention to the last page of the of the
previously noted six-page handout, which addresses potential
questions. He noted that one question may be, "Will you ...
take on too much risk?" He continued:
We've all said we have this target [of] hitting a 5
percent real rate of return over time, and we're
comfortable making that statement. But what if, to
achieve a higher rate of return, ... our
constitutional amendment doesn't pass and we, one way
or another, ... believe we should strive for a higher
rate of return ... and accept more risk than is
prudent?" And that is a risk. You can't say, "That
will never happen, it has never happened, I see no
evidence it will happen."
I ... have worked with about every trustee of the
permanent fund with the exception of about four in the
beginning. ... I've worked with every executive
director. I've worked for or with every chief
investment officer [of] the Alaska Permanent Fund, and
I will tell you, in the history of the permanent fund,
there has never been an inclination of striving for
too much risk. When you become a fiduciary and have
responsibility of managing the fund, it's inherent in
the process that you take your responsibility very,
very seriously, and so there's no history - no
suggestion - that the permanent fund would be prepared
to reach too far for a return.
Number 1700
How will the board of trustees use this flexibility?
That becomes a tougher question. One is obviously
because [of] the statutory limitations; we would use
it to allow our investments [to] rise to what we hope
are their potential. As I noted at the beginning of
my presentation, we're trying to set the permanent
fund up to meet future flexibility, and so there's a
"nonpredictive" element about how you would use it.
...
If you ask me right now what [we would] look at, one
of course is being able to increase our returns by
letting our winners continue on. We might look at
some high yield. High yield is: the pejorative term
is "junk bonds." There's really two categories of
high yields; you can really divide a line between the
two. ...There is a category of high yield that's very
close to investment-grade corporate debt. They've
worked out their problems and they are in the process
of probably being upgraded and become investment
debts. That's a more conservative approach, if that's
not an oxymoron. Then there's the other, where you're
taking bigger bets on companies that have huge
problems and then you expect equity-like returns. We
may, over the next year - and I've not posed this
question with the board - but we may start taking a
look at the more conservative approach. Be mindful
that we will educate ourselves for as much as a year
or two years on a subject before we discard it or make
sense [of it]. As I noted, we got permission for the
basket clause in 1999. We are only now, after years
of study, beginning to implement some of the
strategies that use the basket clause. So, when I say
... something like that, I'm saying this is something
we may evaluate.
Number 1549
MR. STORER turned to the question of derivatives. He explained
that derivatives are financial instruments where "their return
is derived from some other investment instrument." For example,
he noted that a measure for large-cap equities is the S&P
[Standard & Poors] 500 index. He noted that there are futures
and forward contracts that base their return on the performance
of the S&P 500 index. He continued as follows:
We use derivatives now, in a sense. We will hedge
currency. When we bank an international investment we
may hedge that currency risk before we buy the
currency to pay off the security. Our managers do
that. So, there are any number of ways to use
derivatives; they all aren't all bad. When you see
derivatives and you see negative headlines, ...
typically it's because they've used derivatives for
leveraging the portfolio in a rather significant
manner, and it's not the use of the derivative so much
as increasing the risk by using the leverage.
Number 1456
CHAIR WEYHRAUCH asked Mr. Storer if the basket clause got its
name when it was adopted in 1999, or was it a term that "just
grew."
MR. STORER offered his belief that it became a term of art
"during that process."
CHAIR WEYHRAUCH said when he hears the word "basket," he thinks
of a basket used in a grocery store and "picking and choosing
small amounts to go throughout the line." He asked Mr. Storer,
"Is that how the public would view what a basket clause is, in
terms of the larger scale when you're dealing with investments
in the permanent fund?"
MR. STORER mentioned diversification. He stated, "So, even if
one gets the ability through the basket clause to make
investments, we are still driven by diversification. And our
point would be to fill that basket with a bunch of diversified
options that would not put risk in any (indisc. - overlapping
voices)." In response to a follow-up question from Chair
Weyhrauch, he confirmed that "we're asking to make the basket
bigger," or to increase the flexibility.
Number 1365
REPRESENTATIVE SEATON asked if part of [the intent] is to be
able to maintain assets that have appreciated and may "go up
more." He clarified that he is trying to figure out "the 15
percent." He asked, "Does that mean that the funds could then
take international equities to 31 percent, with the 15 percent,
less the 16 percent, currently, if the fund thought ...
international assets are going up and ... we've had a good run
in our investments here and we want them to continue, so we'll
use our authority to increase ... that allocation to 30
percent?"
MR. STORER responded that that technically - emphasis on the
word "technically" - could be correct. However, he stated that
it would also be unlikely, keeping in mind that the goal is a
fully diversified portfolio. He revealed that next week the
[APDC] will recommend increasing the international equity
allocation from 16 to 18 percent. He added, "In fact, I think
we're more like 17 [percent] as it now stands. We're also using
parts of the basket clause." He continued as follows:
So, the fundamental question would be, "If one used
the entire basket clause to increase a single asset
class, would it still meet the rules of
diversification and [the modern] prudent [investor
rule]?" I am well aware of many public funds that
have been invested in excess of 25 percent in the
international equity markets, but as a practical
matter, that would be unlikely that we would use what
I call the privilege of an increased basket clause in
any single thing. ... As [of] now we aren't going to
use it in a number of options that will behave
differently in different market environments.
Number 1234
REPRESENTATIVE SEATON asked for examples of "what these other
new investments" are.
Number 1168
MR. STORER responded as follows:
As noted, we do have a 55 percent limitation in the
stock market; that is unique in public funds
throughout the country where you follow the prudent
investor rule. There are no limitations whatsoever.
So, I would like to preface my response by saying that
even with the increased basket clause, our constraints
would still constrain us to being one of the more
conservative public funds in the country. So, even if
we increase it, we're still not going to have the
ability to take as much risk as other public funds
may. And of course, risk is not necessarily
pejorative; you should be rewarded for being
compensated for that risk.
As an immediate objective we will probably use the
basket clause to not be forced to sell stocks in the
... equities if we exceed the statutory limit, because
we would apply ... that basket clause to the
additional equities. ... We don't believe that is
bad at all. What we're doing is we're letting ... the
markets define when to rebalance, we're not letting
... arbitrary constraints tell us when to apply. So,
one immediate use would be simply to benefit from the
appreciation of the markets and not be forced to sell
for arbitrary reasons.
[Regarding] the balance of it, we would ... educate
ourselves on any number of things. I mentioned an
example - potentially high yield. We've looked at it
modestly. We have looked at private equity and we're
starting a modest program in private equity, which, by
definition, that's "nonpublicly" traded investments.
... It's a diversified portfolio that could have some
venture capital, some buyouts in it. Typically you
expect to earn about 5 percent return in excess of the
publicly traded markets [when] you do something like
that.
Number 0997
MR. STORER mentioned absolute return strategy and hedge fund.
He said that he is about to recommend something that's kind of
unique. He continued as follows:
I'm introducing, for the first time ever, ... a pilot
program. These are very sophisticated investment
approaches; we've studied it for well over a year.
And there's a lot more to be learned, but the only way
I think we can learn beyond here is live. And so, I'm
recommending that we invest a modest amount in a pilot
absolute return strategy. We're going to define it as
very low risk. Our objective is to have ... targeted
risk that is equal to or less than the bond market.
That'll be part of the criteria. ... I think
everyone in this room will agree that sometimes things
exist in government perpetually, and to make it truly
a pilot program, I'm recommending a sunset clause ...
so that the program will expire within 30 months, so
that not only by policy it will die, but our contracts
with the experts will expire in 36 months, as well.
So, the only way we can continue forward on that one
is to take the knowledge we've learned and vote it up,
rather than it just [becoming] perpetual. So, that is
another use, and I'd like to think that's a
conservative approach to a very sophisticated
investment strategy. So, those are sort of on the
immediate table.
I spoke last week in front of [the Senate State
Affairs Standing Committee], and I did the cornucopia
of opportunities, most of which I don't personally
agree make any sense. When people invest in timber,
it usually means timber in Indonesia or overseas. And
can you imagine investing in timber in a small way and
then [ending] up with an environmental nightmare in a
country where you have no control. So, I'm giving you
a bad example, in my opinion. So, we have to work
through all these things.
Number 0760
REPRESENTATIVE BERKOWITZ said he would quarrel with Mr. Storer's
assertion that the list forces conservative investments.
Conversely, he said it seems to him to force imprudent
investments. He said sometimes there might emerge conflicts
between the list in Title 37 and the explanation of what a
prudent investor should do in Title 13. He said, "When you're
forced to sell assets because you're going up against the upper
limits, that's not conservative ...."
Number 0740
MR. STORER concurred with Representative Berkowitz's statement.
He said that he has been "at or near" the permanent fund and has
long thought that the statutory list could become so restrictive
that "it belongs in the Smithsonian rather than as an investment
tool." He stated, "We have not suffered, to date, but I think
... that we need to create a flexibility to manage the fund
successfully in the future."
Number 0682
REPRESENTATIVE GRUENBERG indicated that he may be offering an
amendment that would eliminate the [limitations] and allow the
board to just invest under the prudent person rule. He asked
Chair Weyhrauch if the bill would not be moved out of committee
today, because he indicated that he has questions to ask to
which he would like answers at the next meeting.
CHAIR WEYHRAUCH stated that it is not his intention to move the
bill today.
Number 0487
RONALD W. LORENSEN, Attorney at Law, Simpson, Tillinghast,
Sorensen & Longenbaugh, P.C., told the committee that that firm
is outside counsel to the APFC. He stated that he has worked
with Mr. Storer and the board on the proposed legislation before
the committee. He announced that he would limit his testimony
to addressing the changes sought in the bill. Both sections, he
noted, would make amendments to AS 37.13.120. He stated that AS
37.13 is the chapter that deals with the APFC and is described
as the legal or statutory list. Section 120 is approximately
four pages long, he noted, with subsection (g) setting out the
legal list of those investments that the [APFC] is authorized to
invest in. Other subsections within Section 120 provide either
limitations or guidance with respect to the investments of the
fund. For example, he said, subsection (a) is the provision
that deals with the prudent investor rule as it applies to the
fund, while subsection (k) is the subsection that created the
basket clause in 1999. Subsection (k) would be amended by the
bill to add references to two additional subsections within
Section 120, as exceptions to the operation of the basket
clause. Those additions are subsections (h) and (j).
MR. LORENSEN stated that subsection (h) would prohibit the
corporation from investing in futures contracts, except in
specific circumstances. He continued as follows:
That limitation, although it makes sense in the scheme
of the existing statutory list, creates some
difficulties in terms of flexibility, with respect to
the basket clause. ... The example I have most in
mind is in the area of hedge funds, where hedge funds
may invest, as part of their strategy, some portion of
the funds under management in various forms of futures
contracts. This limitation page would prohibit the
basket clause from being used for those kinds of hedge
fund investments. It certainly was not the intention
at the time that the basket clause was proposed to the
legislature that that limitation exist to apply to the
basket clause; it was just, basically, something that
hadn't been anticipated or perceived as a problem at
the time.
MR. LORENSEN stated that subsection (j) is a provision in
Section 120 that states that the [APFC] may not invest in bonds,
basically, where the interest payment on a bond has been
defaulted in the last five years. And again, that's a prudent
rule, with respect to fixed income as a class of investment, but
it creates difficulties when you're talking about alternative
forms of investment, such as high yield investments, which Mr.
Storer's also described as what some people call, "junk bonds,"
where you're looking for a higher return. And the reason you're
looking for a higher return is because you are investing in a
class of bonds which is more risky, and frequently ... that risk
is demonstrated by the fact that interest payments have not been
made within the last five years.
[The committee took a brief at-ease.]
TAPE 04-26, SIDE A
Number 0001
MR. LORENSEN continued as follows:
So, adding [subsection] (j) in Section 2 of the bill,
to the exceptions for the operation of the basket
clause, would permit a portion of the assets of the
permanent fund to be invested in certain alternative
investments, which use - as a part of their investment
strategy - investing in bonds, which have a higher
risk of default, but also the counter veiling
consideration is that they have a higher potential for
an increased return.
MR. LORENSEN turned to the other change proposed in Section 2 of
the bill, which is to increase the limit on the size of the
basket clause from 5 percent to 15 percent. He noted that there
had already been discussion on the issue. Section 1, he
specified, addresses the potential restrictions on the
investment ability of the permanent fund in alternative
investments. Mr. Lorensen paraphrased Section 1 of the bill,
which read as follows:
*Section 1. AS 37.13.120(e) is amended to read:
(e) The corporation may not borrow money or
guarantee from principal of the fund the obligations
of others except as provided in this subsection. With
respect to [REAL PROPERTY] investments of the fund,
the corporation may, through an entity in which the
investment is made, borrow money if the borrowing is
without recourse to the corporation and the fund.
MR. LORENSEN explained that the idea is as long as the fund
itself is protected by some intervening legal entity, it is
currently permissible "for real estate only" to make investments
that might involve borrowing money as part of the investment
strategy. He added, "And, of course, there we're talking about
leverage, basically." He continued as follows:
Now that we look at various available forms of
alternative investments, we see that certain kinds of
hedge funds, and potentially also certain kinds of
private equity funds, do - as a part of their
investment strategy - invest ... through limited
partnerships. It's never the [APFC] itself that would
be the investor, but the [APFC] would purchase an
interest in a limited partnership, for instance. And
the limited partnerships, again, may enter into
borrowing for leverage purposes, as a part of the
investment strategy. And so, here the recommendation
is simply to delete the ... limitation on real
property and make it available for any kind of
investment of the fund, so long as it is done through
a separate legal entity and so long as there is no
recourse back against the fund.
Number 0356
REPRESENTATIVE LYNN asked how 15 percent was chosen in Section 2
of the bill.
MR. LORENSEN deferred to Mr. Storer.
Number 0419
MR. STORER replied that "we" want as much investment flexibility
as possible and the constitution [allows] investments as
designated by law, which would be 15 percent. He added, "I
would note that if you looked at other public funds, it's silent
by virtue of their rules. Their rules would be 100 percent, not
15 percent. So, 15 percent still [is a] far more conservative
constraint than others."
REPRESENTATIVE LYNN asked if the 15 percent was "pushing the
envelope" or whether it was "still plenty of room."
MR. STORER responded that he personally doesn't think it's
pushing the envelope at all. Conversely, he opined it's the
maximum that "we" can use and still fall within the direction
that the constitution allows. He observed that where he has
seen public funds that have no constraints, those funds are
still managed in well-diversified portfolios. He said he
doesn't see undue risk in being allowed that extra flexibility.
Number 0610
REPRESENTATIVE GRUENBERG asked, "What do you mean by 'not
withstanding these other subsections'?"
Number 0652
MR. LORENSEN replied as follows:
"Notwithstanding", in this context means that even
though these limitations exist, they do not apply to
the basket clause.
Number 0670
REPRESENTATIVE SEATON, indicating [the language to be deleted
regarding] real estate in Section 1 of the bill, asked, "Is that
because they're real estate mortgages?"
MR. LORENSEN answered that he thinks real estate mortgages are
probably the best example of how real estate investments are
made by the permanent fund. He noted that the permanent fund
actually has "a fairly low percentage of its assets in real
estate that is actually leveraged or is borrowed." He said some
of the real estate properties that are purchased by the [APFC]
do have a borrowing, leverage, or mortgage component to them,
and "this was inserted in 1999 to make it clear that that was
permissible, so long as it was done through a separate title-
holding entity."
Number 0750
MR. STORER added that the [APFC] leveraged its "direct real
estate portfolio approximately 15 percent; it's an incremental
return." He stated that that's still conservative by virtually
all standards. For example, he proffered that publicly traded
real estate investment trusts "tend to run about 40-60 percent
leverage." He offered his understanding that most public funds
actually use more leverage - particularly in the last few years
with the lower interest rate.
REPRESENTATIVE SEATON asked, "Is that, basically, the futures
market that we're talking about, whereas real estate is more
mortgaged?"
MR. LORENSEN answered no. He continued as follows:
Maybe the best example has nothing to do with either
mortgages or real estate, but is in the area of
private equity, where ... there are leveraged buyouts
and that sort of investment activity as part of the
strategy. And so, there will be a borrowing component
in these private equity transactions, which is - again
- nothing to do with real estate, specifically, but
just is a way to finance the underlying transaction.
And so, to the extent that a particular private equity
investment involves a leverage aspect, we would like
to see this language in place to make it clear that
that's permissible. Private equity is now permissible
to the extent of the cap created by the basket clause.
Number 0903
MR. STORER added that "we" view "this" as a cleanup to the
original intent of the basket clause. He said he hopes the
committee agrees.
MR. LORENSEN concurred.
Number 0948
CHAIR WEYHRAUCH announced that HB 466 was heard and held.
HB 423-TAXICAB DRIVER LIABILITY
[Contains discussion of HB 68.]
Number 0960
CHAIR WEYHRAUCH announced that the next order of business was
HOUSE BILL NO. 423, "An Act relating to accidents involving the
vehicle of a person under the influence of an alcoholic
beverage; and providing for an effective date."
Number 0985
JIM SHINE JR., Staff to Representative Tom Anderson, Alaska
State Legislature, presented HB 423 on behalf of Representative
Anderson, sponsor. Mr. Shine read his testimony as follows:
House Bill 423 is a "Good Samaritan" bill for taxicab
operators who transport intoxicated persons or who
drive an intoxicated person's motor vehicle to their
home or another directed location. This legislation
would create a deterrent for those who might otherwise
drive impaired if unable to find an alternative method
of transportation. It grants taxicab companies legal
immunity in the event that an accident occurs, except
in the case of recklessness, gross negligence, or
intentional misconduct.
MR. SHINE, in response to a question from Chair Weyhrauch,
confirmed that the order of committee referral was reversed from
how it shows on the bill; therefore, the House State Affairs
Standing Committee is the first committee of referral and the
House Judiciary Standing Committee is the second. He continued
reading his testimony as follows:
There are times when Alaskans find themselves in an
"end-of-evening dilemma" - they are over the .08 blood
alcohol limit and shouldn't drive, but are worried and
reluctant to leave their car unattended overnight. HB
423 resolves this dilemma by allowing a taxicab
operator to drive an intoxicated person home while a
second operator follows them home in their vehicle.
This legislation would allow the intoxicated person
and his or her vehicle to get home safely without the
taxicab operator fearing liability. HB 423 promotes
responsible behavior and encourages people to do the
right thing and not drive while intoxicated.
While annual alcohol-related traffic fatalities have
decreased by more than 33 percent over the past few
decades, the latest statistics show a recent increase
with more than 17,400 people killed and more than half
a million others injured in alcohol-related crashes in
2002 in the United States. Alaska had 87 traffic
deaths, of which 35 were alcohol-related, [which
equated to] 40 percent in 2002. The previous year,
there were 47 alcohol-related deaths out of the 89
deaths, which equated to 53 percent.
In order for this program to be successful, cab
companies and liquor establishments must work and
communicate closely. These establishments will
implement the following strategies and policies:
Place signs near pay phones, direct lines to cab
companies, and other conspicuous areas of the
establishment, such as restrooms and exits; train the
establishment staff on the availability of this
program and how to inform patrons, and how to
implement the process; make public service
announcements at closing time to help influence
patrons to use the program; pay a portion of the cab
fare cost agreed upon by establishments and program
officials; and track program usage to assess
effectiveness to promote and or improve the program.
MR. SHINE noted that the Checker Cab Company in Anchorage has
set some guidelines for the program. He shared those written
guidelines, which read as follows [some punctuation changed]:
A minimum of six designated taxi drivers on duty every
night to be available for this program.
A flat $40 fee per car delivery made from any licensed
establishment to one destination in the Anchorage
area, for both the patron and his/her vehicle.
Every car delivery that is done will be logged into a
logbook in the dispatch office, to ease in the
tracking of the progress of this program and how well
it is working to benefit the community.
Training of taxicab drivers and dispatch employees so
designated drivers will be able to cover the car
deliveries safely.
Promote, with all the taxi drivers' help, how this
program is available to all customers heading to any
drinking establishment in the Anchorage area. It is a
convenient way to enjoy all [licensed] establishments
without worrying about retrieving a vehicle the next
day.
MR. SHINE continued reading his testimony as follows:
This service will be free to the consumer. The cab
companies will receive $40 for each trip they make.
It's a reduced flat rate for transportation anywhere
in the Anchorage bowl area. This legislation is
supported by Mother's Against Drunk Drivers (MADD),
and there is a letter of support in your bill packet.
This bill is identical to House Bill 68, which
unanimously passed the House in the 22nd legislature
by a vote of 37-0. In the Senate, it passed through
the [Senate Transportation Standing Committee], but
stalled in the [Senate Judiciary Standing Committee]
and was never heard.
MR. SHINE noted that Darwin Biwer was available to testify. He
said he would answer questions from the committee, but would
defer any technical questions to Mr. Biwer.
Number 1256
DARWIN BIWER, Board Member, Cabaret Hotel Restaurant & Retailers
Association (CHARR), explained the formation of HB 423, stating
that it was a concept brought forth by two CHARR board members,
Rod Pfleiger and John Pattee. He said that HB 423 was another
example of the liquor industry trying to promote safe driving;
CHARR had supported previous, similar legislation that stalled
in the Senate. He said that HB 423 was a "housekeeping" bill,
so the liability [insurance] for taxicab companies would be
lower. He reiterated that there would be no costs to the
consumer with the passage of HB 423; those costs would be [paid]
by the liquor companies and [through] donations.
Number 1395
REPRESENTATIVE HOLM first complimented CHARR, specifically in
Anchorage, for bringing forth HB 423. He indicated that he had
witnessed the successful implementation of a similar process in
Canada, where a connection has been made between taxicab
companies and liquor establishments.
REPRESENTATIVE HOLM, noting that [drinking and driving] is a
statewide problem, and HB 423 is enacting a statewide policy,
asked Mr. Biwer how CHARR was interacting with the other
communities in Alaska.
MR. BIWER stated that there is a pilot program enacted in
Anchorage, and CHARR wanted to implement the program, work the
bugs out, and then take it to other communities within the
state.
REPRESENTATIVE HOLM thanked Mr. Biwer and stated that he thought
that HB 423 was a very responsible thing that establishment
owners did to take care of the public.
Number 1509
REPRESENTATIVE BERKOWITZ asked if there was a "sunset date" on
the Anchorage pilot program, and he said, if not, CHARR should
think about implementing one or going statewide from the start.
He also asked who would bear the costs if there was an accident
as a result of negligence on the part of a taxi driver.
MR. BIWER stated that he wasn't the person to talk about
insurance rates, but he thought that there was a representative
from Allstate Insurance that was present, who would be able to
answer that question. He stated that the purpose of HB 423 is
to reduce the insurance rates for the taxicab companies to give
them incentive to participate in the program.
REPRESENTATIVE BERKOWITZ asked if there have been any assurances
from the insurance companies that rates will go down with the
passage of HB 423.
MR. BIWER said that the rates for a taxi would be somewhere
around $1000 a month if HB 423 was not passed. He cited that as
one of the reasons that HB 423 was introduced; so rates would go
down and the pilot program could be implemented.
CHAIR WEYHRAUCH cited the earlier testimony from Mr. Biwer, when
he said there would be no costs to the consumer, and asked what
costs were involved.
MR. BIWER responded that the cost would be for the cab ride and
the two cab drivers. He said that the Anchorage taxicab
companies have set a flat rate of $40, regardless of distance,
within the Anchorage bowl area.
REPRESENTATIVE WEYHRAUCH asked for an annual estimate for
expenses that would be required industry-wide.
MR. BIWER said that CHARR was going to apply for federal grants,
and has had financial commitments from liquor distributors, so
there really is no fiscal note. In response to further
questions, he stated that many establishments already bear some
costs because they pay for cab rides for their patrons. He said
that CHARR felt that HB 423 was a better way to go about doing
that. He made the comment that this was a pilot program and
CHARR doesn't have all the answers to those questions yet.
Number 1737
REPRESENTATIVE GRUENBERG asked what position Frank Dahl held in
CHARR.
MR. BIWER responded that Mr. Dahl is on the Board of Directors
of Anchorage CHARR.
Number 1800
REPRESENTATIVE SEATON noted that in HB 423 there was no mention
if the vehicle driven already had insurance. He stated that
this may be a situation where [the legislature] is giving
liability for negligence to a driver of an uninsured vehicle who
then gets into an accident. He said that it would seem like
there will be some fallback to the people who are paying for the
driver. He stated that he didn't think that the legislature was
to the point where it would grant someone total immunity just to
get an intoxicated person's car home. He stated that it is
risking a victims injuries without someone being liable. He
asked Mr. Biwer to think about that and address that issue when
the committee next discusses HB 423.
[HB 423 was heard and held.]
ADJOURNMENT
Number 1847
There being no further business before the committee, the House
State Affairs Standing Committee meeting was adjourned at 10:00
a.m.
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