Legislature(2009 - 2010)BELTZ 211
03/20/2009 08:00 AM Senate EDUCATION
| Audio | Topic |
|---|---|
| Start | |
| SB134 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 134 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE EDUCATION STANDING COMMITTEE
March 20, 2009
7:59 a.m.
MEMBERS PRESENT
Senator Bettye Davis, Vice Chair
Senator Charlie Huggins
MEMBERS ABSENT
Senator Donald Olson
Senator Gary Stevens
COMMITTEE CALENDAR
SENATE BILL NO. 134
"An Act adopting and relating to the Uniform Prudent Management
of Institutional Funds Act; relating to the investment of money
for charitable purposes by institutions, including governmental
institutions; and relating to the University of Alaska."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 134
SHORT TITLE: PRUDENT MANAGEMENT OF INSTITUTIONAL FUNDS
SPONSOR(s): SENATOR(s) PASKVAN
03/02/09 (S)READ THE FIRST TIME - REFERRALS
03/02/09 (S) EDC, FIN
03/20/09 (S) EDC AT 8:00 AM BELTZ 211
WITNESS REGISTER
SENATOR PASKVAN
Alaska State Legislature
Juneau, AK
POSITION STATEMENT: Sponsor of SB 134.
JAMES LYNCH, Associate Vice President
Finance
University of Alaska (UA)
POSITION STATEMENT: Supported SB 134.
ERIC WOHLFORTH, Chair
University Investment Committee
University of Alaska Foundation
POSITION STATEMENT: Supported SB 134.
LYNN LEVENGOOD
Uniform Law Commissioner
State of Alaska
POSITION STATEMENT: Supported SB 134.
KEN CASTNER, representing himself
POSITION STATEMENT: Supported SB 134.
ACTION NARRATIVE
7:59:35 AM
VICE CHAIR BETTYE DAVIS called the Senate Education Standing
Committee meeting to order at 7:59 a.m. Present at the call to
order were Senators Huggins and Davis.
SB 134-PRUDENT MANAGEMENT OF INSTITUTIONAL FUNDS
7:59:47 AM
CHAIR DAVIS announced consideration of SB 134.
SENATOR PASKVAN, sponsor of SB 134, said this bill will bring
Alaska's guidance and requirements for the administration of
endowments and charitable funds up to date and consistent with
national standards. The Uniform Prudent Management of
Institutional Funds Act (UPMIFA) attempts to bring all of the
various types of non-profit organizations and governmental
entities under the same requirements and standards for
administration of endowments and charitable funds. This act is
default legislation which only applies in the absence of other
more specific requirements or law or governing instruments. For
example, this does not apply to the Permanent Fund because it
has specific investment standards written into its act.
He said that UPMIFA replaces obscure and obsolete rules and
concepts for the investment and management of endowments and
charitable funds with current industry best practices. UPMIFA
provides clear guidance on the standards of performance and
prudent practices for the investment and management of
endowments and charitable funds consistent with the Uniform
Prudent Investment Act adopted by Alaska 10 years ago. UPMIFA
defines specific factors to be considered in managing charitable
funds such as the accumulation of earnings, the expenditure of
endowment funds, and the obligation to provide for future
beneficiaries. The investment of funds including the obligation
to manage to the overall objective of the funds in the portfolio
to consider the investment horizon, cost of management,
diversification, rebalancing, verification or relevant facts and
use of special skills or expertise that a fiduciary possesses
and a prudent delegation of investment and management functions.
He explained that UPMIFA minimizes the exposure of non-profits
and volunteer trustees to disputes and legal challenges over
issues related to obscure and outdated administrative rules and
practices by clarifying the specific requirements in the
applicable performance standards.
Further, he said, UPMIFA incorporates a less onerous and less
expensive process for the modification or release of donor
restrictions on gifts that may have become wasteful,
impractical, unlawful or impossible to achieve. He said, as a
member of an investment board, he believes these are some of the
investment standards that are important to bring Alaska's
investment standards in line with national standards.
8:03:31 AM
SENATOR HUGGINS asked if there are any organizations other than
the Permanent Fund that do not come under UPMIFA.
SENATOR PASKVAN replied that he is not aware of any.
SENATOR HUGGINS asked if he could foresee any unintended
consequences.
SENATOR PASKVAN replied no; and this is a step in the right
direction to, for example, provide voluntary trustees who are
making decisions on these institutional funds a better
understanding of prudent investment practices.
8:04:58 AM
SENATOR HUGGINS asked if this wouldn't require a staff of three
lawyers to administer.
SENATOR PASKVAN answered no; "the point of this is to not have
that happen."
8:05:28 AM
JAMES LYNCH, Associate Vice President, Finance, University of
Alaska (UA), said he has managed their endowments for the last
25 years and supported SB 134. He related that UPMIFA was
approved by the Uniform Law Commission in 2006 and in subsequent
years has been adopted by 26 states and the District of
Columbia. In 2009 it was adopted by three more states, and bills
were introduced to implement these UPMIFA in 14 other states.
There are two reasons for that: one is that for most states this
is an update of prior uniform regulation that came out in the
1970s, and most states have operated under similar standards for
the last 30-40 years. Alaska never adopted the original Uniform
Management Act. The other reason is that it provides a lot of
flexibility for managers during economic turmoil and economic
downturn. This update was developed because of confusion that
arose in the last market decline and the bursting of the tech
bubble in 2001/2.
8:08:32 AM
MR. LYNCH explained that the Act is a compilation of best
practices for charitable foundations and endowments; it protects
donors by making their intent paramount in determining what can
and should happen to donations and endowments. It authorizes
such things as the total return concept, which allows managers
of endowments to use current investment techniques and
strategies. Otherwise they end up with a lot of fixed income
investments, and there's almost no way that investing in fixed
income can inflation-proof a fund. It also provides the
charitable organizations with the flexibility they need in these
economic times to deal with market conditions.
He explained that when you manage an endowment, you have three
objectives. The first one is to maximize the returns, next is to
inflation-proof to be able to retain the purchasing power. When
these endowments are used at the University for supporting a
faculty member's salary or a scholarship, for instance, those
costs go up annually. The endowment has to be inflation-proofed
so that spending can increase as needed. Third, management tries
to stabilize distributions. It's not much value to find out that
the investment market is down this year, but the student still
has to pay tuition. The same is true for a faculty member's
salary.
8:11:13 AM
Stabilization is probably the most important of the three, he
emphasized. The Act protects the non-profit community and its
many volunteers. It protects them from the failure to follow
what are really outdated rules and obscure practices on managing
these funds.
He explained that it does a couple of other small things that
are important for administration of funds. Two sections relate
exclusively to the University; one makes sure that this Act does
apply to the University. Second, it's to correct an unintended
consequence that occurred during establishment of the Retirement
Management Board. The authority for the Board of Regents to
manage its endowments and the land grant trust fund basically
came from a statutory reference to the Alaska Pension Board in
AS 14.25.180 that dealt with some of the fiduciary duties of the
Pension Board and applied those to the University. It also
indicated that AS 37.10.071, which is the fiduciary
responsibilities toward state funds, applies to the Board of
Regents. When the reference was changed to the Retirement
Management Board, provisions were inserted for managing pensions
that don't apply to endowments at all, and it is not clear as to
whether other state statutes on fiduciary responsibilities do
apply. This corrects that situation.
8:14:02 AM
ERIC WOHLFORTH, Chair, University Investment Committee,
University of Alaska, said this bill would apply in a case where
the trust instrument is silent with regard to the terms of
management and the provisions for payouts. He explained the
typical gift to the University establishing a scholarship fund
is silent on such things as what the payout can be for the
scholarship. Trust law in Alaska now says you can't go below the
original cost of the fund, so a lot of University scholarships
this year won't have a payout. This bill applies in all cases
where the original gift instrument is silent and says you can
have a percent of market value payout. However documents with
other stated payout provisions in them would prevail over this
law.
This bill also gives portfolio managers freedom in the kind of
assets that can be invested in the portfolio according to very
elaborate rules relating to prudence. It does not attempt to
specify what sorts of investments are legally required. The
default nature of this bill is important as well as the broader
authority for investing that previously existed.
8:17:03 AM
SENATOR HUGGINS asked about his use of the terms "endowment" and
"principle." He asked if this legislation allows his investment
organization to dip into the principal when it was silent where
without this legislation that couldn't be done.
MR. WOHLFORTH said that is correct. The original Uniform
Management of Institutional Funds Act of 1970 said you could
distribute current yield and capital appreciation. The updated
UPMIFA says you can distribute any money in the endowment and if
it drops below the original gift value you can continue to make
distributions, but you have to inflation-proof the fund. It
allows you to basically borrow against future earnings. However,
there are a lot of requirements imposed. You have to take into
consideration general economic conditions, the effect of
inflations, expected tax consequences, the roll of the
investment itself within the portfolio, the expected total
return and the other resources of the institution. It allows
flexibility, but it is all governed by what is prudent.
SENATOR HUGGINS said his concern is the present financial
debacle where the economic paradigm most people have lived by
has been thrown out the window. He mentioned the current
arguments for and against the Permanent Fund paying out a
dividend this year because the principle has dropped below the
original deposits.
MR. WOHLFORTH agreed that this is an unprecedented period where
a whole new paradigm of investment is slowly emerging, but this
legislation in general does not tie them to any particular era
or time with regard to what is an appropriate payout rule. Until
1970, endowments could only invest in bonds and pay out interest
- period. That was replaced by the total return concept that
allows investments in common stocks as well as bonds. That
notion became part of the accepted investment tool and is part
of this legislation. What has happened in the last year and a
half has thrown almost every calculation out of kilter, but he
didn't think it had thrown the total return notion out of
kilter. He thinks that flexibility is necessary so that as a new
paradigm develops, people can get a better idea of what
investment philosophy ought to be going forward.
8:23:07 AM
SENATOR HUGGINS continued; it appears to him at the national
level the prevailing thought is decreasing flexibility in favor
of more regulation and asked him to comment on that.
MR. WOHLFORTH responded that is true, but those considerations
of decreasing flexibility to deal with "the bizarre instruments
that have developed" do not seem to apply at the endowment
level. This legislation doesn't tie endowments to a return
environment, which is based on 100-percent fixed income, but
rather it provides for operating in different environments but
with prudent investment guidelines.
8:25:14 AM
MR. LYNCH added that one of the reasons UPMIFA was developed is
due to the market downturn in 2001/2 - because at that time
boards and institutions made a number of erratic decisions. Some
of them looked at their whole pool of endowments - the
University, for instance, has over 600 endowments, 250 of which
are currently "under water." Those won't have any more
scholarship distributions. Others decided to make payouts
anyhow. What this bill does is offer a happy medium based on
good judgment, which can't be legislated. You can lay out
standards and principles and then trust the trustees to make
prudent decisions. You can borrow against principal, but not
spend it. Your borrowing has to be judged based on the
circumstances surrounding it.
8:28:22 AM
LYNN LEVENGOOD, Uniform Law Commissioner, State of Alaska, said
the commission provided the legislation to the national body to
make sure it would still qualify as a uniform law, because minor
changes were made that were unique to Alaska. The national
governing body found the changes were not substantial, and that
the legislation still qualified as a uniform state law.
However, they thought one issue needed to be corrected and that
is the title, which says that this is "a uniform, prudent
management of institutional funds act." The key words are
"institutional funds", which is broader than the term
"endowment". Under AS 13.70.090 definitions, "endowment fund" is
defined as "an institutional fund or part of an institutional
fund," so the term "endowment" is narrower than the term
"institutional fund". The glitch is in the bill's last paragraph
on "applicability" where they think "endowment fund" should be
changed to "institutional fund" because that is broader in scope
and is consistent with the title and focus of the bill which is
to govern the management of institutional funds.
8:32:11 AM
KEN CASTNER said he serves as a fiduciary on a couple of
community foundation boards and is active in investment
committees of both of those boards; he supported SB 134. He said
this bill simply gives the attorney general very specific
authority to act, which was absent now. Without this, a donor
may bequest to a University for a specific purpose, and then the
gift might not get used for that intent. The donor would be
completely frustrated from asserting the intent of the original
gift. This gives the attorney general the authority to intercede
to make sure the donor's wishes are followed.
All the other things Senator Huggins was concerned about are
already being acted on under other national standards, he said,
with various federal regulations. What was prudent in 2005 is
different than what is prudent today; an endowment is in
perpetuity so you don't want to have a sinking fund. This bill
provides for a balance between prudence and maintaining public
purpose.
8:35:25 AM
CHAIR DAVIS closed public testimony.
SENATOR PASKVAN agreed to write up an amendment based on Mr.
Levengood's suggestions.
8:37:26 AM
SENATOR HUGGINS asked why "and relating to the University of
Alaska" is in the title.
SENATOR PASKVAN responded that as Mr. Lynch testified that they
are amending the statutes to make sure the principles apply to
the Board of Regents management of the University endowments on
page 7. This language makes it very clear that the Board can
make distributions from the principal if it is prudent.
VICE CHAIR DAVIS held SB 134 in committee.
8:38:58 AM
There being no further business to come before the committee,
Vice Chair Davis adjourned the meeting at 3:38.
| Document Name | Date/Time | Subjects |
|---|