Legislature(1999 - 2000)
05/12/1999 09:09 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
May 12, 1999
9:09 AM
TAPES
SFC-99 # 135, Sides A and B
CALL TO ORDER
Co-Chair John Torgerson convened the meeting at
approximately 9:09 A.M.
PRESENT
In addition to Co-chair Torgerson, Senators Sean Parnell,
Dave Donley, Loren Leman, Gary Wilken, Pete Kelly, Lyda
Green, Randy Phillips and Al Adams were present when the
meeting was convened.
Also Attending: REPRESENTATIVE GAIL PHILLIPS; JIM KELLY,
Research and Liaison Officer, Alaska Permanent Fund
Corporation; CLARK GRUENING, Vice-Chair of Alaska Permanent
Fund Board of Trustees; TERRY A. BROWN, Chief Investment
Officer, Alaska Permanent Fund Corporation; EDWARD BURKE,
staff to Representative Jerry Sanders; REPRESENTATIVE JERRY
SANDERS; aides to committee members and other members of
the Legislature.
Attending via Teleconference: JAMIE KENWORTHY, Director,
Alaska Science and Technology Foundation, offnet.
SUMMARY INFORMATION
Co-chair Torgerson called the meeting to order at
approximately 9:09 a.m. He indicated the committee would
first take up HB 156 followed by HB 209 and then continue
on with the posted agenda.
HOUSE BILL NO. 156
"An Act relating to investments by the Alaska
Permanent Fund Corporation; and providing for an
effective date."
CS FOR HOUSE BILL NO. 156(STA)
"An Act relating to investments by the Alaska
Permanent Fund Corporation; and providing for an
effective date."
CS FOR HOUSE BILL NO. 156(FIN)
"An Act relating to investments by the Alaska
Permanent Fund Corporation; and providing for an
effective date."
REPRESENTATIVE GAIL PHILLIPS was invited to join the
committee. She read her sponsor statement into the record.
Revisions would include more investment possibilities, and
therefore more returns for the Permanent Fund Corporation.
She noted one amendment, page six, lines 26 CSHB 156(FIN)
from the original version.
She reminded the committee that the House passed the bill
out with a 39 yea - 1 nay vote. She urged the Senate
Finance Committee to report this bill out.
In response to a question by Senator P. Kelly she said this
bill would allow more flexibility to increase stock.
JIM KELLY, Research and Liaison Officer, Alaska Permanent
Fund Corporation was invited to join the committee.
CLARK GRUENING, Vice-Chair, Alaska Permanent Fund Board of
Trustees was also invited to join the committee. He gave a
brief history of the Permanent Fund. The Legislature has
made the pivotal decisions to increase the funds in the
Permanent Fund Corporation. They voluntarily made special
appropriations to the principle. Two-thirds of the amount
was voluntarily deposited for inflation proofing. The fund
today is approximately $26 billion. The Legislature has
also helped in investment flexibility. They allowed
investment in stock and real estate. They have also been
successful in allowing foreign investments for the
corporation.
Mr. Kelly said he would not go into the case for investment
flexibility as Representative Phillips had made sufficient
comments. The Permanent Fund was a public fund as they had
funds over $5 million.
Senator Leman commented on requested flexibility last year.
"How have the earnings been affected? Is an incremental
improvement better than none at all?"
Mr. Kelly responded. He said the fund expected to earn
7.75 percent. There is a diminishment of volatility.
Mr. Gruening said volatility also appears in fixed income.
Mitigation of volatility is the mixture of assets.
Co-chair Torgerson asked for an explanation of Section 1 of
the bill. Mr. Kelly indicated that it was sometimes
prudent in real estate investment to borrow money to
protect the particular asset. A limited liability
corporation would be set up. Co-chair Torgerson said he
did not understand that if they were the one hundred
percent owner that they would not be the liable entity.
Mr. Gruening further explained. He said this bill would
protect from increase of risk to the fund. He referred to
line nine on page one, "if the borrowing is without
recourse to the corporation".
Senator Parnell asked how this would work. Would the LLC
handle this? Mr. Gruening explained the necessity to
protect tenants. Senator Parnell said LLC would have the
liability rather than the corporation? Mr. Gruening
indicated that was correct. They wanted to protect any
recourse to the corporation. Senator Parnell asked if the
State was protected in this transaction? Mr. Gruening said
if the paperwork was done properly there should be no
liability to the State. Borrowings are done where the
borrowing entities are corporations. Senator Parnell asked
if the Permanent Fund would be the shareholder with someone
else in these transactions? Mr. Gruening indicated again
that was correct. "We are not talking about tort
liability, we are talking about contracts."
Co-chair Torgerson asked why they did not just take cash
rather than borrowing money? Mr. Gruening said they could
get more out of their assets rather than using cash.
Mr. Kelly indicated they could directly borrow money. Co-
chair Torgerson asked for an explanation. Mr. Gruening
said there was would be a mortgage against the property;
however the lender would know this was going on. Co-chair
Torgerson asked if this would come before the Legislature
again? Mr. Gruening said this was true on all investments.
Co-chair Torgerson asked about page two, lines 19 - 23.
Mr. Gruening said that this offered a broader definition of
entities as opposed to securities.
Co-chair Torgerson asked about page three, lines 17 and 18.
Why do we need the addition of "and other equity interests
in entities organized"?
TERRY A. BROWN, Chief Investment Officer, Alaska Permanent
Fund Corporation was invited to join the corporation. He
responded to the question posed by Co-chair Torgerson. He
said this was a vehicle potential for asset backed
securities. This would allow us to buy into some other
markets and the ability to go into asset backed securities,
which are a form of fixed income investments.
Mr. Kelly said most of the language had been drafted twenty
years ago and therefore they had tried to clean up the
language more to present day. They have looked to increase
investment without increasing risk. Co-chair Torgerson
felt that the language was too broad-based and did not know
if he was in favor of this or not.
Co-chair Torgerson asked for an explanation of the bottom
of page three, top of page four. Mr. Kelly indicated that
this was a substantial portion of the bill granting
increased flexibility. He explained the process of getting
an increase in real estate for the corporation. The
Legislature however, put a dollar limit of $150 million on
a project, which in some cases only allowed them two-thirds
ownership, rather than one hundred percent. They are now
asking for the ability to purchase property and be one
hundred percent owners regardless of the dollar amount. He
explained the difficulties in protecting the permanent fund
interests when partners know there is a specific dollar
amount limit.
Senator Pete Kelly asked for further clarification of this
statement. Mr. Kelly said that someone could set a false
higher price on the property and force the permanent fund
to have to sell. Mr. Gruening also explained the leverage
the other partner can use against them in the selling of
property they may feel they need to get out of.
Senator Wilken asked if by lifting this restriction would
put them more at risk? Mr. Brown explained that on the
contrary they would not be so restricted and therefore this
would enhance any deals they could make.
Co-chair Torgerson referred to the top of page five. "Are
we going to be hiring more individuals?" Mr. Kelly said no
and referred the committee to "Real Estate Policies".
There is a substantial checklist they must conform to and
there is no anticipated increase to staff.
Co-chair Torgerson voiced concern over increase in
employees. Mr. Gruening explained there was sufficient
oversight to prevent this. Mr. Kelly further indicated
that the investment properties would not change; they would
continue to be investing in the same kinds as at present.
Co-chair Torgerson asked for an explanation of "nondomestic
entities" as opposed to "nondomestic corporations". Mr.
Gruening explained that this would include some entities
that were not necessarily corporations. Co-chair Torgerson
asked that further clarification of this be submitted to
his office.
Mr. Kelly went on to explain interests in a titleholding
entity, real estate investment trust, real estate operating
company, or other entity. Sometimes a real estate
investment trust could be purchased without a foreign
investment. However, later a foreign company could be
picked up.
(Tape number 135, Side A switched to Side B at log #591.)
Co-chair Torgerson continued on page six. Mr. Brown said
there might be occasions when they would have to sell
stocks and put them in another asset. This was a mechanism
used by many today for specific asset allocation decisions.
Mr. Kelly commented briefly on the real estate trust.
Co-chair Torgerson continued on page six, line 19. Mr.
Gruening said that this was amended in the House to
increase the allocation an additional five- percent.
Co-chair Torgerson asked for an explanation of Section 6,
page six. Mr. Kelly said this was explained in a letter
from Mr. O'Leary of CALLAN ASSOCIATES.
Mr. Brown explained direct ownership. They have a limited
partnership/ownership. Mr. Gruening said gold was not
available to them as an investment.
Mr. Kelly said a bond, for instance would be available and
could be picked up quickly with this kind of flexibility.
He explained that the Treasury Division has policies for
investments.
Co-chair Torgerson suggested a change on page seven, line 1
for the deletion of "comments" and insertion of "approval".
Mr. Kelly said this would have to be taken up with the
board. They system up until now has worked fine with the
language of the past twenty years.
Co-chair Torgerson suggested that there be a complete cap
on fifty-five percent to anything outside stock. He asked
that they think about this.
Co-chair Torgerson HELD the bill in committee and said he
would try to bring it up again by Friday.
He then called HB 209, noting that it had been schedule
last evening.
HOUSE BILL NO. 209
"An Act amending the size of grants for which the
Alaska Science and Technology Foundation must allocate
at least 50 percent of endowment income and amending
the maximum amount of the grant that the Alaska
Science and Technology Foundation may award for
development of the Kodiak launch complex and Fairbanks
satellite ground station space park; and providing for
an effective date."
JAMIE KENWORTHY, Director, Alaska Science and Technology
Foundation testified before the committee via OFFNET. He
explained the sponsor statement and the Kodiak Launch
Facility. He said this project was expected to be
finalized at their board meeting 4 June. He was available
to answer any questions the committee might have.
Co-chair Torgerson asked about grants and how many they
anticipated in making? Mr. Kenworthy said they do
approximately five per year. In reference to page one of
the bill, Co-chair Torgerson asked if this could be amended
down to $200,000. Mr. Kenworthy said at present they could
live with it, but did not know what the Board would
consider, especially as time goes on.
Co-chair Torgerson said he felt the amount of $200,000 as
compared to $250,000 would make the committee more
comfortable. Senator Phillips said he would rather see a
larger reduction.
The committee took a brief at ease at approximately 10:17
a.m.
Co-chair Torgerson reconvened the committee. Senator
Wilken supported the bill and MOVED amendment #1 to delete
"$200,000". Mr. Kenworthy indicated the urgency to get
this bill reported out.
WITHOUT OBJECTION amendment #1 was ADOPTED. Senator Wilken
MOVED SCS HB 209 and by a roll call vote of 6 yeas
(Torgerson, Leman, Wilken, Adams, P. Kelly, Green) and 1
nay (Phillips) (Parnell, Donley absent) it was REPORTED OUT
with individual recommendations and zero fiscal note for
the Department of Commerce and Economic Development.
Co-chair Torgerson called HB 68.
HOUSE BILL NO. 68
"An Act extending the termination date of the Board of
Pharmacy to June 30, 2005; and providing for an
effective date."
JANET SEITZ, staff to Representative NORM ROKEBORG was
invited to join the committee. She read the sponsor
statement into the record.
WITHOUT OBJECTION HB 68 was REPORTED OUT of committee with
individual recommendations and zero fiscal note for the
Department of Commerce and Economic Development.
Co-Chair Torgerson called HB 102. (There followed a brief
pause on record.)
HOUSE BILL NO. 102
"An Act imposing certain requirements relating to
cigarette sales in this state by tobacco product
manufacturers, including requirements for escrow,
payment, and reporting of money from cigarette sales
in this state; providing penalties for noncompliance
with those requirements; and providing for an
effective date."
Senator Adams MOVED HB 102 and WITHOUT OBJECTION it was
REPEORTED OUT WITH individual recommendations and zero
fiscal notes from the Department of Law and the Department
of Revenue.
Co-chair Torgerson called HB 157.
HOUSE BILL NO. 157
"An Act relating to absences from the state while
serving on oceangoing vessels of the United States
merchant marine for purposes of eligibility for
permanent fund dividends; and providing for an
effective date."
EDWARD BURKE, staff to Representative Jerry Sanders was
invited to join the committee. He requested a brief at
ease pending the arrival of Representative Sanders.
The committee took a brief at ease.
Co-chair Torgerson reconvened the committee.
Representative JERRY SANDERS was invited to join the
committee. He explained that the dividend would only be
provided to the qualified seaman rather than his entire
family. He asked the committee's support. There were
several that had wanted to testify regarding this bill.
Co-chair Torgerson advised he did not have anyone on line.
Senator Wilken said he had an amendment to include the
Peace Corps and asked the bill be held so he could work
with Representative Sanders. Representative Sanders said
he did not feel the Peace Corps should be included in this
bill because they belong to a different group. It should
be in a separate bill. He noted that the bill had been
defeated in the House.
Co-chair Torgerson cautioned that this could become a
"christmas tree" as did the eligibility bill last year.
Senator Wilken commented. He felt there was a compelling
reason that the Peace Corps should be provided for, however
he said it was not his intent to kill the bill.
Senator Donley also felt that the Peace Corps is a separate
issue and should be in another bill. He would like to see
this bill move forward as is.
Senator P. Kelly said everyone could make a choice and
these were career choices and should not depend on the
inclusion to receive the permanent fund.
Senator Leman said he would like an amendment to add
foreign service. They are as deserving also.
Representative Sanders indicated he would like to see the
bill passed out as is.
Co-chair Torgerson SET ASIDE HB 157 and asked Senator
Wilken and Senator Leman to work with Representative
Sanders regarding their specific issues. He then called
HB 217.
HOUSE BILL NO. 217
"An Act relating to obligations and payments to the
state under fishery cooperative contracts; and
providing for an effective date."
TIM BENINTENDI, staff to Carl Moses was invited to join the
committee. He read the sponsor statement into the record.
He would be happy to respond to any questions the committee
may have.
Senator Leman MOVED HB 217 and WITHOUT OBJECTION it was
REPORTED OUT with individual recommendations and
accompanying fiscal note from the Department of Revenue,
zero.
Co-chair Torgerson reviewed the agenda for tomorrow and
said SB 76, SB 167 and SB 123 would be on the calendar.
There would be no evening meeting tonight.
ADJOURNMENT
Co-chair Torgerson adjourned the committee at approximately
10:45 a.m.
(Tape number 135, Side B, log #103.)
SFC-99 -1- 05/12/99
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