Legislature(2005 - 2006)BELTZ 211

05/03/2005 03:30 PM Senate STATE AFFAIRS


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03:44:52 PM Start
03:48:01 PM HB215
04:01:43 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ SB 189 REQUIREMENTS FOR DRIVER'S LICENSE/I.D. TELECONFERENCED
<Above Bill Hearing Canceled>
Bills Previously Heard/Scheduled
= HB 215 PERM FUND CORP. INVESTMENTS/REGULATIONS
Moved CSHB 215(FIN) Out of Committee
                    ALASKA STATE LEGISLATURE                                                                                  
            SENATE STATE AFFAIRS STANDING COMMITTEE                                                                           
                          May 3, 2005                                                                                           
                           3:44 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Gene Therriault, Chair                                                                                                  
Senator Thomas Wagoner, Vice Chair                                                                                              
Senator Charlie Huggins                                                                                                         
Senator Kim Elton                                                                                                               
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Bettye Davis                                                                                                            
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
CS FOR HOUSE BILL NO. 215(FIN)                                                                                                  
"An  Act  relating  to the  investment  responsibilities  of  the                                                               
Alaska  Permanent  Fund   Corporation;  relating  to  regulations                                                               
proposed  and adopted  by the  Board  of Trustees  of the  Alaska                                                               
Permanent  Fund  Corporation  and providing  procedures  for  the                                                               
adoption  of  regulations by  the  board;  and providing  for  an                                                               
effective date."                                                                                                                
                                                                                                                                
     MOVED CSHB 215(FIN) OUT OF COMMITTEE                                                                                       
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: HB 215                                                                                                                  
SHORT TITLE: PERM FUND CORP. INVESTMENTS/REGULATIONS                                                                            
SPONSOR(s): REPRESENTATIVE(s) ROKEBERG BY REQUEST                                                                               
                                                                                                                                
03/09/05       (H)       READ THE FIRST TIME - REFERRALS                                                                        
03/09/05       (H)       STA, FIN                                                                                               
04/12/05       (H)       STA AT 8:00 AM CAPITOL 106                                                                             
04/12/05       (H)       Moved Out of Committee                                                                                 
04/12/05       (H)       MINUTE(STA)                                                                                            
04/13/05       (H)       STA RPT 5DP 1NR                                                                                        
04/13/05       (H)       DP: GARDNER, LYNN, ELKINS, RAMRAS,                                                                     
                         SEATON;                                                                                                
04/13/05       (H)       NR: GATTO                                                                                              
04/14/05       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
04/14/05       (H)       Moved CSHB 215(FIN) Out of Committee                                                                   
04/14/05       (H)       MINUTE(FIN)                                                                                            
04/15/05       (H)       FIN RPT CS(FIN) 4DP 5NR                                                                                
04/15/05       (H)       DP: HAWKER, FOSTER, MEYER, CHENAULT;                                                                   
04/15/05       (H)       NR: CROFT, MOSES, HOLM, STOLTZE, KELLY                                                                 
04/19/05       (H)       BEFORE THE HOUSE                                                                                       
04/19/05       (H)       WEYHRAUCH NOTICE OF RECONSIDERATION                                                                    
                         WITHDRAWN                                                                                              
04/20/05       (H)       TRANSMITTED TO (S)                                                                                     
04/20/05       (H)       VERSION: CSHB 215(FIN)                                                                                 
04/21/05       (S)       READ THE FIRST TIME - REFERRALS                                                                        
04/21/05       (S)       STA, FIN                                                                                               
04/26/05       (S)       STA AT 3:30 PM BELTZ 211                                                                               
04/26/05       (S)       Heard & Held                                                                                           
04/26/05       (S)       MINUTE(STA)                                                                                            
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
Jim Baldwin                                                                                                                     
Department of Law                                                                                                               
PO Box 110300                                                                                                                   
Juneau, AK  99811-0300                                                                                                          
POSITION STATEMENT:  Answered questions on HB 215                                                                             
                                                                                                                                
Mike Burns, CEO                                                                                                                 
Alaska Permanent Fund Corporation                                                                                               
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT:  Answered questions related to the HB 215                                                                 
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR GENE  THERRIAULT called the  Senate State  Affairs Standing                                                             
Committee meeting to  order at 3:44:52 PM.  Present were Senators                                                             
Elton, Wagoner, Huggins and Chair Therriault.                                                                                   
                                                                                                                                
     CSHB(FIN) 215-PERM FUND CORP. INVESTMENTS/REGULATIONS                                                                  
                                                                                                                                
CHAIR   GENE  THERRIAULT   announced  HB   215  to   be  up   for                                                               
consideration.  He asked  for an  explanation  of the  regulatory                                                               
process that would be used in setting up this new system.                                                                       
                                                                                                                                
JIM  BALDWIN,   Department  of  Law,   explained  that   the  new                                                               
abbreviated  regulatory process  is very  similar to  the process                                                               
used in  the Alaska Industrial  Development and  Export Authority                                                               
(AIDEA) and the Alaska Housing  Finance Corporation (AHFC). Those                                                               
processes were enacted  in law when the  corporations argued that                                                               
they needed  to be more  nimble than  the regular line  agency to                                                               
have the ability  to adapt to market conditions.  AIEDA needed an                                                               
abbreviated  adoption process  since it  was in  the housing  and                                                               
secondary mortgage market.                                                                                                      
                                                                                                                                
He noted the comparison between  the AS 44.62 regulation adoption                                                               
process  and the  proposed process  in CSHB  215(FIN). The  basic                                                               
differences are in the amounts of  time for public notice and the                                                               
amount of  time it  takes a regulation  to become  effective once                                                               
it's filed.  Another significant difference  is that there  is no                                                               
Department  of  Law  review  and   approval  by  the  regulations                                                               
attorney.  They are  effective upon  filing  with the  Lieutenant                                                               
Governor's Office.                                                                                                              
                                                                                                                                
DOL is closely  involved with the Permanent  Fund Corporation and                                                               
he suggested DOL would be  involved in drafting the regulation so                                                               
the Permanent  Fund Corporation  would not  escape DOL  review or                                                               
involvement.                                                                                                                    
                                                                                                                                
3:48:01 PM                                                                                                                    
                                                                                                                                
CHAIR  THERRIAULT  asked  Mr.  Burns  to  explain  the  types  of                                                               
additional  investment opportunities  and to  review the  handout                                                               
titled   "Alaska  Permanent   Fund  Corporation   Reducing  Risk,                                                               
Increasing Return."                                                                                                             
                                                                                                                                
MICHAEL BURNS,  CEO, Alaska Permanent Fund  Corporation, directed                                                               
members to the graph on  page 4 labeled "Efficient Frontier." The                                                               
horizontal line  indicates risk according to  annualized standard                                                               
deviation, and the vertical line indicates annualized return.                                                                   
                                                                                                                                
     The chart  shows potential risk and  return for various                                                                    
     portfolios   under   the  Fund's   current   investment                                                                    
     restrictions  (blue   line),  and  under   the  Prudent                                                                    
     Investor Rule alone (red line).                                                                                            
                                                                                                                                
     The chart demonstrates that  under the Prudent Investor                                                                    
     Rule, the  Fund could potentially earn  the same return                                                                    
     as the current portfolio  (March 2004 target) with more                                                                    
     than 3 percent less risk  (Expected Return = 8.83). Or,                                                                    
     for the same risk the  Fund could earn almost 1 percent                                                                    
     more return (Standard Deviation = 10.29).                                                                                  
                                                                                                                                
3:50:39 PM                                                                                                                    
                                                                                                                                
As  previously mentioned,  all but  six states  have adopted  the                                                               
Prudent   Investor  Rule   rather   than  maintaining   statutory                                                               
investment lists.                                                                                                               
                                                                                                                                
CHAIR  THERRIAULT   asked  how   availing  yourself   of  riskier                                                               
investment options, would lower the risk.                                                                                       
                                                                                                                                
MR.  BURNS   initiated  the  explanation   by  saying   that  the                                                               
corporation just  released one small  cap manager and  hired nine                                                               
small   cap   managers.   Small  cap   investment   is   capacity                                                               
constrained. The investment  firms tend to be  small and although                                                               
they may  do a good job  of managing $300 million,  the staff and                                                               
systems  are probably  insufficient  to manage  $500 million.  In                                                               
addition,  the  math  shows  that   in  the  small  cap  area  of                                                               
investment management, it's better to  have more managers to come                                                               
up with more  ideas. Of course, that's not the  case in all asset                                                               
classes.                                                                                                                        
                                                                                                                                
Accordingly, the  corporation released the one  small cap manager                                                               
that was paid  $550 million per annum and hired  nine managers at                                                               
just  over  $60  million  apiece. Interestingly,  of  those  nine                                                               
managers,  between one  third  and one  half  wouldn't have  been                                                               
hired on their  own. Together the corporation liked  the way they                                                               
fit into the breadth approach of the small cap market place.                                                                    
                                                                                                                                
He went on  to explain that the  investment key is to  try to get                                                               
investments  that  don't  correlate.  The effort  is  to  achieve                                                               
balance and  have assets moving  in different  directions because                                                               
higher  risk  investments  that   are  uncorrelated  can  give  a                                                               
portfolio that  is less  risky. Finally, he  made the  point that                                                               
portfolios today  are managed as  portfolios and not as  an asset                                                               
class or an individual ownership.                                                                                               
                                                                                                                                
CHAIR THERRIAULT summarized it's the blend of risks.                                                                            
                                                                                                                                
MR. BURNS said yes.                                                                                                             
                                                                                                                                
SENATOR  CHARLIE  HUGGINS asked  if  hedging  is employed  as  an                                                               
investment strategy.                                                                                                            
                                                                                                                                
MR. BURNS  replied an absolute  return strategy might be  used to                                                               
lock in  a percentage and  those are basically hedged  assets. He                                                               
suggested   the  types   of  assets   wouldn't  be   dramatically                                                               
different;  there  would  be  combinations   of  long  and  short                                                               
strategies of hedged positions.                                                                                                 
                                                                                                                                
3:55:09 PM                                                                                                                    
                                                                                                                                
SENATOR HUGGINS asked  if hedging would be a greater  part of the                                                               
strategy than it is currently.                                                                                                  
                                                                                                                                
MR. BURNS  said it would depend  on how the market  reacts to the                                                               
different conditions.  What's most important about  the statutory                                                               
list   is  its   lack  of   responsiveness  to   changing  market                                                               
conditions.                                                                                                                     
                                                                                                                                
3:56:01 PM                                                                                                                    
                                                                                                                                
SENATOR HUGGINS asked if the  Prudent Investor Rule requires more                                                               
or less financial agility.                                                                                                      
                                                                                                                                
MR.  BURNS  replied  the  corporation   uses  the  term  "prudent                                                               
investor" because  it's widely known  and is the  standard that's                                                               
used across  the country. He read  page 1, lines 11  through page                                                               
2, line 1 and pointed out  it refers to an institutional investor                                                               
rather than a prudent investor.                                                                                                 
                                                                                                                                
3:57:32 PM                                                                                                                    
                                                                                                                                
SENATOR KIM  ELTON questioned whether  the prudent  investor rule                                                               
works  differently for  real estate  investments than  for equity                                                               
investments.                                                                                                                    
                                                                                                                                
MR.  BURNS replied  the equity  investment  process is  different                                                               
than the real  estate investment process, which tends  to be more                                                               
yield-driven.                                                                                                                   
                                                                                                                                
SENATOR  ELTON asked  if the  provisions  in HB  215 would  apply                                                             
equally  to  the real  estate  investment  portfolio and  to  the                                                               
equities portfolio.                                                                                                             
                                                                                                                                
MR. BURNS said yes.                                                                                                             
                                                                                                                                
CHAIR THERRIAULT noted the bill had  a zero fiscal note. He asked                                                               
Mr. Burns to be aware that  some Senate members have questions on                                                               
the  bill and  they would  look  to Senator  Stedman and  Senator                                                               
Seekins for a final opinion before it moves to the floor.                                                                       
                                                                                                                                
4:01:26 PM                                                                                                                    
                                                                                                                                
SENATOR  WAGONER motioned  to report  CSHB 215(FIN)  and attached                                                               
fiscal  notes  from  committee with  individual  recommendations.                                                               
There being no objection, it was so ordered.                                                                                    
                                                                                                                                
There being  no further  business to  come before  the committee,                                                               
Chair Therriault adjourned the meeting at 4:01:43 PM.                                                                         

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