Legislature(1993 - 1994)
02/04/1994 09:09 AM STA
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SENATE STATE AFFAIRS COMMITTEE February 4, 1994 9:09 a.m. MEMBERS PRESENT Senator Loren Leman, Chair Senator Mike Miller, Vice Chair Senator Johnny Ellis MEMBERS ABSENT Senator Robin Taylor Senator Jim Duncan COMMITTEE CALENDAR SENATE BILL NO. 245 "An Act relating to investments of the permanent fund involving equity interests in and debt obligations secured by mortgages on real estate; and providing for an effective date." SENATE BILL NO. 170 "An Act relating to income of the permanent fund." SENATE JOINT RESOLUTION NO. 38 Proposing amendments to the Constitution of the State of Alaska relating to revenues from natural resources, the Alaska permanent fund, the appropriation limit and the budget reserve fund; and providing for an effective date for the amendments. PREVIOUS SENATE COMMITTEE ACTION SB 245 - See State Affairs minutes dated 1/28/94. SB 170 - See State Affairs minutes dated 1/26/94, 1/28/94. SJR 38 - See State Affairs minutes dated 1/26/94, 1/28/94. WITNESS REGISTER William H. Scott, Executive Director Alaska Permanent Fund Corporation P.O. Box 25500, Juneau, AK 99802-5500¶465-2047 POSITION STATEMENT: in favor of SB 245 Pete Jeans, Chief Real Estate Investment Officer Alaska Permanent Fund Corporation P.O. Box 25500, Juneau, AK 99802-5500¶465-2047 POSITION STATEMENT: in favor of SB 245 Jim Kelly, Research & Liaison Officer Alaska Permanent Fund Corporation P.O. Box 25500, Juneau, AK 99802-5500¶465-2047 POSITION STATEMENT: in favor of SB 245 POSITION STATEMENT: testified on SJR 38 Shelby Stastny, Director Office of Management & Budget ¶465-3568 POSITION STATEMENT: in favor of SB 170 POSITION STATEMENT: testified on SJR 38 Roger Cremo 425 G Street, Anchorage, AK 99501¶333-8188 POSITION STATEMENT: in favor of SJR 38 Representative Mark Hanley State Capitol, Juneau, AK 99801-1182¶465-4939 POSITION STATEMENT: testified on SJR 38 ACTION NARRATIVE TAPE 94-6, SIDE A Number 001 CHAIRMAN LEMAN calls the Senate State Affairs Committee to order at 9:09 a.m. Number 010 CHAIRMAN LEMAN announces SB 170 will be heard later in the meeting. Number 016 CHAIRMAN LEMAN brings up SB 245 (PERMANENT FUND INVESTMENTS IN REAL ESTATE) as the first order of business before the committee today. The chairman calls representatives of the Alaska Permanent Fund Corporation as the first witnesses. Number 023 WILLIAM H. SCOTT, Executive Director, Alaska Permanent Fund Corporation, introduces Pete Jeans, the Chief Real Estate Investment Officer for the corporation. Number 037 PETE JEANS, Chief Real Estate Investment Officer, Alaska Permanent Fund Corporation, gives the committee some background on the real estate investment experience of the corporation. Originally, the corporation began by investing in real estate pools. Since that time, the corporation has become one of the largest institutional real estate holders in the United States. One of the problems investors in real estate pools have is that there absolutely no control over the assets. Other than real estate pools, the corporation also had the option of co-investing in property with other institutional investors. Six years ago, when the corporation began co-investing, many of the other pension funds and co- investors were sitting on the sidelines. This enabled the corporation to do quite a bit of investing, mostly with small pension funds. The larger pension funds weren't willing to co- invest; if they were investing, they were going to invest 100%. The few properties in which the corporation did invest with the larger pension funds, were properties worth 200-250 million dollars; even the larger funds don't want to hold one property of that size. Number 102 MR. JEANS says one of the problems with 40% investments, is that the corporation doesn't have any control over the property. At the time the Alaska Permanent Fund Corporation began co-investing, there wasn't much investing going on, and the corporation was able to negotiate buy-sells and shoot-out clauses which gave the corporation some control over the deals. That is no longer the case. Over the last year, the corporation has lost quite a few deals because the managers weren't willing to do deals with no controls. The corporation has become the leader in co-investing and has dealt with over 200 funds in the country. The problem now is that there is more money out there, and when the corporation tries to line up partners on a proposal, if the potential partners like it, they do the whole deal and the corporation doesn't get any of it. One of the problems the corporation is going to run into with less than 100% investment in properties is finding partners to take a minority position, with no controls in the investment. Number 140 MR. JEANS states the real estate market is starting to turn around, and the people the corporation co-invested with five years ago are going to be the corporation's major competitors. Unless the corporation is allowed to go to 100% investments in real estate, it is going to be extremely difficult for the corporation to get any money out on real estate, especially on the good properties. Number 149 CHAIRMAN LEMAN thanks Mr. Jeans for his testimony and asks if anyone has any questions. The chairman agrees with Mr. Jeans that the corporation should be able to invest 100% in real estate, but is hesitant to make that change. Number 183 MR. JEANS says the corporation has been fortunate for the last three years because it has weathered the down-turn in real estate very well. It worked to the corporation's best interest in enabling it to find co-investors. However, that is now changing. Since 1993, the corporation has started losing deals. The corporation purchased quite a few apartments over the last two or three years. It is probably a good time to be putting those apartments back on the market, but unfortunately the corporation's partners don't want to sell. Number 214 The committee begins discussing some amendments and the proposed State Affairs Committee substitute for SB 245. SENATOR ELLIS says he thinks the amendments to SB 245 look too restrictive to him, and he is not uncomfortable with the original bill. Number 221 SENATOR MILLER says he is more comfortable with the committee substitute for SB 245 than he is with the original bill. He believes the board is going to have to be willing to compromise to get a bill passed in the legislature. Senator Miller is not comfortable in giving the corporation leeway to invest 100% in any property, of any size. Number 235 SENATOR ELLIS comments on a historical perspective relating to investment requirements for the corporation: he recalls Tom Fink's proposal to only allow the Alaska Permanent Fund Corporation to invest in property within the State of Alaska. This would have caused an enormous crash; this kind of restriction, in hind sight, would have been really disastrous. The restriction in the amendment is much more reasonable than Fink's proposed restriction, but Senator Ellis wanted to warn the committee not to put too many restrictions on the permanent fund corporation. He reiterates that he leans towards allowing the managers at the corporation more discretion in their investments. The track record of the corporation puts Senator Ellis's mind at ease. Number 254 SENATOR MILLER states he agrees with Senator Ellis, and he did not agree with Mayor Fink's proposal, but he does not think it is wise to put all one's eggs in one basket either. Number 260 JIM KELLY states the Alaska Permanent Fund Corporation has a target of having 10% of its' investments in real estate, while the legislature has a target of 15% investment in real estate for the corporation. The corporation is not going to be able to reach the legislature's target of 15% if they are not allowed to invest in a higher percentage of a deal. PERS and TERS already have the option to do 100% deals. They have no restrictions except the prudent investor rule. The corporation has the prudent investor rule, plus an authorized list of additional restrictions. If the corporation didn't have these additional restrictions, it would still follow the prudent investor rule. In the absence of the additional restrictions, the corporation is not going to put 380 million dollars into one deal. The committee could put in an upper number if it makes the committee feel comfortable, but the board is not going to approve the corporation getting into a 350 million dollar deal anywhere. The board's main job is to diversify the fund and keep it safe, in addition to making money. The board is having a hard time keeping the fund safe with the restrictions it has right now. The corporation is also going to have a harder time making money. Number 275 MR. JEANS comments it is difficult to set limits for investments, but limits can always be changed. The corporation would like to be able to handle real estate in the same way it would manage any other asset class. Number 288 CHAIRMAN LEMAN asks if the corporation can sell its' interest in a property even if a partner does not want to sell. Mr. Scott replies it is extremely difficult to do without control of the investment. Mr. Jeans adds, that to sell a minority interest in a property, the corporation would have to discount it to the extent it wouldn't make sense to sell it. Number 302 MR. SCOTT comments that the difference between the lesser players in the real estate market and the Alaska Permanent Fund Corporation is that when the lesser players have a property that is performing well, they don't want to sell it, while the corporation thinks that is the best time to sell in order to maximize returns. Number 312 MR. KELLY asks Mr. Jeans if he would explain the reasoning behind why the corporation invested so much money in Tyson's Corner and the likelihood of the corporation investing that much in any one project again. Number 317 MR. JEANS states Tyson's Corner is a unique property and is probably one of the top three shopping centers in the country. The corporation owns 39% of Tyson's Corners, which is a controlling interest. It is worth it to the corporation to have 145 million dollars invested in Tyson's Corner in order to have the controlling interest; the corporation has veto rights over all the other partners. Tyson's Corner is such a well-known asset, that almost any pension fund in the country would buy Tyson's from the corporation. The corporation doesn't have close to that amount of money in any other property. One of the problems the corporation has with its co-investors is that they are mostly small pension funds with perhaps 50-100 million dollars invested in about 5 properties, and if those properties are performing well, those pension funds are afraid to sell. The only choice the corporation has, if we want to market the properties, is to buy out these co- investors. The 40% rule, when it came into effect, was to allow the corporation to piggy-back on the major pension funds and utilize their investment expertise. The 40% rule is now enabling the smaller pension funds to piggy-back on the corporation, because the larger funds are now doing their own deals and they won't give the corporation a piece of it. Number 348 CHAIRMAN LEMAN suggests that on page 1, lines 9 and 10 of the proposed committee substitute the figure 20,000,000 be changed to 50,000,000. Also add: if the investment exceeds 50,000,000, the corporation shall have no more than 67% ownership in a property. The Chairman asks Mr. Jeans if this language would restrict the corporation too much on its' larger investments. Number 364 MR. JEANS replies that proposal would be more workable than the limitations with which the corporation currently has to work. Number 366 CHAIRMAN LEMAN asks if the corporation would lose deals or lose out on opportunities with the changes he has just proposed. Number 368 MR. JEANS responds the corporation will lose some major retail properties and some major offices. The difficulty the corporation will have with any restrictions is in finding an investor willing to come in and take a minority share in a property. If these restrictions pass, the corporation will probably find itself doing deals up to 50 million, period. Number 373 SENATOR ELLIS asks what the administration's position is on SB 245. Number 375 CHAIRMAN LEMAN answers he is not aware of a position from the administration. Number 377 MR. JEANS and MR. SCOTT responds the administration has no objection to SB 245. Number 379 SENATOR ELLIS says one could then make the assumption the governor would sign the legislation if it passed. Number 380 MR. JEANS and MR. SCOTT answer that it is their understanding the governor would sign the legislation. Number 383 CHAIRMAN LEMAN comments that in order to pass SB 245 out of State Affairs Committee today, the members must come to agreement on the bill. The chairman asks Senator Miller what he would agree to in SB 245. Number 384 SENATOR MILLER states if the bill changes above and beyond what it is now, he cannot vote for it on the floor. Number 388 SENATOR MILLER moves the adoption of CSSB 245 (STA) in lieu of the original bill. Number 389 CHAIRMAN LEMAN, hearing no objection, notes that CSSB 245(STA) has been adopted. Number 391 CHAIRMAN LEMAN offers an amendment to CSSB 245(STA). On page 1, lines 9 and 10 change 20,000,000 to 50,000,000. On page 1, line 12 change 40 percent to 33 percent. On page 2, line 5 change 40 percent to 33 percent. On page 2, line 9 change 60 percent to 6 6 percent. Number 396 CHAIRMAN LEMAN, hearing no objection to the amendment, notes the amendment has been adopted unanimous consent. Number 400 SENATOR ELLIS asks that CSSB 245(STA) be moved from committee with individual recommendations. Number 401 CHAIRMAN LEMAN, hearing no objection, orders that CSSB 245(STA) be discharged from the Senate State Affairs Committee with individual recommendations. Number 404 CHAIRMAN LEMAN brings up SB 170 (DISPOSITION OF PERMANENT FUND INCOME) as the next order of business before the committee today and calls Senator Rieger and Mr. Stastny to testify. Number 412 SHELBY STASTNY, Director, Office of Management & Budget, Governor's Office, says there is not a formal administration position on SB 170, but that he personally is favorably disposed to the bill. Number 424 CHAIRMAN LEMAN asks Senator Rieger what effect SB 170 will have on future dividends if it passes. Number 431 SENATOR RIEGER says the effect of SB 170 will likely be that dividends will probably hit 900 dollars before they start climbing again. This affect is drawn from run # 10, which Senator Rieger thinks is the most likely run. Senator Rieger continues to describe the differences between run # 10 and run # 11. He states under SB 170. Number 473 CHAIRMAN LEMAN asks Senator Rieger if the formula for payout of dividends will be changed to accommodate inflation proofing the fund. Number 474 SENATOR RIEGER says that a hold-harmless feature could be added to the bill so dividend amounts do not drop. However, once the fund is inflation proofed, any amount could be paid out in dividends without having to worry about protecting the fund. Number 477 CHAIRMAN LEMAN asks if anyone has questions or if there is anyone else wishing to testify on SB 170. Hearing none, the chairman asks the pleasure of the committee. Number 480 SENATOR MILLER makes a motion to discharge SB 170 from the Senate State Affairs Committee with individual recommendations. Number 481 CHAIRMAN LEMAN, hearing no objections, orders SB 170 discharged from committee with individual recommendations. Number 483 CHAIRMAN LEMAN brings up SJR 38 (RESTRUCTURE PERMANENT FUND) as the next order of business before the committee. The chairman invites Mr. Stastny to comment on SJR 38. Number 492 SHELBY STASTNY, Director, Office of Management & Budget (OMB), Governor's Office, states OMB has spent some time reviewing Mr. Cremo's proposal (SJR 38). While OMB would like to believe SJR 38 would solve the state's fiscal problems, it doesn't appear that it would, at least in the short term, fifteen to twenty years. OMB shares the concerns many people have regarding the amount of revenues that will come to the state. If one excludes for current use the resources we have in our reserve funds, then it appears this proposal would exacerbate the current budget gap to the tune of 200 to 300 million dollars a year. OMB bases these projections on mid-case scenarios of the Department of Revenue projections. It could be even more if based on low-case scenarios. So it certainly would put great pressure on the budget. Mr. Stastny thinks that by the year 2000 the state would be dealing with a total appropriations budget of about the 2.4 billion dollar range, which would be a significant reduction from today's budget. This range would be equivalent to taking about 700 million dollars out of our current budget. If we could live with that reduction for ten or fifteen years, there is a period of time where we would cross the line and there would be more money available under the Cremo plan than there would be under the current revenue projections. Number 540 MR. STASTNY says one of the constraints from the type of plan in SJR 38 is that we would have difficulties investing in revenue raising matters. One argument for SJR 38 is we would be able to bond for projects, but the question that always comes up is if you've got money available, should you be bonding? OMB does not believe the state could live within the constraints of SJR 38 for the period of time we would have to until we reached the point in which we were in a better position with cash flow. Mr. Stastny does not believe the state can save ourselves rich, and he thinks that's what SJR 38 will try to do. He thinks the state will better be able to invest its' money in income-producing resources in the future, and will be able to make the state rich by using the resources of the state. Number 564 CHAIRMAN LEMAN comments that the state cannot spend itself rich either. Number 566 MR. STASTNY asks if the state could invest itself rich. Number 570 CHAIRMAN LEMAN calls Representative Hanley as the next witness. Number 579 REPRESENTATIVE HANLEY states he has set up the Alaska Permanent Fund Corporation's numbers, as well as Mr. Cremo's plan in his computer. TAPE 94-6, SIDE B Number 582 REPRESENTATIVE HANLEY continues, saying the January 27th run that he did is based on mid-case scenarios. The Alaska Permanent Fund Corporation, as well as the Governor's Office use the low-case scenario for their revenue projections. So he then changed his chart to show the low-case scenario as well as the percentage of the first year withdrawal has been reduced from 20% to 16.4%, with a geometric progression down to the 6% numbers. Number 572 SENATOR ELLIS asks Representative Hanley if the figures on his chart are in nominal dollars. Number 570 REPRESENTATIVE HANLEY replies that the figures on his chart are in nominal dollars. Those are the basic changes that were made at the request of the committee. The chart was developed in order to come up with an apples to apples comparison. Representative Hanley says his numbers come out pretty comparable to Mr. Stastny's numbers. Another addition to the chart was a net withdrawal percentage. Representative Hanley continues with his explanation of his chart on "Traditional vs Cremo Budgeting". Number 559 CHAIRMAN LEMAN asks Representative Hanley if SJR 38 has been double-checked to make sure the language in it is very clear. Number 547 REPRESENTATIVE HANLEY states he has suggested House Finance Committee look at the spreadsheets and fiscal aspects of SJR 38, and then send the resolution back to the House Judiciary Committee to double-check the language. There are some questions in regards to clarifying some of the definitions, for instance, a definition for the term "biological marine resource". Every single word in SJR 38 needs to be defined for the record so that it is very clear in the future as to what was intended. Number 532 CHAIRMAN LEMAN thanks Representative Hanley for his testimony and calls Mr. Cremo to testify. Number 530 ROGER CREMO, testifying from Hawaii, states he does not share Mr. Stastny's concerns. Mr. Stastny's characterization of SJR 38 as a savings plan is incorrect. It is merely an attempt to convert the fluctuating revenues that the state has now into revenues that fluctuate less or not at all. The permanent fund now seems to be an income fund. Mr. Cremo questions whether the Alaska Permanent Fund Corporation has the authority to even invest 40% in stocks. He questions whether it has the authority to invest in real estate. He questions whether it has the authority to buy and invest in currency. Number 500 MR. CREMO thinks it is important that in the proposed fund, the withdrawal is taken from a twelve quarter average of fund value. This means the withdrawal is less than a nominal 6%. Mr. Cremo does not agree with the comments made by Mr. Kelly, Mr. Goldsmith, or Mr. Stastny. Mr. Cremo goes on to detail his disagreement with their comments. One of the reasons he disagrees with the comments of Mr. Kelly is because the Alaska Permanent Fund Corporation uses extremely conservative figures. He continues his analysis of permanent fund corporation practices and inflation proofing of the fund. He believes his plan, SJR 38, would solidify the inflation proofing of the permanent fund. Number 368 MR. CREMO doubts the correctness of some of the points made by Mr. Goldsmith. One point of disagreement is that Mr. Goldsmith thinks SJR 38 is too complicated, while Mr. Cremo thinks SJR 38 is a very simple plan. He disagrees on another point: saying the earnings reserve account is not part of the permanent fund, but simply another general fund. Mr. Cremo summarizes by saying he finds it difficult to agree with much of what he is hearing. Number 288 CHAIRMAN LEMAN thanks Mr. Cremo for his testimony and asks if anyone else wishes to testify. Number 284 MR. KELLY clarifies for the committee that when he referred to real withdrawals from the fund, he was including the oil revenues that are added in that category. Number 272 CHAIRMAN LEMAN states there is some tinkering to be done on SJR 38, but he doesn't necessarily thinks the resolution needs to be kept in the committee to do it, and so is not opposed to moving it out of committee. Number 260 SENATOR ELLIS says work on SJR 38 will continue; he would like to see the bill move on. Senator Ellis makes a motion to discharge SJR 38 from the Senate State Affairs Committee with individual recommendations. Number 249 CHAIRMAN LEMAN, hearing no objection, orders that SJR 38 be discharged from committee with individual recommendations. Number 245 CHAIRMAN LEMAN announces the agenda for Wednesday, February 9, 1994 as SB 237 and SB 220. Number 240 CHAIRMAN LEMAN adjourns the Senate State Affairs Committee meeting at 10:27 a.m.