Legislature(2003 - 2004)

02/24/2004 03:37 PM Senate STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
            SENATE STATE AFFAIRS STANDING COMMITTEE                                                                           
                       February 24, 2004                                                                                        
                           3:37 p.m.                                                                                            
TAPE (S) 04-9&10                                                                                                              
MEMBERS PRESENT                                                                                                               
Senator Gary Stevens, Chair                                                                                                     
Senator John Cowdery, Vice Chair                                                                                                
Senator Bert Stedman                                                                                                            
Senator Gretchen Guess                                                                                                          
Senator Lyman Hoffman                                                                                                           
MEMBERS ABSENT                                                                                                                
COMMITTEE CALENDAR                                                                                                            
SENATE BILL NO. 227                                                                                                             
"An Act relating to municipal initiative and referendum                                                                         
     HEARD AND HELD                                                                                                             
SENATE BILL NO. 326                                                                                                             
"An Act relating to investments of Alaska permanent fund assets;                                                                
and providing for an effective date."                                                                                           
     HEARD AND HELD                                                                                                             
SENATE BILL NO. 352                                                                                                             
"An Act amending  the Public Employment Relations  Act to exclude                                                               
from collective  bargaining individuals who  perform confidential                                                               
or managerial duties for a  public employer and relating to those                                                               
exclusions; and providing for an effective date."                                                                               
     HEARD AND HELD                                                                                                             
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: SB 227                                                                                                                  
SHORT TITLE: MUNI INITIATIVE AND REFERENDUM ELECTIONS                                                                           
SPONSOR(s): SENATOR(s) STEVENS G                                                                                                
05/15/03       (S)       READ THE FIRST TIME - REFERRALS                                                                        
05/15/03       (S)       CRA, STA                                                                                               
02/18/04       (S)       CRA AT 1:30 PM FAHRENKAMP 203                                                                          
02/18/04       (S)       Moved  SB 227 Out of Committee                                                                         
02/18/04       (S)       MINUTE(CRA)                                                                                            
02/19/04       (S)       CRA RPT  4DP 1NR                                                                                       
02/19/04       (S)       DP: STEDMAN, LINCOLN, WAGONER,                                                                         
02/19/04       (S)       STEVENS G; NR: ELTON                                                                                   
02/24/04       (S)       STA AT 3:30 PM BELTZ 211                                                                               
BILL: SB 326                                                                                                                  
SHORT TITLE: PERMANENT FUND INVESTMENTS                                                                                         
SPONSOR(s): RULES BY REQUEST OF LEG BUDGET & AUDIT                                                                              
02/13/04       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/13/04       (S)       STA, FIN                                                                                               
02/24/04       (S)       STA AT 3:30 PM BELTZ 211                                                                               
BILL: SB 352                                                                                                                  
SHORT TITLE: MANAGERS NOT EMPLOYEES UNDER P.E.R.A.                                                                              
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
02/23/04       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/23/04       (S)       STA                                                                                                    
02/24/04       (S)       STA AT 3:30 PM BELTZ 211                                                                               
WITNESS REGISTER                                                                                                              
Doug Letch                                                                                                                      
Staff to Senator Gary Stevens                                                                                                   
Alaska State Capitol                                                                                                            
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT:  Answered questions on SB 227 for Senator                                                                 
Gary Stevens, sponsor                                                                                                           
Scott Bendt-Ericksen                                                                                                            
Ketchikan Gateway Borough                                                                                                       
344 Front Street                                                                                                                
Ketchikan, AK 99901                                                                                                             
POSITION STATEMENT:  Testified in support of SB 227                                                                           
Robert Storer                                                                                                                   
Executive Director                                                                                                              
Alaska Permanent Fund Corporation                                                                                               
P.O. Box 25500                                                                                                                  
Juneau, AK 99802-5500                                                                                                           
POSITION STATEMENT:  Explained SB 326                                                                                         
Ron Lorenson                                                                                                                    
Outside Counsel                                                                                                                 
Alaska Permanent Fund Corporation                                                                                               
P.O. Box 25500                                                                                                                  
Juneau, AK 99802-5500                                                                                                           
POSITION STATEMENT:  Answered questions on SB 326                                                                             
Kevin Jardell                                                                                                                   
Assistant Commissioner                                                                                                          
Department of Administration                                                                                                    
PO Box 110200                                                                                                                   
Juneau, AK  99811-0200                                                                                                          
POSITION STATEMENT:  Introduced SB 352                                                                                        
Art Chance                                                                                                                      
Labor Relations Director                                                                                                        
Department of Administration                                                                                                    
PO Box 110200                                                                                                                   
Juneau, AK  99811-0200                                                                                                          
POSITION STATEMENT:  Testified on SB 352                                                                                      
Jeffery Prather                                                                                                                 
Juneau, AK  99801                                                                                                               
POSITION STATEMENT:  Did not support SB 352                                                                                   
Kevin Brennan                                                                                                                   
Kodiak, AK 99615                                                                                                                
POSITION STATEMENT:  Did not support SB 352                                                                                   
Leslie Simmons                                                                                                                  
Anchorage, AK 99501                                                                                                             
POSITION STATEMENT:  Did not support SB 352                                                                                   
Dean Williams                                                                                                                   
No address provided                                                                                                             
POSITION STATEMENT:  Did not support SB 352                                                                                   
Steve Hoffman                                                                                                                   
Ketchikan, AK 99901                                                                                                             
POSITION STATEMENT:  Did not support SB 352                                                                                   
Ole Larson                                                                                                                      
Palmer, AK 99645                                                                                                                
POSITION STATEMENT:  Did not support SB 352                                                                                   
Bruce Senkow                                                                                                                    
Fairbanks, AK 99701                                                                                                             
POSITION STATEMENT:  Did not support SB 352                                                                                   
Shannon Fleming                                                                                                                 
Juneau, AK 99801                                                                                                                
POSITION STATEMENT:  Did not support SB 352                                                                                   
George Pappas                                                                                                                   
Kodiak, AK 99615                                                                                                                
POSITION STATEMENT:  Did not support SB 352                                                                                   
Gerry Guay                                                                                                                      
Anchorage, AK 99501                                                                                                             
POSITION STATEMENT:  Did not support SB 352                                                                                   
Doris Tanner                                                                                                                    
Willow, AK 99688                                                                                                                
POSITION STATEMENT:  Did not support SB 352                                                                                   
June Pennell-Stephens                                                                                                           
Fairbanks, AK 99701                                                                                                             
POSITION STATEMENT:  Did not support SB 352                                                                                   
ACTION NARRATIVE                                                                                                              
TAPE 04-9, SIDE A                                                                                                             
CHAIR GARY STEVENS called the Senate State Affairs Standing                                                                   
Committee meeting to order at 3:37 p.m. Present were Senators                                                                   
Guess, Hoffman, Stedman, Cowdery and Chair Gary Stevens.                                                                        
        SB 227-MUNI INITIATIVE AND REFERENDUM ELECTIONS                                                                     
CHAIR GARY STEVENS announced SB 227 to be up for consideration                                                                  
and that he was the sponsor. He paraphrased the following                                                                       
sponsor statement:                                                                                                              
     Senator  Bill  227 is  "An  Act  relating to  municipal                                                                    
     initiative and referendum elections."                                                                                      
     The bill  was introduced to help  local governments who                                                                    
     are facing  cost increases and  having to  avoid costly                                                                    
     special  initiative  elections   and  referendums  that                                                                    
     voters bring forward.                                                                                                      
     In many cases the issues  are not so pressing that they                                                                    
     cannot  wait   for  the  regular   municipal  election.                                                                    
     Special  elections are  costly and  often have  a lower                                                                    
     voter turnout than regular elections.                                                                                      
     Under current  law, municipalities  are forced  to hold                                                                    
     initiative  elections and  referendums  within 75  days                                                                    
     and because elections are normally  held in October, it                                                                    
     is   often  quite   costly   and   burdensome  to   the                                                                    
     Recently, the Fairbanks North Star  Borough had over 46                                                                    
     petitions  filed in  four months.  There  was only  one                                                                    
     special election,  but it  cost $35,000  plus volunteer                                                                    
     help  and the  workload on  municipal employees.  Still                                                                    
     there  was  the potential  to  have  many more  special                                                                    
     elections at enormous cost to the municipality.                                                                            
     This bill  would result in cost  savings to communities                                                                    
     that choose to wait until  the next general election to                                                                    
     consider the issue then saving  both time and money for                                                                    
     the municipalities.                                                                                                        
     This  legislation would  give  the  governing body  the                                                                    
     option of calling a special  election if the council or                                                                    
     assembly wanted  to have  the initiative  or referendum                                                                    
     considered in  a more timely  basis. Examples  might be                                                                    
     for bonding  issues, special  initiatives that  are not                                                                    
     particularly time-sensitive. In  those cases, any local                                                                    
     governing assembly can vote to  hold a special election                                                                    
     so there is  that option - special  election or regular                                                                    
     The  bill is  supported  by the  Municipal League,  the                                                                    
     Fairbanks  North  Star  Borough,  the  Kenai  Peninsula                                                                    
     Borough,  and  the   Alaska  Association  of  Municipal                                                                    
     Clerks.  It  streamlines  the  special  initiative  and                                                                    
     referendum  process  by  giving  local  governments  an                                                                    
     option to cut costs and  hold a special election during                                                                    
     their annual election cycle.                                                                                               
SENATOR GRETCHEN  GUESS observed there  would be a  13-month wait                                                               
if  the next  regular election  fell less  than 60  days after  a                                                               
petition was certified.                                                                                                         
She said she would like  further explanation of the local control                                                               
CHAIR  GARY STEVENS  initially pointed  out that  Anchorage isn't                                                               
affected  because it  is a  first class  city. Then  he explained                                                               
that  municipalities could  continue with  a special  election or                                                               
referendum  if  they chose  to  do  so  or  they could  elect  to                                                               
postpone until  the regular October  election. This  simply gives                                                               
another option  so municipalities  aren't forced to  hold special                                                               
elections on every issue that comes before them.                                                                                
SENATOR BERT STEDMAN remarked that  the issue of cost savings can                                                               
be substantial and this gives cities more fiscal control.                                                                       
CHAIR GARY STEVENS  told Senator Guess he would come  back to her                                                               
in awhile if she had more questions.                                                                                            
SENATOR JOHN COWDERY  noticed that there was a change  from 45 to                                                               
60 days  and he wondered what  had to be prepared  within 60 days                                                               
of the election.                                                                                                                
CHAIR GARY STEVENS  told him everything that's  associated with a                                                               
regular election has to be  done including ballot preparation and                                                               
staff arrangements.                                                                                                             
JOHN COWDERY asked if all polling stations would stay the same.                                                                 
CHAIR GARY STEVENS said they would.                                                                                             
SENATOR  GUESS  asked  what  would   happen  if  a  petition  was                                                               
certified 30 days before the regular election.                                                                                  
CHAIR GARY  STEVENS read  Section 1, but  wasn't clear  about her                                                               
SENATOR LYMAN  HOFFMAN said the language  creates a disqualifying                                                               
window for petitions  that are certified less than  60 days prior                                                               
to a regular election.                                                                                                          
SENATOR COWDERY wasn't certain that he read Section 1 correctly.                                                                
CHAIR GARY STEVENS asked his staff whether he had clarification.                                                                
DOUG LETCH,  staff to Senator  Gary Stevens, said "it  comes down                                                               
to local  option that  does exist  that says that  if you  have a                                                               
more pressing  matter that comes  before the governing  body they                                                               
do  have  that option  of  putting  on  a special  election."  He                                                               
thought the Kenai clerks might be able to elaborate.                                                                            
CHAIR   GARY   STEVENS   said   a   Ketchikan   Gateway   Borough                                                               
representative  was  online  and  might be  able  to  answer  the                                                               
SCOTT  BENDT-ERICKSEN,   attorney  with  the   Ketchikan  Gateway                                                               
Borough, thanked  the Chair for  introducing the  legislation and                                                               
said  municipal attorneys  and clerks  support the  bill and  the                                                               
concept. He  said he  did have some  specific suggestions  and he                                                               
though he could answer some of the questions that were raised.                                                                  
The  reason  for  the  change  from 45  to  60  days  is  because                                                               
elections require  pre-clearance from the Justice  Department and                                                               
it would be  difficult to complete the clearance in  less than 60                                                               
days. With regard to Senator Guess's  question, he said that if a                                                               
petition  is certified  less  than  60 days  prior  to a  regular                                                               
election,  it  could  be  as   long  as  14  months  before  that                                                               
initiative measure appears on the ballot.                                                                                       
MR. BENDT-ERICKSEN suggested changing  the word "regular" on page                                                               
1,  line 5  to "regular  or special"  or simply  remove the  word                                                               
"regular" to make it clear that there was an option.                                                                            
He also suggested  that if there isn't a  regular election within                                                               
75  days of  a petition  being  certified, there  should be  some                                                               
provision for the  measure to be suspended until there  is a vote                                                               
on the referendum petition.                                                                                                     
The balance of Mr. Bendt-Ericksen's testimony was indiscernible.                                                                
CHAIR GARY  STEVENS asked him  to comment  to the issue  of voter                                                               
turnout in regular elections versus special elections.                                                                          
MR. BENDT-ERICKSEN stated that  special elections frequently have                                                               
half or less than half the turnout of regular elections.                                                                        
SENATOR COWDERY  noted that most  of the  language on line  6 was                                                               
not new but it was confusing  nonetheless. He then asked what the                                                               
outer limit might be.                                                                                                           
MR. BENDT-ERICKSEN replied  the greatest length of  time would be                                                               
about 14  months. If a  petition weren't certified until  59 days                                                               
before the next regular election,  it wouldn't go on that regular                                                               
election. It would  go on the regular election one  year later. A                                                               
special election could be called if the matter was pressing.                                                                    
CHAIR  GARY  STEVENS  restated  the  timeframe,  which  would  be                                                               
between 60  days and  14 months  and then made  the point  that a                                                               
local governing  body could make  the decision to have  a special                                                               
SENATOR GUESS asked which statute  gives municipalities the local                                                               
option because it isn't contained in the bill.                                                                                  
MR. LETCH supplied, "Title 29, line [chapter] 60."                                                                              
CHAIR GARY STEVENS asked Mr.  Bendt-Ericksen to explain the issue                                                               
of referendums.                                                                                                                 
MR. BENDT-ERICKSEN  explained that  a referendum  typically comes                                                               
about because  someone wants  to repeal  or undo  an action  of a                                                               
governing body. He continued, "  Under the current provisions, if                                                               
the referendum  petition is submitted  before the  effective date                                                               
then the  issue can be suspended  until the vote. If  the measure                                                               
has  already gone  into  effect, then  it's  not suspended  until                                                               
there is a vote on the issue."                                                                                                  
CHAIR GARY  STEVENS announced he  would hold the bill  to address                                                               
the issues that were raised.                                                                                                    
               SB 326-PERMANENT FUND INVESTMENTS                                                                            
CHAIR GARY STEVENS  announced SB 326 to be  up for consideration.                                                               
He asked Mr. Storer to step forward.                                                                                            
ROBERT STORER,  executive director  of the Alaska  Permanent Fund                                                               
Corporation sat down and introduced  himself and Ron Lorenson who                                                               
is outside counsel to the permanent fund.                                                                                       
MR.  STORER  described the  request  to  increase the  investment                                                               
flexibility  of the  permanent  fund as  a  timely and  important                                                               
issue.  As background  he  reported that  AS  37.13.120 sets  out                                                               
statutory investing guidelines for  the board to follow including                                                               
adherence  to  the  prudent-investor  rule.  He  noted  that  the                                                               
permanent fund is  one of the last public  funds, including those                                                               
managed by the Department of Revenue, that is guided by statute.                                                                
He  maintained   that,  "The  challenges  for   managers  of  the                                                               
permanent  fund  are  to  be  able   to  manage  the  fund  in  a                                                               
contemporary way in what is in  fact a very dynamic industry, and                                                               
deal  with  legislative  changes  that  allow  us  to  meet  that                                                               
MR.  STORER noted  that  he  would address  his  comments to  the                                                               
Investment  Flexibility   handout  that  members  had   in  their                                                               
packets. The following is his verbatim testimony.                                                                               
     Over the  next couple of  pages you'll see  the history                                                                    
     of some  of the legislative changes  that the permanent                                                                    
     fund  has asked  for  and received  support  for.   The                                                                    
     bottom of  page 3,  which was SB  156, was  approved in                                                                    
     1999.  In 1999  the  Permanent Fund  Board of  Trustees                                                                    
     were allowed one exemption from  the statutory list and                                                                    
     it's what we call the "basket clause."                                                                                     
     SB  156  actually  did  a couple  of  things.  One  was                                                                    
     increase  our  statutory  limitation investing  in  the                                                                    
     stock  market  from  50  to 55  percent.  But  it  also                                                                    
     allowed  the administrators  of the  permanent fund  to                                                                    
     make  investments outside  of the  statutory list,  but                                                                    
     still following the prudent  investor rule. The prudent                                                                    
     investor rule really defines a  process that allows one                                                                    
     to make an informed  decision. That's the criteria that                                                                    
     is involved in the prudent investor rule.                                                                                  
     The permanent  fund was given  permission to  invest up                                                                    
     to  5 percent  of  the fund  outside  of the  statutory                                                                    
     list. To suggest that we  took this ability and ran out                                                                    
     and got  into all  kinds of investments  is not  so. In                                                                    
     fact, we are just now four  years later, after a lot of                                                                    
     evaluation  of  different  opportunities; we  are  just                                                                    
     about  to implement  some of  the  strategies that  are                                                                    
     embedded  in the  basket  clause. I  think  that is  an                                                                    
     important issue.  When we ask for  permission, we still                                                                    
     approach our responsibility prudently.                                                                                     
     Page 4 simply  shows if you look at the  statutes - and                                                                    
     I call  it the maturation  of the permanent fund  - the                                                                    
     permissible list.  You'll see how the  asset allocation                                                                    
     of the Alaska Permanent Fund  has changed over years. I                                                                    
     actually started work ... at  the permanent fund in May                                                                    
     of 1983. Why do  I say that? One, I do  have a sense of                                                                    
     history and the  other is I arrived in May  of 1983 and                                                                    
     the  permanent fund  had  just  received permission  to                                                                    
     invest  in the  U.S. stock  market and,  in fact,  they                                                                    
     funded their first  equity managers in June  or July of                                                                    
     1983. You can see  the non-U.S. investments occurred in                                                                    
     the late 1980s etc.                                                                                                        
     Why  are we  proposing  -  and Ron  will  tell you  the                                                                    
     technical  aspects  -  we're   proposing  a  couple  of                                                                    
     things. The  essence and the  most important  thing may                                                                    
     be  increasing  the  "basket  clause"   from  5  to  15                                                                    
     percent.  That is  to allow  future administrations  of                                                                    
     the  permanent fund  to  meet what  is  a very  dynamic                                                                    
     industry changing  its investment  options to  have the                                                                    
     latitude  to address  a  changing  investment world  as                                                                    
     they occur.                                                                                                                
     Another  [reason]  is  potentially to  allow  different                                                                    
     instruments that  will allow us to  increase our return                                                                    
     objective over  some time. Another  one - and  it's not                                                                    
     necessarily  contradictory  -  is the  more  investment                                                                    
     options  you  have, the  more  you  can diversify  your                                                                    
     portfolio or reduce your risk.  In a conversation I had                                                                    
     with Senator  Stedman I believe  if you asked us  do we                                                                    
     have  all the  diversification  we need  right now  the                                                                    
     answer is  yes. And  we had  that conversation.  But if                                                                    
     you ask me  what do we need in the  future, we need the                                                                    
     flexibility to  respond to changing  financial markets.                                                                    
     To address them  in a contemporary manner  so we cannot                                                                    
     ignore the need  for potential expanded diversification                                                                    
     in the future.                                                                                                             
     Last  item  and  it's  not  on this  list  but  it's  a                                                                    
     management  tool.  There  are certain  things  that  we                                                                    
     could  do  in  the  course of  business  that  are  not                                                                    
     incurring  more  risk.  It's  sort  of  the  arcane  or                                                                    
     complexity of  investment management,  but it  would be                                                                    
     ways to implement strategies in  a low cost way that we                                                                    
     are   precluded   from   currently   because   of   the                                                                    
     limitations on the statutory list.                                                                                         
     I've added a  list of the asset  allocation. Every year                                                                    
     we  visit  our asset  allocation  and  we adopt  it  by                                                                    
     resolution. Our March  10 and 11 board  meeting we will                                                                    
     be making a recommendation  for some adjustments to the                                                                    
     asset allocations.  What you  see is our  current asset                                                                    
     allocation. You'll see it  broken down between domestic                                                                    
     equities, U.S. stocks;  international equities, foreign                                                                    
     stocks;  U.S. bonds  and  I would  note  that the  U.S.                                                                    
     bonds  are  all  investment   grade.  Either  all  U.S.                                                                    
     treasuries [which are] agencies  of the U.S. government                                                                    
     or  high  grade  corporate debt,  and  then  non-dollar                                                                    
     bonds,  which are  mostly  sovereign  issues by  Japan,                                                                    
     England etc. and 10 percent allocation to real estate.                                                                     
     I'll use  domestic equities as  an example.  Our target                                                                    
     is 37  percent, but we  create bands around  it. You'll                                                                    
     see on domestic equities it's  plus or minus 7 percent.                                                                    
     Our  goal is  to  create a  discipline,  that when  you                                                                    
     reach a certain point  - hopefully through appreciation                                                                    
     - you automatically rebalance closer  to target. By the                                                                    
     same token,  when our equity investments  go down there                                                                    
     is an  inflection point where we  must rebalance closer                                                                    
     to target.  That's a tough  one because usually  it's a                                                                    
     lot  harder  to put  new  money  in a  declining  stock                                                                    
     market because it takes a  real discipline. It occurred                                                                    
     in October  of 2002.  No great  insight other  than the                                                                    
     fund  went  outside its  bands,  but  it turns  out  we                                                                    
     missed  the bottom  of the  bear market  by about  four                                                                    
     days. It  was a  superb piece of  timing, but  that was                                                                    
     more discipline than it was a particular skill.                                                                            
     The point is  we try to have bands  that are reasonable                                                                    
     but not  get into  a lot  of rebalancing  because there                                                                    
     are a  lot of  transaction costs  that one  occurs when                                                                    
     you rebalance so  we try to have  some reasonable bands                                                                    
     around our target.                                                                                                         
     Why am  I noting that?  I'm noting that because  on the                                                                    
     current  statutory limitations,  we  will be  - if  the                                                                    
     board  adopts the  recommended  asset  allocation -  up                                                                    
     near  our statutory  limitations  in  both the  "basket                                                                    
     clause" and  equities. What does that  mean? That means                                                                    
     that our investment  managers in the board  will not be                                                                    
     deciding  our   asset  allocation.  Statutes   will  be                                                                    
     deciding our  asset allocation. It suggests  that right                                                                    
     now  our  stock  -  our managers  -  decide  when  we'd                                                                    
     maximize  our return.  They will  then sell  that stock                                                                    
     and  buy  other  stock,  but   we  will  be  forced  by                                                                    
     statutory limitations to limit  the upside potential on                                                                    
     stocks. Of course, risk is  not symmetrical because the                                                                    
     stock  market can  go down  so we  have some  statutory                                                                    
     controls on how  much we can gain  on appreciation, but                                                                    
     not so on the down side.                                                                                                   
     That is another  reason why I think it  is a compelling                                                                    
     argument  and I  hope you  will agree  that we  need to                                                                    
     expand  our flexibility.  Not in  terms of  making pure                                                                    
     decisions, but  simply to let  the permanent  fund take                                                                    
     advantage of the appreciation  in the financial markets                                                                    
     when they occur.                                                                                                           
     This is the  first opportunity I've had  to address the                                                                    
     Legislature on this issue. On  the last page I tried to                                                                    
     think  of  what  would  be   some  of  your  questions,                                                                    
     criticisms - whatever you want to  call it - and I came                                                                    
     up with three.                                                                                                             
     The first thing I would  ask if I was scrutinizing this                                                                    
     is would the fund be taking  too much risk if they were                                                                    
     given  this  latitude. Of  course  we  can't speak  for                                                                    
     future administrators of  the fund, but I  can give you                                                                    
     a  history lesson.  I've had  the privilege  of working                                                                    
     with  all but  four  trustees of  the Alaska  Permanent                                                                    
     Fund  Corporation. I  have worked  for,  been or  known                                                                    
     every executive  director of the Alaska  Permanent Fund                                                                    
     Corporation and I  have worked for or  with every chief                                                                    
     investment  officer  in  the   history  of  the  Alaska                                                                    
     Permanent Fund Corporation.                                                                                                
     What I  have observed is  the corporate culture  of the                                                                    
     administrators  of the  fund -  they  have always  used                                                                    
     this  investment  privilege  very  prudently  and  very                                                                    
     conservatively.  We have  always spent  time trying  to                                                                    
     ferret out  fads from real  contemporary issues  and we                                                                    
     are more than  content to watch and  learn from others'                                                                    
     mistakes. If history  is a lesson of this,  I would say                                                                    
     that we've  used our  privilege of  expanded investment                                                                    
     flexibility  judiciously,  carefully  and I  think  the                                                                    
     fund has benefited from that.                                                                                              
     How will  the board  of trustees use  this flexibility?                                                                    
     That's a  key issue  that I  would ask  and one  of the                                                                    
     main  things,  as  I've  noted,   is  to  allow  future                                                                    
     administrators the flexibility  to address contemporary                                                                    
     investment  management  issues.  So to  some  degree  I                                                                    
     don't know. I  can identify some sort  of cornucopia of                                                                    
     options or  the myriad  of options that  are available.                                                                    
     Clearly one use, and the  immediate use would be to not                                                                    
     have  the statutory  constraints  if  the funds  assets                                                                    
     appreciate and  we would hope  that they would.  We are                                                                    
     currently using a bit of  the statutory "basket clause"                                                                    
     or  the outside  of  the  statutory identifications  to                                                                    
     invest  in  private equities.  [It  would  be a]  small                                                                    
     weighting  - no  more  than 3  percent  and [we  would]                                                                    
     probably take  several years to implement.  We probably                                                                    
     won't  start investing  our  first  dollars until  late                                                                    
     spring, early  June. That alone, if  we're successful -                                                                    
     and of  course we  spent a  lot of  time studying  it -                                                                    
     success  actually will  take that  3 percent  over a  5                                                                    
     percent limit  because of appreciation right  there. We                                                                    
     are  going to  propose to  the board  something that  I                                                                    
     think is unique.                                                                                                           
     The term of art right  now is called an absolute return                                                                    
     strategy. You see it in the  papers a lot - it's called                                                                    
     a  hedge  fund. Sometimes  you  see  negative press  on                                                                    
     hedge  funds.  You  always see  the  headlines  in  the                                                                    
     negative.  It's not  necessarily  bad,  but what  we're                                                                    
     doing in the first time  of the permanent fund is we're                                                                    
     recommending a pilot  program - a program  that will be                                                                    
     small  enough so  that if  there are  problems it  will                                                                    
     have, we  hope, virtually no impact  on the performance                                                                    
     of the fund.  By the same token, if  it's successful it                                                                    
     will have virtually no impact on the permanent fund.                                                                       
     These are sophisticated  investment philosophies and we                                                                    
     want  to  learn from  the  live  experience. The  other                                                                    
     thing that  is unique in  this proposal is  we're going                                                                    
     to have  a sunset  clause. The  contracts will  be good                                                                    
     for up to  36 months and then  that investment strategy                                                                    
     will die  as a  matter of course.  We're not  saying we                                                                    
     want this  flexibility in perpetuity.  We think  it has                                                                    
     merit, but we want to learn more from it.                                                                                  
     The  last   one  is  derivatives.   That  was   a  more                                                                    
     pejorative word in  the '80s and earlier  '90s and less                                                                    
     so now.  What are derivatives? The  simplest definition                                                                    
     -  it  is an  investment  instrument  that derives  its                                                                    
     return from some other investment.  An example would be                                                                    
     hedging your  equity exposure using an  equity contract                                                                    
     - either  a forward or  a futures contract.  That's not                                                                    
     investing in the stock market,  but the returns on that                                                                    
     contract  will  be  derived  by  the  reality  of  what                                                                    
     happens   in  the   stock  market.   That's  called   a                                                                    
     derivative  - people  use  derivatives  to hedge  their                                                                    
     exposure. You can use a  derivative to gain exposure in                                                                    
     a certain  market - immediately  while you  invest then                                                                    
     systematically in the stocks you want as an example.                                                                       
     Would there  potentially be derivatives? The  answer is                                                                    
     yes, hopefully in a very deliberate manner.                                                                                
CHAIR GARY STEVENS asked Mr. Lorenson for his comments.                                                                         
RON LORENSON, outside counsel for the Alaska Permanent Fund                                                                     
Corporation, walked members through the bill and gave an                                                                        
explanation of the recommended changes.                                                                                         
He suggested  focusing on Section  2 first because  that contains                                                               
the "basket clause." The provision begins  on page 1, line 14 and                                                               
continues  through  line   10  on  page  2.   He  explained  that                                                               
subsection (g) is what Mr. Storer  referred to as the legal list.                                                               
It  describes  the  investment  forms  that  the  Permanent  Fund                                                               
Corporation is authorized to invest  in with the exception of the                                                               
basket clause.                                                                                                                  
He continued  to say  that in  addition to  (g), there  are other                                                               
provisions  under [AS]  37.13.120 that  provide a  restriction on                                                               
investments under certain circumstances.                                                                                        
     That's what has  raised the concern or  the interest of                                                                    
     the Permanent Fund Corporation in  terms of making some                                                                    
     adjustments  in   the  way  the  basket   clause  would                                                                    
     operate. Right now, under  the basket clause provision,                                                                    
     it  says, 'Notwithstanding  (g)'  and  that means  even                                                                    
     though  there is  this legal  list, you  don't have  to                                                                    
     follow the legal list for up  to 5 percent of the value                                                                    
     of  the assets  of the  fund.  You can  go outside  the                                                                    
     legal  list as  long as  the other  investments satisfy                                                                    
     the prudent investor rule.                                                                                                 
     With  respect  to  that  5 percent,  it's  okay  to  go                                                                    
     outside that legal list. There  are, however, under (h)                                                                    
     and (i),  which are  the two  provisions you'll  see at                                                                    
     the bottom of page 1 in  section 2 that are proposed to                                                                    
     be  added  to  the  language  authorizing  the  'basket                                                                    
     clause'  - there  are some  additional restrictions  in                                                                    
     (h) and (i),  which by a legal  interpretation, if they                                                                    
     aren't  specifically  acknowledged, would  continue  to                                                                    
     operate to restrict the use of the 'basket clause.'                                                                        
     I was involved  in 1999 when the bill  was presented to                                                                    
     the Legislature and passed, it  wasn't the intention of                                                                    
     the   drafters  or   ever   in   discussion  with   the                                                                    
     Legislature that  those two  provisions operate  to act                                                                    
     as restrictions on the 'basket clause.'                                                                                    
     What (h)  does is say  that futures contracts  can only                                                                    
     be  used under  certain very  restricted circumstances.                                                                    
     Overall  it  makes sense  in  terms  of a  conservative                                                                    
     approach  to investment,  but in  terms of  the prudent                                                                    
     investor rule and flexibility  under the basket clause,                                                                    
     applying that  limitation on futures has  the effect of                                                                    
     potentially  limiting  various   kinds  -  particularly                                                                    
     hedge funds  - that the permanent  fund might otherwise                                                                    
     be able to invest in as a result of the basket clause.                                                                     
     (i) says that  the permanent fund cannot  invest in any                                                                    
     fixed  income asset  bond -  essentially -  where there                                                                    
     has been a default on  the interest payment in the last                                                                    
     5  years.  It  makes  a  lot  of  sense  as  a  general                                                                    
     investment guideline,  but to the extent  that you want                                                                    
     to be  able to  take advantage  of the  'basket clause'                                                                    
     and use  various funds of alternative  investments such                                                                    
     as  some of  the  high yield  bond  type products  that                                                                    
     might  be  available.  It acts  as  a  restriction  and                                                                    
     limitation  that  again,  wasn't intended  when  people                                                                    
     were visualizing  what the basket clause  might be used                                                                    
He pointed out  the other change on page 2  increases the size of                                                               
the basket clause from a maximum of  5 percent to a maximum of 15                                                               
Subsection (e)  in section  1 says  the corporation  can't borrow                                                               
money as  part of  its investment  strategy. The  second sentence                                                               
was then  added to  permit investments  that the  corporation was                                                               
involved  in -  and  at that  time  the only  focus  was on  real                                                               
property  investments -  to permit  real property  investments of                                                               
the fund  - to borrow money  is a way of  leverage potentially as                                                               
part of the investment in a particular piece of real estate.                                                                    
     What  (e) does  is say  the permanent  fund corporation                                                                    
     can't borrow money as part  of its investment strategy.                                                                    
     It makes a  lot of sense and no one  has suggested that                                                                    
     the permanent fund  should borrow money as  part of its                                                                    
     strategy.  But the  second sentence  was then  added to                                                                    
     permit  investments that  the corporation  was involved                                                                    
     in  - and  at  that time  the only  focus  was on  real                                                                    
     property   investments  -   to  permit   real  property                                                                    
     investments of the  fund - to borrow money is  a way of                                                                    
     leverage  potentially as  part of  the investment  in a                                                                    
     particular piece of real estate.                                                                                           
     When  the permanent  fund invested  in real  estate, it                                                                    
     always does it through a holding  company - an LLC or a                                                                    
     limited  partnership. It  doesn't  do  it directly  and                                                                    
     that's  what  this  language  authorizes.  The  holding                                                                    
     company  can borrow  money as  part  of its  investment                                                                    
     strategy with respect  to an asset as long  as there is                                                                    
     no   recourse   back   against   the   permanent   fund                                                                    
     corporation.  In  other  words,  as long  as  the  only                                                                    
     reliable entity is the holding  company and there is no                                                                    
     ability  to go  back  and  sue or  pursue  a claim  for                                                                    
     default against the corporation.                                                                                           
     That's the way it's set  up for real estate. There's no                                                                    
     reason not  to provide  the same flexibility  for other                                                                    
     forms  of holding  entities -  limited partnerships  in                                                                    
     the area  affirmative investments - private  equity for                                                                    
     instance.  We're  just  recommending  there,  that  the                                                                    
     restriction  for real  property be  taken out,  but the                                                                    
     limitation  remains.  That   is  that  the  corporation                                                                    
     cannot borrow money  directly. If money is  going to be                                                                    
     borrowed, it is part of  the investment strategy of the                                                                    
     corporation.  It has  to be  through  some other  legal                                                                    
     entity that isolates the  corporation from liability if                                                                    
     things don't go right.                                                                                                     
SENATOR  JOHN COWDERY  asked how  many dollars  15 percent  might                                                               
represent at today's value.                                                                                                     
MR. STORER answered 10 percent would represent $4.2 billion.                                                                    
SENATOR COWDERY inquired  about the type of  investments that are                                                               
TAPE 04-9, SIDE B                                                                                                             
4:22 pm                                                                                                                       
MR. STORER  replied there are  numerous options most of  which he                                                               
wouldn't support,  but an example  of investment  expansion could                                                               
be private equity buyouts. Some  hedge funds have absolute return                                                               
strategies and  there are a  myriad of  sophisticated approaches.                                                               
An obvious  approach would  be high  yield debt,  which can  be a                                                               
speculative investment. Another category of  high yield debt is a                                                               
company  that  has   fallen  out  of  investment   grade  and  is                                                               
restructuring.  The  latter  doesn't  offer  as  much  investment                                                               
opportunity as  the more  speculative type,  but it  is a  way of                                                               
increasing  fixed  income  returns beyond  investment  grade.  He                                                               
suggested that is a standard tool that deserves consideration.                                                                  
Some  funds  are looking  at  timber,  agriculture and  commodity                                                               
based investments.  He wasn't endorsing  those, but they  do fall                                                               
within investment grade.                                                                                                        
He noted  that many  funds are  diversifying and  some endowments                                                               
and  foundations are  becoming  more aggressive  on the  absolute                                                               
return strategies.                                                                                                              
SENATOR COWDERY  mused the corporation  must support  the concept                                                               
and a number of desirable options must be unavailable currently.                                                                
MR.  STORER maintained  the  options are  numerous  and some  are                                                               
worthy of evaluation.  He asked members to remember  that it took                                                               
more  than two  years of  study before  they concluded  that they                                                               
wanted  to  invest   in  the  private  equity   market.  When  he                                                               
identifies  the options  as worthy  of consideration,  he assured                                                               
members  that  a lengthy  and  in  depth  study  is part  of  the                                                               
process. Certainly,  he wouldn't support  some of the  options he                                                               
SENATOR  COWDERY  asked  if  new  investment  managers  would  be                                                               
selected or guidelines changed.                                                                                                 
MR. STORER replied nothing like  that would change. He noted that                                                               
the corporation manages  quite a lot of money  internally and the                                                               
staff does  very well.  However, "These, by  and large,  are more                                                               
sophisticated  investments  that  require  more  personnel,  more                                                               
analysis  etc.  So the  answer  is  we  would most  clearly  seek                                                               
outside expertise to assist us in managing those assets."                                                                       
To  do  that,  he  said, they  establish  criteria,  which  might                                                               
include expected  returns, types  of options, and  benchmarks and                                                               
standards. The  consultant would  be told  to review  peer groups                                                               
that have  expertise in  that area. They  look at  performance as                                                               
well as how long they have  managed that type of discipline. They                                                               
look at the depth of the  organization and an analysis of whether                                                               
or not  repeated success is  likely. After that,  three prospects                                                               
are  brought in  for interview  and the  board makes  a selection                                                               
from there.                                                                                                                     
He advised  that any time  they make  an investment policy  it is                                                               
posted on  the web  site. There are  resolutions for  every asset                                                               
class or  discipline that managers  must follow broadly  and then                                                               
contracts further tighten the guidelines.                                                                                       
SENATOR COWDERY  asked if a  manager had ever  underperformed and                                                               
had to be changed.                                                                                                              
MR. STORER  replied they try  to stay with  a manager as  long as                                                               
their  discipline  works  because  there  are  transaction  costs                                                               
associated with  change. Although there  are a number  of issues,                                                               
one is whether the assets  are managed as represented and another                                                               
questions  whether  they  are  managing it  well.  They  look  at                                                               
whether the management  style is out of favor or  whether the job                                                               
is simply done poorly.                                                                                                          
He  pointed out  that one  equity manager  they selected  in 1983                                                               
still  has "a  substantial relationship  with the  permanent fund                                                               
and the others have not so  they have been fired for performance,                                                               
for  personnel  turnover  or  for  mergers...or  simply  we  have                                                               
decided that we need to implement different strategies."                                                                        
SENATOR HOFFMAN noted he was  around in 1999 when the Legislature                                                               
made the last  change. Although he doesn't  have any reservations                                                               
about adding (h) and (i), the  request also triples the amount of                                                               
funds that wouldn't be restricted  by the investment rule. To put                                                               
$4.2  billion  into perspective,  he  called  it $4,200  million.                                                               
Although  they are  the same,  the  latter sounds  like a  larger                                                               
number.  "You're  asking  for  a lot  more  flexibility"  and  he                                                               
questioned whether that might not be too much risk.                                                                             
He  reminded members  that  the POMV  (percent  of market  value)                                                               
question  was  also  before   legislators.  Currently  the  state                                                               
doesn't use the earnings from  the permanent fund, but that could                                                               
change  if  POMV passes  and  a  percentage  of the  earnings  is                                                               
allotted  to government  and  the  state comes  to  rely on  that                                                               
income.  When  you  become dependent  upon  your  earnings,  it's                                                               
natural  that  you  become  less   willing  to  assume  risk,  he                                                               
MR.  STORER agreed  with  the last  statement  saying that,  "The                                                               
sooner you need the money, the more conservative you should be."                                                                
SENATOR HOFFMAN interjected, "The more you're dependent on it."                                                                 
MR. STORER agreed adding that  stock market investment is for the                                                               
long   term.  He   confirmed  that   Senator  Hoffman   correctly                                                               
identified  the  two issues.  He  called  the first  issue  house                                                               
cleaning related  to the original  intent and the other  issue is                                                               
potentially expanding the risk from  5 to 15 percent. However, as                                                               
he identified earlier,                                                                                                          
     As a  management tool, one  of the things that  we will                                                                    
     be doing right now  is restricting ourselves because of                                                                    
     the statutory  limitations so it actually  could work -                                                                    
     we wouldn't have  to change our asset  allocation - and                                                                    
     the  current  statutes would  be  an  inhibitor on  our                                                                    
     return simply  because we would be  forced to liquidate                                                                    
     assets because of statutory limitations, not what the                                                                      
     market and asset allocation tells you.                                                                                     
He also  made the point  that even  at 15 percent,  the permanent                                                               
fund  is probably  the most  restrictive and  conservative public                                                               
funds in the  country. It is far more restrictive  than the state                                                               
retirement system, he said.                                                                                                     
They are  not cavalier when it  comes to large numbers,  but they                                                               
are  used  to  managing  money  and  the  implications  of  large                                                               
numbers. He  said, "I'm not  prepared to suggest that  the future                                                               
managers of the  fund would put all their eggs  in a $4.2 billion                                                               
basket. I don't  know, but I think the opposite  would occur." He                                                               
agreed  that   Senator  Hoffman's   concern  is  valid,   but  he                                                               
maintained  that  the  increased  investment  latitude  would  be                                                               
diversified  and  they would  continue  to  follow the  rules  of                                                               
prudent investing.                                                                                                              
SENATOR  HOFFMAN  recalled  that  in the  early  '90s,  the  fund                                                               
managers  asked to  invest in  foreign stocks  and that  wasn't a                                                               
very good decision for the first several years.                                                                                 
He then asked where the sunset clause was referenced.                                                                           
MR. STORER  explained that it related  to just the one  issue and                                                               
they  intend to  impose  the sunset  clause  in their  investment                                                               
policies and not statute. That  one investment strategy will be a                                                               
very small component, he said.                                                                                                  
SENATOR  HOFFMAN said,  "You're not  saying that  that should  be                                                               
considered in  this legislation and  the Legislature  should look                                                               
at it in three years and see how the fund is doing."                                                                            
MR. STORER maintained  that a statutory sunset  on the investment                                                               
strategy  would not  be  a good  idea,  but frequent  performance                                                               
evaluation is always a good idea.                                                                                               
SENATOR BERT  STEDMAN said he  understood private  placements but                                                               
he needed further  clarification on increasing the  basket from 5                                                               
to  15 percent.  He questioned  whether future  markets might  be                                                               
used and if so, how much and where would they be used.                                                                          
MR.  STORER  replied  they  would be  used.  Future  markets  are                                                               
currently used  to a  small degree  and he could  see a  day when                                                               
they would be  used more. Although they have never  done so, they                                                               
can use futures  to hedge a long position. Fund  managers use the                                                               
futures market  on currency on international  investments because                                                               
they  tend to  have longer  settlement  dates. When  you make  an                                                               
international investment,  you invest in  the company and  in the                                                               
currency. Managers  use futures to  lock in the currency  rate at                                                               
the time.                                                                                                                       
He  said  more and  more  often,  managers  are employed  to  use                                                               
futures  in more  sophisticated  ways. There  is  danger in  that                                                               
though  because   a  residual   futures  contract   is  potential                                                               
leverage. They  aren't suggesting such  use and are  very mindful                                                               
of that issue.                                                                                                                  
However,  using   futures  as  a  management   tool  to  mitigate                                                               
transaction costs can be worthwhile. For example,                                                                               
     We  have a  significant payout  annually to  - for  the                                                                    
     dividend payout and one could  take their cash flow and                                                                    
     instead  of investing  in -  and  it would  be a  small                                                                    
     component   -  the   stock  market   and  incurring   a                                                                    
     transaction  cost   and  then  selling  it   later  and                                                                    
     incurring  another  transaction  cost.  One  could  use                                                                    
     either future  or forward contract that  expires - that                                                                    
     takes the cash and commits that  to a future so that it                                                                    
     expires  right  on  that  date  to  reduce  transaction                                                                    
     costs. My guess is that  the dividend costs right about                                                                    
     2 to  $5 million  in transaction  costs. So  that's one                                                                    
     type of tool, but there are  a myriad of ways one could                                                                    
     use them.  I would assume  they would be used  not now,                                                                    
     not next  year, but maybe  five years down the  road. I                                                                    
     would expect  to see  more use  of futures  contracts -                                                                    
     forward contracts, but I can't tell you the magnitude.                                                                     
SENATOR STEDMAN said they would  use short-term futures to bridge                                                               
a  settlement  timeframe  versus  hedging  the  currency  on  the                                                               
MR. STORER replied that would be  one way and another would be to                                                               
mitigate transaction costs for funding the dividend.                                                                            
SENATOR STEDMAN viewed it differently.  He said, "If you're going                                                               
to access  the futures  market for  short timeframes  to mitigate                                                               
your calendar  on your settlement  versus using futures  to hedge                                                               
currency  in your  international  portfolio  - particularly  your                                                               
international bond portfolio. So there's no intent to do that?"                                                                 
MR. STORER replied, "No, not right now."                                                                                        
SENATOR STEDMAN  said, "So  there's no intent  to use  the basket                                                               
move  from 5  to  15 [percent]  - where  you  can actually  start                                                               
getting a  fairly good chunk of  leverage on your portfolio  - to                                                               
go in  and speculate or  leverage up your equities  portfolio. It                                                               
would always be used as a hedge?"                                                                                               
MR. STORER  replied they  weren't discussing  that use  right now                                                               
and although he  couldn't say it would never  happen, he couldn't                                                               
envision that the board would  leverage their equity portfolio in                                                               
the foreseeable future.                                                                                                         
With regard to  increasing the flexibility now  and the reference                                                               
to the ability to invest  in the international equity markets, he                                                               
said, "There  seems to be  a classic  event that occurs  when the                                                               
permanent   fund  is   trying   to   increase  their   investment                                                               
capabilities. What happened during that  period [1999] is that it                                                               
was only through the success  of the international equity markets                                                               
-  and  specifically  in  Japan  -  that  we  were  able  to  get                                                               
legislative ability to make international investments."                                                                         
The  point  Senator Hoffman  made  was  correct, he  said;  their                                                               
initial  investment in  the  international  equities market  went                                                               
down. Fortunately they  didn't invest a great deal  of money, but                                                               
since  that  time  the international  market  returns  have  been                                                               
significant.   In  fact,   international   equity  markets   have                                                               
outperformed  the  domestic equity  market  in  the last  several                                                               
He concluded,  "You have to  justify your ability by  showing how                                                               
these high returns occur and  it's like all things, you overshoot                                                               
in  both directions.  That is  the point  of getting  flexibility                                                               
4:50 pm                                                                                                                       
CHAIR  GARY  STEVENS noted  that  it  was  getting late  and  the                                                               
members had a  number of questions on the  issue. Furthermore, 35                                                               
people  were waiting  to speak  on the  next bill.  He stated  he                                                               
would like to return to this at a later date.                                                                                   
MR. STORER  replied, "We  would be delighted  Mr. Chair.  It's an                                                               
important issue and we want to make everybody comfortable."                                                                     
CHAIR GARY STEVENS held SB 326 in committee.                                                                                    
          SB 352-MANAGERS NOT EMPLOYEES UNDER P.E.R.A.                                                                      
CHAIR GARY STEVENS  announced SB 352 to be  up for consideration.                                                               
He read  the title and  asked Kevin  Jardell to come  forward and                                                               
introduce the bill.                                                                                                             
KEVIN  JARDELL,  assistant  commissioner for  the  Department  of                                                               
Administration, explained that the  intention is to modernize the                                                               
Public Employee  Relations Act (PERA). The  changes would conform                                                               
to most states  that allow public employees to  bargain and would                                                               
also conform  to federal law,  which applies to  private industry                                                               
unions throughout the U.S. Department of Education.                                                                             
The impetus for  the change stems from  confusion and frustration                                                               
associated  with trying  to  implement  the new  administration's                                                               
policies, he  said. In  working through  the policies,  they were                                                               
trying to  understand the management  they have in the  state and                                                               
how to utilize that management  to implement the administration's                                                               
The  first  thing  they  noticed  is  that  there  was  excessive                                                               
micromanagement on  the commissioner level. They  determined that                                                               
lower-level  managers   should  be   implementing  many   of  the                                                               
policies,  but found  there were  no lower-level  managers. Under                                                               
current state law,  the organization is such  that everyone below                                                               
the  commissioner, including  assistant commissioners  and deputy                                                               
commissioners, is  labor under PERA. Upon  further investigation,                                                               
they found that although assistant  and deputy commissioners have                                                               
the right  to bargain, they  haven't exercised that  option. That                                                               
isn't the pressing problem, he said.                                                                                            
ASSISTANT COMMISSIONER JARDELL continued  to say that the problem                                                               
is that  there is  no line drawn  to define  managers, management                                                               
and  labor.  They were  certain  that  drawing  the line  at  the                                                               
commissioner level  was not appropriate,  but weren't  sure where                                                               
it  would  be   appropriate.  The  focus  was   to  identify  the                                                               
management  team  and  train them  as  professionals  that  would                                                               
become a part of policy implementation at the division level.                                                                   
They looked  at state history and  learned that this isn't  a new                                                               
concept. The Cooper, Hammond and  Hickel administrations all took                                                               
some action  on this  issue. In  1977 and  1980, the  Blue Ribbon                                                               
Commission   reviewed   PERA.   In   particular   they   reviewed                                                               
confidential  employees and  the managerial  class of  employees.                                                               
That  task  force  determined  that  those  employees  should  be                                                               
management rather than in organized labor.                                                                                      
A number  of previous administrations  concluded that  they could                                                               
solve  the  problem  by removing  these  people  from  classified                                                               
service  and  placing  them in  partially  exempt  service.  This                                                               
doesn't solve the problem, he  asserted. First, placing employees                                                               
in the  partially exempt service,  doesn't remove their  right to                                                               
bargain.  The  other   reason  it  doesn't  work   is  that  this                                                               
administration doesn't  believe that it  is in the  best interest                                                               
of the state  to make career-service employees who  have risen to                                                               
the  management level  in a  division into  political appointees.                                                               
This  administration doesn't  want more  political appointees  at                                                               
this level, he insisted.                                                                                                        
What  this administration  wants to  do is  to develop  a career-                                                               
service path for  management level employees that  would be under                                                               
the political  appointees. That  line is  at the  deputy director                                                               
level  and  it  would  "provide   a  lot  of  continuity  between                                                               
administrations  and a  professionalism  and  a management  class                                                               
that we currently  don't spend the resources to train  and put in                                                               
because we can't identify them as management."                                                                                  
He pointed to the Division  of Retirement and Benefits to provide                                                               
example  of  another  problem. One  director  oversees  over  100                                                               
employees and  when he or she  is gone, for any  reason, there is                                                               
no management  representative in  the division during  the entire                                                               
absence.  In  those instances,  organized  labor  is running  the                                                               
division. To address that issue,  they are trying to identify the                                                               
managerial,   deputy  director   level   that   is  acting   with                                                               
independence in implementing the governor's policies.                                                                           
He said appointees create and  develop policy then the next level                                                               
of management  implements the policy with  discretion. That level                                                               
of  independent  judgment is  the  root  of the  definition  they                                                               
propose to adopt. The employee must  have that to be defined as a                                                               
management  level. Employees  that exercise  independent judgment                                                               
to implement policy are defined as managerial level.                                                                            
SB 352 adopts the federal standard for confidential employees.                                                                  
CHAIR GARY  STEVENS told Assistant  Commissioner Jardell  that he                                                               
wanted  to  give  him  every opportunity  to  fully  present  the                                                               
administration's point  of view,  but it  might have  to be  at a                                                               
future  time. Many  people were  waiting  to testify  and it  was                                                               
getting late in the day.                                                                                                        
ASSISTANT COMMISSIONER  JARDELL concluded  that the  principle of                                                               
the bill  is "to build a  better management scheme for  the state                                                               
of  Alaska,  not make  new  political  appointees, but  generally                                                               
professionalize and train a management class of employee."                                                                      
CHAIR   GARY  STEVENS   thanked  him   for  working   within  the                                                               
committee's  time constraints.  He said  he would  begin to  take                                                               
testimony  in Juneau  then  move to  the  various communities  to                                                               
allow the 35 some people to speak.                                                                                              
SENATOR GRETCHEN  GUESS asked the  Chair if he wanted  members to                                                               
hold  their  questions until  the  end  of the  public  testimony                                                               
CHAIR GARY  STEVENS replied Assistant Commissioner  Jardell would                                                               
return  to  complete his  testimony  and  answer questions  at  a                                                               
future hearing.                                                                                                                 
JEFFERY PRATHER,  staff manager with children  services in Juneau                                                               
said he  listened to  the previous testimony  and he  was unclear                                                               
"who all  they're envisioning being  a part of this."  As someone                                                               
who might potentially be management,  he cautioned the members to                                                               
take care  in determining the  level that is appropriate  to draw                                                               
the line. In  his office, managers make  many sensitive decisions                                                               
and  "politics can  play a  role in  decisions that  are made  by                                                               
supervisors  throughout  the state."  He  maintained  there is  a                                                               
level of  comfort having  a union  to act as  a buffer  when they                                                               
must make  decisions that  align with  state regulation  and law,                                                               
but are troubling due to other issues.                                                                                          
KEVIN  BRENNAN from  Kodiak testified  via teleconference  on his                                                               
own behalf. He  works for the Alaska Department of  Fish and Game                                                               
(ADF&G). He thought  Assistant Commissioner Jardell's explanation                                                               
very interesting  when compared  to the vague  language contained                                                               
in  the  bill.  In  fact,  the description  of  a  manager  could                                                               
conceivably include anyone in the supervisory unit.                                                                             
"Politicizing  public  employee   positions  would  diminish  our                                                               
effectiveness in  the state."  He asked that  the bill  be tabled                                                               
because it is an attack on PERA and collective bargaining.                                                                      
LESLIE  SIMMONS testified  via teleconference  from Anchorage  in                                                               
opposition to  SB 352. She  said she  is a front  line supervisor                                                               
for the  solid waste program  in the Department  of Environmental                                                               
Conservation.   She   implements    policy   developed   by   her                                                               
commissioner,  division   director,  and  program   manager.  She                                                               
provides information to help them in policy development.                                                                        
Because  of her  technical expertise,  schooling and  experience,                                                               
she   is  instrumental   in   helping   the  department   develop                                                               
environmental regulations.  "I do  my job with  the understanding                                                               
of  the  political,  social and  economic  implications.  I  make                                                               
decisions based on  sound science, laws and  regulations and best                                                               
management   practices.   Not   based   on   shifting   political                                                               
elections." She urged the committee to table the bill.                                                                          
CHAIR GARY STEVENS thanked Ms.  Simmons and announced that it was                                                               
5:00 pm  and even though the  hearing would continue for  a while                                                               
longer, his  intention was to  hear the bill again  the following                                                               
Tuesday.   Everyone  that   wanted   to  speak   would  have   an                                                               
DEAN WILLIAMS testified via teleconference  to say that Assistant                                                               
Commissioner   Jardell's   comments   are  well   understood   by                                                               
supervisory members. However, he  respectfully disagreed with his                                                               
analysis  of  the  situation  and  what he  believes  to  be  the                                                               
problem.  He reasoned  that  as  "you move  down  into the  state                                                               
management team,  you understand that  when a director  leaves of                                                               
course   we're    carrying   out    the   governor's    and   the                                                               
administration's   programs  and   plans.  We   are  the   career                                                               
This  legislation makes  jobs  that  are not  and  should not  be                                                               
political very  political indeed. "We respectfully  disagree with                                                               
the  analysis  of  Assistant Commissioner  Jardell  and  ask  the                                                               
committee to  look very carefully  at what is in  the legislation                                                               
and the severe  ramifications that we believe it's  going to have                                                               
on the supervisory employees and the state as a whole."                                                                         
STEVE  HOFFMAN from  Ketchikan testified  via teleconference.  He                                                               
questioned  whether  the bill  was  an  attempt to  better  state                                                               
government or a first step toward union busting.                                                                                
OLE LARSON testified  via teleconference from the  Mat-Su LIO and                                                               
said  where  he  works, the  commissioner,  deputy  commissioner,                                                               
directors, and  special assistants are all  political appointees.                                                               
He  didn't hear  about the  bill  until the  previous Friday,  he                                                               
didn't read about  it until yesterday and  he couldn't understand                                                               
the urgency. "The state employment  system isn't broken or out of                                                               
control." He  said he was  opposed to the legislation  because it                                                               
wouldn't  provide any  protection to  supervisory employees  from                                                               
the political whims of changing administrations.                                                                                
He stated  that there  is just one  supervisory layer  under him.                                                               
"There isn't  a long career ladder  to begin with and  this would                                                               
eliminate what career ladder is  left." A staff member asked what                                                               
"undivided loyalty" means and he believes this is a scary issue.                                                                
TAPE 04-10, SIDE A                                                                                                            
5:12 pm                                                                                                                       
CHAIR GARY STEVENS announced that  he wanted the entire committee                                                               
hear all  the testimony on  this important issue and  he intended                                                               
to take additional public testimony the following Tuesday.                                                                      
BRUCE  SENKOW testified  via  teleconference  from Fairbanks  and                                                               
advised that he  is the president of the  Alaska Public Employees                                                               
Association. When he reviewed the bill,  he found it to be "wrong                                                               
on so  many levels." With regard  to loyalty, he has  never heard                                                               
of a  supervisor disobeying a  direct request from a  director or                                                               
commissioner if  he or  she was given  clear direction.  Next, he                                                               
couldn't   figure  out   where  the   governor's  concern   about                                                               
confidentiality was  coming from  because "we probably  hear more                                                               
from  commissioners and  political appointees  than we  ever hear                                                               
from labor relations staff."                                                                                                    
The  issue of  cost is  noteworthy  even though  the fiscal  note                                                               
doesn't  reflect  that.  Under collective  bargaining,  there  is                                                               
arbitration if you  must terminate someone. That  is costly. With                                                               
this  bill,  he  thought  a  predetermination  hearing  would  be                                                               
necessary  followed  by a  personnel  board  hearing. After  that                                                               
lawyers would get  involved. "That's going to cost  you ten times                                                               
more than  what an arbitration will  cost to find out  whether or                                                               
not you did what you should have done."                                                                                         
Drawing   on  years   of  experience,   he  asserted   that  most                                                               
supervisors  are more  fiscally responsible  than most  political                                                               
appointees. "On  so many levels, this  is the wrong time  and the                                                               
wrong thing to  address. The system isn't broken  it doesn't need                                                               
to be fixed. I think this needs to be tabled."                                                                                  
SHANNON  FLEMING   testified  that   she  is   the  investigation                                                               
supervisor for the office of  children's services in Juneau. Many                                                               
of her sentiments were stated  already, but she wanted to comment                                                               
on conflicting loyalties.                                                                                                       
She  professed to  no conflicting  loyalties  now, but  suggested                                                               
that she very well might  if she didn't have union representation                                                               
because  she  helps  six social  workers  make  difficult  family                                                               
related decisions on a daily basis.                                                                                             
GEORGE PAPPAS,  an area management  biologist for  the Department                                                               
of Fish  and Game,  testified via  teleconference from  Kodiak in                                                               
opposition to SB 352.                                                                                                           
As a manager of a  fully allocated fishery, nearly every decision                                                               
that  he  makes  serves  some  user group  and  takes  away  from                                                               
another, he  said. He questioned  whether the next  generation of                                                               
biologists  would  be  able  to base  their  decisions  on  sound                                                               
biological   principles   rather   than   the   politically   and                                                               
economically  based  process seen  in  the  early 1900s.  Without                                                               
protection of  a union, he was  concerned that he could  lose his                                                               
job  for  making a  publicly  unpopular,  but biologically  sound                                                               
GERRY  GUAY  testified  via   teleconference  from  Anchorage  in                                                               
opposition  to  the   bill.  He  works  for   the  Department  of                                                               
Environmental  Conservation   and  is  also  the   chair  of  the                                                               
Southcentral  supervisory  unit.  SB  352 implies  the  500  plus                                                               
members of the state supervisory  workforce need to be controlled                                                               
because  they   aren't  supportive   of  the   current  political                                                               
direction. "The  implication that  we could be  better controlled                                                               
is not only  a dangerous conclusion, but  severely undermines the                                                               
fabric of state government and being a public servant."                                                                         
     Our role as supervisors is  not to be controlled but to                                                                    
     serve   the   residents   of  the   state   of   Alaska                                                                    
     irrespective of  the controlling party. We  are here to                                                                    
     provide  informed advice,  technical  expertise and  to                                                                    
     serve as  check and  balance when decisions  don't make                                                                    
     sense. This is not to  suggest that we work against the                                                                    
     political  pundit, but  instead we  make sure  that the                                                                    
     desired  results are  based  on  informed decisions.  I                                                                    
     believe the mere suggestion of  political control at my                                                                    
     mid-managerial level should send  fear to the hearts of                                                                    
     most Alaskans.                                                                                                             
He  observed  that  he  interpreted  the  bill  differently  than                                                               
Assistant Commissioner Jardell and asked how the bill would:                                                                    
   · Improve the loss in productivity in the state system caused                                                                
     by political turnover every 4 years                                                                                        
   · Handle the loss in informed experienced leadership in the 3                                                                
     to 6 months following each election                                                                                        
   · Address the brain-drain as older staff leave or are forced                                                                 
   · Counter the loss of staff leaving for bigger money in the                                                                  
     private sector because state employment no longer offers                                                                   
   · Counter the loss of dedicated state workers and managers                                                                   
   · Address fewer experienced state workers wanting to become                                                                  
   · Protect supervisory members that are already afraid to                                                                     
     testify at legislative hearings because they are afraid of                                                                 
     political retribution                                                                                                      
DORIS TANNER testified via teleconference  from the Mat-Su LIO to                                                               
represent supervisory members of  the Election Board. She opposed                                                               
any  effort to  open  the Public  Employment  Relations Act.  She                                                               
advised that  she had a written  statement to read and  she would                                                               
send the committee a copy for the file. She read:                                                                               
     PERA isn't broken; if anything  it isn't strong enough.                                                                    
     This is  evident in the  continual upheaval  and damage                                                                    
     done to  vital state programs  and service of  each and                                                                    
     every administrative change in subjective replacement                                                                      
     Raiding  PERA will  increase  the  number of  long-term                                                                    
     employees  - and  these are  employees with  experience                                                                    
     and  history necessary  to  operate efficient  programs                                                                    
     and  services  -   arbitrarily  replaced  by  political                                                                    
     influence. I am  here today to tell  you about personal                                                                    
     experiences  with   political  appointments   in  state                                                                    
     government. As you know,  each and every administration                                                                    
     brings  with it  political  appointees  into key  state                                                                    
     positions.  We have  pretty much  learned to  live with                                                                    
     that.  Those positions,  however, bring  their own  key                                                                    
     people   in.  These   political  pawns   are  generally                                                                    
     inexperienced  in the  department they  are charged  to                                                                    
     represent. They  bring varying levels of  education and                                                                    
     experience and a complete  misunderstanding for how the                                                                    
     department,  the division,  or  the program  functions.                                                                    
     They lack  the history or  memory to quickly get  up to                                                                    
     speed in the mission  of the department they represent.                                                                    
     In  short,  they bring  chaos  into  a perfectly  oiled                                                                    
     If PERA  is raided, this political  process will become                                                                    
     the norm  occurring daily rather than  every four years                                                                    
     that we currently experience.                                                                                              
MS. TANNER noted that one of her employees wrote, "This is the                                                                  
first time in my life that I have felt afraid to say what I                                                                     
think in  a workplace.  This is  not like  me." That  paranoia is                                                               
widespread and is holding the state hostage, Ms. Tanner charged.                                                                
Finally she asked,  "Why is this issue only  receiving the notice                                                               
of one  hearing held one  day after its introduction?"  She urged                                                               
the committee to kill SB 352.                                                                                                   
CHAIR GARY STEVENS  thanked her for her  comments then explained,                                                               
for the record, "that we did send  this out on Thursday - that it                                                               
was  posted on  Friday.  It was  not given  a  bill number  until                                                               
Monday when  it went  across the Senate  floor." He  continued to                                                               
say  that there  would  be  another hearing  to  give everyone  a                                                               
chance to speak to the issue.                                                                                                   
He announced  he would  like to  hear from  one more  person from                                                               
Fairbanks  so that  each community  had two  people speak  to the                                                               
JUNE PENNELL-STEPHENS,  APEA member and manager  at the Fairbanks                                                               
North Star  Borough, stated that  she was  the next on  the list.                                                               
She made the  point, "You make good managers  by hiring qualified                                                               
people  and training  them properly,  not  merely by  prohibiting                                                               
them  from  carrying a  union  card."  It  is short  sighted  and                                                               
offensive to say that someone can't  be a good manager and a good                                                               
union  member.  Her contract  gives  her  the explicit  right  to                                                               
express political opinions, which is  not included in the general                                                               
personnel policy  that covers  non-union employees.  Without that                                                               
guarantee, many public employees  would be directly or indirectly                                                               
deprived  of  their  right  of  free  speech.  She  charged  that                                                               
prohibiting all  managers from belonging to  any union whatsoever                                                               
might well be  an infringement on their first  amendment right to                                                               
the freedom  of association.  She urged  the committee  to defeat                                                               
the bill.                                                                                                                       
CHAIR  GARY STEVENS  announced that  the  committee schedule  was                                                               
full for  the coming  Thursday meeting,  but they  would continue                                                               
hearing the bill  again on Tuesday of the next  week. He noted he                                                               
hadn't  given Assistant  Commissioner Jardell  an opportunity  to                                                               
complete his testimony and asked him if he had anything to add.                                                                 
ASSISSTANT  COMMISSIONER  JARDELL  replied he  would  return  and                                                               
answer questions at a later time.                                                                                               
CHAIR GARY  STEVENS held  SB 352 in  committee and  adjourned the                                                               
meeting at 5:30 pm.                                                                                                             

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