Legislature(2003 - 2004)
02/24/2004 03:37 PM Senate STA
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* first hearing in first committee of referral
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+ 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
elections."
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
municipalities.
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
election.
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
option.
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
question.
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
question.
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
election.
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
challenge."
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
for.
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
percent.
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
considered.
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
mentioned.
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
reasoned.
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
portfolio.
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
years.
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
now."
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
policies.
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
period.
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
opportunity.
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
employees...."
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
decision.
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
out
· Counter the loss of staff leaving for bigger money in the
private sector because state employment no longer offers
security
· Counter the loss of dedicated state workers and managers
· Address fewer experienced state workers wanting to become
managers
· 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
machine.
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
issue.
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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