SB 131-DIVEST INVESTMENTS IN IRAN  9:18:54 AM SENATOR WIELECHOWSKI announced that SB 131 was again before the committee. Since the committee heard the bill, the governor made a surprise announcement that he is asking the Alaska Permanent Fund Corporation (APFC), Alaska Retirement Management (ARM) Board, and Department of Revenue (DOR) to divest their holdings from any companies doing business in Iran. He said he applauds the governor's support for divesting, but it is not clear whether he and the agencies he asked to divest currently have sufficient legal authority to do so. He wished to learn more about that question and about the fiscal notes the bill received from the APFC. One of the fiscal notes, for $200,000 in FY 13, refers to APFC custody and management fees. 9:19:01 AM LAURA ACHEE, Director of Administration and Communications, Alaska Permanent Fund Corporation (APFC), Department of Revenue (DOR), Juneau, Alaska, introduced herself. She offered to answer questions about SB 131. SENATOR PASKVAN questioned the transactional cost related to the bill. MS. ACHEE explained that two elements relate to the costs; one is the direct pass through cost that APFC is charged for brokers buying and selling stocks, and the other is the cost of having both internal and external staff manage the portfolio. At the front end is the initial cost of divesting the stocks, and then there are on-going costs of making sure those stocks are not re- bought. SENATOR PASKVAN said he thought those transactional costs were part of every day, usual costs. 9:22:59 AM MS. ACHEE countered the idea that APFC would not be doing anything different. One of the tasks that would be different is the monitoring of unacceptable stocks on the list to make sure that they are not purchased. Also, the issue of paying the brokers is a fixed cost. The management cost is not included in the fiscal note. She addressed the issue of profits versus losses, which cannot be estimated. Managers are expecting that there might be some offers, but those costs are also not included in the fiscal note. SENATOR PASKVAN said he thought the investments should be divested no matter what the cost. SENATOR KOOKESH wondered if the fiscal note changed due to the governor's interest. MS. ACHEE answered said no. SENATOR KOOKESH asked if the costs will be shared with the governor. MS. ACHEE said she has not discussed that situation. SENATOR KOOKESH wondered how fiscal notes are determined now that the governor has weighed in. 9:26:43 AM SENATOR WIELECHOWSKI said that Senator Kookesh made a good point. He wondered where the $200,000 would come from if the bill does not pass, now that the governor has stated support. MS. ACHEE said that discussion would have to happen and the money would have to be found. She thought the direction of inquiry was premature. SENATOR GIESSEL asked if there were other stocks APFC is prohibited from investing in. MS. ACHEE said there were none. SENATOR MEYER pointed out that there are some restrictions. For example, high risk trading is not done. MS. ACHEE did not know. A number of years ago the investment authority was turned over to the APFC. SENATOR WIELECHOWSKI said he had been told that the Permanent Fund was divested from Sudanese investments. MS. ACHEE said that was incorrect. SENATOR WIELECHOWSKI said he understood that former-Governor Palin requested that. MS. ACHEE did not recall that. She assured the committee that there has never been any divestment for any reason. 9:30:03 AM DAN WAYNE, Legislative Legal Counsel, Legislative Affairs Agency, introduced himself. SENATOR WIELECHOWSKI related his conversation with Legislative Legal questioning the governor's authority to request or demand that the Permanent Fund divest from investments. MR. WAYNE explained that the constitution gives the governor power under Article 3, Section 16, to force compliance with any constitutional or legislative mandate, which may make the governor think he can take action to divest funds from the Permanent Fund. Mr. Wayne did not think the Permanent Fund Corporation could act on the request because the constitution says in Article 9, Section 15, that "the principle of the Permanent Fund shall be used only for those income producing investments specifically designated by law as eligible for Permanent Fund investment." The legislature has designated by law how that money is supposed to be invested in AS 37.13.120(a) "when adopting regulations authorized by this section, or managing and investing fund assets, the prudent investor rule shall be applied by the corporation. The prudent investor rule is applied to investment activity of the fund, means that the corporation shall exercise the judgment and care under the circumstances then prevailing, that an institutional investor of ordinary prudence, discretion, and intelligence exercises in the designation management of large investments entrusted to it, not in regard to speculation, but in regard to the permanent disposition of funds, considering preservation of the purchasing power of the fund over time while maximizing the expected total return from both income and appreciation of capital." He concluded that the legislature has said this is the law to follow when investing money. SB 131 adds a subsection to AS 37. 13.120 on page 5, Section 3, "the board shall comply with AS 37.10.072," which is the new section that requires divestment. He opined that without legislative direction, the APFC can't divest from Iran investments unless it would satisfy the requirements of the prudent investment rule. SENATOR WIELECHOWSKI asked Ms. Achee for clarification on the fiscal note. He wondered how many fund managers were contacted regarding the need for a fiscal note. MS. ACHEE replied there were about 20-25 fund managers. SENATOR WIELECHOWSKI inquired how many thought there would be a cost. MS. ACHEE said three fund managers decided SB 131 would require a cost. One manager gave an estimate for manager fees, but they were not included in fiscal note, as well as transaction costs. She emphasized that the amount of $200,000 is not a definite number, but a rough estimate. SENATOR WIELECHOWSKI concluded that the fiscal note was based on the recommendation of one fund manager. He summarized page 2, lines 5-11, "if an investment in the fund is managed as a commingled investment or other business structure in which the fund is not the sole owner, the law does not apply." He asked if it was a commingled investment. 9:38:06 AM MS. ACHEE responded that it was not a commingled fund. All managers that did not suggest that there would be a cost are separate account active managers that do not fall under either exclusion in the bill. SENATOR WIELECHOWSKI understood that the one fund manager manages about $1.3 billion. MS. ACHEE clarified that the manager manages $1.4 billion, $1 billion of which is international large capitalized company stock. SENATOR WIELECHOWSKI stated that the state pays that manager about $350,000 per quarter. MS. ACHEE said manager fees vary. She did not know the number. SENATOR WIELECHOWSKI asked if Ms. Achee or her lawyers had looked at subsection (b). MS. ACHEE said she has and it does not apply. SENATOR WIELECHOWSKI thought it was a commingled investment. 9:40:46 AM MS. ACHEE reviewed definitions: an active separate account is an account where the manager makes decisions based on what is best for the individual portfolio; passive managers align the portfolio directly to an index and charge a significantly smaller fee; commingled funds are blended with other institutional investors like a mutual fund. SENATOR PASKVAN requested a definition of basis points. He said he estimated the transactional costs to be 25 basis points. He wondered if they could be negotiated lower. 9:42:51 AM MS. ACHEE defined a basis point as a fraction of a percent. For example, $200,000 is two basis points of a $1 billion portfolio. SENATOR PASKVAN asked if the value is 99.8 percent after two basis points are removed. MS. ACHEE said that APFC does not approach it that way. She asked for further clarification of Senator Paskvan's question. SENATOR PASKVAN assumed a $100,000 investment with a 2 basis point transactional cost. He asked what amount remained. MS. ACHEE said it would be the remainder if the stock were to be sold for full value. SENATOR PASKVAN restated the question based on a $100 investment. He asked if $99.80 would remain. MS. ACHEE agreed. SENATOR PASKVAN explained the rational for his analysis. 9:45:03 AM SENATOR WIELECHOWSKI asked if there is a section in the contract with the fund manager that discusses how much it would cost for a legislative change. MS. ACHEE did not know. SENATOR WIELECHOWSKI wondered if the governor could legally direct investments. MS. ACHEE deferred to Legislative Legal to answer. SENATOR KOOKESH asked Ms. Achee to follow up on that question. MS. ACHEE did not feel comfortable answering the question. SENATOR PASKVAN also wanted feedback on the question. SENATOR KOOKESH said it was new ground and he wished to follow the process. SENATOR WIELECHOWSKI thanked Ms. Achee for her work. He left the decision on the bill to the committee. 9:48:01 AM SENATOR PASKVAN asked when the APFC might respond. SENATOR WIELECHOWSKI requested more information about the governor's letter. He related that Mr. Wayne maintained that the governor's letter did not give the APFC authority to divest. He also wondered if the governor could give authority for APFC to divest. MS. ACHEE said she would try to get an answer as soon as possible, but it was up to the Department of Law to respond. SENATOR WIELECHOWSKI said the committee would hold the bill until further notice. SENATOR MEYER recalled that the previous governor verbally requested divestment from Sudan. He also wanted to find out the governor's legal role. He agreed with the bill's intent from a policy standpoint. He suggested moving the bill. SENATOR KOOKESH also agreed to move the bill. 9:50:22 AM SENATOR PASKVAN moved to report SB 131, version M, from committee with individual recommendations and the attached fiscal notes. SENATOR WIELECHOWSKI added that there are two attached fiscal notes; one from the Department of Revenue - Treasury, and one from the Department of Revenue - APFC Operations. A revised fiscal note concerning APFC custody and management fees may be forthcoming. SENATOR GIESSEL said in spite of the governor's support, she was unsure of the bill. She stated objections to political aspects of the bill, even though she did not dispute Iran's action. She noted that Norway makes objective decisions about investments. SENATOR WIELECHOWSKI agreed that that's the argument against the bill. He said each individual case should be looked at based on its own merits. He said Norway has a board that does allow social investing. For example, Norway does not invest in tobacco companies. He thought this bill was a unique situation. He argued in favor of the bill. 9:53:36 AM SENATOR GIESSEL commented on an investment Norway declined to make. SENATOR WIELECHOWSKI announced that without objection, SB 131 moved from the Senate State Affairs Standing Committee.