Legislature(2019 - 2020)GRUENBERG 120
04/25/2019 03:00 PM House STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| HB139 | |
| HB132 | |
| HJR18 | |
| HJR6 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 139 | TELECONFERENCED | |
| *+ | HB 132 | TELECONFERENCED | |
| *+ | HJR 6 | TELECONFERENCED | |
| *+ | HJR 18 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 139-AK PERM. FUND CORP. PROCUREMENT EXEMPTION
3:04:06 PM
CO-CHAIR FIELDS announced that the first order of business would
be HOUSE BILL NO. 139, "An Act providing an exemption from the
state procurement code for the acquisition of investment-related
services for assets managed by the Board of Trustees of the
Alaska Permanent Fund Corporation."
3:04:23 PM
ROBERT ERVINE, Staff, Representative Jennifer Johnston, Alaska
State Legislature, on behalf of Representative Johnston, prime
sponsor of HB 139, paraphrased from the sponsor statement, which
read as follows [original punctuation provided]:
House Bill 139 adds an exemption to the state's
procurement code that would let the Alaska Permanent
Fund Corporation (APFC) be exempt from the code when
evaluating and managing assets.
In a recent effort to cut costs and increase revenue
margins, pressure has been placed on the APFC to bring
more of their fund management in-house. With markets
changing quickly, it is important that they have the
tools to quickly evaluate and manage investments.
Under existing law, APFC is exempt from the state's
procurement code when it acquires income producing
assets or delegates its investment authority. However,
they must comply with the state's procurement code
when evaluating and managing the assets in which it
invests. This bill will allow them to perform due
diligence in a timely manner.
This exemption will improve APFC's ability to identify
subject matter experts, gather professional background
information and negotiate contracts in under 10 days,
compared to the minimum 54 days required under the
state's procurement code. The change proposed in this
bill will allow an expeditious timeline that closely
aligns with the pace of the markets in which APFC
works.
Allowing APFC the exemption in HB 139 will give them
the tools they need to meet the added demands that
Alaskans are placing on the fund.
3:05:36 PM
REPRESENTATIVE STORY asked for the number of investments that
would be exempt from the procurement code under HB 139.
3:06:37 PM
ANGELA RODELL, Executive Director, Alaska Permanent Fund
Corporation (APFC), responded that APFC expects HB 139 to affect
about eight to ten decisions annually.
REPRESENTATIVE STORY asked whether money would be saved through
the procedures proposed under HB 139.
MS. RODELL answered that it is her belief that there will be
some cost savings. The APFC would be able to acquire subject
matter experts itself instead of relying on third party
contractors to acquire subject matter experts and, thereby,
generating cost savings to the state and to the fund.
REPRESENTATIVE VANCE asked for an explanation of the current
procurement code under which APFC operates.
MS. RODELL relayed that APFC is under the full state procurement
code, and the only exemption is for the investment decisions.
For example, APFC is not subject to the procurement code to buy
a bond or to hire a money manager.
REPRESENTATIVE VANCE asked for the length of time in the current
procurement process.
MS. RODELL answered that the length of time is about 50 to 60
days, including notifications and appeals.
REPRESENTATIVE VANCE asked whether HB 139 would waive that
process, so that someone could be hired within a few days.
MS. RODELL responded, "That is correct."
REPRESENTATIVE VANCE commented that she understands the need to
respond quickly to investment opportunities. She asked why
there is need for the proposed change considering the fund is
performing well.
MS. RODELL offered that if APFC can streamline the process, use
staff resources to directly acquire the needed expertise, and
not rely on third parties in order to avoid the procurement
process, it can be much more opportunistic and timely in
accessing investments and, therefore, get more investment
return.
REPRESENTATIVE VANCE questioned how procedures under HB 139
would prevent the "good old boy" type of hiring of which many
people are suspicious.
MS. RODELL answered that the APFC trustees and staff take their
fiduciary responsibility very seriously. The proposed exemption
is meant to confirm the underlying thesis of an investment, not
give a "good old boy" a subject matter waiver or steer business
in any one direction. The APFC has instituted processes to
prevent such from occurring, and the fund results demonstrate
the efficacy of those processes.
REPRESENTATIVE VANCE asked for an elaboration of the
requirements for hiring investors.
MS. RODELL explained that the process for hiring managers and
investment advisors is in the APFC Board of Trustees investment
policy. The policy is a living document that the board reviews
annually to ensure that the policy continues to reflect the
procedures and the goals of the fund. Within that policy are
manager selection rules and requirements; the APFC is required
to use the board's general consultant to assist with the
selection process; and a process for alternative manager
searches is outlined in the policy. She offered that a series
of questionnaires are used for the selection process. The
process is like the [state] procurement process absent the time
periods and state contracting requirements.
3:13:16 PM
REPRESENTATIVE LEDOUX stated that she was under the impression
that the proposed legislation would allow APFC to retain third
party people, which currently must be accomplished under the
procurement code. She asked for confirmation that Ms. Rodell's
testimony is that APFC currently relies on a consulting firm to
make the hires, and HB 139 would allow APFC to hire the [subject
matter experts] directly.
MS. RODELL replied that currently APFC can hire a fiduciary -
someone with specific responsibility to manage fund money. The
proposed legislation would expand APFC's hiring authority to
include subject matter experts relevant to a specific investment
idea. For example, APFC wants to directly invest in a
biotechnology idea and not use a fiduciary, but because it lacks
the underlying expertise [in the subject matter], it would like
to consult with a medical person. Currently APFC must go
through the state procurement process to find that professional
service. She stated that APFC is asking for a procurement code
exemption to acquire that professional service.
REPRESENTATIVE LEDOUX asked whether the state's procurement
code, not personnel code, would be used to hire state employees.
MS. RODELL responded that APFC does not use the procurement code
to hire people. She explained that she is referring to
professional service contracts with subject matter experts.
REPRESENTATIVE LEDOUX asked for confirmation that the experts
would not be hired as employees but retained as contractors.
MS. RODELL answered, "That is correct." She stated that the
experts would be hired to opine on a specific subject matter in
their fields of expertise, such as engineering, biotechnology,
technology, or software. The APFC would ask the experts to use
their expertise to opine on the business validity of a potential
investment.
REPRESENTATIVE LEDOUX mentioned that she is confused by the term
"hire." She offered that MS. Rodell is referring to retaining
an expert as a third-party contractor and not an employee of
APFC.
MS. RODELL concurred.
3:16:33 PM
REPRESENTATIVE WOOL expressed that currently APFC can spend up
to $100,000 without being subject to the state procurement code;
therefore, an expert could be paid up to that amount.
MS. RODELL agreed that the state procurement code has limited
exception for under $100,000.
REPRESENTATIVE WOOL asked whether an expert opinion costing over
$100,000 is common and asked for confirmation that the amount is
the cost for an opinion and not a percentage of the investment
or return.
MS. RODELL responded, "That is correct." She added that the
cost depends on the time spent reviewing all the information and
writing an opinion. She said that part of the challenge is that
the shorter the time frame available for the review, the higher
the cost.
REPRESENTATIVE WOOL offered, "$100,000 a week, I guess that's
acceptable."
MS. RODELL mentioned that at times there are teams of reviewers;
therefore, the procurement may involve the work of an entire
group.
REPRESENTATIVE WOOL asked for confirmation that an investment by
APFC is not subject to the procurement code.
MS. RODELL answered, "That is correct."
REPRESENTATIVE WOOL asked whether a real estate investment, such
as purchasing a skyscraper, can be made without adhering to the
procurement code.
MS. RODELL answered, "That is correct."
REPRESENTATIVE WOOL offered that the procurement code needs to
be followed when getting advice on the building being intact, if
the advice is $150,000.
MS. RODELL answered, "Exactly."
REPRESENTATIVE WOOL suggested that the cost of an opinion on a
major skyscraper is substantial.
MS. RODELL replied, "It can be."
3:19:43 PM
CO-CHAIR FIELDS asked for an example of how obtaining the expert
opinion on investments has produced significant returns for the
corporation and how giving APFC the ability to contract with
experts would provide the opportunity for more returns.
MS. RODELL stated that APFC invested $189 million in JUNO
Therapeutics between 2012-2013. The investment opportunity came
directly to APFC from the group forming JUNO Therapeutics; it
was a fast-track investment. The APFC was unable to procure a
medical expert opinion in the timeframe available for evaluating
the investment. She said that the investment was offered as an
IPO (initial public offering) in 2017 and has netted the
permanent fund about $1.8 billion. The investment was extremely
lucrative and is the type of investment that APFC wants to be
able to pursue using one of its investment managers and not a
third-party.
REPRESENTATIVE LEDOUX asked whether using a fiduciary means
using another investment manager, and therefore, paying more for
the service.
MS. RODELL responded, "That is correct."
3:22:11 PM
CO-CHAIR KREISS-TOMKINS asked for further explanation of the two
different types of third parties - the third party that APFC is
currently using versus the third party it would use under the
proposed legislation.
MS. RODELL explained that currently APFC uses an investment
manager third party; under HB 139 it would use a non-fiduciary
third party - one that is not an investment manager.
CO-CHAIR KREISS-TOMKINS asked if currently that [third party]
investment manager in turn procures the services of the subject
matter expert; therefore, APFC is paying the investment manager
as a middleman to obtain the expertise.
MS. RODELL responded, "That is correct." She added that the
investment manager then invests some of his/her own money into
the investment alongside of APFC money.
CO-CHAIR KREISS-TOMKINS offered that under HB 139, the
corporation could cut the middle entities out of the equation.
MS. RODELL answered, "That is correct."
REPRESENTATIVE WOOL offered that currently APFC is using two
middlemen - the fiduciary and the subject matter expert; the
proposed legislation would eliminate the fiduciary and APFC
could hire the expert directly. He asked whether the intent of
the proposed legislation is to save money by not paying the
middleman. He also asked whether the procurement code is
followed for hiring the fiduciary.
MS. RODELL confirmed that eliminating the [third-party]
investment manager does save the corporation the cost of the
manager's fees. The proposed legislation also enables APFC to
react in a timely manner to investment opportunities.
REPRESENTATIVE WOOL asked whether APFC pays the investment
manager an hourly rate or a percentage of the investment.
MS. RODELL confirmed that APFC pays a management fee that is a
percentage of the investment. She added that the investment
manager usually receives a percentage of any profit-sharing over
and above attaining certain performance indicators.
REPRESENTATIVE WOOL suggested that APFC enters a fiscal
relationship with the investment managers for a period; under HB
139, APFC would hire the expert directly, pay him/her for the
service, make the investment, and "move on."
MS. RODELL replied, "Correct."
3:26:23 PM
REPRESENTATIVE LEDOUX offered that the proposed legislation
would save APFC a great deal of money. She asked Ms. Rodell to
give an example in which APFC would have liked to have retained
a [subject matter expert] directly but had to retain an
intermediary fiduciary. She asked what amount of money was paid
to the fiduciary.
MS. RODELL referred to the previous example involving JUNO
Therapeutics, in which APFC invested $189 million and netted
about $1.8 billion after selling the stock. She stated that if
a fiduciary was involved in the transaction, he/she would have
gotten a $1 million fee and 20 percent of the profit-sharing.
The amount going to the fiduciary would be in the millions. She
said that APFC is pleased with its return on that investment.
She maintained, however, that decrements, such as the $1 million
fee, cannot be seen in a $65 billion budget - it "doesn't move
the needle"; therefore, discussing fee savings is a challenge
for APFC. She emphasized that fee savings is important to the
corporation, and the corporation is always looking for ways to
create better results for the people of Alaska through its
investment activity.
3:30:00 PM
REPRESENTATIVE VANCE asked whether APFC could provide the
legislature a report next year on the savings under HB 139 if
passed.
MS. RODELL responded that she believes that tracking that
information would be possible, especially if the request is made
in advance.
REPRESENTATIVE WOOL offered that HB 139 would not only save the
corporation money but extend to it nimbleness, freedom, control,
and flexibility.
MS. RODELL concurred.
CO-CHAIR FIELDS stated that HB 139 would be held over.