Legislature(2023 - 2024)ADAMS 519
04/26/2024 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB174 | |
| HB169 | |
| HB232 | |
| HB260 | |
| HB368 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 260 | TELECONFERENCED | |
| += | HB 368 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 174 | TELECONFERENCED | |
| += | HB 169 | TELECONFERENCED | |
| + | HB 232 | TELECONFERENCED | |
HOUSE BILL NO. 174
"An Act restricting fiduciary actions by a fiduciary
of a state fund, the Alaska Retirement Management
Board, and the Alaska Permanent Fund Corporation Board
that have the purpose of furthering social, political,
or ideological interests."
3:13:26 PM
Co-Chair Foster invited the bill sponsor and his staff to
the table.
REPRESENTATIVE KEVIN MCCABE, SPONSOR, offered a brief recap
of the bill. The bill prioritized the financial or
pecuniary interests of beneficiaries when managing state
funds, ensuring responsible investment decisions focused
solely on financial gain. The bill reinforced and
guaranteed that state funds continue to be managed in such
a way as to ensure a maximum risk adjusted return within
established parameters. The bill strengthened efforts to
establish a sustainable long-term fiscal plan for Alaska by
eliminating external social, political, or ideological
goals from investment considerations. He stated that the
bill did not limit options for achieving maximum risk
adjusted return. The bill would align Alaska with a growing
number of states by introducing legislation that emphasized
responsible investment management and fiscal
responsibility. The bill prohibited practices like board
stacking ensuring members of predominant boards prioritize
financial gain and refrain from advancing external non-
pecuniary interests. He relayed that passage of the bill
would be a significant step forward in responsible
investment management for Alaska, safeguarding citizens'
financial interests for the state's long term benefit.
Representative McCabe stated that the bill would ask the
state's large funds to maintain focus on achieving the
highest possible rate of return within the established risk
parameters for fiduciaries. He elaborated that the bill
would mean Alaskans could trust that their financial
interests were being protected, contributing to confidence
in the state's management and fostering a stable economic
environment. He hoped it would fortify the development of a
durable and sustainable long-term fiscal strategy for the
state devoid of trends or influences. He thanked the
committee for hearing the bill.
Co-Chair Foster OPENED public testimony.
Co-Chair Foster CLOSED public testimony. He provided the
contact information for written testimony.
Co-Chair Foster asked for a review of the fiscal notes. He
began with the fiscal note from the Department of Revenue
(DOR).
3:16:54 PM
ZACH HANNA, CHIEF INVESTMENT OFFICER, TREASURY DIVISION,
DEPARTMENT OF REVENUE (via teleconference), reviewed the
fiscal note from DOR, control code cQJja. He began by
stating that the Alaska Retirement Management Board (ARMB)
and Treasury Division staff were very focused on the
state's long standing fiduciary duty covered under AS
37.10.071(c) to invest in the sole financial best interest
of the roughly $50 billion in funds collectively managed by
the department. He relayed that the investment standard was
higher than that of most states, which had been critical in
avoiding some of the problems highlighted by the bill. The
department had no issue with the intent of the bill, and it
would not change what the department invested in. He added
that aspects of the bill were helpful in clarifying the
existing fiduciary standard.
Mr. Hanna relayed that the department's primary concern was
related to the section of the bill [Section 1] specifying
that "an action is considered to have the purpose of
furthering a social, political, or ideological interest if
evidence indicates a commitment to" a series of five
specific activities. He stated that some of the underlying
companies and stock market index funds and elsewhere in the
funds managed by the division were engaged in some mix of
the five activities. He pointed out that it was despite the
investments having been made only in the sole financial
best interests of the funds managed by the division.
Mr. Hanna remarked that the fact the division invested in
the companies may be considered evidence by some that the
investments were questionable or not permitted under the
language in the bill. He understood that was not the intent
of the legislation; however, they were hot button issues
for the press, public, and special interest groups who may
misinterpret the language in the bill. Consequently, the
division would anticipate an increase in information
requests and testimony and engagement with ARMB and staff,
and the potential for a recurring need to prove that the
fiduciary standard was being followed in even easily benign
investment cases or to prove a negative that ARMB and staff
were not engaged in investment for social, political, or
ideological reasons when that had never been the case.
Mr. Hanna stated that the research could be time consuming
and either supplanted existing investment activity or
called for more staff resources. The division had no issue
doing the additional work if it was needed from a policy
perspective, but the division was a small organization
running at lean staffing levels. The division was
requesting an additional investment officer in its fiscal
note. He relayed that he would be remiss in painting the
need for the resource as a certainty. He clarified that the
fiscal note was an estimate based on the division's
expectations given the current environment. He understood
there could be differences of opinion. He elaborated that
the resource lift could be low, or it could be high
initially and taper off over time. The division operated
under a microscope through a public process, which was
totally fitting due to its management of public assets.
Ultimately, the division would fold into its workflow
whatever policy path was laid out by the legislature
regardless of resource addition. He thanked the committee
for its time.
3:20:40 PM
Representative Galvin stated her understanding that the
funds were presently managed under the prudent investor
rule, which ensured a comprehensive consideration of all
things that an investor should consider. She imagined that
a prudent investor would want to be aware of any changes in
the market that may come about due to social, political, or
ideological factors. She wondered how much the bill may
hamper the division as fund managers and worrying they may
run afoul with the proposed statute. She understood it was
difficult to know the direction of the market. She noted
that Mr. Hanna had mentioned being under a microscope
already and she was not certain one [additional] investment
officer would be sufficient to address all of the questions
that may come as a result of the bill.
Mr. Hanna responded that the prudent investor rule was part
of AS 37.10.071(c) and the prudent investor rule was fairly
common across state funds. He quoted a piece of the
statute, "apply the prudent investor rule and exercise the
fiduciary duty in the sole financial best interest of the
funds." He explained that Alaska's statutory standard was
higher than most states had. He clarified that the division
did not believe the bill would constrain its ability to
invest in the highest risk adjusted returns or in the sole
financial best interest of the funds. He believed the
language may be misinterpreted by some and may call into
question those investments even though they had been made
according to the standard and that defending those
investments may be time consuming. He noted that the
division had seen the topic over the years. He shared that
in 2000 he had done a fairly sizeable research project on
ESG [environmental social governance] investments when the
board had been approached over a series of meetings and
years to make investments that were arguably in line with
social, political, or ideological interests. He had
presented the research to the board and the board had
adopted its position as reiterating the underlying
fiduciary standard and that all aspects touching on risk
and return should be borne in mind when making investments,
but investments should only be made if they were in the
sole financial best interest of the plans.
3:24:28 PM
Representative Josephson provided a hypothetical scenario,
excluding the controversy related to the Alaska Permanent
Fund Corporation (APFC) investing $200 million in the State
of Alaska, which he believed was fairly unique. He
considered a scenario where the state wanted to invest in
[the oil company] Santos (with the Pikka project west of
Prudhoe Bay) and the company was under orders from its
Australian board to promote carbon capture, utilization,
and storage (CCUS). He believed the main point of CCUS was
to eliminate greenhouse gases. He detailed that even though
the state's interest in investing in Santos may be to make
money, Santos was interested in making money, while keeping
the climate as carbon-free as possible. He asked if Mr.
Hanna would interpret the situation to mean the state could
not invest in Santos.
Mr. Hanna clarified that he was the CIO of the DOR Treasury
Division and not APFC. He wondered if Representative
Josephson may want to direct his question to APFC.
Representative Josephson asked if Mr. Hanna's office did
not have any oversight over ARMB.
Mr. Hanna replied that his office had oversight over ARMB,
but the specific issue Representative Josephson was asking
about was APFC related.
Representative Josephson asked Mr. Hanna the same question
relative to ARMB.
Mr. Hanna answered that the hypothetical scenario touched
on a potential additional issue that he had not commented
on previously. He explained that ultimately any investment
made under existing statute and under the proposed
legislation would have to be in sole financial best
interest of funds managed by the Treasury Division. That
being said, some of the investments were with companies
that engage in some of the five activities listed in the
bill. The scenario used by Representative Josephson fell
under the first of the five listed. He did not believe it
would prohibit investment in something if a company engaged
in offsetting or disclosing greenhouse gas emissions,
provided the investment was driven solely for financial
reasons; however, the mere fact of making an investment
like that became challenging for the board and staff
because it may provide evidence in the minds of some that
the investment had been made for the purpose of social,
political, or ideological interests. He stated that
defending it and clarifying for the public that it was not
the case, could be time consuming.
3:28:48 PM
Representative McCabe responded to the question by
Representative Josephson. He stated that in competitive
labor markets and product markets corporate managers were
trying to maximize long-term shareholder value and they
should of their own accord pay attention to employee,
customer, community, and environmental issues, which is
what Santos did. He stated that the bill specified the
primary focus of ARMB and APFC should be to maximize the
money coming in that would be supplied to the Permanent
Fund to fund government or to retirees. He indicated that
they should only be focused on the pecuniary money coming
in and not the secondary or tertiary carbon sequestration.
Co-Chair Foster noted that the DOR fiscal note was OMB
component 121. He asked for a review of the APFC fiscal
note, OMB component 109.
3:30:17 PM
DEVEN MITCHELL, CEO, ALASKA PERMANENT FUND CORPORATION,
JUNEAU (via teleconference), reviewed the indeterminate
fiscal note control code zTKkm from APFC. He stated that
that the fiscal note incorporated some of the thought
process Mr. Hanna had discussed with the committee. He
relayed that through the course of discussions with the
bill sponsor and his staff, APFC determined there was a
pretty clear path to adjusting its fiscal note through
potential clarifications on the record of the bill's intent
and/or a minor amendment to the bill. He remarked that the
bill could be read in two different ways. He elaborated
that the term "board" was critical because the board may
not take an action that led to some of the activities
described in the bill being priorities of staff. He
explained that with that context, the bill was concerning
from a fiscal impact perspective because staff would
continue to invest the fund with the intent of preserving
purchasing power of the fund and maximizing expected
returns, but the APFC board would be restricted from
mandating that staff invest based on the criteria
identified in the legislation. The corporation understood
the bill sponsor's intent and looked forward to the
continuation of the conversation.
Representative Josephson asked if the bill would prohibit
APFC from considering a divestment from a firearms
manufacturer because they were a firearms manufacturer. He
provided a hypothetical scenario where the board considered
that there were 100,000 people shot per year and 40,000
killed by firearms and that it would be possible to make as
much money investing somewhere else. He wondered if it
would be consistent with the prudent investor rule.
Mr. Mitchell responded that based on his understanding of
the sponsor's intent, the board may not take an action that
would prohibit APFC from investing with a firearms
manufacturer (for example), but the level of restriction
would not change the way APFC staff would consider
investments' risks and rewards for purposes of determining
whether they fit into the APFC portfolio. From a prudent
investor perspective, APFC staff would continue to do the
same activities they did presently in identifying the best
investments for the fund. Under the legislation, staff
would do so with the knowledge that a board could not
direct staff against investing in the fashion described in
the five ways listed in the bill.
Co-Chair Foster believed Fadil Limani with DOR was trying
to call into the meeting and may want to add to the
conversation.
Representative Hannan referenced an earlier question by
Representative Josephson directed to DOR. The question had
pertained to APFC's use of $200 million towards Alaska
business investments three or four years earlier. She asked
if the bill would require a different analysis or
restriction on APFC's ability to choose to do an Alaska
specific investment. It was her understanding the board
decided to make the investment even though it was taking a
greater risk in some of the investments because they did
not have a long financial track record.
Mr. Mitchell replied that he did not think the bill would
do anything to change the board's ability to consider asset
allocation or investment policy decisions that may
incorporate deploying money in Alaska. There was a statute
specifying that to the extent risk and reward were equal
that APFC should consider or favor Alaskan deployment of
money for investment purposes. He looked at the five
categories in the legislation and highlighted eliminating,
reducing, offsetting, or disclosing greenhouse gas
emissions as an example. He stated it would become one of
the limitations of the powers of the board. He explained
that the board would not be able to mandate that APFC
invest with that outcome, rather it could have an
additional program in Alaska or in a different asset class
anywhere as long as it met the other standards in the
prudent investor rule and statutory framework of the
corporation.
Representative Hannan considered a hypothetical scenario
where the carbon sequestration industry started to flourish
in Alaska and an Alaskan company was established with that
intended purpose. She remarked that because it was a
nascent industry there was not a long investment record.
She wondered if the bill would restrict APFC from being
able to invest in the companies arising in the carbon
sequestration industry over the next 20 years.
3:38:54 PM
Mr. Mitchell responded that as long as the bill was
interpreted as he had described where the check was at the
board action level, there should not be an impact because
staff would still analyze each investment opportunity on
its own merits. He stated it would not be under the
directive of the board to deploy money specifically into
the area based on a mandate at the board level, but it
could still be deployed in the area to take advantage of
economic opportunity or location to benefit the returns of
the corporation on behalf of the fund.
Representative Coulombe asked about the phrase "for the
purpose of furthering a social, political, or ideological
interest." She thought it seemed pretty clear that the bill
was directing investments to those making for the fund. She
stated it did not seem to appear to say the funds could not
invest in companies that were doing these things. She asked
if it was the phrase APFC was concerned about. She wondered
if the phrase was clear or needed clarification.
Mr. Mitchell believed Representative Coulombe was
referencing AS 37.13.120(f)(2). He had not focused on those
criteria specifically. He referenced his interpretation
based on conversations with the bill sponsor's staff that
the restrictions were prohibited for the board to mandate,
not for staff to participate in investments that may
otherwise fall within the criteria; the bill would mean
investments would not be based on a mandate of a board, but
on the fiduciary standards and criteria that were followed
to maximize return of the fund. He stated that as long as
that was the interpretation, it became much less concerning
from his perspective. He noted that it was already the way
the fund operated to maximize return; APFC did not manage
for social, environmental, or governmental change reasons.
Representative McCabe agreed with the statement by Mr.
Mitchell. He did not want the board to be changed or
stacked to be able to mandate staff to not invest in any
oil companies because oil was bad, even though the oil
companies in the portfolio were currently the highest
performing companies. He highlighted a hospital doing a
surgery the board did not like as another hypothetical
example. He did not want divestment in a high paying
company because of something it did. He thanked the
committee for its time.
Co-Chair Foster Amendment set an amendment deadline for
Wednesday, May 1 at 5:00 p.m.
HB 174 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB260 Additional Documents-January 2024 Dept of Health 01.31.2024.pdf |
HFIN 4/26/2024 1:30:00 PM |
HB 260 |
| HB260 Sectional Analysis 02.01.2024.pdf |
HFIN 4/26/2024 1:30:00 PM |
HB 260 |
| HB260 FY25 Gov Operating Budget for DOH 02.01.2024.pdf |
HFIN 4/26/2024 1:30:00 PM |
HB 260 |
| HB260 Sponsor Statement 02.01.2024.pdf |
HFIN 4/26/2024 1:30:00 PM |
HB 260 |
| HB 368 Legal Memo 042424.pdf |
HFIN 4/26/2024 1:30:00 PM |
HB 368 |