Legislature(2005 - 2006)HOUSE FINANCE 519
04/14/2005 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB71 | |
| HB211 | |
| HB103 | |
| HB215 | |
| HB169 | |
| HB27 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 211 | TELECONFERENCED | |
| + | HB 103 | TELECONFERENCED | |
| HB 215 | |||
| += | HB 33 | TELECONFERENCED | |
| = | HB 169 | ||
| = | HB 71 | ||
| = | HB 27 | ||
HOUSE BILL NO. 215
An Act relating to the investment responsibilities of
the Alaska Permanent Fund Corporation; relating to
regulations proposed and adopted by the Board of
Trustees of the Alaska Permanent Fund Corporation and
providing procedures for the adoption of regulations by
the board; and providing for an effective date.
REPRESENTATIVE NORMAN ROKEBERG, SPONSOR, noted that the bill
was brought forward by the Alaska Permanent Fund
Corporation. He stated that the bill would change the
current policy of statutorily limiting the allocation of the
agency's portfolio.
Representative Rokeberg referenced Amendment #1, #24-
LS0698\A.1, Cook, 4/1/405. (Copy on File). He requested
consideration of the amendment, which would provide that the
Board of Trustees could go through the rule adoption prior
to the effective date of the bill. He reiterated his
support of Amendment #1. The Board needs authority in order
to be able to start drafting regulations and would happen
with passage of the amendment.
2:47:27 PM
Vice-Chair Stoltze inquired if the amendment would delete
the effective date. Reprehensive Rokeberg said it would
change the effective date in order to allow for the rule
making authority to move forward.
MICHAEL BURNS, CHIEF EXECUTIVE OFFICER, ALASKA PERMANENT
FUND CORPORATION, directed his comments to the legislation.
Initially, the fund was limited to a bond portfolio.
Overtime, the Legislature loosened those restrictions,
creating a statutory list of permissible investments. He
noted that that 45 of the 50 states have eliminated the
statutory lists and now use the prudent investor rule.
2:49:25 PM
Mr. Burns provided a handout "Reducing Risk, Increasing
Return", and referenced Page 4. (Copy on File). The chart
indicates potential risk and return for various portfolios
under the Fund's current investment restrictions and under
the prudent investor rule. The underlying asset allocations
for the main points of the chart are shown. The chart
demonstrates that under the prudent investor rule, the Fund
could potentially earn the same return as the current
portfolio with 3% less risk.
2:52:03 PM
LAURA ACHEE, ALASKA PERMANENT FUND CORPORATION, offered to
answer questions of the Committee.
Representative Rokeberg requested that Mr. Burns explain the
impacts on the fixed income portfolio. Mr. Burns advised
that in a raising rate environment, the portfolio is very
vulnerable to price declines.
Representative Rokeberg added that as interest rates go up,
the principle balance is actually loosing money. He asked
how the bill allows managing that risk. Mr. Burns responded
that addressing the value of the principle, there are a
number of "tools" the Corporation might use:
· Absolute return strategy;
· Various hedging; and
· Derivatives.
Mr. Burns mentioned "hard" assets. There are a variety of
strategies and combinations of assets that can protect the
State against rising rates.
2:54:54 PM
Representative Holm referenced the prudent investor rule and
asked how it relates to the current discussion. Mr. Burns
responded that the prudent investor rule was established in
1994. The requirements are "not to be right", instead
encouraging a process involving questions and standards.
Representative Holm asked what happens if there are no
standards. Mr. Burns replied that it is the process in
place, managing oneself and measuring the risks. The
prudent investor rule is about the diligence placed on the
controls and how the fund operates. He acknowledged that
was vague.
2:57:15 PM
Representative Holm commented that investing is a form of
art. He asked how the Board determines if the standards of
the prudent investor rule are being met. Mr. Burns stated
that the Board has to measure how things are presented and
follow-up on those concerns. The prudent investor rule is a
management process tool and a way of doing business. He
mentioned the legal components.
3:01:11 PM
In response to Representative Holm, Mr. Burns pointed out
the primary decision the Board makes is determining what the
asset allocations are going to be. From there, it is
determined who will be responsible for implementing it. He
agreed it is a "term of art".
Representative Holm acknowledged he was nervous given
concerns managing the Public Employment Retirement System
(PERS) and the Teachers Retirement System (TRS).
3:02:33 PM
Co-Chair Meyer asked if the investment strategy was
conservative. Mr. Burns responded it was a very
conservative managed fund, consisting of a balance of asset
categories and styles for growth and equity in the fund. He
emphasized that it is diversified.
Co-Chair Meyer asked if the investment strategies would stay
the same through passage of the legislation. Mr. Burns
explained that some of the asset categories would replace
some of the fixed income categories, which would remove the
price swing vulnerability. The private equity deals are
hopeful and that the Board would like to expand the private
equity type investments.
3:06:24 PM
Representative Croft inquired the expected return in March
2004. Mr. Burns pointed out that the historical status is a
7.83% return of the picked asset mix. The standard
deviation is 10.29%. Representative Croft understood that
is an asset mix used to achieve those goals.
Representative Croft referenced Page 5 of the handout,
inquiring about the regulatory interest. Mr. Burns noted
those are some category potentials.
Representative Croft asked that with a little more risk, was
it possible that the Fund could receive higher returns. Mr.
Burns replied it is such a small draw on the fund, not like
a pension fund and the draw tends to be around 5%. The
Board has the patience to stay in a fund for a longer term.
Representative Croft inquired about the relative individual
risk. Mr. Burns responded that the Permanent Fund functions
as an endowment.
3:10:22 PM
Mr. Burns spoke to the risk factors and return levels.
Representative Croft asked if that was addressed through
switching the large cap equities. Mr. Burns said whatever
the combination, the intent is to accumulate a portfolio of
assets, where performance is not connected to each another.
He pointed out that some private equities do not always have
a correlation to each another. It is of no concern how each
asset performs but instead, how the portfolio performs as a
whole.
Representative Rokeberg added that the asset mix can lower
the risk.
3:13:30 PM
Representative Weyhrauch noted a new section of the bill
addressing regulation adoption. Mr. Burns discussed that
the constitutional amendment, which created the Permanent
Fund, describes assets prescribed by law and that the
Legislature should grant rule-making authority to the Board
of Trustees.
Vice-Chair Stoltze inquired if that could alter the basket
requirement amount. Mr. Burns responded that at present,
the basket clause is at 10%.
Vice-Chair Stoltze inquired if there was a statutory amount
indicating a specific dollar figure. Mr. Burns reiterated
it was 10%. The overriding principle will always be the
prudent investment rule and one tenant is diversification.
3:16:35 PM
Representative Croft read from AS 37.13.121: "Mortgages are
capped at 15%, real estate investment capped at 15%, CD's
and other investments capped at 20%; domestic and non-
domestic capped at 55%."
Vice-Chair Stoltze asked if the legislation provides for
investing in the gas line proposal. Mr. Burns said that the
Permanent Fund would need specific statutory authority to
invest in something like that. Vice Chair Stoltze asked if
the language was broad enough to allow for it. Mr. Burns
thought it might be depending on the proposed amount.
Representative Weyhrauch pointed out that last year's
legislation had an amendment that allowed the Permanent Fund
to specifically invest in the gas pipeline. The Senate
Finance Committee stripped that clause out.
3:19:42 PM
Co-Chair Chenault asked if the legislation would provide
that hedge funds be used and the 1% Permanent Fund
designation. (Testimony inaudible).
Mr. Burns replied that a hedge fund strategy could very well
be a part of the legislation. Hedge funds can provide a
broad handle. There is no percent at this time on in-State
investments. The Board was insulated from political
pressure last session by stripping out the clause that
members could be removed for "cause". The Board is
independent and members have a four-year staggered term. He
pointed out that the Board would like to do more in-State
investing.
3:22:06 PM
Representative Hawker added comments toward diversification
as mandated by the prudent investor rule and prohibiting the
concentration of risk in small environments. Mr. Burns
acknowledged it has been a challenge attempting to invest in
Alaska because there are only a few projects in the State
large enough.
3:23:14 PM
Representative Rokeberg mentioned investment in the gas
pipeline. He thought that a pipeline investment would
provide a more fixed income portfolio. He added it could be
limited by that investment strategy. Mr. Burns mentioned
the categories of the prudent investor rule:
· Diversification,
· Concentration, and
· Determining if it is of an investment grade.
Representative Rokeberg maintained that the only possible
way to use any funding above the criteria would be through
passage of the proposed legislation. Mr. Burns thought
that, however, the process could be addressed such as
legislative intent and it would be appropriate.
3:26:02 PM
Representative Weyhrauch interjected that if the investment
meets the prudent investment rule, then the State should
invest in it.
Representative Croft pointed out that he could not find a
provision within statute that would prevent investing in the
pipeline. He thought investing would be limited as it is
currently within the 5% market basket. He thought it could
be difficult to justify under the prudent investor rule, but
saw no restrictions in what could be done through
regulation.
Mr. Burns informed members that the Trustees take their
fiduciary role seriously. He believed that the limitations
of the prudent investor rule could limit pipeline
investment.
Representative Kelly stated the proposed legislation is
important and understood it would take the decisions from
the Legislature and place it with the qualified Board.
3:29:42 PM
Representative Hawker MOVED to ADOPT Amendment #1, #24-
LS0698\A.1, Cook, 4/14/05. (Copy on File). Vice-Chair
Stoltze OBJECTED.
Representative Rokeberg explained that Amendment #1 was a
housekeeping measure, authorizing the Board to proceed with
the regulation rule making it prior to the effective date.
Vice-Chair Stoltze WITHDREW his OBJECTION. There being NO
further OBJECTION, it was adopted.
Representative Weyhrauch MOVED to ADOPT Amendment #2, Page
3, Line 8, delete "mailing" and insert "providing". Vice-
Chair Stoltze OBJECTED.
Representative Weyhrauch explained that current language
does not include other options such as emailing and faxing.
The amended language will be broader. Representative
Rokeberg supported the change. Vice-Chair Stoltze WITHDREW
his OBJECTION, Amendment #2 was adopted.
3:32:17 PM
Representative Foster MOVED to REPORT CS HB 215 (FIN) out of
Committee with individual recommendations and with the
accompanying fiscal note. There being NO OBJECTION, it was
so ordered.
CS HB 215 (FIN) was reported out of Committee with a "no
recommendation" and with zero note #1 by the Alaska
Permanent Fund Commission.
3:32:45 PM
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