01/27/1998 01:43 PM House FIN

HOUSE BILL NO. 308                                                             
                                                                               
"An Act making a supplemental appropriation to the                             
Alaska Permanent Fund Corporation; and providing for an                        
effective date."                                                               
                                                                               
JIM KELLY, DIRECTOR OF COMMUNICATIONS, ALASKA PERMANENT FUND                   
CORPORATION testified in support of HB 308.  He observed                       
that the Permanent Fund performed better than expected in                      
the current fiscal year.  Assets under management grew from                    
$22.1 to $23 billion dollars between June and December 1997.                   
This growth is in addition to the $747 million dollars that                    
were paid in dividends.                                                        
                                                                               
Mr. Kelly noted that the Fund's total return was flat to                       
modestly positive during the last three months. The first                      
quarter of the fiscal year the Fund earned a period return,                    
not annualized, of 5.04 percent.  He noted that U.S.                           
equities performed at 8.84 percent.  This equals an                            
annualized return of more than 35 percent. He observed that                    
manager fees are based on the value of assets under                            
management.  When the Fund goes up in value, the manager                       
fees increase.                                                                 
                                                                               
Mr. Kelly noted that the Board has put mitigating factors                      
into place that has reduced the growth of manager fees.  A                     
greater percentage of equity assets were moved into passive                    
index accounts.  Fees for passive management are just a                        
fraction of active management fees.  He added that there was                   
a temporary movement of billions of dollars of equity assets                   
into a passive transition account during the Fund's                            
restructuring. Restructuring was undertaken to accomplish                      
the Board-directed shift in asset allocation into passive                      
management, international equities and emerging markets.  He                   
explained that most of this restructuring took place in the                    
last quarter.                                                                  
                                                                               
Mr. Kelly observed that the Fund experienced a number of                       
positive outcomes from restructuring.  Significant capital                     
gains have been realized. The net income for the Permanent                     
Fund during the first half of the year was $1.5 billion.  A                    
net income of $2.1 billion dollars is projected for the                        
year.                                                                          
                                                                               
Mr. Kelly cautioned that future expectations are not as                        
high.  He did not think that the kind of returns                               
institutional and individual investors have been earning in                    
the past few years would continue.    The Fund is expecting                    
single digit returns from all asset classes for the                            
intermediate-term, with the exception of small-cap U.S.                        
stocks which the Fund's investment consultant, Callan                          
Associates, projects at an average of 10.1 percent for the                     
next five years.                                                               
                                                                               
He emphasized that expectations are also for increased                         
short-term volatility.   He stressed that the Corporation                      
requests that SB 200 be amended and reduced to $4,494                          
thousand dollars.  He estimated that this would provide                        
sufficient corporate receipts to pay managers for the                          
remainder of the year.  He asserted that money budgeted for                    
manager fees will be used solely for manager fees.  If                         
there is a surplus the unused corporate receipts will lapse.                   
                                                                               
Mr. Kelly observed that fees for the first six months total                    
$11,079,800.  The supplemental will allow an additional                        
$14,106,200 for the last two quarters of the year.  For                        
every dollar of net income the Fund earns this year, manager                   
fees will cost 1.19 cents.                                                     
                                                                               
Co-Chair Therriault noted that the fee structure was                           
negotiated down for a saving.                                                  
                                                                               
PETER BUSHRE, CHIEF FINANCIAL OFFICER, ALASKA PERMANENT FUND                   
CORPORATION explained that custody fees were negotiated down                   
by $625 thousand dollars.  The supplemental request is for                     
manager fees.  Contract negotiations have reduced a number                     
of manger fees during the current fiscal year.  Custody fees                   
and manager fees are both paid with corporate receipts.                        
                                                                               
Co-Chair Therriault asked if savings in custody fees were                      
taken into consideration in the shift of authorization.                        
                                                                               
Mr. Bushre replied that a portion of the savings was taken                     
into consideration.  A portion was also used to cover                          
deficits in other categories.                                                  
                                                                               
Mr. Kelly noted that the Alaska Permanent Fund Corporation                     
is committed to lapse funds left over from manager fees.  He                   
observed that the funds left over from custody fees have not                   
been obligated in other categories at this time.  He noted                     
that the year is only half over.                                               
                                                                               
In response to a question by Co-Chair Therriault, Mr. Bushre                   
observed that the request is for the last quarter of the                       
fiscal year.                                                                   
                                                                               
Representative Davies reiterated that any remaining funds                      
will be lapsed.  Mr. Kelly agreed that any corporate                           
receipts authorized to pay manager fees would not be shifted                   
to other categories, but would be lapsed back to the Fund.                     
                                                                               
Representative Martin maintained that the current                              
arrangement is working well.  He stressed that managers                        
should be paid for their success, but cautioned that manager                   
fees should not become a vehicle for supplemental funding.                     
                                                                               
Co-Chair Therriault clarified that the intent is to                            
scrutinize expenditures, even if they are corporate                            
receipts.  He stated that it does not make sense to lapse                      
money if it can be shifted over to reduce other costs.  He                     
asked for more information regarding the $625 thousand                         
dollars that were saved in custody fees.                                       
                                                                               
Mr. Bushre clarified that $625 thousand dollars is a                           
projected surplus in the custody fee budget for FY 99.   The                   
supplemental request is for FY 98.  He added that new                          
contracts have recently gone into effect.  There are some                      
savings as a result of the new contracts.                                      
                                                                               
HB 308 was HELD in Committee for further consideration.