Legislature(2003 - 2004)
05/06/2004 09:00 AM House FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 466
An Act relating to investments of Alaska permanent fund
assets; and providing for an effective date.
Representative Foster MOVED to ADOPT work draft #23-
LS1699\H, Cook, Craver, 5/5/04, as the version of the bill
before the Committee. There being NO OBJECTION, it was
adopted.
ROBERT D. STORER, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, DEPARTMENT OF REVENUE, commented that the
request would increase investment flexibility. He noted
that most funds must follow the prudent investor expert
rule, however, that the Permanent Fund contains an extra
obligation, a statutory list outlining what can be invested
in. Four years ago, the Legislature gave the Permanent Fund
Corporation the ability to invest up to 5% in types of
investments not mentioned in the statutory list, referred to
as the "basket clause". It provides a 5% limitation. After
studying it for four years, regarding the various ways to
use it, a strategy was implemented providing a modest amount
in private equities and a conservative amount in a pilot
program with an absolute return. Presently, there is a
problem. If the strategy works and grows, the Permanent
Fund will be forced to liquidate assets because of the
statutory limitations. The proposed legislation requests
two items:
· On Line 14 provides "housecleaning items" from the
existing intent of the basket clause; and
· On Page 2, Line 3, instead of 5%, increasing it to
10%.
Mr. Storer pointed out that the second change resulted from
an amendment passed on the Senate side. The 10% would
provide a few years of latitude and then "down the road",
the Permanent Fund could come back and ask for increased
flexibility. He indicated that Version H would be
acceptable to the Permanent Fund.
Representative Joule inquired if the 15% request had been
based on projections. Mr. Storer advised that over the
interim, there would be no change in the projection. It
will take a number of years to implement the strategy. The
15% was intended to essentially give future administrators,
greater flexibility in a dynamic industry while addressing a
changing market as it occurs. The State would continue to
target a 5% real rate of return. He hoped that by
increasing the latitude, it would allow investors a better
chance of achieving the 5%, while allowing latitude to
reduce the volatility of the expected returns.
Vice Chair Meyer asked why the Senate choose 10% over the
requested 15%. Mr. Storer understood that the Senate was
concerned about taking on too much risk. The Permanent Fund
Corporation does not agree that would be the case. The
history of the Permanent Fund has been very conservative in
applications. During the technology bubble, the Fund did
not own any of those types of stocks. He added that it took
four years to implement the basket clause. The Fund Board
is cautious and deliberative when making investment
decisions.
Vice Chair Meyer asked the current breakdown of asset
allocations in the Fund. Mr. Storer noted that the asset
allocation target was:
· 56% equities and of that 18% is in non-dollar
international equities
· The U.S. bond portfolio is 28%
· A 10% target in real estate
· The non-dollar bond portfolio is at about 4%
· A 2% private equity currently being implemented
· A 1% target for absolute strategy or hedge fund
Vice Chair Meyer asked clarification if the hedge funds
included futures or commodities. Mr. Storer replied that
they do not include commodities but have used futures from
time to time. There must be a modest leverage.
Representative Fate asked the return for the last five
years. Mr. Storer pointed out that the investment board
recommends a rolling 10-year average, which never has gone
below a 5% rate of return average. One year, there was a 3%
real and another with a 2% real; currently, the returns are
up over the 5%. In a down turned market, there were two
years with a less than a 5% return.
Representative Fate inquired if protections would be made if
the 10% number was given by the Legislature. Mr. Storer
explained that would provide the latitude needed to increase
flexibility in an amount of perhaps one quarter to one half
percent. He noted that is a lot of money when dealing with
a $28 billion dollar fund. The key in achieving the goal is
allowing current investments to rise, taking advantage of
the full market cycle.
Representative Croft noted with a 5% internal target, it is
appropriate to have a 10% ceiling, so that successful
investments will not have to be sold. Mr. Storer agreed.
Representative Croft inquired the target. Mr. Storer
replied that with a 5% limitation, the fund is using 3% as a
cushion, no matter what.
Representative Foster MOVED to report CS HB 466 (FIN) out of
Committee with individual recommendations and with the
accompanying fiscal note. There being NO OBJECTION, it was
so ordered.
CS HB 466 (FIN) was reported out of Committee with a "do
pass" recommendation and with zero note #1 by the Department
of Revenue.
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