03/01/1996 01:30 PM House FIN

  HOUSE BILL NO. 525                                                           
                                                                               
       "An Act designating certain  permissible investments by                 
       the  Alaska  Permanent  Fund  Corporation  in   taxable                 
       municipal or state  debt securities and  corporate debt                 
       securities; changing the allocation  limits on domestic                 
       and  nondomestic  government and  corporate securities,                 
       nondomestic  corporate  promissory notes,  domestic and                 
       nondomestic  corporate  stocks, and  taxable government                 
                                                                               
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       debt securities; and providing for an effective date."                  
                                                                               
  Representative Martin gave a  brief overview of HB 525.   He                 
  noted that the legislation is the  result of a joint meeting                 
  between the Legislative  Budget and Audit Committee  and the                 
  Revenue Subcommittee of the House Finance Committee, held on                 
  2/7/96.  The meeting examined why  the State's PERS, TRS and                 
  SBS  funds performed  better  than the  Permanent Fund.   He                 
  observed that it was revealed at the hearing that 90 percent                 
  of the  performance difference  was due  to a difference  in                 
  portfolio makeup.   He  stressed that  the legislation  will                 
  help the Permanent Fund Corporation to  make more money.  He                 
  observed that  a one  percent  increase or  decrease in  the                 
  market results in a $152.0 million dollar gain or loss.                      
                                                                               
  BRYON  MALLOT,  EXECUTIVE  DIRECTOR,  ALASKA PERMANENT  FUND                 
  CORPORATION  explained  that  the  legislation  does   three                 
  things.  House Bill 525 removes  the 5 percent allocation to                 
  foreign  fixed  income  instruments   from  the  50  percent                 
  allocation, which  includes the  statutory authorization  to                 
  invest  in  stocks.   This would  allow  the Fund  to remove                 
  foreign debt to  the fixed income  asset class.  The  equity                 
  portfolio  could  then  be  taken  to  a  50  percent  asset                 
  allocation.  The bill  will also remove a limitation  on the                 
  ability  of  the   Fund  to  invest  in   A-rated  corporate                 
  securities.   In addition, HB 525  allows the Permanent Fund                 
  Corporation to invest  in Baa-rated corporate paper.   These                 
  are investment grade  securities that are typically  held in                 
  prime  sponsor  portfolios.   He  observed that  the average                 
  asset allocation for stocks is at 50 percent.  The Permanent                 
  Fund Corporation's  limitation is  currently at  45 percent.                 
  He reiterated that  the Permanent Fund has  under performed.                 
  He   maintained  that   the   limitations  are   principally                 
  responsible for the under performance.  He observed that the                 
  Permanent  Fund  Board  of  Trustees  view  the  changes  as                 
  remedial.    He  emphasized  that  the legislation  was  not                 
  hastily drawn.  He added that  the entire array of statutory                 
  investment capability of the Fund will be reviewed.                          
                                                                               
  Representative Martin pointed out that  the only function of                 
  the Permanent Fund  Board of Trustees  is to make the  State                 
  money.                                                                       
                                                                               
  Representative Kohring  noted  that the  changes will  bring                 
  additional risk.  He asked if  the risk had been quantified.                 
  Mr. Mallot  noted that  Callan and  Associates provided  the                 
  Board  with   a  review   of  the   Alaska  Permanent   Fund                 
  Corporation,  "Asset  Allocation  Considerations"  (copy  on                 
  file).  Callan And Associates quantified the risk associated                 
  with the change on page 4 of their report.  The report noted                 
  that if the portfolio is increased  to 50 percent that there                 
  would be a  modest increase in  risk during the first  year.                 
                                                                               
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  He  added  that over  a 5  and  10 year  period there  is no                 
  increase in risk but  there is a modest increase  in return.                 
  He  observed   that  if  A-rated  and   Baa-rated  corporate                 
  securities are added to their  percentage in the performance                 
  index there would  be some short  term risk but returns  out                 
  strip the risk in 3 to 4 years.                                              
                                                                               
  In  response  to a  question  by Representative  Mulder, Mr.                 
  Mallot stated that  the Board believes that there  is upward                 
  pressure toward larger allocation to the equities market, in                 
  order to optimize  returns over  time.  He  stated that  the                 
  Board may be back to ask for an increase in this aspect.                     
                                                                               
  Representative Brown MOVED to report HB 525 out of Committee                 
  with  individual recommendations  and with  the accompanying                 
  fiscal note.  There being NO OBJECTION, it was so ordered.                   
                                                                               
  HB  525  was reported  out  of  Committee with  a  "do pass"                 
  recommendation and with a zero fiscal note by the Department                 
  of Revenue.