02/02/2012 09:00 AM Senate STATE AFFAIRS

               SB 131-DIVEST INVESTMENTS IN IRAN                                                                            
                                                                                                                                
9:18:54 AM                                                                                                                    
SENATOR WIELECHOWSKI announced  that SB 131 was  again before the                                                               
committee. Since the committee heard  the bill, the governor made                                                               
a surprise  announcement that he  is asking the  Alaska Permanent                                                               
Fund  Corporation  (APFC),  Alaska  Retirement  Management  (ARM)                                                               
Board, and Department  of Revenue (DOR) to  divest their holdings                                                               
from any  companies doing business  in Iran. He said  he applauds                                                               
the  governor's  support  for  divesting, but  it  is  not  clear                                                               
whether he  and the  agencies he asked  to divest  currently have                                                               
sufficient  legal authority  to do  so. He  wished to  learn more                                                               
about that question and about  the fiscal notes the bill received                                                               
from the  APFC. One of the  fiscal notes, for $200,000  in FY 13,                                                               
refers to APFC custody and management fees.                                                                                     
                                                                                                                                
9:19:01 AM                                                                                                                    
LAURA  ACHEE,  Director  of  Administration  and  Communications,                                                               
Alaska Permanent  Fund Corporation (APFC), Department  of Revenue                                                               
(DOR), Juneau, Alaska, introduced  herself. She offered to answer                                                               
questions about SB 131.                                                                                                         
                                                                                                                                
SENATOR PASKVAN questioned the transactional  cost related to the                                                               
bill.                                                                                                                           
                                                                                                                                
MS. ACHEE  explained that two  elements relate to the  costs; one                                                               
is the direct pass through cost  that APFC is charged for brokers                                                               
buying and  selling stocks, and the  other is the cost  of having                                                               
both internal  and external  staff manage  the portfolio.  At the                                                               
front end is  the initial cost of divesting the  stocks, and then                                                               
there are on-going costs of making  sure those stocks are not re-                                                               
bought.                                                                                                                         
                                                                                                                                
SENATOR PASKVAN  said he thought  those transactional  costs were                                                               
part of every day, usual costs.                                                                                                 
                                                                                                                                
9:22:59 AM                                                                                                                    
MS.  ACHEE  countered the  idea  that  APFC  would not  be  doing                                                               
anything different. One  of the tasks that would  be different is                                                               
the monitoring  of unacceptable stocks  on the list to  make sure                                                               
that  they are  not  purchased.  Also, the  issue  of paying  the                                                               
brokers is a  fixed cost. The management cost is  not included in                                                               
the  fiscal  note. She  addressed  the  issue of  profits  versus                                                               
losses, which  cannot be estimated.  Managers are  expecting that                                                               
there  might  be  some  offers,  but those  costs  are  also  not                                                               
included in the fiscal note.                                                                                                    
                                                                                                                                
SENATOR  PASKVAN  said  he  thought  the  investments  should  be                                                               
divested no matter what the cost.                                                                                               
                                                                                                                                
SENATOR KOOKESH  wondered if the  fiscal note changed due  to the                                                               
governor's interest.                                                                                                            
                                                                                                                                
MS. ACHEE answered said no.                                                                                                     
                                                                                                                                
SENATOR  KOOKESH asked  if  the  costs will  be  shared with  the                                                               
governor.                                                                                                                       
                                                                                                                                
MS. ACHEE said she has not discussed that situation.                                                                            
                                                                                                                                
SENATOR  KOOKESH wondered  how  fiscal notes  are determined  now                                                               
that the governor has weighed in.                                                                                               
                                                                                                                                
9:26:43 AM                                                                                                                    
SENATOR  WIELECHOWSKI  said  that  Senator Kookesh  made  a  good                                                               
point.  He wondered  where the  $200,000 would  come from  if the                                                               
bill does not pass, now that the governor has stated support.                                                                   
                                                                                                                                
MS.  ACHEE said  that discussion  would  have to  happen and  the                                                               
money  would have  to  be  found. She  thought  the direction  of                                                               
inquiry was premature.                                                                                                          
                                                                                                                                
SENATOR  GIESSEL  asked  if  there  were  other  stocks  APFC  is                                                               
prohibited from investing in.                                                                                                   
                                                                                                                                
MS. ACHEE said there were none.                                                                                                 
                                                                                                                                
SENATOR MEYER pointed  out that there are  some restrictions. For                                                               
example, high risk trading is not done.                                                                                         
                                                                                                                                
MS. ACHEE  did not  know. A  number of  years ago  the investment                                                               
authority was turned over to the APFC.                                                                                          
                                                                                                                                
SENATOR WIELECHOWSKI  said he  had been  told that  the Permanent                                                               
Fund was divested from Sudanese investments.                                                                                    
                                                                                                                                
MS. ACHEE said that was incorrect.                                                                                              
                                                                                                                                
SENATOR  WIELECHOWSKI  said  he understood  that  former-Governor                                                               
Palin requested that.                                                                                                           
                                                                                                                                
MS. ACHEE  did not  recall that. She  assured the  committee that                                                               
there has never been any divestment for any reason.                                                                             
                                                                                                                                
9:30:03 AM                                                                                                                    
DAN  WAYNE,   Legislative  Legal  Counsel,   Legislative  Affairs                                                               
Agency, introduced himself.                                                                                                     
                                                                                                                                
SENATOR  WIELECHOWSKI related  his conversation  with Legislative                                                               
Legal questioning  the governor's authority to  request or demand                                                               
that the Permanent Fund divest from investments.                                                                                
                                                                                                                                
MR.  WAYNE explained  that the  constitution  gives the  governor                                                               
power under Article  3, Section 16, to force  compliance with any                                                               
constitutional  or  legislative  mandate,   which  may  make  the                                                               
governor  think he  can  take  action to  divest  funds from  the                                                               
Permanent  Fund.  Mr. Wayne  did  not  think the  Permanent  Fund                                                               
Corporation  could act  on the  request because  the constitution                                                               
says  in  Article 9,  Section  15,  that  "the principle  of  the                                                               
Permanent  Fund shall  be used  only for  those income  producing                                                               
investments  specifically  designated  by  law  as  eligible  for                                                               
Permanent Fund investment."                                                                                                     
                                                                                                                                
The legislature has designated by  law how that money is supposed                                                               
to  be invested  in  AS 37.13.120(a)  "when adopting  regulations                                                               
authorized  by  this  section, or  managing  and  investing  fund                                                               
assets,  the  prudent  investor  rule shall  be  applied  by  the                                                               
corporation. The  prudent investor rule is  applied to investment                                                               
activity of the  fund, means that the  corporation shall exercise                                                               
the judgment  and care under  the circumstances  then prevailing,                                                               
that an institutional investor  of ordinary prudence, discretion,                                                               
and  intelligence  exercises  in the  designation  management  of                                                               
large investments entrusted to it,  not in regard to speculation,                                                               
but in regard to the  permanent disposition of funds, considering                                                               
preservation of the purchasing power  of the fund over time while                                                               
maximizing  the  expected  total  return  from  both  income  and                                                               
appreciation of capital."                                                                                                       
                                                                                                                                
He concluded  that the legislature  has said  this is the  law to                                                               
follow when investing  money. SB 131 adds a subsection  to AS 37.                                                               
13.120 on  page 5,  Section 3,  "the board  shall comply  with AS                                                               
37.10.072," which  is the new  section that  requires divestment.                                                               
He  opined that  without  legislative direction,  the APFC  can't                                                               
divest  from  Iran  investments   unless  it  would  satisfy  the                                                               
requirements of the prudent investment rule.                                                                                    
                                                                                                                                
SENATOR  WIELECHOWSKI asked  Ms. Achee  for clarification  on the                                                               
fiscal note.  He wondered how  many fund managers  were contacted                                                               
regarding the need for a fiscal note.                                                                                           
                                                                                                                                
MS. ACHEE replied there were about 20-25 fund managers.                                                                         
                                                                                                                                
SENATOR WIELECHOWSKI inquired  how many thought there  would be a                                                               
cost.                                                                                                                           
                                                                                                                                
MS. ACHEE said  three fund managers decided SB  131 would require                                                               
a cost. One  manager gave an estimate for manager  fees, but they                                                               
were not included  in fiscal note, as well  as transaction costs.                                                               
She  emphasized that  the amount  of $200,000  is not  a definite                                                               
number, but a rough estimate.                                                                                                   
                                                                                                                                
SENATOR WIELECHOWSKI concluded that the  fiscal note was based on                                                               
the recommendation  of one  fund manager.  He summarized  page 2,                                                               
lines  5-11, "if  an  investment  in the  fund  is  managed as  a                                                               
commingled investment  or other  business structure in  which the                                                               
fund is not the sole owner, the  law does not apply." He asked if                                                               
it was a commingled investment.                                                                                                 
                                                                                                                                
9:38:06 AM                                                                                                                    
MS.  ACHEE responded  that  it  was not  a  commingled fund.  All                                                               
managers that  did not  suggest that  there would  be a  cost are                                                               
separate account  active managers that  do not fall  under either                                                               
exclusion in the bill.                                                                                                          
                                                                                                                                
SENATOR  WIELECHOWSKI  understood  that   the  one  fund  manager                                                               
manages about $1.3 billion.                                                                                                     
                                                                                                                                
MS. ACHEE  clarified that  the manager  manages $1.4  billion, $1                                                               
billion  of  which  is international  large  capitalized  company                                                               
stock.                                                                                                                          
                                                                                                                                
SENATOR  WIELECHOWSKI stated  that  the state  pays that  manager                                                               
about $350,000 per quarter.                                                                                                     
                                                                                                                                
MS. ACHEE said manager fees vary. She did not know the number.                                                                  
                                                                                                                                
SENATOR  WIELECHOWSKI  asked if  Ms.  Achee  or her  lawyers  had                                                               
looked at subsection (b).                                                                                                       
                                                                                                                                
MS. ACHEE said she has and it does not apply.                                                                                   
                                                                                                                                
SENATOR WIELECHOWSKI thought it was a commingled investment.                                                                    
                                                                                                                                
9:40:46 AM                                                                                                                    
MS. ACHEE reviewed definitions: an  active separate account is an                                                               
account where the  manager makes decisions based on  what is best                                                               
for  the   individual  portfolio;  passive  managers   align  the                                                               
portfolio  directly  to  an  index  and  charge  a  significantly                                                               
smaller   fee;   commingled   funds  are   blended   with   other                                                               
institutional investors like a mutual fund.                                                                                     
                                                                                                                                
SENATOR PASKVAN requested  a definition of basis  points. He said                                                               
he estimated  the transactional costs  to be 25 basis  points. He                                                               
wondered if they could be negotiated lower.                                                                                     
                                                                                                                                
9:42:51 AM                                                                                                                    
MS. ACHEE defined  a basis point as a fraction  of a percent. For                                                               
example, $200,000 is two basis points of a $1 billion portfolio.                                                                
                                                                                                                                
SENATOR  PASKVAN asked  if the  value is  99.8 percent  after two                                                               
basis points are removed.                                                                                                       
                                                                                                                                
MS.  ACHEE said  that APFC  does not  approach it  that way.  She                                                               
asked for further clarification of Senator Paskvan's question.                                                                  
                                                                                                                                
SENATOR  PASKVAN assumed  a $100,000  investment with  a 2  basis                                                               
point transactional cost. He asked what amount remained.                                                                        
                                                                                                                                
MS. ACHEE said it would be the  remainder if the stock were to be                                                               
sold for full value.                                                                                                            
                                                                                                                                
SENATOR   PASKVAN  restated   the  question   based  on   a  $100                                                               
investment. He asked if $99.80 would remain.                                                                                    
                                                                                                                                
MS. ACHEE agreed.                                                                                                               
                                                                                                                                
SENATOR PASKVAN explained the rational for his analysis.                                                                        
                                                                                                                                
9:45:03 AM                                                                                                                    
SENATOR WIELECHOWSKI asked if there  is a section in the contract                                                               
with the fund  manager that discusses how much it  would cost for                                                               
a legislative change.                                                                                                           
                                                                                                                                
MS. ACHEE did not know.                                                                                                         
                                                                                                                                
SENATOR  WIELECHOWSKI  wondered  if the  governor  could  legally                                                               
direct investments.                                                                                                             
                                                                                                                                
MS. ACHEE deferred to Legislative Legal to answer.                                                                              
                                                                                                                                
SENATOR KOOKESH asked Ms. Achee to follow up on that question.                                                                  
                                                                                                                                
MS. ACHEE did not feel comfortable answering the question.                                                                      
                                                                                                                                
SENATOR PASKVAN also wanted feedback on the question.                                                                           
                                                                                                                                
SENATOR KOOKESH  said it was new  ground and he wished  to follow                                                               
the process.                                                                                                                    
                                                                                                                                
SENATOR WIELECHOWSKI thanked Ms. Achee  for her work. He left the                                                               
decision on the bill to the committee.                                                                                          
                                                                                                                                
9:48:01 AM                                                                                                                    
SENATOR PASKVAN asked when the APFC might respond.                                                                              
                                                                                                                                
SENATOR  WIELECHOWSKI   requested  more  information   about  the                                                               
governor's letter. He related that  Mr. Wayne maintained that the                                                               
governor's letter did  not give the APFC authority  to divest. He                                                               
also wondered  if the governor  could give authority for  APFC to                                                               
divest.                                                                                                                         
                                                                                                                                
MS.  ACHEE  said she  would  try  to get  an  answer  as soon  as                                                               
possible, but it was up to the Department of Law to respond.                                                                    
                                                                                                                                
SENATOR  WIELECHOWSKI  said the  committee  would  hold the  bill                                                               
until further notice.                                                                                                           
                                                                                                                                
SENATOR  MEYER  recalled  that  the  previous  governor  verbally                                                               
requested divestment from  Sudan. He also wanted to  find out the                                                               
governor's legal  role. He agreed  with the bill's intent  from a                                                               
policy standpoint. He suggested moving the bill.                                                                                
                                                                                                                                
SENATOR KOOKESH also agreed to move the bill.                                                                                   
                                                                                                                                
9:50:22 AM                                                                                                                    
SENATOR  PASKVAN  moved  to  report   SB  131,  version  M,  from                                                               
committee  with  individual   recommendations  and  the  attached                                                               
fiscal notes.                                                                                                                   
                                                                                                                                
SENATOR  WIELECHOWSKI added  that there  are two  attached fiscal                                                               
notes; one  from the  Department of Revenue  - Treasury,  and one                                                               
from  the Department  of  Revenue -  APFC  Operations. A  revised                                                               
fiscal note  concerning APFC custody  and management fees  may be                                                               
forthcoming.                                                                                                                    
                                                                                                                                
SENATOR GIESSEL said in spite  of the governor's support, she was                                                               
unsure of  the bill. She  stated objections to  political aspects                                                               
of the bill,  even though she did not dispute  Iran's action. She                                                               
noted that Norway makes objective decisions about investments.                                                                  
                                                                                                                                
SENATOR WIELECHOWSKI agreed that  that's the argument against the                                                               
bill. He said  each individual case should be looked  at based on                                                               
its  own merits.  He  said Norway  has a  board  that does  allow                                                               
social investing. For example, Norway  does not invest in tobacco                                                               
companies.  He  thought this  bill  was  a unique  situation.  He                                                               
argued in favor of the bill.                                                                                                    
                                                                                                                                
9:53:36 AM                                                                                                                    
SENATOR  GIESSEL commented  on an  investment Norway  declined to                                                               
make.                                                                                                                           
                                                                                                                                
SENATOR  WIELECHOWSKI announced  that without  objection, SB  131                                                               
moved from the Senate State Affairs Standing Committee.