03/25/2009 08:00 AM Senate EDUCATION

        SB 134-PRUDENT MANAGEMENT OF INSTITUTIONAL FUNDS                                                                    
                                                                                                                                
VICE CHAIR BETTYE DAVIS announced consideration of SB 134.                                                                      
                                                                                                                                
SENATOR  PASKVAN,  sponsor  of  SB 134,  said  the  state  should                                                               
consider adopting  this bill because  it will make sure  that the                                                               
best investment  practices will govern  the actual  investment of                                                               
institutional funds;  it will  withdraw obsolete  rules governing                                                               
prudent total  return expenditure  and provide  a modern  rule of                                                               
prudence  consistent   with  the  rules  that   will  govern  the                                                               
investment. It  will eliminate the  differences in  investment in                                                               
expenditure  rules that  apply to  different types  of non-profit                                                               
organizations - in other words,  the same rules will govern under                                                               
all of the Uniform Prudent  Management of Institutional Funds Act                                                               
(UMPIFA).  It will  encourage the  growth of  institutional funds                                                               
while eliminating  investment risk  that threaten  principal, and                                                               
will assure that  there are adequate assets  in any institutional                                                               
fund to  meet program  needs, and  it will be  part of  a uniform                                                               
national system.                                                                                                                
                                                                                                                                
SENATOR  PASKVAN  said  he  has   letters  of  support  from  the                                                               
University  of  Alaska Foundation,  The  Foraker  Group, and  the                                                               
Rasmussen Foundation.  These organizations believe this  will get                                                               
                                   st                                                                                           
Alaska where it should be in the 21 Century.                                                                                    
                                                                                                                                
8:06:10 AM                                                                                                                    
SENATOR HUGGINS joined the meeting.                                                                                             
                                                                                                                                
DANA OWEN,  staff to  the Education  committee, advised  that the                                                               
committee  substitute (CS)  to SB  134, version  \S, incorporates                                                               
two  changes  on  page  8, line  21  where  "endowment"  replaces                                                               
"institutional"   and  on   line  24   where  "institution"   and                                                               
"institutional fund" replace "endowment".  This is in response to                                                               
suggestions by the University and  the University Foundation that                                                               
noted  some   of  their  funds   don't  qualify   technically  as                                                               
"endowment funds,"  and they wanted  to make sure that  they came                                                               
under the provisions of the act.                                                                                                
                                                                                                                                
SENATOR  HUGGINS  moved to  adopt  CSSB  134, labeled  26-LS0487,                                                               
Version S, as the working document of the committee.                                                                            
                                                                                                                                
VICE CHAIR DAVIS objected for discussion.                                                                                       
                                                                                                                                
SENATOR STEVENS  asked what difference  those term  changes made.                                                               
What University funds  might they be able to  invest because it's                                                               
called "institutional funds" not "endowment funds."                                                                             
                                                                                                                                
SENATOR PASKVAN replied that it  was to make sure its application                                                               
was as  broad as possible.  An "endowment fund"  on page 6  has a                                                               
more narrow  definition than "institutional fund."  This bill was                                                               
sent back to the national  committee by Alaska's member and their                                                               
recommendation    was   to    substitute   "institutional"    for                                                               
"endowment".                                                                                                                    
                                                                                                                                
8:08:58 AM                                                                                                                    
JIM LYNCH,  University of Alaska Foundation,  Anchorage, AK, said                                                               
that Senator Paskvan was correct.  They are trying to assure that                                                               
what Alaska  has is consistent  with other states'  uniform laws.                                                               
It is designed for prudent  investment of all types of charitable                                                               
organizations that are non-profits.                                                                                             
                                                                                                                                
8:09:51 AM                                                                                                                    
SENATOR OLSON  asked how  long the commission  has been  in place                                                               
and what its success rate is with regard to managing funds.                                                                     
                                                                                                                                
SENATOR  PASKVAN   replied  that  this  is   designed  to  define                                                               
"prudence" so  that funds don't  dissipate over time, but  at the                                                               
same time recognizing that in  difficult economic times, prudence                                                               
may include disbursing from the principal.                                                                                      
                                                                                                                                
8:11:39 AM                                                                                                                    
SENATOR OLSON  asked what  has happened to  the funds  managed by                                                               
this group  during the  2001 downturn and  now during  the global                                                               
recession.                                                                                                                      
                                                                                                                                
SENATOR PASKVAN  replied that many institutional  funds are below                                                               
their  original contributed  capital amount.  Mr. Lynch  from the                                                               
University Foundation  in his testimony last  week indicated that                                                               
of the  University's 500-plus funds, 250  were technically "under                                                               
water." Many  charitable organizations  are struggling  right now                                                               
because  of the  economic  downturn, but  their charitable  needs                                                               
still continue. So, the question  is how does a volunteer sitting                                                               
on that board  in a prudent manner deal with  the funds they have                                                               
available to meet  those charitable needs. That is  the intent of                                                               
this bill.                                                                                                                      
                                                                                                                                
SENATOR OLSON  said he's having  a hard time  equating charitable                                                               
funds with institutional funds, which  are used more to make sure                                                               
that "some  kind of university  or some learning  institution can                                                               
continue to function in spite of what's happened."                                                                              
                                                                                                                                
SENATOR  PASKVAN  responded   that  specifically  the  University                                                               
distributes scholarships,  and students  continue to  be educated                                                               
even  in  depressed  economic  times. In  fact,  the  demand  for                                                               
education increases in a down economy.                                                                                          
                                                                                                                                
8:14:08 AM                                                                                                                    
JIM LYNCH, University  of Alaska Foundation, said  the purpose of                                                               
an endowment  is to support a  program in perpetuity. How  do you                                                               
do that? It requires income  as well as consistency. Students who                                                               
are getting  scholarships are  there for four  and five  years or                                                               
more. The  issue is  how to sustain  their scholarships  over the                                                               
long  term prudently.  You can't  have  rigid rules  to do  that.                                                               
While  the  University   is  one  of  the   primary  managers  of                                                               
endowments, a  lot of  other organizations  have these  funds for                                                               
different purposes.                                                                                                             
                                                                                                                                
He explained that  most of these funds come  to the organizations                                                               
through  contributions.  Courts  have  held  with  following  the                                                               
donor's intent rather than rigid  rules. The law identified a lot                                                               
of areas as to what prudence is  and what has to be considered in                                                               
making decisions. This guidance  is includes "best practices" for                                                               
non-profit boards  many of which  are run by  volunteers. Thirty-                                                               
seven  states have  adopted or  introduced  bills regarding  this                                                               
rule.                                                                                                                           
                                                                                                                                
8:17:28 AM                                                                                                                    
SENATOR  OLSON asked  if scholarships  will be  awarded from  the                                                               
corpus, not just the earnings.                                                                                                  
                                                                                                                                
MR. LYNCH replied  that this concept really came  into play about                                                               
40 years ago. It moved  from principal and income, which doesn't'                                                               
fit  the  endowment concept  very  well  in today's  environment.                                                               
"It's purpose and mission that drive this law."                                                                                 
                                                                                                                                
SENATOR OLSON asked SENATOR PASKVAN  to interpret whether that is                                                               
a yes or no.                                                                                                                    
                                                                                                                                
MR. LYNCH said  the answer is a yes, but  the concept of "corpus"                                                               
no longer exists.                                                                                                               
                                                                                                                                
SENATOR PASKVAN expanded upon his  answer. Specifically, this law                                                               
is   default  legislation   in  the   sense  that   a  charitable                                                               
contribution   has   been   made  that   doesn't   have   express                                                               
restrictions on it. Many contributions  are made to funds so that                                                               
food can be  distributed to the needy. The question  is can those                                                               
monies be used to fulfill  the purpose of the organization, which                                                               
is to feed  the hungry and give scholarships to  people when they                                                               
need it whether it's good financial  times or bad. This says that                                                               
prudent management  allows for those fiduciaries  who are running                                                               
a  fund  to  make  the   distributions  that  are  necessary  and                                                               
appropriate  - unless  there are  express restrictions  regarding                                                               
distribution of  the capital, like  with the Permanent Fund  - in                                                               
both good and bad financial times.                                                                                              
                                                                                                                                
8:21:16 AM                                                                                                                    
SENATOR STEVENS  asked if  this has any  impact on  the Permanent                                                               
Fund.                                                                                                                           
                                                                                                                                
SENATOR PASKVAN replied that it does not.                                                                                       
                                                                                                                                
8:22:04 AM                                                                                                                    
VICE  CHAIR DAVIS  withdrew her  objection and  version S  CS was                                                               
adopted.                                                                                                                        
                                                                                                                                
SENATOR STEVENS  moved to  report CSSB  134 (EDC)  from committee                                                               
with  individual  recommendations  and attached  fiscal  note(s).                                                               
There being no objection, the motion carried.