Legislature(2021 - 2022)SENATE FINANCE 532
04/27/2022 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB243 | |
| HB28 | |
| HB79 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 28 | TELECONFERENCED | |
| + | HB 79 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | SB 243 | TELECONFERENCED | |
SENATE BILL NO. 243
"An Act relating to power cost equalization; and
providing for an effective date."
9:08:42 AM
Co-Chair Bishop relayed that it was the second hearing for
SB 243, and the committee would consider a Committee
Substitute (CS), cover fiscal notes, and look to the will
of the committee.
Senator Hoffman MOVED to ADOPT proposed committee
substitute for SB 243, Work Draft 32-LS1573\I (Klein,
4/26/22).
9:09:21 AM
AT EASE
9:09:58 AM
RECONVENED
Co-Chair Bishop OBJECTED for discussion.
9:10:11 AM
ERIN SHINE, STAFF, SENATOR CLICK BISHOP, discussed an
Explanation of Changes document (copy on file):
Version 32-LS1573\B to 32- LS1573\I
New Section 1
Page 1, line 4 Page 2, line 6
Adds a new section to the bill amending AS
42.45.080(a)(2) to remove the four percent nominal
target return when investing of the Power Cost
Equalization Endowment Fund and replaces the investing
guidance for the commissioner of the Department of
Revenue with the prudent-investor rule.
Ms. Shine explained that the new language had been taken
from the investment responsibilities for the board of the
Permanent Fund, which could be found in AS 37.13.120 (a).
Co-Chair Stedman asked if the committee could discuss what
was being replaced by the change, including the target
return.
Ms. Shine stated that currently in statute the Power Cost
Equalization Fund (PCE) Endowment Fund had a targeted
return of four percent. The CS proposed to replace the four
percent target with the Prudent Investor Rule, outlined on
page 1, line 10 of the bill. She offered to read the text
aloud.
Co-Chair Stedman thought it was important to read the
passage. He referenced the "Prudent Man Rule, which had
evolved into the Prudent Investor Rule.
Ms. Shine read from Section 1 of the bill:
the "prudent-investor rule" as applied to investment
activity of the fund means exercising the judgment and
care under the circumstances then prevailing that an
institutional investor of ordinary prudence,
discretion, and intelligence exercises in the
designation and 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 the appreciation of
capital
Co-Chair Stedman thought further explanation was warranted.
He thought that the current four percent targeted return
was not applicable to an endowment style portfolio, and
that the PCE Endowment Fund should be managed similarly to
the Permanent Fund in perpetuity. He discussed the growth
of the principal after inflation, and asserted that a four
percent target rate was too low. He supported the change to
the bill.
9:14:10 AM
Senator Wielechowski asked if the proposed CS would lead to
a higher rate of return.
Ms. Shine answered affirmatively, if the PCE Endowment Fund
was invested as the Permanent Fund, which was had current
targeted returns 6.2 percent. She expanded that the
proposed change to the bill would likely result in greater
returns.
Senator Wielechowski asked how the returns on the PCE
Endowment Fund had compared to the returns on the Permanent
Fund or the Alaska Retirement Management (ARM) Board.
Ms. Shine did not have the information at hand, and offered
to provide the information at a later time. She cited that
in years past the fund had targeted the four percent return
in statute and there were potentially monies that the fund
was not receiving.
9:15:44 AM
CURTIS THAYER, EXECUTIVE DIRECTOR, ALASKA ENERGY AUTHORITY,
DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT
(via teleconference), considered the five-year average of
the PCE Endowment Fund, and cited returns of $150 million
in the current year and $48 million the previous year. He
acknowledged the fluctuation in returns and highlighted
that it was partly due to the Department of Revenue's (DOR)
management of the fund, which had been extremely
conservative one year and had only yielded $48 million in
returns.
Senator Wielechowski wondered if anyone from DOR could
comment on how the bill might change the investment
philosophy.
Co-Chair Bishop relayed that there was no one from the
department available at the present time.
Senator Wilson commented that the department had been
managing to the four percent return that was currently in
statute, and he had felt that removing the four percent
would encourage the department to work towards a higher
return.
Senator von Imhof guessed that the investment would be less
bonds and more equities to rebalance the portfolio. She
knew that equities were associated with greater returns but
higher volatility. She emphasized that greater returns
meant greater risk. She mentioned inflation. She mentioned
the goal of returns being over inflation over time. She
wanted to confirm that the PCE Endowment Fund had a five
percent draw, like the percent of market value (POMV) draw
from the Permanent Fund, and had a five-year lookback based
on the draw.
Mr. Thayer answered in the affirmative. He cited annual
returns of $112 million in 2017, $76 million in 2018, $74
million in 2019, $48 million in 2020, and $150 million in
2021.
Co-Chair Stedman thought there was a three-year look back
rather than five years, which was more volatile. He thought
the smoothing mechanism made the draw more predictable.
Ms. Shine agreed that the POMV from the PCE Endowment Fund
had a three-year lookback and a five percent draw.
9:19:57 AM
Co-Chair Bishop WITHDREW his OBJECTION. There being NO
further OBJECTION, it was so ordered. The CS for SB 243 was
ADOPTED.
Co-Chair Bishop addressed a new fiscal note from the
Department of Commerce, Community and Economic Development
(DCCED), OMB Component 2602. The fiscal note showed an
appropriation for the Alaska Energy Authority with $15
million in Designated General Funds (DGF) in FY 23, with
the same amount in the out years until FY 28.
Senator Hoffman MOVED to report CSSB 243(FIN) out of
Committee with individual recommendations and the
accompanying fiscal note. There being NO further OBJECTION,
it was so ordered.
Senator von Imhof asked if there had been public testimony
on the bill.
Co-Chair Bishop answered "yes."
CSSB 243(FIN) was REPORTED out of committee with six "do
pass" recommendations and one "amend" recommendation, and
with one new fiscal impact note from the Department of
Commerce, Community and Economic Development.
9:21:37 AM
AT EASE
9:24:46 AM
RECONVENED