Legislature(2003 - 2004)

05/06/2004 09:00 AM House FIN

Audio Topic
* first hearing in first committee of referral
+ 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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