04/19/1996 03:15 PM House L&C

 HB 345 - PENSION INVESTMENT BOARD PROCUREMENTS                              
                                                                               
 Number 954                                                                    
                                                                               
 CHAIRMAN KOTT announced the next order of business would be HB 345,           
 "An Act relating to the procurement of investment and brokerage               
 services by the Alaska State Pension Investment Board."                       
                                                                               
 TIM VOLWILER was first to testify on HB 345.  He indicated he                 
 didn't know what version of the bill the committee was addressing.            
                                                                               
 CHAIRMAN KOTT informed Mr. Volwiler the committee was addressing              
 Version K, Labor and Commerce, dated 04/10/96.                                
                                                                               
 MR. VOLWILER informed the committee he anticipates retiring through           
 the teacher's retirement system (TRS) in about ten years.  He said            
 he has expressed his reservations about the bill previously.  Mr.             
 Volwiler said this is a defined benefit system for retirees, so as            
 an individual, he anticipates receiving the same amount of money              
 regardless of what happens to the pension funds.  However, if the             
 pension funds are used, in his view, inappropriately for economic             
 development within the state and the investments perform poorly,              
 then every municipality and the state is going to have to make up             
 the difference in those earnings which didn't happen because it was           
 used for local investments that may have been more risky.  Mr.                
 Volwiler said he doesn't like seeing any requirements put on the              
 Pension Investment Board.  He said he believes the board is                   
 operating fine by itself.  Mr. Volwiler said he doesn't know what             
 is meant by materially sacrificing competency or performance.  He             
 referred to the risk and expected yield and said he thinks it is              
 hard to predict what the risk of an investment is going to be and             
 what the yield is going to be.                                                
                                                                               
 MR. VOLWILER referred to AAA municipal bonds and said if you want             
 to buy 50, he doesn't think it is appropriate in the state of                 
 Alaska.  He stated he would buy one bond from every state and that            
 is diversification.  Mr. Volwiler explained he doesn't want to see            
 the legislature use this as a shadow, (AIDEA).  If those                      
 investments are earning less, it will be the taxpayers of the                 
 municipalities and the state who are going to pay the difference.             
 He stated he is strongly opposed to HB 345.                                   
                                                                               
 Number 1055                                                                   
                                                                               
 WILLIE ANDERSON, NEA - Alaska, was next to address HB 345.  He                
 stated he testified against the earlier version of the bill.  Mr.             
 Anderson said he appreciates the work the staff to the House Labor            
 and Commerce Committee did to try to mitigate some of the                     
 opposition to the bill earlier.  He said the bill still needs a lot           
 of work.  Mr. Anderson referred to the top of page 2 of the bill,             
 "The board shall (10) increase the board's utilization of brokerage           
 and investment services provided by in-state business," and said              
 the problem with that is the need to increase.  When does this                
 increase?  He asked if it means that you have one brokerage firm              
 this year, so you must have two next year and three the next year.            
 He referred to testimony given on the bill the previous Wednesday             
 where it was stated that there was only five brokerage firms in the           
 state that deal with any level of quantity like this pension                  
 investment addresses.  He stated that is a major concern to NEA -             
 Alaska and they still oppose the bill.  Additionally, when you look           
 at item (11), based on risk level and expected yield, potentially             
 you could have the total investment of the pension fund invested in           
 the state of Alaska if you have an expected yield of 10 or 12                 
 percent and it is equal to other diversified yields.  Once again,             
 this is guess work, you can't guarantee any precise yield.  The               
 company puts forth their perspectives and you take your best guess            
 on it.  The potential is the entire pension fund could be invested            
 in the state of Alaska using these standards and it isn't very wise           
 investment strategy from their perspective.  It is NEA - Alaska's             
 belief that the bill is unnecessary as the Investment Board                   
 currently has the authority to make decisions about which firm to             
 and which investments to use.  He continued to give testimony                 
 against the bill.                                                             
                                                                               
 Number 1346                                                                   
                                                                               
 CHAIRMAN KOTT said Section 11 basically says that the board should            
 invest funds in the state if, in fact, the risk level and expected            
 yield is either equal to or more favorable than alternative                   
 investment opportunities.  He said if we had AAA bonds in New York            
 and AAA bonds that were available in Alaska, with 6 percent yield             
 in the New York bond and 6 1/4 yield in the Alaska bond, which                
 would be the best bond to invest in that would contribute to the              
 pension fund?                                                                 
                                                                               
 MR. ANDERSON said under those circumstances, the Alaska bond would            
 be the best yield to invest in because it causes economic growth to           
 the state and it gives a better yield for the pension fund.  If it            
 is expected that all the bond investments should be in Alaska as              
 opposed to diversifying around the country, that could be a major             
 problem.  If it is a municipal bond, there is a level of security             
 in that, but if it is corporate bond, there is less security in               
 that and it could have a higher yield but you wouldn't want to put            
 all your bond investment in that corporate bond in the state of               
 Alaska.                                                                       
                                                                               
 Number 1432                                                                   
                                                                               
 REPRESENTATIVE ELTON said he agrees with Mr. Anderson's response.             
 He also pointed out the board currently has the ability to do that            
 now.  It would be smart to diversify in the bond markets.                     
                                                                               
 CHAIRMAN KOTT said he wouldn't believe that the members of the                
 board who are charged with fiduciary responsibility would put all             
 that money in one nest egg in the state of Alaska.                            
                                                                               
 REPRESENTATIVE ELTON said with the word "shall" on page 2, line 2,            
 there could be some that could make the argument that it is not a             
 permissive word and "shall" says that you shall do that.                      
                                                                               
 CHAIRMAN KOTT said considering the portfolio we're talking about,             
 he doesn't think anyone in Alaska could offer a bond that would be            
 equal in yield and risk.                                                      
                                                                               
 Number 1520                                                                   
                                                                               
 REPRESENTATIVE ROKEBERG said we should do things to encourage                 
 investment in the state; however, he does have problems with the              
 bill as it is currently written.                                              
                                                                               
 Number 1614                                                                   
                                                                               
 JIM SIMEROTH, President, Kenai Peninsula Education Association,               
 testified via teleconference.  He stated there are about 700 people           
 who are a little nervous about this bill.  Some of them fear it is            
 a possible raid on their pension funds.  He noted he didn't have              
 the most current version of the bill and requested it be faxed to             
 him.  Mr. Simeroth said there is a lot of concern and there seems             
 to be a bit of micromanaging of the Pension Investment Board and              
 that creates real concern.  It has already been expressed that the            
 Pension Investment Board could, if they so choose, make Alaska                
 investments.  He said that is appropriate, but it should be left up           
 to the board to utilize those services that they deem are most                
 appropriate in-state or out of state.  Mr. Simeroth referred to               
 requisite skills that are required and said he doesn't know what              
 those would be.  Again, that seems to be part of what the board               
 would be addressing when they decide where the investments are                
 going.  There is concern that this might evolve into something                
 where politically the decisions are made where pension investments            
 are going to be.  In addition, some people are concerned that if              
 we're looking for a high rate of return, the risk goes up.  We have           
 a pension fund that currently operates very well and he doesn't see           
 the need for tampering with it.                                               
                                                                               
 Number 1826                                                                   
                                                                               
 CHAIRMAN KOTT indicated there were no further witnesses to testify.           
 He then closed the public hearing.  He announced the bill would be            
 held until the following Monday.